Political Stability and Economic Growth - Global Analysis - Essay Example

Political Stability and Economic Growth: A Global Analysis There is a direct relationship between political stability and economic growth. Strong macroeconomic growth is facilitated by a stable political environment and conversely, instability on the political front inhibits positive economic growth. A cross-continental analysis of the political and economic situations of four countries, Canada, Iraq, the United Kingdom and Somalia, will demonstrate a direct relationship between political stability (or lack thereof) and economic growth. A theoretical analysis of the two key concepts in this essay, political stability and economic growth, will be guided by Leon Hurwitz’s definition of what constitutes political stability. This analysis will then be followed by an in-depth examination of these four diverse countries, each representing different regions of the world. Finally, this essay will demonstrate that political stability must be present for an economy to be healthy and is a necessary condition for the promotion of strong and continued economic growth. How does one define political stability? Theoretically speaking, the term is notoriously difficult to define and definitions will necessarily vary (see Ake 271-283; Fosu 329-348; Pasos 70-86; Goldsmith 471-480). Nonetheless, it is integral that the concept of political stability be defined for the theoretical purpose of this essay. Leon Hurwitz explored four conceptions of political stability and defined it as: 1) the absence of violence, 2) the duration of government, 3) the existence of a legitimate political regime, and 4) the absence of structure change (149-163). Since this definition is comprehensive it will guide the political component of this essay as well as complement the economic systems analysis of our four case studies. What sort of factors influence economic growth? The economic growth of a country is routinely measured by an aggregate indicator such as Gross Domestic Product (GDP), which represents the increase in goods and services produced by an economy. Economic growth can also be measured in GDP per capita, an indicator of the average annual income of an individual within a given economy. Annual economic growth and national productivity are influenced by a variety of factors including international terms of trade (imports vs. exports), the national unemployment rate and inflation rates (Henderson 338). Canada, Iraq, the United Kingdom and Somalia represent a fascinating cross-section of countries with which to analyze the effect of political stability on economic growth. From a political standpoint both Canada and the United Kingdom are parliamentary democracies with entrenched electoral systems and a tradition of competitive, as well as free and fair, elections. They are also both advanced industrial economies with strong and consistent economic growth. Canada and the United Kingdom will be considered representative countries for North America and Europe respectively. Iraq and Somalia represent two under-developed economic systems in the Middle East and Africa. Both are characterized by an incredibly precarious political situation which this essay will argue, hinders positive and consistent economic growth. Canada Canada has an advanced industrial economy and is a member of the G8 group of countries. In terms of actual land mass, Canada is the second largest country in the world and is also blessed with rich natural resources. A self-governing dominion since 1867, Canada has retained special ties to Great Britain and developed its economy in tandem with the United States. The US-Canadian border remains the largest unfortified border in the world and despite separatist threats emanating periodically from the province of Québec, Canada has enjoyed almost a century and a half of political stability coupled with strong economic growth (CIA World Factbook 2008). Political situation in Canada Following Hurwitz’s definition of political stability, Canada is an incredibly stable country, characterized by a strong parliamentary system, free elections and the peaceful transfer of prime ministerial authority. Hurwitz explored four conceptions of political stability and as a refresher, defined it as: 1) the absence of violence, 2) the duration of government, 3) the existence of a legitimate political regime, and 4) the absence of structure change (149-163). Is Canada a violent place? Violent crime and homicide are relatively rare. The Canadian homicide rate was 1.82 per 100,000 people in 2004 and in the same year the homicide rate in the United States stood at 6.4 per 100,000. Political violence is also rare and political power is transferred following elections through non-violent means. In fact, a Canadian politician has not been assassinated in more than a century and a half when Thomas D’Arcy McGee was killed in Ottawa in 1868 (Kennedy et al 398; Wilson 12). How durable is the Canadian government? Although Canadian governments change with relative frequency, Canada has an entrenched parliamentary system dating back to Confederation (1867). While Queen Elizabeth is the nominal head of state, real power is exercised by the Prime Minister and his/her political party. The offices of Prime Minster, Parliamentary Speaker and Governor General (the Queen’s Representative to Canada) are a constant aspect of the Canadian political scene and not subject to change (CIA World Factbook 2008). Is the current Canadian regime perceived as legitimate? Yes, by and large the Canadian political system is perceived as being legitimate by the Canadian populace and general federal as well as provincial elections received widespread popular support. Discontent with the Canadian political process is not widespread but there are pockets of discontent in the province of Quebec, although the separatist movement there appears to have fizzled out after periodic violence in the 1970s and 80s (Pinard 281-314). Has Canada experienced recent structural change? No, Canada’s parliamentary institutions largely remain unchanged since the days of Confederation. While the government does change every few years – and generally goes back and forth between the Liberal and Conservative political parties – the institutions of governance in Canada remain the same. Economic Situation in Canada Described as “an affluent, high-tech industrial society in the trillion-dollar class, Canada resembles the US in its market-oriented economic system, pattern of production, and affluent living standards” (CIA World Factbook 2008). Recent membership in the North American Free Trade Agreement (NAFTA) with the United States and Mexico has also facilitated regional economic integration. A stable political situation in Canada has led to strong economic growth since the latter half of the twentieth century. With a population of 32.3 million people, Canada’s GDP is $1.266 trillion (2007 estimated) with a real growth rate of 2.7%. Canada’s GDP per capita was estimated in 2007 at $38,400 and the employment rate is officially a low 6%. Canada’s GDP has grown from between 1.7% and 3.4% since 2003 (CIA World Factbook 2008). According to the Wall Street Journal and the Heritage Foundation, Canada has the seventh freest economy in the world as ranked in their Index of Economic Freedom, 2008. Canadian exports were estimated at $428 billion and were primarily manufactured goods including motor vehicles and parts as well as aerospace technology and industrial machinery. Additionally, Canada: “enjoys a large trade surplus, thanks to oil and mineral exports. Because of its bilateral trade relationship with the United States, its economy tends to track that of its larger southern neighbor…unemployment is at a 30-year low” (Holmes et al 129). As a one of the world’s leading free-market democracies, Canada’s economy has benefited from a close relationship with the United States as well as economic integration through multinational organizations like NAFTA and the G8. Canada is one of a handful of countries in the “trillion dollar club” – countries with an annual GDP of a trillion dollars or more – and while the Canadian economy continues to diversify, macroeconomic growth remains strong (Zestos and Tao 873). Iraq Iraq, following Saddam Hussein’s ouster in 2003, Iraq provides perhaps one of the best modern examples the impact of political instability on economic growth, particularly since Iraq is a country rich in natural resources. The political situation following the US-led invasion has had an incredibly disruptive effect on oil production in Iraq with subsequent affects to the economy as a whole. From a macro-economic standpoint, one cannot overemphasize the importance of oil to the Iraqi economy. In fact, 2/3rds of Iraq’s present economic output is derived from the sale of oil in international markets. Additionally, the security situation in Iraq remains the greatest impediment to the smooth functioning of the Iraqi economy as a whole (Wood et al 65). Political situation in Iraq Following Hurwitz’s definition of political stability, Iraq today is an incredibly unstable country, beset by extreme violence and sectarian strife. Hurwitz explored four conceptions of political stability and they are applied to Iraq below: Is Iraq a violent place? Yes, in fact Iraq is arguably one of the most dangerous and violent places on earth. According to the British Broadcasting Corporation, by February 2008 a total of 85,263 non-military personnel (civilians and Iraqi policemen) have been killed since the invasion of 2003 (2008). Suicide attacks are commonplace and violent acts occur on a daily basis. Both political reconciliation and the smooth functioning of the economy are inhibited by an extremely precarious security situation. How durable is the Iraqi government? Not very durable as Iraq’s present government is a loose-coalition of political parties, each representing different ethnic communities. Democracy has been imposed from abroad and is a new concept to the Iraqi people. The current political system represents the sectarian nature of Iraqi society and exacerbates important sectarian cleavages. Iraq is overcoming a 35 year legacy of Ba’ath Party rule and democracy has not yet been entrenched. Kurds in the north want independence, Sunnis feel marginalized under the new regime and the majority Shi’a population is seeking redress for past grievances. Iraq today is on the verge of internal combustion and the government is being propped up by a foreign – and always unpopular – American-led coalition force. Far from durable, and intrinsically tied to the security situation, the Iraq government is precarious at best (Zizek 42-49; Simon 68). Is the current Iraqi regime legitimate in the eyes of the Iraqi public? Yes and no. Although many Iraqis welcomed the end of Saddam Hussein’s tyrannical rule, the inability of the present government to improve the security situation, as well the overt presence of foreign (re: American) troops on the ground serve to undermine the current government and de-legitimize it in the eyes of the many Iraqis (Simon 57-76). Has Iraq experienced recent structural change? Yes, Iraq has undergone an intense political, social and economic transformation following the removal of Saddam Hussein’s Ba’athist regime in 2003. After Saddam’s overthrow, the Ba’ath Party was banned, the armed forces were disbanded and the economy suffered as a result of war. Of extreme importance, oil production – accounting for 2/3rds of Iraq’s economic output – ground to a halt following the US-led invasion (Foote et al, 65). Economic Situation in Iraq The present economic situation in Iraq, in spite of some gains following the US invasion, remains insecure. In 2007, Iraq had population of 28.2 million people, a labour force of 7.4 million, and a Gross Domestic Product of $55.44 million. GDP per capita was estimated at $3,700. Inflation, an increase in the general level of prices for goods and services, is high and running at 31.6%. Iraq’s unemployment situation today is estimated to also be a high 30%. Although negative in 2003 and 2004, Iraq’s GDP growth rate is now estimated at 5% in 2008. How has continued political instability affected the economic situation in Iraq? (CIA World Factbook 2008). Iraq’s economy suffered greatly following the US-led invasion of 2003. In fact, Gross Domestic Product in 2003 – the year of the invasion – contracted and was negative at -3%. The following year in 2004, Iraqi insurgency began and GDP further contracted to -21.8%. Iraq in 2005 witness exceptional growth of 52.3% but in 2006 annual growth fell again to -3%. As mentioned above, annul GDP growth for 2008 is estimated at 5% with GDP per capita at $3,700 (CIA World Factbook 2008). What role does oil play in the Iraqi economy? Oil is integral to the Iraqi economic situation as this country is the second largest petroleum producer in the world (Alkadiri and Mohamedi 20). Prior to the invasion Iraqi oil production was estimated at 2.5 million barrels per day. It dropped to almost zero in April of 2003 and exports completely ceased operations in June. Electricity generation also fell by 25% that year with the International Monetary Fund (IMF) estimating that GDP per capita fell by 22% in dollar terms in 2003 (Foote et al 65). In its annual Index of Economic Freedom 2008, the Wall Street Journal and the Heritage Foundation describe the effect of political instability today on the Iraq’s oil industry: Iraqs oil industry provides more than 90 percent of hard-currency earnings but has been hurt by pipeline sabotage, electricity outages, and years of neglect and postponed maintenance. Economic recovery, though helped by high oil prices and economic aid from the United States and other foreign donors, is hampered by continued insurgency and instability (Holmes et al 217). Unemployment, estimated at upwards of 30% in 2007, is a direct result of the war and the social and economic instability caused by civil strife and extreme violence. In fact, the unemployment rate represents a 75% increase from that recorded in the 1997 Iraqi Census (Foote et al, 67). Described in Foreign Affairs magazine as the “growth of warlordism” (Simon, 68), endemic violence, upheaval associated with the invasion, and a weakened central authority have dramatically reduced the economic prospects of the average Iraqi. People are afraid to leave their homes due to the prevalence of murder and daily bombings. In addition to hurting the job prospects of Iraqi citizens, crime was also described by the World Bank as one of the “main obstacles to private sector investment in Iraq” (Foote et al 66). The United Kingdom The United Kingdom of Great Britain and Northern Ireland1 has been an economic powerhouse for centuries and as the “dominant industrial and maritime power of the 19th century, the UK has played a leading role in developing parliamentary democracy” (CIA World Factbook 2008). The United Kingdom is made up of England, Scotland, Wales and Northern Ireland and has an advanced industrial economic structure. A member of the G8 group of countries, the UK is a global leader in international affairs with one of the largest economies in the world. Today’s population stands at nearly 61 million people and the United Kingdom holds the distinction of being home to the world’s oldest parliamentary democracy (BBC Country Profile, United Kingdom 2008). Political situation in the UK Following Hurwitz’s definition of political stability, the United Kingdom is a stable country, characterized by a strong parliamentary system, and fair and free elections involving the peaceful transfer of prime ministerial authority. The current head of state is Queen Elisabeth II, a constitutional monarch wielding symbolic political power (Bowler, Wenzel and Lanoue 242). Hurwitz explored four conceptions of political stability and as a refresher, defined it as: 1) the absence of violence, 2) the duration of government, 3) the existence of a legitimate political regime, and 4) the absence of structure change (149-163). Here they are applied to the UK below: Is the UK a violent place? Violent crime and homicide are relatively rare in the UK. The high-profile attacks in London’s Tube system in 2005 caused much controversy but were largely isolated incidents. Political violence with relation to unrest in Northern Ireland has also decreased significantly since the Good Friday Accord of 1998 (Reynolds 1999-2000; 2006) How durable is the British government? Although the political party in power in government does change every few years, the UK has an entrenched parliamentary system, known as the oldest in the world. Queen Elizabeth is the Executive and official head of state but real power is exercised by the Prime Minister and the party in power. As world’s the oldest parliamentary democracy, durability is an intrinsic component of British political governance (BBC Country Profile, United Kingdom 2008). Is the current British regime perceived as legitimate? Yes, by and large the British political system is perceived as being legitimate by the population despite regional tensions (Scottish/Welsh desires for more autonomy) and nascent republicanism. Discontent persists in Northern Ireland but the government has co-opted important segments of the Irish republican movement and by and large the British population is content with the status quo (Bowler, Wenzel and Lanoue 248). Has the UK experienced recent structural change? No, while Her Majesty’s Government does change every few years – and generally goes back and forth between the Labour and the Conservative political parties – the structure of governance in the UK has remained the same for centuries. Economic Situation in the UK The UK’s population is 61 million and it has the 2nd largest economy in Europe after Germany. Britain is also recognized as having one of the strongest and most consistently stable economies in the European Union. With an estimated total GDP of $2.84 trillion and a GDP per capita of $46,740, few countries in the world – let alone in Europe – can match the sheer economic strength of the combined economies of England, Scotland, Wales and Northern Ireland. Strong and consistent economic growth is characteristic of the modern and diversified British economy with annual GDP growth estimated at 2.2% in 2008. Unemployment remains low at 4.7% (2007) and inflation was most recently estimated in 2008 at 1.9% (The Economist 108). According to the Wall Street Journal and the Heritage Foundation in their Index of Economic Freedom 2008, the United Kingdom has the tenth freest economy in the world. UK exports were estimated at $587.5 billion and were primarily manufactured goods, fuels, chemicals, food, as well as financial and insurance services. Political stability and reform has had an important influence on the growth of the British economy. Accordingly, since the market reforms instituted by Prime Minister Margaret Thatcher in the 1980s, the United Kingdom has experienced steady economic growth and has outpaced other large EU economies. Under the Labour governments of Tony Blair, Britain promoted an open, global economic outlook and made stability a priority…The City of London remains one of the world’s leading centers of commerce and should continue to grow. The U.K. is now the world’s top destination for foreign direct investment (Holmes et al, 383). As a one of the world’s leading free-market economies and the site of the world’s oldest parliamentary democracy, the UK is a European powerhouse. Britain is also one of a handful of countries in the “trillion dollar club” – countries with an annual GDP of a trillion dollars or more – and its economy continues to grow in tandem with stable political situation. As stated above, political stability, especially the recent peace in Northern Ireland, has contributed to increased direct foreign investment and consistent economic growth in the UK. Somalia Political situation in Somalia Following Hurwitz’s definition of political stability, Somalia today is an incredibly unstable country, beset by extreme violence and lacking central authority in the form of a national government. Hurwitz explored four conceptions of political stability and as a refresher, defined the term as: 1) the absence of violence, 2) the duration of government, 3) the existence of a legitimate political regime, and 4) the absence of structure change (149-163). Is Somalia a violent place? Yes, in fact Somalia, along with Iraq, is one of the most dangerous and violent countries in the world. The life expectancy of the average Somali today is 47 years for men and 49 years for women (BBC Somalia Country Profile, 2008). According to Time Magazine: Since the collapse of the last functioning government in 1992, Somalia has been a prisoner of bloody anarchy, a void filled by vicious and impressively armed chaos, as rival warlords, clans and sub-clans and Islamists prosecuted a series of civil wars — over power, over historic tribal animosities and over competing visions of Islam (Perry, 2008) How durable is the Somali government? According to Mohammed Hussein Farah Aidid, former warlord and Somalias new Deputy Prime Minister, "Its a symbolic government. Permanence we do not have. We do not have institutions; we do not have a credible force. Unless [we receive outside assistance] quickly, we have no chance of building a nation." (Perry, 2008). Is the current Somali regime legitimate in the eyes of the Somali public? The British Broadcasting Corporation reports that “Somalia has been without an effective central government since President Siad Barre was overthrown in 1991.” (BBC Somalia Country Profile, 2008). In fact, chaos, anarchy and factionalized fighting between warlords have been the normative state of affairs in Somalis for more than 15 years. The current government – known as the Transitional Federal Government - headed by former warlords President Abdullahi Yusuf Ahmed and Prime Minister Nur Hassan Hussein was installed in Mogadishu by Ethiopian forces in December 2007. Ethiopia has historically been the traditional enemy of Somalia and this is certain to hurt the credibility of the current regime among Somalis. It must be noted that chaos remains supreme and the transitional authority is unable to maintain law order. Its current grasp on power is tenuous at best (BBC Somalia Country Profile, 2008). Has Somalia experienced recent structural change? The Somali state imploded following the overthrow of Siad Barre in 1991. Civil ensued and resulted in total Somali institutional collapse. All institutions of governance (the security services, the judiciary, the economy) ceased to function in any coherent capacity. Recently, attempts have been made to install a Transitional Governing Authority but the traditional pillars of government (legislature, executive, judiciary) do not presently exist in Somalia (BBC Country Profile, Somalia, 2008). Economic Situation in Somalia Situated on the easternmost tip of the Horn of Africa, Somalia is one of the world’s poorest countries with a per capita GDP of $600 (2007 estimate). In fact, in a global GDP per capita ranking by the US Central Intelligence Agency, Somalia scored last out of a total of 216 countries. Also that year, Somalia’s estimated official Gross Domestic Product was estimated to be a mere $2.483 billion (CIA World Factbook, 2008). As with GDP, unemployment and inflation in Somalia are difficult concepts to quantify and measure. While it is known that there is extreme poverty and unemployment in Somalia, actual numbers are hard to come by. In fact, in its annual Human Development Report for Somalia, the United Nations was unable to measure unemployment in Somalis and listed it as “not available” (HDI, 2007/2008). Despite this estimates exist and in 2005 the World Bank reported that Somalias labor force was an estimated 4.6 million (or 56% of the countrys total population) with a whopping urban unemployment rate of 66% (CIA World Factbook, 2008). A figure for inflation, as a measure of the annual increase in consumer prices, is equally hard to measure and is absent in the literature. Somalia’s total lack of functioning government and institutional capacity inhibits economic growth and the result is one of the world’s smallest GDPs per capita. Accordingly, in its annual Index of Economic Freedom 2008, the Wall Street Journal and the Heritage Foundation made the conscious (and conspicuous) decision to omit Somalia due the complete absence of the rule of law, stating that “economic freedom in Somalia is impossible to analyze” (Holmes et al, 2008). Internationally renowned and well-respected British periodical The Economist followed suit and omitted Somalia in its annual economic rankings, The World in 2008 (The Economist, 2008). Concluding Remarks There is a very direct and strong relationship between political stability and economic growth. The cases of Iraq and Somalia demonstrate how instability on the political front can inhibit positive economic growth. Britain and Canada are examples of counties with mature parliamentary and economic systems and both are members of the exclusive “trillion dollar” GDP club. It’s important to note that while a country like Iraq may have high annual GDP growth, developing countries may experience quicker rates of annual growth and these rates of growth can be illusive. From a macroeconomic perspective, other factors including unemployment, GDP per capita and total GDP output can be better indicators of the actual size and strength of a particular national economy. This cross-continental analysis looked at case studies in Africa, North America, Europe and the Middle East and came to the conclusion that political stability must be present for an economy to be healthy and is a necessary condition for the promotion of strong and continued economic growth. Works Cited Ake, Claude. A Definition of Political Stability. Comparative Politics 7:2 (Jan., 1975): 271-283. Alkadiri, Raad and Fareed Mohamedi. “World Oil Markets and the Invasion of Iraq”. Middle East Report 27 (Summer, 2003): 20-27+30-31. Bennett, Peter D. and Robert T. 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