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CAN POLITICAL INSTABILITY BE GOOD FOR GROWTH ? THE CASE OF THE MIDDLE EAST AND NORTH AFRICA January 1999

Previous studies suggest that the higher is the level of political instability (PI), the lower is the investment rate. Yet, some paradoxical findings have been left unanswered, in particular concerning the Middle East and North Africa (MENA) region, where conventional measures of PI are extremely low and positively rather than negatively related to investment and growth. This paper attempts to explain the paradoxical findings. It develops a political economy model that distinguishes between internal and external sources of PI, incorporates interactions between them and shows that both the magnitude and direction of their effects on investment can vary. The model suggests (1), that domestic PI can have positive effects on investment by forcing the government to adopt a more efficient policy, but (2), external PI tends to reduce domestic PI and thus makes policy worse. We present empirical evidence for the MENA countries over the period 1970-1990 that is consistent with these predictions. * The authors express their appreciation to Ayman Kandeel for his assistance in obtaining some of the data used in this paper, to Kity Chan and Cindy Lee for her help in preparing tables, to Mehdi Farsi for his help in the computations and especially to Irma Adelman, Mohamed Bechri, Hadi Esfahani, Ibrahim El-Badawi, Habib Fetini, Imed Limam, Murat Sertel, Kutlu Somel, and Nabil Sukkar for their useful comments on an earlier version of this paper.