Stability in the political environment of a country is the main key towards economic development. Sustainable market and growth in the economy are not possible if the country is not facing favourable environment for investment or if it is facing political instability. Since the day Pakistan was born, it is continuously facing political instability (Chughtai, 2015). Political scenario of Pakistan always remained unpredictable due to which big investors always showed reluctance to start any big industry in Pakistan. Political instability is the reason that the foreign investors are not willing to invest in Pakistan. Once Karachi was known as the business hub of Pakistan generating more than 70% of the total revenue (Irshad, 2015). But due to political instability, bad law and order situation in the economic hub and excessive tarrifs and trade barriers on imports and exports, the majority of the investors had shifted their businesses either to Bangladesh or the United Arab Emirates.
Pakistan’s name is listed among those countries who have an abundance of natural resources, but due to political restlessness in the country, it has not attained the level of growth that it has to achieve. Political instability no doubt is an obstacle to the development in every field of life. However, whenever it took a country under its graze, development in the economic sector has suffered the most.
If we look at the history of Pakistan, we will find out that since its independence, the country remained failed to get a stable democratic government and it is oppressed under the political wrangling, feudalism and among the war between political parties of the Country. This phenomenon had eliminated all the possible chances of bringing a stable political environment in Pakistan.
Political stability and the economic growth are interconnected with each other. Instability in the political environment is a serious threat to the investors, and it might reduce the investment in the country which leads to the decrease in the economic development (McCann, 2002). Whereas if the economic condition of a country is slow, it might lead to the political unrest and collapse of the government. To develop the economy of a country, it has to be politically stable. Subjugation can help a country to achieve political stability. If the political environment of a country is stable, local as well as foreign investors will be willing to invest in the country, and thus the foreign direct investment will bring prosperity in the country by creating more and more jobs.
According to a report published by World Bank, Pakistan has spent minimum amount on the educational sector among other South Asian countries and is one of the lowest performer (Roshandel, 2010). Although, enrollment in the schools in increasing in Pakistan still it is lagging behind other countries in South Asia. Infant mortality rate in Pakistan is facing a similar situation. Gender disparity holds in the health, education and all other sectors. The ratio of tax to GDP is also one of the lowest in the world, and it is almost half of what Pakistan could achieve.
Bringing reforms in the country is the responsibility of one political party neither a party can do this alone. It requires that all the political parties should stand under one commitment and bring stability in the country. Remember that a country can only achieve economic development if the political scenario of the country is stable. An honest government making policies to propel growth in the country will help to bring economic development in the country.
Political stability plays a key role in bringing prosperity to a country and making it economically developed. Instability in the political system of a country could seriously harm the economic environment of a country. Lipstel (1960) described the concept of political instability in very simple words. He said that the political environment of a country is said to be stable if it has a consistent dictatorship or democracy for over 25 years (Rehman, 2016).
A country’s strong economic system depends on how efficient the government is working. The more efficient the government is, the more strong political scenario of the country will be. A government is said to be inefficient if it is facing problems over and over again in the implementation of its policy system. The relationship between the change in economic conditions and political instability can be scrutinised in two different ways.
First, the unstable political environment will create volatility and uncertainty in the society which will ultimately reduce the foreign direct investment in the country causing a decrease in the factors of production thus eliminating many jobs from the society and causing a decrease in the growth (Rehman, 2016). Secondly, uncertainty in the political scenario of a country change the investment nature and thus affects the spending patterns of not only an individual but of the whole society and thus create a direct effect on the growth of the economy rather than creating an impact on the investment(Rehman, 2016).
Modern politico-economic research shows that coalition governments of two or more political parties are a serious threat to the political environment as well as to the economic situation of a country (Talbot,2012). As these type of governments more prone and a serious threat to the survival of the government. Traynoe (1999) says that the political instability is a serious threat towards the change of political behaviour it can change the behaviour of politics of a country and that behavioural change leads to change the political system of a country in an unconstitutional way(Talbot,2012).
Since 1970’s Pakistan is facing a lot of variations in the economic situation of the country. These variations came as a result of the indo-pak war in 1971. As a result of this war, Pakistan lost an adequate share of human resource as well as financial resources. In the second half of 1970’s Pakistan faced a legitimate growth till 1988, due to sustainable development and consistent economic policies and Afghan war. After 1988, Pakistan’s economy has seen a huge downfall for a long period due to the instability in the political scenario as governments were changing after every 2-3 years (Rehman, 2016). Every political party was trying hard that the other party won’t complete their tenure and as a result of this, within around ten years, four different governments came, and none of them completed their tenure. This consistent change in the governments leads to poor economic and political policies which became a cause of downfall in the economy. After Musharraf’s martial law, from 2000 onwards, Pakistan’s economy saw a positive growth rate and an increase in the GDP.
The most important part of this study is that how instability in the political scenario of a country discourages economic growth and stops it way from globalization and how it affects the political and socio-economic environment of a country. Instability in the political scenario of a country reduces economic growth which leads to the reduction in the local and foreign direct investment as investors feel threatened under this situation and don’t want to risk their money by investing in such a country which won’t give them profit. As a country sees the reduction in the investment, it ultimately faces low productivity, low consumption level and less saving as purchasing power and earning capacity of the people has decreased.
Political instability in a country causes a rise in the unemployment and inflation which leads to the unrest in the society and creates uncertainty and due to this violence and stikes become a part of routine life in which not only protest against their employers for giving them fewer salaries but they also protest against the governments for making such policies that are not giving them any relief. Due to all these people start criticising the government and their plans and policies. This unrest in the society and chaotic situation gives a negative message to the investors and prevents them from investing in the country. Ultimately, investors start hesitating from risking their money because the ultimate goal of invest is to gain maximum profit and if your investment is not providing you with enough profit then obviously no one will invest in that.
China Pakistan Economic Corridor and its Impact on Pakistan
CPEC is the collection of different infrastructure projects that are now under construction in Pakistan. It’s estimated the cost at the start of the project was $56 billion but as the times passes, due to some delays and change in the political and economic conditions its estimated costs are now reduced to $62 billion (Rehman, 2016). Under CPEC, Pakistan will not only focus on the infrastructure to improve its transportation system, but it will also focus on other big projects like the construction of different dams and different powerplants which will ultimately help Pakistan to overcome its power shortage.
Officials of the Pakistani government say that the CPEC will be a game changer for the economy of Pakistan and it will create around 2.3 million jobs till 2030 (Shaikh, 2015). With the creation of around 2.3 million jobs, all the institutions in our country will be filled with the employees that are currently jobless and facing unemployment.Under this great project, China will help Pakistan to develop the second deepest part of the world “Gawadar Port” located in Balochistan province. The development of this project will not only help China but Pakistan as well for the liberalization of the trading system and it will also help us to make an easy access to the global markets and will help a lot to take easy access to the European markets.
With the development of this port, Pakistan will become an emerging market for all the developed economies as all the countries will have easy access to Pakistan through this port. Secondly, Pakistan can earn a lot of profit through this project, as we will be giving China a free trade way as a result of which around 200,000 trucks will pass through our border to China thus creating a lot of business opportunities throughout the country and thus increasing the revenue(Shaikh, 2015). Due to CPEC almost 10 million Chineses will come to Pakistan which will definitely effect our customs and traditions but it will help to give a boost to our economy.
Four major components of CPEC are energy sector development, Gwadar port, industrial development and communication infrastructure. Pakistan lacks in infrastructure, communication and energy sector that are very necessary for the uplift of any economy. This project will help us focus on our energy projects through which we can overcome our power shortage. Which will ultimately help us restart ou industry which is it is a working condition due to lack of power supplies. Export industry will see a boom if we become able to overcome our energy problem and end the energy crisis.
The development of this port will give us an absolute advantage over our neighbour countries as non of them have a deep port like the one we have and other than China, Russia and Turkey are also willing to become a part of this project as this will also help them giving a boost to their industries.
For the successful implementation of this project, stability in the political system of Pakistan is required which will ultimately help Pakistan to stabilise its economy and to increase its GDP.
Iran- Pakistan Gas pipeline and its Impact on Pakistan
Iran Pakistan gas pipeline project is also known as the IP gas or peace pipeline. It is a project of 2,775 km long pipeline through which Iran will deliver natural gas to Pakistan (Roshandel, 2010). Discussions for this project first started in 1995 between Iranian and Pakistani governments. An agreement was signed between the two governments for the construction of the pipeline between Karachi and South Pars Gas Field. In 1999, an agreement was signed between Iran and India and his pipeline project was extended from Pakistan to India (Roshandel, 2010).
Right now this pipeline project is on hold due to the sanctions being imposed on Iran from the United States. Upon the completion of the project, this pipeline will provide 3.2 billion cubic feet gas on a daily basis to Pakistan which will greatly help to overcome the energy crisis that is being faced by the government (Roshandel, 2010). Under this project, a power generation plant will also be constructed will generat around 4,000 MW of electricity and thus creating many job opportunities in the backward areas of the province of Sindh and Balochistan.
The implementation of this project will be done by segment approach according to which each of the countries that are a part of this project will construct the pipeline their respective areas by themselves and will be responsible for its security.
Pakistan’s political history has always seen ups and downs. Throughout the history, 38 years, she has been ruled by military dictators whereas the remaining years it has seen different political regimes (Spitzley, 1996). Throughout the political regimes, most of the time she has seen unrest in the political situation as different political parties were trying to make their government and through the other one out. Continuous instability and downfall in the political situation have generated interest of many researchers that how all this is effecting the GDP growth rate and economic progress of the country.
The researchers found that most of the time different political issues are responsible for poor fiscal policies. Most of the politicians always support those policies that are favouring their interest. Wrong policies lead to decrease in the investment level which leads to the reduction in jobs from the society and ultimately causes inflation.
A study investigated the political and economic factors to find out the reasons that the economic growth is volatile in Pakistan and why people are taking their investments outside of the country. The results said that non-economic factors like political instability, corruption, frequent regime changes, conflicts among different departments of the government, energy crisis are some of the reasons that are causing lower investment and poor economic performance.
In our study, economic growth is taken as a dependent variable. GDP is being used as economic growth’s proxy in Pakistan. Terrorism is unrest and general violence in a country. Some researchers say that assassination of political leaders or any terrorist attack in the country changes the political and social environment of the country thus creating economic and political unrest in the country. Therefore, terrorism will be used as a proxy for the measurement of political unrest and how it affects the GDP. Strikes from the sectarian activists or political parties for partial or complete resistance to the policies of the government will be used to measure instability in the political scenario and how it is affecting the GDP. An election is another factor of political and economic instability. As people do not know that who is going to win the elections and what will be the outcome and then what would the policies the upcoming government will make to give subsidy to the investors. Therefore it is also used as a proxy to measure unrest in the political situation and its effect on the GDP. We give them “1” when they occur and “0” else.
Results and Discussion
Statistical results will be discussed in this section. The aftermath of this study plus the reasons for noted outcomes follows. The following table shows the descriptive statistics.
Table 1. Descriptive Statistics
This shows that the avg GDP/ quarter is 7.879 with SD 0.7797. The minimum value of GDP is 6.4326 while the maximum is 9.0719. GDP os negatively skewed with 0.2925.
The results of explanatory variables and correlation matrix are shown in table 2. Since completion tells us about the relationship between the variables. It also tells about the direction and the strength of the relationship. A table shows that the variables do not have a strong relationship with one another and are independent of each other.
Table 2. Checking multi-correlation among different explanatory variables
This study has probe the effect of the instability in the political situation in Pakistan on the economic growth over the period of 1988-2010. To study the political instability, elections, strikes, regime and terrorism have been used as proxies. GDP has been used widely in the previous literature to measure the growth of the economy in the country. The reason behind the negative impact of terrorism on the dependent variable GDP is, terrorism has always negatively affected the market. Due to terrorism, our markets remained shut for weeks. Industrial people who were used to invest in the country which was a big reason for the creation of jobs have started pulling out their money and started investing in neighbouring countries from where they can earn more profit and where the law and order situation is better than Pakistan. Terrorism gave rise to a volatile economic environment which gave a bad image to the local as well as to the foreign investors who have now stopped all investments in Pakistan. This situation gave rise to the inflation and has increased poverty and unemployment in the country. The uncertainty in the elections and frequent regime changes in Pakistan also affected the economic growth rate in Pakistan.
This study provides implications to the investors, policymakers, financial institutions and regulatory authorities to set their plans and policies and chalk out the goals keeping in view the political instability of the country.
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