Political Instability: How Far It Impedes Macroeconomic Performance in Pakistan?

Abstract

Political instability has been a much-debated topic in Pakistan’s history since its inception. This paper examines the impact of political instability, during the period of 1985-2018, on macroeconomic performance of Pakistan. The political instability is proxied by ‘percentage decline in annual tourist arrivals’. Foreign direct investment and trade are used as control variables. Long run relationship is found and it is statistically significant. Empirical results based on Johansen cointegration are estimated using fully modified ordinary least squares (FMOLS), Dynamic ordinary least squares (DOLS) and Conical Cointegration Regression (CCR). These confirm the negative relationship. Granger causality is also applied to show the cause-effect relationship which shows political instability as a cause of declining national income and foreign direct investment. This negative relation between political instability and macroeconomic performance exists both in short run and long run. Granger causality technique shows a Uni-causal relationship from political instability to national income. Recommendations based on empirical analysis are made in the end.