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Is geopolitical risk always detrimental to economic growth?

Author

Listed:
  • Saakshi Jha

    (Indian Institute of Management Ranchi)

  • Sunny Bhushan

    (Symbiosis International (Deemed University))

  • Nupur Nirola

    (OP Jindal Global University)

Abstract

In the recent past, geopolitical tension has taken center stage in defining macroeconomic dynamics. Given that, this study examines the impact of geopolitical risk on economic growth for 41 countries from 2000 to 2020. Our panel estimations using the feasible generalized least square (FGLS) technique show that geopolitical risk positively and significantly impacts economic growth. The results are consistent even after addressing endogeneity concerns using system GMM and auto-correlated explanatory growth variables using the PCSE estimation. Our results indicate that a percent increase in geopolitical risk increases economic growth to 3.3%. For the cohort of advanced and emerging economies, our result shows that the advanced economies can better mitigate any geopolitical shocks and experience favorable growth rates. On the other hand, emerging economies posit a detrimental impact of geopolitical risk on their economic growth, thereby indicating an asymmetric effect between the two sets of economies. Further, macroeconomic conditions and institutional factors play a significant role in determining the impact of geopolitical risk on the economic growth of 41 countries. In the presence of institutional factors like democracy and economic freedom, the relationship between geopolitical risk and economic growth remains intact. In the context of geopolitical risk, these institutional factors stimulate economic growth.

Suggested Citation

  • Saakshi Jha & Sunny Bhushan & Nupur Nirola, 2024. "Is geopolitical risk always detrimental to economic growth?," Economic Change and Restructuring, Springer, vol. 57(2), pages 1-31, April.
    • Handle: RePEc:kap:ecopln:v:57:y:2024:i:2:d:10.1007_s10644-024-09585-1
    DOI: 10.1007/s10644-024-09585-1
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    More about this item

    Keywords

    Geopolitical risk; Economic growth; FGLS; System GMM; Macroeconomic instability; Varieties of democracy;
    All these keywords.

    JEL classification:

    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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