Nexus between political instability and economic downturn in Pakistan

Outline:
1) Introduction.
2) Overview of the political instability relationship with economic downturn.
3) Historical examples of political instability leading to economic downfall:
a) Zimbabwe.
b) Greece.
c) Venezuela.
d) Pakistan.
4) A bird eye view of the countries where political instability could not effect economic
stability:
a) United Kingdom.
b) Germany.
c) Italy.
5) How political instability has led to an economic downturn in Pakistan:
5.1) Inconsistent economic policies are the result of political unrest in the country.
5.2) Political instability has eroded investor confidence, both domestic and foreign.
5.3) Political instability has also given birth to Fiscal Mismanagement and Budget
Deficits.
5.4) Public institutions have deteriorated due to political instability too.
5.5) The riots and strikes due to political fiasco led to the closure of business and trade
activities, interrupting the GDP growth.
6) Consequences of political instability and economic downturn in Pakistan.
6.1) poverty and widen income inequality.
6.2) High unemployment rate.
6.3) political radicalization and extremism.
6.4) Currency Depreciation and Inflation.
6.5) Decline in human development index.
7) Strategies to address political instability and promote economic stability.
7.1) Political parties should sit together and crave out a long term vision to foster political
and economic development.
7.2) There must be a charter of economy for economic stability.
7.3) Public participation should be encouraged to hold politicians accountable for their
immature and self-interest policies.
7.4) With the help of political commitment, the tax base must be expanded, resulting in
political and economic stability.
8) Conclusion.
 Nexus between political instability and economic downturn in Pakistan
Political instability and economic downturns are often intertwined, with one exacerbating the
other in a vicious cycle. This relationship has been observed in various countries across the
globe, including Pakistans. Historical examples from countries like Zimbabwe, Greece,
Venezuela, and even Pakistan itself demonstrate how political turmoil has resulted in economic
downfall. On the other hand, nations like the United Kingdom, Germany, and Italy have
managed to maintain economic stability despite political uncertainties. In the case of Pakistan,
political unrest has led to, inconsistent economic policies, and a decline in investor confidence.
The resulting fiscal mismanagement, budget deficits, and deterioration of public institutions
have further contributed to economic downturns. Riots, strikes, and disruptions in business
activities have also impacted the country's GDP growth. The consequences of this nexus
between political instability and economic downturns in Pakistan are widespread, including
increased poverty, income inequality, unemployment, and even political radicalization and
extremism. Currency depreciation and inflation have further added to the nation's challenges,
leading to a decline in the human development index. Therefore, long-term vision building, a
charter of economy, public participation, and expanded tax base are some strategies to foster
both political and economic stability. In short, the correlation between political instability and
economic downturn in Pakistan highlights adverse effects and consequences, requiring effective
strategies to overcome instability, ensure economic stability and foster sustainable growth.
Political instability has a significant relationship with economic downturns. When a country
experiences frequent changes in government, social unrest, or political upheaval, it creates an
uncertain environment for businesses and investors. This uncertainty leads to a lack of
confidence in the economy, resulting in decreased investments, reduced consumer spending,
and a slowdown in economic growth. Additionally, political instability disrupt essential
government functions, leading to poorly implemented policies and ineffective governance. As a
result, economic stability and development suffer, exacerbating the downturn. However,
unstable structure in politics, off course is the most critical factor affecting the economic
stability of the state since political stability is the precondition of the economic stability. Ray
Jovanovich aptly said, “Without political stability there can be no economic prosperity, that's
the bottom line.”
Political instability is potent catalyst for economic downfall, and several nations have
experienced this harsh reality throughout history. Right now Pakistan economy is badly
impacting by political instability. Since last year in April 2022, Pakistan is going through the
worst political crisis which in turn brought an economic crisis. There are some other historical
examples worldwide that are worth noting. First and foremost, Zimbabwe experienced a severe
economic downfall due to political instability in the early 2000s. President Robert Mugabe's
land reform policy, which involved seizing white-owned commercial farms and redistributing
them to landless black Zimbabweans, led to a collapse in agricultural production. The country's
currency hyper inflated, reaching astronomical levels, and the economy suffered a serious
decline. Similarly, in late 2009, Greece experienced a major economic crisis due to mismanagement,
corruption, and lack of transparency in public finances. The government sought bailouts from the
European Union and IMF, leading to a prolonged recession, budget cuts, and high unemployment.
Moreover, Venezuela's 2010 economic crisis was caused by political instability, misuse of its oil-
dependent economy, and authoritarian policies. The country experienced hyperinflation, scarce basic
goods, and millions fleeing for better opportunities abroad. These examples serve as cautionary tales,
highlighting the critical link between political stability and a nation's economic well-being.

On the contrary, The United Kingdom, Germany, and Italy stand as shining examples of developed
countries that have demonstrated an impressive ability to maintain economic stability even in the face
of political instability. The UK experienced significant political instability due to Brexit
negotiations, leading to changes in government leadership and challenges in reaching a
withdrawal agreement. Despite this, the country's well-diversified economy, strong financial
sector, and institutional stability have maintained economic resilience. Germany has generally
been considered politically stable, but it has also faced some periods of instability, particularly
related to coalition governments. For instance, 2017 federal election, where the Christian
Democratic Union, Christian Social Union, and Social Democratic Party formed a new
government. In addition to this, Italy has had a history of more frequent changes in
governments and periods of political uncertainty. Nevertheless, its diversified economy, strong
manufacturing sector, and strong trade relationships have helped support its economic
stability. In brief, despite experiencing periods of uncertainty and leadership changes, these
nations have managed to navigate through turbulent political waters while preserving their
strong economic foundations.
Now it is important to discuss that how political instability in Pakistan caused economic
downturn in Pakistan. To begin with, political instability leads to the switching of economic
policies.In Pakistan, political unrest has been a significant driver of inconsistent economic
policies, leading to detrimental effects on the country's financial stability. The frequent changes
in governments, coupled with power struggles and policy reversals, have hindered long-term
planning and investment. For instance, between 2008 and 2023, Pakistan witnessed sixteen
different finance ministers, exacerbating the policy flip-flops. As a consequence, the economy
faced challenges like a rising fiscal deficit, soaring inflation, and an unstable currency. This
turmoil in governance has deterred foreign investors, causing foreign direct investment (FDI) to
plummet from $5.4 billion in 2007 to $1.45 billion in 2023. The lack of consistent policies has
hindered economic growth and created uncertainty for businesses and investors. Therefore,
political instability has resulted into inconsistent economic policies, as like it has eroded
investor’s confidence.
Apart from inconsistencey in smooth functioning of the economic policies political instability
has eroded investor confidence, both domestic and foreign. It has had a detrimental impact on
investor confidence, leading to economic uncertainties and reduced foreign direct investment
(FDI). According to the World Bank, Pakistan's FDI inflows declined from $5.4 billion in 2017 to
$2.1 billion in 2019 and in 2023 it is $1.45 billion highlighting the severity of the issue. Unstable
government and internal power struggles have contributed to policy flip-flops and inconsistent
regulatory frameworks, deterring both domestic and foreign investors. The country's
Corruption Perceptions Index (CPI) ranking by Transparency International also worsened, with
Pakistan ranking 140th out of 180 countries in 2022. Such indicators signal an alarming lack of
transparency and governance, making investors wary of potential risks. To regain investor
confidence, Pakistan must prioritize political stability, strengthen rule of law, and implement
robust reforms to create a more attractive investment climate. Put briefly; Foreign and
domestic investor confidence has been weakened by political unrest, like it has given birth
Fiscal Mismanagement and Budget Deficits.
Political unrest also led to fiscal mismanagement and budget deficits. Pakistan has experienced
significant political instability over the years, and this has had detrimental effects on its fiscal
management and budget deficits. The frequent changes in government and lack of policy
continuity have hindered effective economic planning and implementation. As a result, the
country has struggled to maintain fiscal discipline, leading to ballooning budget deficits. For
instance, in the fiscal year 2022-2023, Pakistan's budget deficit reached 6.5 % of GDP, which
was the highest in the last decade. The situation has been exacerbated by challenges such as
corruption, inefficient tax collection, and bloated public expenditures. Such fiscal
mismanagement has hampered economic growth and jeopardized the country's ability to
service its debt, creating a vicious cycle of financial instability and economic uncertainty.
Addressing these issues will be crucial for Pakistan's sustainable economic development.so,
political uncertainty has led to fiscal and budget deficits as it has deteriorated public
institutions.
Political instability has also contributed to the decline of public institutions. The economic
institution such as WAPDA, finance, commerce, textile and industry all are badly affected due to
corruption, incompetence, and ineptness. Last year, the WAPDA chairman appeared before the
National Accountability Bureau (NAB) where he was interrogated about corruption worth RS
775 million in the Terbela Fourth Power Hydro Project. They invest only on the half ongoing
projects and remaining half is pocketed for their use. Hence, the poor management, corruption
and inability caused stagnation of the economic process to devastating end. In short, political
turmoil has destroyed public institution in the similar way political riots disrupted GDP growth,
affecting business and trade.
Due to the riots and strikes caused by the political crisis, business and trade activities were also
suspended, which halted GDP growth. During times of political unrest, businesses often
suspend operations due to safety concerns, while trade activities are disrupted, resulting in
decreased economic output. This cause a decline in GDP growth. According to a survey title
‘The Economics of Social Unrest’, on average unrest, event caused a 1% decline in the
GDP.For Pakistan, the long political uncertainty caused a major dent in GDP growth. Political
instability is common followed by riots and strikes by the people.as a result it halted business
and trade activities. It also generated a negative signal to investors who consequently stopped
investing in such a risky environment and shifted their business to other countries, affecting the
economic progress. Unfortunately, the story of nexus between political instability and
economic downturn does not end here. The Consequences of political instability and economic
downturn in Pakistan will be discussed in subsequent paragraphs.
Political instability and economic downturn in Pakistan have led to a distressing repercussion of
deepening poverty and widening income inequality. The country's political landscape has been
marked by frequent changes in government and governance challenges, impacting economic
stability. As a result, poverty rates have risen significantly, with the Pakistan Bureau of Statistics
reporting a poverty rate of 37.2% in 2023, up from 24.3% in 2015. Simultaneously, income
inequality has worsened, as indicated by the Gini coefficient reaching 29.6 in 2023. The
economic hardships disproportionately affect vulnerable communities, exacerbating social
disparities and hampering access to basic necessities. These alarming figures underscore the
urgent need for targeted policies to address poverty, promote equitable growth, and ensure
that the benefits of economic development reach all segments of society.
Moving on, Pakistan has experienced a persistently high unemployment rate, and this can be
attributed to a combination of political instability and economic downturn. The country has
faced frequent changes in government, which have resulted in policy uncertainties and
hindered business growth and investment. As a result, job opportunities have been limited,
leaving many citizens unemployed. Furthermore, the economic downturn has further
exacerbated the situation. According to recent reports, as of the present, Pakistan's
unemployment rate stands at approximately 9.1%, with youth unemployment reaching a
staggering 18.7%. This highlights the severity of the issue and its impact on the younger
generation. To address this challenge, it is crucial for the government to focus on implementing
stable and consistent economic policies, promoting job-creating sectors, and fostering a
favorable business environment to stimulate growth and reduce unemployment.
Similarly, Pakistan has experienced political radicalization and extremism due to ongoing
political instability and economic downturn. The country has witnessed a rise in extremist
groups, such as Tehreek-e-Taliban Pakistan (TTP) and Lashkar-e-Taiba (LeT), carrying out
numerous acts of violence. Moreover, the lack of stable governance and frequent changes in
leadership have contributed to public discontent and frustration. The economic challenges,
including high inflation rates and rising unemployment, have further exacerbated social
grievances, making some segments of the population more susceptible to radical ideologies.
The influence of certain religious seminaries (madrasas) in promoting extremist ideologies has
also been a concern. Continued monitoring and effective policy measures are necessary to
address the underlying issues and counter the threat of radicalization in Pakistan.
In addition to this, in recent years, Pakistan has experienced severe economic challenges due to
political instability, resulting in currency depreciation and high inflation. The country's currency,
the Pakistani Rupee (PKR), has depreciated significantly against major international currencies,
such as the US Dollar and Euro. This depreciation has led to a surge in import costs, further
fueling inflationary pressures. Since the onset of political turmoil and economic crisis, inflation
rates have surged to alarming levels, exceeding 10% annually. According to a recent report of
2023 the current inflation rate is 28.3%. The uncertain political environment and lack of
consistent economic policies have deterred foreign investment and hampered economic
growth. As a result, the country continues to grapple with the adverse effects of these factors
on its currency value and inflation rate.
Pakistan has also experienced a decline in its Human Development Index (HDI), a direct
consequence of political instability and an economic downturn. The country's HDI, which
measures factors such as life expectancy, education, and income, has witnessed a worrisome
downward trend. According to recent UN report of Human Development Index Pakistan presently
ranks 161 out of 192 states. Pakistan has gone down by seven slots in the Human Development
Index (HDI) ranking for 2021-2022.On the other hand, India presently ranks 132nd on the HDI
index. Bangladesh is doing even better with a 129th ranking. This is the result of political
instability as well as ongoing economic downturn in the country. Due to the unstable political
climate and economic challenges, access to quality education and healthcare has been
hindered, exacerbating poverty and social inequality. Urgent and effective measures are
required to address these issues and restore the country's human development trajectory.
As every problem has a few solution, Pakistan's political parties must come together and craft a
comprehensive long-term vision aimed at fostering sustainable political and economic
development for the nation. Collaborative efforts are essential to address the challenges facing
the country and harness its potential for growth. We should learn from Singapore and Germany
in this regard. Singapore, with its visionary leadership and long-term planning, transformed from a
developing country to a global economic powerhouse. It achieved an impressive GDP growth rate of
5.4% in 2019, as reported by the World Bank. Similarly, Germany's strong political consensus and
strategic economic policies have made it the fourth-largest economy globally, with a GDP of $3.9 trillion
in 2020 after World War II. By emulating their approaches, Pakistan can unlock its immense
potential, attract foreign investments, and promote sustainable economic growth, leading to
improved living standards for its citizens.
Besides that, there must be a charter of economy for economic stability. By bringing together
political parties and stakeholders, this charter can set clear economic policies, enhance investor
confidence, and create a conducive environment for sustainable growth. For instance,
Pakistan's political instability in the past has resulted in economic fluctuations, with GDP growth
ranging from 1.9% to 5.5% between 2000 and 2019 while in 2022 to 2023 it was 0.29%. A
successful example comes from Malaysia, which faced political uncertainty in the late 1990s.
However, their National Economic Recovery Plan (NERP) played a pivotal role in restoring
investor trust and driving GDP growth from -7.4% in 1998 to 8.5% in 2000. A similar proactive
and collaborative approach in Pakistan can pave the way for economic resilience and
prosperity.
Moreover, Public participation should be encouraged to hold politicians accountable for their
immature and self-interest policies. By actively engaging citizens in the decision-making
process, politicians can be held accountable for their immature and self-interest policies.
According to a study by the International Foundation for Electoral Systems (IFES), increased
public participation in the democratic process can lead to a more responsive and responsible
government. For instance, in India, the Right to Information Act (RTI) has empowered citizens
to access government information, promoting transparency and enabling them to hold
politicians accountable for their actions. Similarly, in Brazil, citizen-led initiatives like
participatory budgeting have allowed citizens to have a say in how public funds are allocated,
leading to more accountable governance. Pakistan can draw inspiration from such successful
models to foster public participation and enhance political accountability.
Last but not least, with the help of political commitment, the tax base must be expanded,
resulting in political and economic stability. By increasing tax revenue, the government can
invest in critical sectors such as healthcare, education, and infrastructure. For instance, in the
case of Malaysia, strong political will to reform tax policies helped increase the tax-to-GDP ratio
from 12.4% in 1980 to 16.5% in 2019. This expanded revenue base contributed to the country's
economic growth and development, enabling it to achieve middle-income status. Similarly,
Pakistan's government can use political commitment to implement effective tax reforms,
encouraging voluntary compliance and reducing dependence on foreign aid, fostering a stable
and self-reliant economy.
To conclude it is stated that, In Pakistan, Political instability and economic downturn are closely
interconnected, identify the negative effects as well as repercussions and calls for effective
measures to combat political unrest, maintain economic stability, and promote sustainable
progress. It is evident from historical examples and its current economic challenges.
Inconsistent policies, eroded investor confidence, fiscal mismanagement, and deteriorating
institutions have hindered economic growth. The consequences include increased poverty,
unemployment, radicalization, currency depreciation, and a decline in human development. To
address this issue, political parties must collaborate on a long-term vision and implement a
charter of economy. Encouraging public participation and expanding the tax base can foster
stability. By adopting these strategies, Pakistan can overcome the detrimental effects of
political instability and pave the way for sustained economic stability and prosperity.