Consequences of Political Instability, Governance and Bureaucratic Corruption on Inflation and Growth: The Case of Pakistan.

Adnan Haider, Musleh ud Din Musleh ud Din, Ejaz Ghani


This paper presents a theoretical model with micro-foundations
that captures some important features of Pakistan‘s economy which have
emerged in sixty-four years of its history. A comparison of Pakistan‘s
economic performance during different regimes shows that macroeconomic
fundamentals tend to show an improvement during the autocratic regimes
as compared with those prevailing during democratic regimes. In
particular, periods of autocratic regimes are typically characterised by
low inflation, robust growth and low level of bureaucratic corruption
due to better governance. In contrast, the economic performance during
the democratic regimes has been observed to worsen with weak governance
and high levels of corruption, high inflation due partly to reliance on
seigniorage to finance public spending, and lacklustre growth. Using
annual data from 1950 to 2011, computational modelling is carried out by
applying Markov-Regime switching technique with maximum-likelihood
procedures. The estimation results based on empirical modelling setup
are supportive of the above stylised-facts and also confirm the
implications of the theoretical model. JEL classifications: D73, E31,
H60, O42 Keywords: Political Instability, Governance, Corruption,
Inflation, Growth

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