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Islamic International University

Impact of politics on Economy

Submitted By

Navira Aziz

REG.NO: 560-FSS/BSSOC/F16.

Submitted to

MAM NIDA

Department of Sociology

Faculty of Social Sciences

Date: 10 December 2020

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Contents
Abstract.................................................................................................................................................3
Introduction...........................................................................................................................................4
Problem statement:............................................................................................................................4
Purpose of the study:.........................................................................................................................4
Methodology:....................................................................................................................................5
Research Questions...........................................................................................................................5
Background...........................................................................................................................................6
Conclusions...........................................................................................................................................8
References...........................................................................................................................................10
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Abstract.

Every economic system must be harmonized with the continuing development of a country,
a trend that reflects changes and innovations and also political conflicts that results in
various interests and institutions being represented and modified. The purpose of the study is
to analyze the relationship between economy and politics and its effect on economic growth.
It is important to incorporate political factors to analyze the economic process and to examine
to what extent and inwhat direction the political determinants of a state affects its economic
performance. As a first step for this analysiswe would present the correlations among the
economy and the politics. Next, we would realize anexamination of the effects that different
variables have on economy and politics in our study. In the end we would present the
findings and our conclusions, by highlighting theimportance of a political system in a
country. The methodology used in this study is both theoretical and empirical and
quantitative analysis The main goal of any government is to increase the welfare of its
citizens and by the mean of this study , country had a positive impact on their economic
development.

Keywords: Economic Development; Growth Rate; Politics; Government Performance.

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Introduction
The political parties of any country are supposed to remain dedicated on working for the
social andeconomic development of their countries. This how they should be attempting to
please the generalpeople and earn their support. Their steps and political activities are
expected to be for the bettermentof condition of the country and the people. It is impossible
to analyze a country's economy by taking into account only the market factors .it is important
to include political factors to analyze the economic process(Radu,2015) and to analyze to
what extent and in what direction the regime type of a state government affects its economic
performance. Increasingly, scholars are examining how both political development and
economic development affect unpredictability in per capita GDP growth rates of country.
One of the variables used in our study is the level of education from each country and we
could observe that it has an important role in a country's economic development as its
presence in our models modifies the impact of the political determinants from that country. In
the end we would present the findings and our conclusions, by highlighting the importance of
a political system in a country. The main goal of any government is to increase the welfare of
its citizens and by the mean of this paper we could observe in what extent the political
systems from countries have had a positive impact on their economic development.

Problem statement:
Nowadays political instability has been a cause of concern for many countries around the
world, irrespective of the state of development or their political regime. Previous experiences
tell us that political conflicts can have a disastrous impact on an economy. On the other hand,
domestic conflicts under certain conditions can turn a country into a fragile state status.
Fragile and conflict ridden countries usually lose the ability to develop constructive
relationships within their societies and often suffer from a weak ability to undertake
governance functions (Shonchoy&Tsubota, 2014).

Purpose of the study:

The purpose of this study is to analyze the relationship between economy and politics and its
effect on economic growth within country. It is important to include political factors to
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analyze the economic process and to observe to what extent and in what direction the
political factors of a state affects its economic performance. As a first step for this analysis
present the correlations among the economic development and the political determinants.
Next, we would realize an examination of the effects that different variables have on
economic growth. One variables used in our study is the level of education from country and
we could observe that it has an important role in a country's economic development as it the
impact of the political determinants from that country.

Methodology:
The methodology I used to do this term paper is based secondary sources. I will give my
opinion based on past published articles and model paper. The methodology implemented
within this study has been used many times over years by several researchers such as Scully
(1988), Romer and Weil (1992), Helliwell (1994), Barro (1997). The common point for the
mentioned authors is that they used cross-countries data and observed the same variables
across countries for long periods of time. Barro (1997) showed that when such analyses are
carried out for short periods of time it is very likely to encounter disadvantages such as
„precise timing between growth and its determinants is not well specified at the high
characteristic frequencies of ‘business cycle’ For example, relationships at the annual
frequency would likely be dominated by mistiming and, hence, effectively by measurement
error.

Research Questions

The following are research questions in this study based on research problem:

1. Is there any relationship between economy and politics?

2. Does economic growth affect the relationship of political development?
3. What is the relationship of political stability and economy?
4. What is the relationship of political instability and economy?
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Background
I can start discussing the past papers and review by asking a simple question, which is ‘Does
politicalinstability affect economic growth?’ The first step toward answering this question is
a definition ofwhat it is meant by “political instability”. Thus,we study whether a high
propensity of an executive collapse leads to a reduction of growth. Politicalinstability has
become a threatening and serious problem especially in developing and
underdevelopedcountries. It is creating major problems & hindering the development in these
countries.
Economy of a country depends on the political situation of a country. If the politicians are
rational and have ability of managing the economy then the country will lead to development
and if the politicians are incapable of managing the economic strategies then the economic
development of the country will lead to negative position.

In this term paper I am discussing the secondary sources that are focusing on my research
questions. The main purpose of the paper is to investigate the relationship between economy
and politics. Furthermore I will discuss the effect of the relationship between economic
growth and political development. The past papers are giving us the relationship between
political stability and economy. There is deep relationship between political instability and
economy as I found in many significant articles.

The relationship between economic and political development has long been a source of
study among political scientists. Empirically, much of this work rests on a well-documented
positive correlation between economic and political development. Lipset (1959) argued that
economic development increased levels of urbanization, and education; wealth increased the
prospects for democracy by creating norms supportive of democracy, providing security that
moderated political demands, increased tolerance, and created civil society organizations.
These processes combined to form more institutionalized, stable democracies. Moore (1966)
argued that the formation of a bourgeoisie through capitalist economic development was
essential for the formation of democracy. Not all research, however, has found this direct
linear relationship between economic development and democracy (Przeworksi and Limongi
1997; Przeworski,Alvarez, Cheibub, and Limongi 2000). From this perspective, economic
development does not guarantee political development; instead, political development is the
result of specific decisions by key political actors or other political factors. Boix (2003)
successfully blends both perspectives suggesting that both agency and wealth matter for
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democracy.Other scholars point to the indeterminacy of the relationship between economic

and political development. While economic development may spur political change, this
change may not lead automatically to higher levels of political development or
democracy(Edwards & Thames,(2009).
Abundant literature gave various perspectives of relationships between corruption and
economic growth. First, many scholars argue that corruption will have a negative effect
on economic growth. Shleifer and Vishny (1993) argue that when it is necessary to get
permission from many individuals for a project, and each has veto power over approval,
the cost of corruption will rise and slow economic growth. Myrdal (1974) argues that
corrupt officials may use their arbitrary power to create delays and barriers that would not
otherwise exist in order to collect more bribes. Rose-Ackerman (1997) points out that the
corruption introduces uncertainties into the economic environment that can effect on
private firms.
Political stability definitely plays an important role in keeping society integrated & in
maintaining legitimacy within the state. It is a prerequisite for the economic development,
socialintegration, and supremacy of law in a state. The stability of political system has direct
effects on theprocesses of nation and state building. These both require stable political
systems for their growth &flourishing. The development of a nation & state without firm &
organized system of politics is notpossible & government becomes only a tug of war amongst
various interest groups(Bhattacharya, 2013).
Political instability can directly hurt a country’s economy by affecting the investment
decisions of the firms. It takes time to make the investment decisions by the firms especially
by the manufacturing firms. In instable political environment it is very difficult to determine
the Net present value of an investment as there are many uncertainties regarding social
conditions which make it impossible to count the rate of return. Further, the expectations on
the future policy and financial return depend very much on general, socio and macro
economic conditions.
The political stability always stays a prime concern in any country and always has effect in
any kind of investment analysis to be made. Not to mention that, the economy of a country
heavily depends on how many investments are made within that economy. For the reason
which makes the investment environment in country unpleasant can also be the same reason
which would hamper the economic development of the same economy(Chawdhury,2016).
Economic growth and political stability are strongly related. The uncertainty associated with
anunsteadfast political environment may decrease investment and the speed of economic
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development.Moreover, weak economic performance may lead to government fall down and
political instability.
Therefore, we concluded from the secondary sources about to analyze the interplay
between economics and politics and its effect on economic growth. It is important to include
political factors to analyze the economic process and to observe to what extent and in what
direction the political determinants of a state government affects its economic performance.
As a first step for this analysis we would present the correlations among the economic
development and the political determinants. Next, we would realize an examination of the
effects that different variables have on economic growth, including those representing the
political determinants in our study.

Conclusions
Hence we concluded from the secondary sources that there is deep relationship between
economy and politics. Political instability and instability are the main factors that can stable
the economy and instable the economy if the politicians are not rationale with the country. An
extensive literature discovers how command type affects political stability and hence
economic growth. Political stability has a vigorous and noteworthytotal effect but a trivial
direct effect on growth. The results recommend that political constancy affectseconomic
development circuitously on particular overruling variables. In this segment we inspect how
short- and long-run attentions help us refineour reference point results. From this study we
could observe that, the political determinants do not contribute directly in a notable way to
the economic development. Thus, they are correlated with higher values foreconomic
variables that influence positively the growth. The main goal of any government is to
increase the welfare of its citizens and by the mean of this paper we wereable to determine in
what extent the political had a positive impact on their economicdevelopment. Following 1

measures might come handy here.

Identifying the Risk: In this first stage, risk managers identify the main political risks by
geography. The key question at this stage is: “How can political actors or conditions directly
affect our objectives?” Risk managers can develop an inventory of political risk types,
rangingfrom capital controls to increased taxation to strikes and protests to wars and
terrorism, to scanthe horizon for potential risks.
Avoiding Political Risk with Control Procedures: Companies need to be practical and avoid
states with overt party-political risk. The large companies use urbane scoring systems to
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appraise political risk in areas.

Dealing with Risk as Ongoing Procedure: Sometimes it’s tough to avoid partisan risk, so
politicians need to come to terms with the fact that they won't be able to recognize every
political danger.
Diversify Political risks: Politicians need to expand their partisan risks: companies that have
premeditated business units in numerous topographies need to recognize their cost base.

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References
Boix, Carles. 2003. Democracy and Redistribution. Cambridge: Cambridge University Press.

Bhattacharya, Debapriya. 2013. Assessing Economic Implications of the Present Political

Shocks.Centre for Policy Dialogue

Chawdhury, J. (2016). Political instability a major obstacle to economic growth in

Bangladesh.

Edwards, J. A., & Thames, F. C. (2009). The effects of economic and political development
on GDP growth volatility. Global Economy Journal, 9(2), 1850163.

Radu, M. (2015). The impact of political determinants on economic growth in CEE

countries. Procedia-Social and Behavioral Sciences, 197, 1990-1996.

Shonchoy Abu S and TsubotaKenmei, 2014. “Economic Impact of Political Protests (Strikes)
on Firms: Evidence from Bangladesh”

Lipset, Seymour Martin. 1959. “Some Social Requisites of Democracy: Economic

Development and Political Legitimacy.” American Political ScienceReview 53(1): 69-105.