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THE IMPACT OF POLITICAL INSTABILITY ON INVESTMENT PATTERNS AND
ECONOMIC GROWTH
1.0 Introduction
1.1 Institute of political unrest.
Instability of political system is a significant institutional factor which shapes the
investments behavior and becomes the determinant of economic growth in the societies
of the world. The Institute of Political Unrest mantains that political instability captures all
forms of transitions, from regime change to civil disobedience and governance
challenges. The level of stability in the political sphere of the country being important for
its potential investors and overall economic progress (Treisman, 2016). Boot camps or
retraining programs can be established to equip those who were dislocated during
political instability with the skills or knowledge needed to compete in the changing job
market. This political stability is often a prerequisite of investors, who want to anticipate
their returns and not to experience an introduction of a new political system that can
lead to expropriation or asset seizure (Treisman, 2016). Complimentarily, both the way
of financing and the speed of economic growth are also the crucial factors in the poverty
levels of the world (Vadlamannati and Cooray, 2013). Politically unstable situation may
hinder economic development through disruption of regular business, declining
investment trend, and outflow of capital from the economy. These are the settings
where enterprises either cancel the expansion plans, reduce investment spending or
transfer their production to more competitive jurisdictions. A result is immediately a
lessening of economy activity and more job losses. Instead, more jobs get lost, family
incomes decline and the welfare board is overstretched, causing poverty levels to soar
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and inequalities to become more prominent (Vadlamannati & Cooray, 2013).
Consequently, regulation of political instability effect on investment trends and economic
expansion are main problem for policy makers as well as investors and other relevant
stakeholders. Policymakers need to deal with home-grown policy-related problems,
improve institutional structures, and enhance political stability which are all key to
creating a conducive investment and economic growth climate. Investors and
stakeholders, on the contrary, need to evaluate the influence of political factors on their
investment decisions and take them onto account in order to lessen possible losses and
ensure their returns in the unstable conditions.
1.2 Thesis statement
The political instability as a whole has a multi-factorial nature of which qualifies
as a cause of the investment and growth level fluctuations during its occurrence. It most
certainly is that political unrest encourages increased insecurity and risk perception
among investors, which causes the capital to leak out and limits the investment inflows
as well (Wantchekon, 2013). In addition, a political system where regulations are having
problems to be implemented in their expected effectiveness, may further deteriorate the
economic problems and discourage growth prospects. Therefore, political instability
turns out an impediment to economic stability and stifles the operations of reducing
poverty and stimulating growth on the planet. Political instability leads to an environment
that breeds uncertainties which subsequently erode investors’ confidence and this, in
turn, causes both local and foreigners to pull out their investments (Treisman, 2016).
Investors would be not likely to commit to capital transactions in countries where there
is a high risk of political instability since such a scenario is usually associated with
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increased business risks, potential asset seizure, and complications of regulatory
frameworks. Sometimes, in lacking the political stability, investors do not invest which
can later afflict the reduction of the capital formation, the slow growth of the economy,
and the decrease in the number of the new jobs that are needed by the people but are
not generated, so people remain in poverty and this can halt any development efforts. in
some cases political instability would be a factor of the implementation of proper
economic policies and reforms (Wantchekon, 2013). In politically unstable societies,
governments are tied on their ability to mount or even enforce policy that promotes
economic growth and stability. The policy uncertainty and the frequent political changes
prove to be a problem in making policies as it creates inconsistent decision-making; the
latter hinders long-term planning and investment. Additionally, political instability may
emerge and spread social discords, and friction, if shared resources are channelled
towards security and stability maintenance instead of economic development projects,
which ultimately will worsen the plight of the poor. Unstable politics define a severe
impediment to realistic perspective of economic sustainability and sustainable
development. Addressed with the causes, strengthen the institutions, and fostering
good governance not only create a suitable area for investment, growth, and
enrichment, but also pave the way for a better future.
2.0 Concerning factors influencing political instability
2.1 Socioeconomic inequality
Socioeconomic inequality is a strong factor of political instability, which,
frequently, deepens accumulated dissent and results in social tensions within the
country. Studies have shown that the class differences civilized by income, wealth
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accumulation as well as poor access to resources are some of the common causes of
marginalization and injustice among the poor groups (Quisumbing & Rubin, 2015).
When many members of the population decide that they are not the beneficiaries of the
trickle-down or that their basic needs are not being satisfied, this may initiate them
hating the regime. This goes further than that, as the economic inequality of society can
blow certain cracks wider, thus underlining existing differences by country, race, or even
ethnicity. Likewise to the point, taking action to overcome socioeconomic gaps and
enhance equal opportunity for economic participation are fundamental to the process of
social stability and social cohesion building. Inequality destabilizes social unity by
creating an attitude of envy and discontent among those who believe that they are not
getting sufficient shares in their national wealth growth (Quisumbing and Rubin, 2015).
When a number of people agree that the system is not equal and prompt they argue
that the institutions are untrustworthy or things might lead to social instability. Most
severe situations may bring riots, dissatisfaction, and even violent conflicts when the
minority people oppose the inequity of the benefits distribution in the community.
Moreover, the effect of inequality on communities can be deeper, by accentuating
existing social splits and causing conflicts between people who share the same
ethnicity, race, or region (Piazza, 2013). In addition to that, these factions can seriously
damage social solidarity, tear down the social structure of the society, and make the
ground for political uncertainty fertile. Reducing socioeconomic inequity involves a
holistic strategy that has the capacity to address both the origin and symptoms of
inequality (Quisumbing & Rubin, 2015). It is also about taking steps towards equality in
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education, health care and economic services and removing the obstacles slowing
down the participation of people and obtaining economic liberty.
2.2 Corruption and governance problems are one of the major challenges.
The lack of good governance and corruption pose serious problems for political
stability as they discourage people trust in institutions and erode rule of law. Research
reveals corruption could actually result to undesirable outcomes such as economic
growth disparities, as well as social fragmentation (Ross, 2015). If there was corruption
among public officials, for example such as embezzlement, bribery and favoritism, then
it will not only undermine the fairness of the resource allocation but also create a social
impact of lawlessness and injustice among the population. Besides that, weak public
governance institutions tend not to be able to address grievances or supply essential
services, and in this situation, political instability is going to worsen also (Quisumbing &
Rubin, 2015). Corruption destroys the trust of public to the government authorities and
the institutions which the rule of law is overlooking, as a result jeopardizing the political
stability (Ross, 2015). People's trust in the authorities would fade, and this would turn
people against each other - all these would make people mistrust government and
inclined to hatred toward the wealthy. These may result in social problems such as,
revolt, protests and even violence in order to fullfill the demand of the people for
accountability and transparency. It might be said that corruption distorts how resources
are used which leads to the slowdown in economic growth, worsening inequality and
escalation of social tensions (Quisumbing & Rubin, 2015). Hence, we have to overcome
this challenge of corruption in order to provide for a stable organization and for the
public to trust the systems. Government that has weak institutions amplify political
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instability by failing to find solutions of grievances or offer essential services
(Quisumbing & Rubin, 2015). In the event where the governance of countries is week,
public officials not only may not be properly equipped or in a position to enforce the rule
of law but may as well lack the willingness. This may in the long run, lead to a total
breakdown of the social order and stability of such countries. Furthermore, decaying
institutions of governance get prone to corruption and subjected to powerful
experienced by Nicolas , 2015. The key role in achieving stability and fostering citizen
support is played by measures such as strengthening existing governance mechanisms,
introducing transparency and accountability, and developing capacities of government
agencies.
2.3 Ethnic and other religious conflicts.
Ethnic and religious conflicts are among the major causes of political instability in
diverse societies where different groups try to dominate each other, struggle for the
control of state resources or want to strengthen and develop their identity. Such
disputes might be linked with past grudges or being the result of resource shortage
competition or through the manipulation of politics by unscrupulous leaders who want to
get the resources by all means (Ross, 2015). Ethnic and religious disputes not just
disturb the social harmony but it can turn into violence and civil unrest, which are the
grave obstacles for good governance and stability (Piazza, 2013). Additionally, societal
and economic problems are often interconnected and when ethnicity becomes a
dividing issue, it may lead to escalation of poverty, displacement and human suffering.
To this end, efforts to tackle the origin of ethnic and religious conflicts, the development
of intergroup dialogue and reconciliation as well as the promotion of inclusive political
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systems would undoubtedly necessitate a better political stability and peace. Ethnic and
religious ethno-religious conflicts are the most important things in political stability
because during these conflicts the tensions between different groups intensify and there
is a clash (Piazza, 2013) Here, identity insecurity along with historical grievances,
resource competition, and power struggle by the political leaders seeking political gains
for themselves is the main reasons for these conflicts. If not properly resolved, ethnic
and religious strains have a possibility to spread into the violence, civil unrest and even
civil war, hence strengthening the governmental instability and weakening the social
cohesion. Consequently, ethnic and religious conflicts continue long after their social
and economic ramifications, including forced displacement, chronic poverty, and human
suffering. Thus, helping the communities facing those conflicts to tackle the causes of
those conflicts and through dialogue, reconciliation, and inclusive governance are what
must be done to build peace and stability. They are, in fact, exacerbated by the
existence of a range of factors including historical grievances, competition for
resources, and political developments used by leaders (Ross, 2015). Such disputes are
usually found in the multiethnic societies where the representatives of the different
ethnic or religious groups seek to rule, to get the resource or recognition respectively.
Ethno-religious unrest which is left unattended tends to escalate very fast and results
into violent conflicts with disruptive consequences to both governance and peace in the
nation (Piazza, 2013).
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3.0 One of the most concrete consequences of the political instability is volatility
for investors.
3.1 Decreased investor confidence
Instability in the political system, in most cases, is a disincentive to investors as
decisions on government policies, regulation, and a general business environment
become the grips of uncertainty, which pushes them away. Countries affected by
political disturbances and unpredictability will have potential foreign investors who may
hesitate to commit their capital due to the fear that their investments and returns could
be disrupted which can consequently diminish foreign investment (Mody &
Papageorgiou, 2018). Stability of the political system and policy changes which can
become dramatic or abrupt could induce investors to make a wait-and-see approach or
at worst, withdraw their investments. As a result, a lack of investor confidence may lead
not only to reduced capital inflows but also to a slower growth rate. Investors might not
want to risk their money in developing economies if they cannot assess the reliability
and profitability of potential ventures. Political instability in a country is also correlated
with the country’s FDI inflows, because investors may see political strife as riskier than
stable conditions, even in otherwise favorable investment destinations according to the
research of Treisman (2016). The uncertainties associated with the policies of
governments, regulatory framework of an economy and overall investment environment
in these countries turn away the foreign investors from making long-term commitments
to projects or ventures within these boundary. Besides, political instability has a direct
impact on the investor confidence concerning the property rights and the rule of law that
may set anchor to FDI (Mody & Papageorgiou, 2018). Therefore, nationally institutions
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in countries where political instability being faced can hardly compete the foreign
investment that is required to instigate the economic growth and development. Political
crisis may trigger also a drop in incoming foreign direct investments (FDI) since
potential investors can think of the country in turmoil as a risky destination (Treisman,
2016). A crucial factor that might discourage investment in developing economies is the
unpredictable environment of government policies, regulatory structures, and the
business climate within those countries. Furthermore, political instability might shake
investor’s confidence concerning protection of property rights and the rule of law, which
eventually could be a cause of more hesitancy regarding FDI inflows (Mody &
Papageorgiou, 2018).
3.2 Higher perceived risk
Political instability, most times, means high risk perception for investors as it
implies unpredictability and uncertainty in environment that should attract investors. The
majority of investors consider political instability as a particular risk that in many cases
can become a key element in the profitability and sustainability of their investments
(Papaioannou & Siourounis, 2015). Political risk, which manifests in several ways such
as implementation of policy revisions, government instability, social instability or violent
conflict is an often encountered problem for the investors and businesses. Such threats
may enhance the probability of investment losses and thus, be a challenging situation
for the entrepreneurial organizations. In these circumstances, the investors' attitude to
risk may be amplified: this will result in them demanding the higher returns or the price
for risk premium which will discourage any investments in countries that are politically
unstable, consequently hindering the growth of the economy as well. when political
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instability happens, economic activities get affected and business faces operational
risks. An environment of political uncertainty and lack of regulations can perplex
business planning and decision making, and hindering companies from forecasting
future sources of income or expenditures (Mody & Papageorgiou, 2018). Moreover,
political upheavals and social instability can bring about a disruption of supply chains,
stop operation process, and have a negative effect on the provision of goods and
services. Unpredictable consequences can bring about increased operational costs,
decreased productivity and less income thus business investment will be dissuaded and
economic development will be hampered. political instability has, in turn, become an
investor confidence’s enemy and even damaged the reputation of financial system in
the eyes of investors (Treisman, 2016). In case of the political risk perception, the
investors can go away with their investment in the worst case scenario or can even
decide to not invest in the first place; which will in effect ensure that money goes out of
the country and the capital formation declines. This compound effect subsequently
makes liquidity deficits more severe, financial stability worsens and finally, the cost of
borrowing increases for business and governments. On the whole, political instability
can be the source of a negative cycle which runs in the direction of economic decline
because the investments are reduced and the capital is fleeing, which in its turn further
weakens economy and increases social and political tension.
3.3 A capital flight and disinvestment.
Political turmoil can lead to capital flight and disinvestment by investors with the
aim to mitigate the risk of their assets and maintain them safe. Investors’ decisions to
repatriate their capital from a country experiencing political instability or crisis might
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occasionally prompt the reallocation of their capital to safer or more stable jurisdictions
(North et al., 2009). Being called capital flight, this phenomenon will cause more
problems for the economy by removing resources from the economy, lowering
investment rates, and affecting the exchange rate. Moreover, political uncertainty is
likely to initiate a process in which investors want to get out of their holdings in these
countries, either by liquidating their assets or downsizing their operations. The
withdrawing of funds or the lack of investors can result in a sharp economic decline,
high unemployment, and hindered future growth prospects. Thus, handling political
instability as well as stabilizing investor confidence are the key for both curbing capital
flight and pushing the economic development which is sustainable. In addition to that,
capital flight and disinvestment can add up to the general fragility of the country’s
finances and thus result in economic vulnerabilities (Quisumbing & Rubin, 2015). When
capital flight occurs, it leads to shortages of liquidity and creates vulnerability of financial
institutions, thus there is a higher risk of financial crises. Also, the disinvestment may
damage the productive function of the economy and cut revenue collection as well as
aggravate fiscal imbalance. These events only serve to discredit investors even more,
with capital flight being the hot issue of discussion and resulting into an economic
downward spiral. Stability, therefore, is the key and policy makers must bring about
reforms settling down political instability, governance and economic management that
will lead to regainion of investors' confidence and solid growth in the economy.
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4.0 Impact of Political Instability on Gross Domestic Product
4.1 Slower FDI
Unstable politics oftentimes cause a weaker drive of Foreign Direct Investment
(FDI) into a country. Unstable political environment doesn't encourage foreign investors
to invest their capital into long-term projects or businesses in the country with this
problem (Lust-Okar, 2016). If political frustration can be achieved, investors will be
much more risk-aversive for the processes they fear may affect the value of their
investments such as the change of government policies, regulation frameworks or social
unrest. Consequentially, the growth of FDI inflows prevents it from speeding up, which
leads, as Kuran (2012) points out, to low investment and underdevelopment of the
economy. the FDI inflow downgrade that occurs affects more than just a country's
economic growth, because FDI directly contributes to GDP growth, job creation, as well
as transferring technology and skills (Wei (2000)). Investors from abroad are usually
reputed for introducing professionalism, capital and access to international markets
which in turn can improve the local business by means of infrastructure improvement,
productivity and expansion. But in the volatile political environment, the reticent of the
foreign investors to commit the capital does hold the realization of the benefits back,
which impedes the progress on economic diversification and innovation, and (Mauro,
1995). Consequently, political unrest may render the destination country unattractive for
FDI and adversely affect the scale of FDIs required to develop the country and raise
living standards of the citizens. although the constraint of FDI inflows might cause a
complex economic problem, with the consequence of unemployment and poverty even
worsen (Baliamoune-Lutz & Ndikumana, 2008). Jobs on the one hand, FDI inflows are
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often associated especially in the industry like manufacturing, services and
infrastructural development. Besides, FDI flows from politically unstable surroundings or
economies where FDI is short may reduce job opportunities, therefore, more people
being unemployed and earning less. Besides this, the no investment in critical sectors
such as education, healthcare, and infrastructure remaining is the factor that is another
counterpart of social challenges that do not allow the progress towards sustainable
development goals and more the social-economic divides in the society from to get
deeper.
4.2 Prolongation of national investment
Political uncertainty can also elongate payback periods of national capital
projects. Firms and investors may become more cautious due to uncertainty over the
political landscape that will hold after the election. They therefore tend to delay making
investments commitments (M. Lerner & J. Tufano, 2011). The obscurity caused by
governments policies and regulations could lead to investors’ fear of investing on new
ventures or expanding their existing ones. Investments will be made due to the fear to
pay that will hold the economical develop and will stop for the job creations. Companies
will suspen their capital outlays and expansion plans until the political situation becomes
stable. political instability will bring about the complications of uncertainty, with the latter
generating an overwhelming negative spin-off which will only worsen the economic
challenges (Collier & Hoeffler, 2004). As such, enterprise leaders undertake a wait-and-
see approach and customer confidence fades, driving a spiral towards lower economic
activity, revenue collection, and fiscal stress on the government. As the economy
crumbles, there could be aggravation of political problems along with social unrest that
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probably is a chain reaction. political instability which is of long duration can distort
institutional capability and efficiency of governments giving rise to them being unable to
introduce proper economic reforms and development initiatives in the country
(Kaufmann et al., 2011). The poor institutional and political governance structures along
with the political blockades and polarization can slow policy-making processes and
consequently make the struggle to address the array of urgent social and economic
issues such as poverty, unemployment and economic inequality difficult. Therefore, the
longer the political instability lingers, the greater risk of the stagnation of the economy
and the turmoil of the social system which in turn could re continue the vicious circle of
underdevelopment and instability. In this connection, the political instability has to be
dealt with from the two-fold approach, which involves the improvement of government
institutions, the development of political agreement, and the promotion of economic
policies, which provide benefits to the entire population (Acemoglu & Robinson, 2006).
Enhancing transparency, accountability and rule of law countries contribute to the
creation of favorable environment that catalyzes investment, entrepreneurship, and
sustainable development.
4.3 The decrease in these jobs and its negative effect on income.
The political instability may dampen both investment either foreign or domestic,
affecting employment opportunities in the country. This is, in most cases, a source of
lost income (Lust-Okar, 2016). The positive impact from productive investments is that
they increase economic growth which consequently impacts the number of jobs
available in different parts of the economy. Jobs losses or stagnation though, would
lead to growth of poverty and inequality as individuals and families find it extremely
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difficult to get a stable household income source. Besides, the contraction of economic
activity is likely to cause a drop in wages for workers or the worse, which leads to poor
households having a harder time meeting their financial burden and lessening the total
consumer expenditure in this way. Hence, the stability of the political system becomes
the basis for attracting investments, creating jobs and accelerating the economy to a
level when the interests of everyone are incorporated. Moreover, political uncertainties
can be a barrier for entrepreneurs and businesses to make long-term commitments for
the adoption of innovation and investment in productivity-enhancing technologies
(North, Wallis, & Weingast, 2009). Imprecise political environment will shrink the
investors' expectations regarding the future business climate that as a consequence
affect the investors' decision to forgo or reduce investment in research and development
(R&D), upgraded technology and human capital development The tendency to invest
less in innovation could end up as a major barrier to productivity growth and could make
it quite difficult for local industries to hold their own against the competition in the
international market. Hence, countries which struggle with the so-called political
instability are likely to be left behind in the technological revolution, missing the
opportunity to develop their advanced industries, which prevents the emergence of
long-term economic growth and diversification. This means to say, fomenting political
instability is a matter of the hour for us to develop a stable environment which is a
fundamental aspect of innovation, entrepreneurship and tech progress, driving long-
term economic growth.
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5.0 Success stories on the local level showing the ways that political instability
affects them
5.1 Latin America: Development of emerging markets
In Latin America, the constant challenge of political instability has greatly
impeded the market development of emerging economies. The countries of the region
have obtained many regimes frequently, such as corruption scandals, social unrest and
broken policy, all of which negatively affect the business and economic stability (Collier
& Hoeffler, 2015). For example, the political instability in Venezuela has proven
hyperinflation, economic recession and gross poverty in the country as it has oil
resources enough to make the country among the richests in the world. Likewise, in
Argentina, political instability caused economic crashes and currency crisis, with the
effect of reversing the flow of foreign money and reducing the growth prospects. Such
cases portray the unbalancing effect of political instability to the development objectives
of emerging markets in Latin America, hence, hindering the efforts to raise income
levels and reduce poverty. In addition, political instability may result in a situation of
policy-making stall and absence of political consistency in the development of the
economy (Hausman & Rigobon, 2003). Fluctuation in the policies and frequent changes
in the government priorities can have the same effect on the business planning and can
make the businessmen withdraw the long term investments, as businessmen are faced
with the unpredictability of the regulatory conditions and economic growth. Moreover,
political instability can interrupt the creation of the required structural reforms that set
the stage for competitiveness, good governance, and an inclusive economy. Therefore,
nations having political instability problems will often be impossibly impeded in their
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attempts at resolving serious economic troubles and attaining sustained development
results. Ultimately, tackling political instability and driving political stability, are crucial
grounds for releasing the full economic potential of emerging markets in Latin America
and for sustaining general prosperity among all social strata.
5.2 Middle East: Effects on oil-leaning countries
In the Middle East which is mostly oil producing countries, political instability has
effected the economies of these countries greatly, as the income in most of those
countries comes from oil. Even though many countries have huge oil resources in the
region, they could not successfully translate the wealth into sustainable economic
development and social advancement in most of the cases because political struggles
and governance problems (Hertog, 2010) played the determining role. Political stability,
which may be a result of authoritarian governance, religious tensions, and regional
quarrels, is the biggest threat for investor's confidence, disrupts any economic activities,
and worsens social inequalities. Secondly, the unstable oil revenues have exposed the
issues of these countries to global oil prices rise and fall, thus causing problem of
economic fluctuations and fiscal instability. As a result, political instability in the Middle
East makes the struggle to form diverse economies, promote inclusive growth, and also
address social problems almost impossible. The cycles of instability and
underdevelopment continue. The political instability in the Middle East has not only
affected the region’s security but also spread to other Global Energy systems, and
geopolitical themes (Korany et al., 2010). Wars and instability in the region result in
havoc in production and supplies for oil which in turn amplify the price fluctuations and
market uncertainties. Additionally, political tensions and power rivalry in the region are
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more so the causes of escalating conflicts and proxy wars. This has a lot more to do
with subversion and peace in the region is drastically reduced. Besides, the refugee
crisis in the Middle-east is also a major problem for the associated countries, as it
strains the resources and creates social tensions beyond. The intricate humanitarian
challenges also rise, and the peace and development are complicated process. Thus,
the issue of internal political instability requires not only immediate respite to the region
but also establishes an equilibrium between political and economic keywords to build
brighter future of the region.
5.3 Africa: Difficulties these countries face due their resources.
In Africa, the political instability in the resource rich countries not only has
worsened the problems which the natural resources are needed to solving but also
hamper their development in the long run. Poor and fragile states and resource rich
countries in Africa are characterized by oil, minerals and arable land but are still faced
with political instability, weakened governance and institutional deficiencies (Haggard &
Tiede, 2011). This has precipitated a developmental phenomena termed the "resource
curse" whereby the sheer availability of natural resources fails to be the source of
broad-based economic promotion and human development. Instead of that, political
unrest, corruption, and conflict are the results of the process of resource extraction, and
as a result, people are unhappy, the environment is degraded, and the economy is not
well-managed. As a result, African countries are confronted with a difficulty of breaking
away from patterns of poverty and instability underlining the complexity of this issue as
well as its multifaceted nature when it comes to developing the continent. local and
overseas trade as well as domestic peace in Africa faces impacts of political instability
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with members of neighboring countries and even international markets being affected
(Ndulu et al., 2007). When the internal bloodshed of a country extends its death grip into
its neighboring states, the consequences range from exacerbation of tensions to
humanitarian disasters. However, the resource-led conflicts often attract the neighboring
countries into the struggle in addition to the external players striving for power and
dominance in the market, that potentially poses a further challenge to the peace and
stability to be achieved. In addition, political instability of African countries which is
important for global commodity markets, supply chains and investment flows not only
affect African countries but also touch the whole world. Instability due to resource
extraction disorder and politically risks often leads to investors from abroad to be scared
and it affects efforts of improving the area in term of sustainable development and
poverty reduction. Hence, dealing with political instability in Africa needs collaborative
actions at the domestic, regional and global level to prevent political corruption, support
reform and good governance as well as improve accountability and participation of all
political actors.
6.0 Proposed methods of reducing the negative effects of political turbulence.
6.1 Forging institutions and putting the governance in a strong place.
As a possible solution to suppressing the negative impact on political upheaval,
the idea of strengthening institutions and constitutional mechanisms seems attractive. In
Acemoglu and Robinson (2019) institutions' quality is a determinant of political stability
and economic evolution. It extends to rule of law, property rights protection, and
government effectiveness. Through the establishment of the institutions that are
transparent and accountable to the people, countries will be able to mitigate the risks of
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political turbulence, increase the confidence of the investors, and thereby create long-
term economic development. Through bolstering governance frameworks, we can also
reduce the negative effects of corruption and mitigate the governance-related problems,
which usually initiate the political instability (Aisen, & Veiga, 2013). Creating an
investment-friendly and business-attractive atmosphere that is able to attract foreign
capital is how countries can stimulate economic activities and hence, reduce the
damage of political turmoil to economic growth and development. informing investing
into education and in human capital development can be used to contribute in the
process of resisting political instability (World Bank, 2018). This can be achieved
through supporting better quality and skills education which in turn can help citizens to
experience a bigger role in political participation, social cohesion and to engage in
economic activities. Education creates a thinking mind, inspires citizenship and reminds
of the community of the nation; all of these are major factors in building a peaceful and
wealthy community. The fact, that developing human capital boost the labor productivity
and set the basis for the innovation, innovation and as consequent improve
competitiveness and better mitigate the impact of political turbulence on economic
performance is commensurate. support the forming of inclusive and participatory
governance processes in order to achieve social cohesion and distribute the risk of
political turmoil more broadly (Huntington, 1991). Through the participation of
marginalized individuals in the decisions making processes and place of choice,
countries can handle the differences, reduce social disturbances, and create social
peace. Representative governance will have the potential of reducing social gulfs
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formed due to ethnic, religious and socio-economic status differences, creating a
common national identity and national purpose.
6.2 The development of diversified economy and the investment portfolio is B.
Alternatively, in order to stop the harmful consequences of political turbulence
one can concentrate on the establishing of the future of reliable economy and
investment. Alesina and Perotti (2015) affirm the decrease in national economic
vulnerability to political shocks and economic instability when there is an economic
diversification in countries. Besides the diversification of sectors and commodities,
countries will be supported in keeping themselves away from the predisposition to
shocks and crises in a more sustainable way and will develop a second source of
growth and employment. Also, investment in the sectors like education, healthcare or
infrastructure are the tools enabling the favorable skills growth, higher productivity level
and the inclusive development that, in turn, might help cut the social tensions and might
contribute to the political stability (Campante & Chor, 2012). An investor may mitigate
the risks and potentially maximize the returns of their portfolio through the tactical
distribution of their assets, even when they face a wobbly political environment or a
market that is in constant motion. Therefore, innovative and entrepreneurial activities
can help the economy to be resilient and overcome adversities due to the political ups
and downs (Khan & Luintel, 2016). Countries facilitating an environment open to
innovation and business growth can spark economic vibrancy, innovation, and
adaptability, and encourage the development of renewable business areas. Innovation-
friendly economies can better cope with political disruptions and stay afloat in the
waters of changed international economic environment because they have the ability to
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move rapidly towards new markets and openings. Furthermore, supporting the R&D,
commercialization of technologies, and building skills can be considered as key tools
that will bring the countries at a competitive position and create a scope for their long-
term development and prosperity. bolstering regional economic integration and
cooperation can possibly be the best way to respond to the blow of the political turmoil
(De Haas & Poelhekke, 2016). Through fortifying bilateral economic ties within the
region and participating in inter-regional trade agreements and programs, countries can
increase their economic cooperation and penetration of external markets and promote
trade and investment within the region. Regional Economic Integration can also be a
means of enlarging markets, facilitating the transfer of technology, and promoting
knowledge sharing which coincidentally support economic growth and stability.
6.3 The effectiveness of diplomacy and peace-building efforts in maintaining
stability.
In the pacific tact and peace keeping steps are of the greatest importance in
assuring the ensuing peace and mitigation of negative effects of political disturbances.
In the context of economic shocks and conflict, Bazzi and Blattman (2014) point to a
causal relationship, accentuating the need for precautionary approaches to curtail any
escalation in tensions and violence. The diplomacy initiatives, mediated negotiations,
and the situation resolution mechanisms are very applicable in finalizing conflicts,
making a trust between stakeholders, as well as ensuring political stability. However,
spending on peace-building projects, including reconciliation programs, transitional
justice, and community empowerment projects, can be helpful in that they will attempt to
resolve the root causes of the conflicts and put the communities together such that the
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risks of the conflict recurrences are decreased (Acemoglu & Robinson, 2019). First of
all, through choosing to stick to diplomacy and peace building activities, countries
manage to establish an atmosphere of progress that is peaceful even despite the
political uncertainty and instability which tend to be explosive. Also, regional
collaboration and dialogue can lead to the conflict reduction and also the settlement of
disagreements in a region (De Haas & Poelhekke, 2016). Apart from involving
neighboring countries to take part in friendly conversations that address their common
obstacles through collaborative approaches, states could establish links and reduce the
probability of conflict diplomacy. Regional and multilateral organizations become forums
for dialog and resolve disagreements by mediation and thus contributes to regional
peace and stability. As well as, calling for the projects on crossing border infrastructure,
trade agreement, and joint development initiatives, these countries can stand together
in the economic interdependence and mutual benefit, which can lead to cooperation and
decrease of the risk for war among neighboring countries. Moreover, encouraging
trusting and democratic management practices and public participation can be the initial
step in handling the root causes of political instability and building their resilience
(Hegre, et al., 2017). Through guaranteeing all people having equal access to politics,
guaranteeing human rights and creating an environment for inclusive decision making,
states can bring social harmony and ensure that grievances are not seen as a reason
for creating conflict.
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7.0 Conclusion
7.1 Concluding on the effect of political instability on investment and economic
growth
Political instability shows a great deal of challenges to investment as well as
economic growth since Aisen and Veiga’s empirical research (2013) and Acemoglu and
Robinson’s (2019). They underline the fact that the politico-economic instability is a
leading factor in falling the economic growth by making the investors lose their
confidence and, thus, creating more uncertainty. As Aisen and Veiga (2013) argue,
political instability may result in investment decrease and poorer productivity growth of
the economy. Therefore, the authors conclude that political instability is a key factor
whose presence disrupts the environment of predictability that investors need in order to
make long-term commitments or investment, and reduces economic growth. The
results, therefore, serve as an evidence and proof of the need to have measures in
place to address the political instability as a path to investments growth and economic
development. Moreover, political instability may result in capital flight and disinvestment,
for countries that depending on, it can worsen economic problems (Kaplan & Kaplan,
2013). Investors may want to withdraw their capital from the country or not to invest new
money when perceiveing the political risks as higher. This might result in less overall
investment and in the decrease of the economic activity, too. Furthermore, political
instability creates an environment of uncertainty for foreign direct investment (FDI)
through the security of investments and policy reliability as drivers (Blanchard & Milesi-
Ferretti, 2018). Consequently, the governments of countries undergoing political unrest
will always face the challenge of gaining capital to achieve sustainable economic
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development and growth. In addition, political instability has negative social and
economic implications such as high unemployment levels, the result of which is poverty
and inequality (Piazza, 2011). In economies with political instability, businesses may
postpone their expansion or even lay off employees, due to the uncertainties about the
future of such economic conditions. These actions lead to higher unemployment rates
and wider inequalities. Furthermore corruption and decline of social order and trust in
institutions can hinder the effort of solving social and economic issues and justifies the
struggles of poor countries.
7.2 Encourage for taking proactive measures to overcome political chaos.
The solution to the serious challenges inherent in political chaos is taking the
necessary measures a priori. Mbite and Mbite (2012) recommend education and social
policies with quality opportunities that can expand employment and stabilize politics.
Surplus social cohesion can be achieved through education investment and connecting
peasants with opportunities that lead to economic empowerment. This is then achieved
by addressing underlying matters that spark conflicts as well as serving as a preventive
measure to eruption of political unrest. Similarly, Bazzi and Blattman (2014) also prompt
decision-maker to have a focus on economic diversification and minimize the usage of
volatile commodity that create a buffer against economic shocks and political instability.
Consequently, institutionalizing transparency, accountability, and good governance
mechanisms will be of paramount importance in order to ensure that the economy will
become strong and resilient over political changes, as confirmed by Alesina and Perotti
(2015). Such preventive actions could help to minimize the economic devastation
caused by political disorder by ensuring that the long term interests of the country are
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well protected. In addition, the infrastructure of robust and inclusive institutions is
another factor that is essential in preventing instability and promoting sustainability in
such cases. (Rodik, 2018) Institutions that are responsible of the rule of law, securing
property rights and transparency and accountability play a crucial role as enablers of
investment environment resilience and economic growth. Shoring up institutions
improves the understanding of political risks by providing a transparent framework,
which facilitates the settlement of difficulties and boosts investor certainty thereby
reduces risk. Also, the promotion of discussions and in a way between different societal
groups that would lead to healing the past grievances and building more trusting
relationships would contribute to long term stability and prosperity (Bazzi & Blattman,
2014). A comprehensive approach that benefits both economic, social, and governance
reform areas could help policy makers to address the primary causes of political unrest
and establish appropriate conditions for investment and economic growth.
7.3 Need for the creation of conditions of stability for the establishment of
sustainable development and progress
Instruction is an important element through instigating of the conditions that are
conductive in stability, a reason that is well emphasized by scholars like Hertog (2010).
Deep roots of solid institutions and governance system are building blocks for the
development of stability in the political context and economic growth. The institutions
serve as the functionary legal and regulatory framework providers, accountability and
transparency mechanisms, which crucially by nature are the source of maintainability of
social order and confidence of the investors. Besides, Lust-Okar (2016) also mentions
the application of inclusive political processes to the stability as a factor. Inclusive
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governance that takes care of grievances and is responsive to the interests of all is an
important aspect of trust that citizens share with one another, hence reducing the
likelihood of social unrests or conflicts. Through guaranteeing that all groups in society
are heard, the countries are building in a manner that all citizens have a stake in
decision making. This leads to commitment and participation of those people,
contributing to stability in the long run. Simultaneously, it is argued by the authors that
involving citizens at all levels of social and economic play is crucial for successful
political stability and a sustainable development. Social-economic disparities that are
normally a breeding ground for resentment and disunity among society, are equally
responsible for the generation of tensions and instability. To eliminate these inequalities,
governments must create policies that can provide universal access to education,
healthcare and economic opportunities to avoid social injustice and achieve social
solidarity. Investing in social safety nets as well as poverty alleviation mechanisms
helps create an atmosphere where risk factors and economic instability tend to be
contained, which is a critical factor in achieving overall stability. Another distinctive
feature of building an atmosphere that is supportive of stability is the comprehensive
effort involving various aspects of development. As emphasized by Alesina and Perotti
(2015), policy makers need to look beyond the manufacturing sector to strengthen the
economy so that it is less dependent on volatile political processes. For example, when
a country or group of countries depends on a single sector or product, this can close up
their options and reduce resilience to external shocks or give them no conditions for
increase in other sectors of the economy or create a limited space for new jobs.
Furthermore, embracing innovation and entrepreneurship as major drivers for economic
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vitality can contribute to the creation of chances for the development that is seen as
inclusive, leading eventually to stability.
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8.0 References
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democracy. Cambridge University Press.
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Alesina, A., & Perotti, R. (2015). Income distribution, political instability, and investment.
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Bazzi, S., & Blattman, C. (2014). Economic shocks and conflict: Evidence from
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Campante, F. R., & Chor, D. (2012). Why was the Arab world poised for revolution?
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Hertog, S. (2010). Rentier militaries in the Gulf monarchies: coping with challenges of
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Lerner, J., & Tufano, P. (2011). The consequences of financial innovation: A
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