Nexus between Political Instability and Economic Growth in Pakistan

Abstract This study has explored the effect of political unrest on economic of Pakistan and its volatility over the period of last 22 years using annual time series data, which have been further decomposed into different quarters to capture interim effects. Terrorism, election, regime and strikes have been used as political instability proxies. ARCH and GARCH models have been used to examine the outcome of political uncertainty on the economic progress, that is, GDP in Pakistan. From the outcomes of GARCH (1, 1) model through the independent variables in the mean equation, it was found that among terrorism, election, regime and strikes, only terrorism has significant negative effect on the mean equation of the dependent variable. The results of GARCH (1, 1) model with independent variables in the variance equation shows that elections and regimes have significant negative effect on volatility of GDP. The overall results imply that political instability has significant negative effect on economic growth and the government should take corrective measures to bring political stability.