Domestic barriers Domestic barriers to economic to economic

growth & growth & developmentdevelopment

Political stabilityPolitical stability

‘‘Stabel government and its ability to Stabel government and its ability to withstand forcible removal from power’.withstand forcible removal from power’.

Political stability is associated with Political stability is associated with higher growth rates and better higher growth rates and better development outcomes.development outcomes.

Periodically monitored by int’al Periodically monitored by int’al organizations (WB) by use of indicators organizations (WB) by use of indicators such as: revolutions, civil war, internal such as: revolutions, civil war, internal conflicts, ethnic tensions, frequency of conflicts, ethnic tensions, frequency of elections, demonstrations, ...elections, demonstrations, ...

Indispensable to growth and Indispensable to growth and development:development:

1.1. Stable government is necessary for the Stable government is necessary for the creation of a stable economic environment creation of a stable economic environment (implementation and continuity of economic (implementation and continuity of economic and other policies).and other policies).

2.2. Stable economic environment necessary for Stable economic environment necessary for investments leading to physical capital investments leading to physical capital formation. Political instability makes formation. Political instability makes investments riskier.investments riskier.

3.3. Needed to attract FDI.Needed to attract FDI.

4.4. Political instability leads to an outflow of Political instability leads to an outflow of financial capital (capital flight), which financial capital (capital flight), which contributes to B.oP. deficits.contributes to B.oP. deficits.

Political instability has negative Political instability has negative impacts:impacts:

1.1. Disrupts every aspect of economic life.Disrupts every aspect of economic life.

2.2. Results in deep cuts in public spending Results in deep cuts in public spending on education, health, infrastructure and on education, health, infrastructure and development programs.development programs.

3.3. Undermines investment by introducing Undermines investment by introducing incertainties wrt property rights, tax incertainties wrt property rights, tax rules, expropriations,...rules, expropriations,...

4.4. Induces capital flight, depriving the Induces capital flight, depriving the economy of resources that could have economy of resources that could have been used for domestic investment.been used for domestic investment.

5.5. When accompanied by violence, can When accompanied by violence, can lead to destruction of infrastructure.lead to destruction of infrastructure.

6.6. Increases vulnerability to hunger and Increases vulnerability to hunger and famine, as governments divert famine, as governments divert resources to military or police activities.resources to military or police activities.

Close relationship between political Close relationship between political instability and levels of income, with instability and levels of income, with low per capita income levels low per capita income levels associated with higher levels of associated with higher levels of political instability.political instability.

Causality runs in both directions:Causality runs in both directions: Political instability Political instability → → low econ. growth low econ. growth

→ → low incomes.low incomes. Low incomes Low incomes →→ widespread widespread

dissatisfaction with economic dissatisfaction with economic conditions for which gov is held conditions for which gov is held responsible responsible →→ political instability. political instability.

Circle of political instability. Circle of political instability. Examples: countries in Africa and Examples: countries in Africa and Central and Latin America.Central and Latin America.

CorruptionCorruption WB definition: ‘the abuse of public office for WB definition: ‘the abuse of public office for

private gain’.private gain’. Specially pronounced in countries where the Specially pronounced in countries where the

legal system, mass media and the system of legal system, mass media and the system of public administration are weak and public administration are weak and underdeveloped.underdeveloped.

Monitored by Transparency International (TI), Monitored by Transparency International (TI), that compiles the Corruption Perceptions that compiles the Corruption Perceptions Index, based on public opinion surveys.Index, based on public opinion surveys.

Higher levels of corruption are found in Higher levels of corruption are found in countries with low per capita incomes and low countries with low per capita incomes and low rates of growth.rates of growth.

Corruption leads to lower growth and Corruption leads to lower growth and poorer development performance:poorer development performance:

1.1. Being like a tax, makes private Being like a tax, makes private investments more costly.investments more costly.

2.2. Bribes to be paid for access to basic Bribes to be paid for access to basic services (to teachers, health workers) services (to teachers, health workers) act as a regressive tax and the poor are act as a regressive tax and the poor are deprived from basic social services.deprived from basic social services.

3.3. Bribes go into the pockets of public Bribes go into the pockets of public servants and politicians, not being servants and politicians, not being available to the government for the available to the government for the provision of social services.provision of social services.

4.4. Can result in misallocation of resources as Can result in misallocation of resources as gov officials accept bribes to pursue gov officials accept bribes to pursue uneconomic projects, while neglecting uneconomic projects, while neglecting investments in basic social services investments in basic social services (education, health, sanitation,...)(education, health, sanitation,...)

5.5. Restricts entry of new firms that must pay Restricts entry of new firms that must pay bribes to begin operations, preventing bribes to begin operations, preventing operation of competitive markets.operation of competitive markets.

6.6. Damages people’s trust in the state, its Damages people’s trust in the state, its institutions and leadership.institutions and leadership.

7.7. Weakens prospects for environmental Weakens prospects for environmental sustainability as bribes are paid in order to sustainability as bribes are paid in order to avoid compliance with environmental avoid compliance with environmental regulations.regulations.