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Optimal Fiscal Policy in an Economy Facing Sociopolitical Instability

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  • Chetan Ghate
  • Quan Vu Le
  • Paul J. Zak

Abstract

The paper presents a model of optimal government policy when policy choices may exacerbate sociopolitical instability (SPI). The authors show that optimal policy that takes into account SPI transforms a standard concave growth model into a model with both a poverty trap and endogenous growth. The resulting equilibrium dynamics inherit the properties of government policies and need not be monotone. Indeed, for a broad set of conditions, government policy is unable to eliminate the poverty trap; when these conditions do not hold, “most” countries eventually reach a balanced growth path. The predictions of the model are tested by developing three new measures of SPI for a panel of 58 countries. Estimating optimal policies and the growth equation derived from the model reveals strong support for the theory.

Suggested Citation

  • Chetan Ghate & Quan Vu Le & Paul J. Zak, 2003. "Optimal Fiscal Policy in an Economy Facing Sociopolitical Instability," Review of Development Economics, Wiley Blackwell, vol. 7(4), pages 583-598, November.
    • Handle: RePEc:bla:rdevec:v:7:y:2003:i:4:p:583-598
    DOI: 10.1111/1467-9361.00210
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    5. Chetan Ghate & Quan Vu Le & Paul J. Zak, 2003. "Optimal Fiscal Policy in an Economy Facing Sociopolitical Instability," Review of Development Economics, Wiley Blackwell, vol. 7(4), pages 583-598, November.
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    Cited by:

    1. Paul J. Zak, 2002. "Institutions, Property Rights, and Growth," Recherches économiques de Louvain, De Boeck Université, vol. 68(1), pages 55-73.
    2. Moog, Stefan & Raffelhüschen, Bernd, 2009. "Ehrbarer Staat? Die Generationenbilanz - Update 2009: Wirtschaftskrise trifft Tragfähigkeit," FZG Discussion Papers 38, University of Freiburg, Research Center for Generational Contracts (FZG).
    3. N. Deyshappriya, 2015. "Do corruption and peace affect economic growth? Evidences from the cross-country analysis," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 17(2), pages 135-147, October.
    4. Bittencourt, Manoel & Gupta, Rangan & Makena, Philton & Stander, Lardo, 2022. "Socio-political instability and growth dynamics," Economic Systems, Elsevier, vol. 46(4).
    5. Patricia Justino, 2007. "Carrot or stick? Redistributive transfers versus policing in contexts of civil unrest," Research Working Papers 3, MICROCON - A Micro Level Analysis of Violent Conflict.
    6. Quan V. Le, 2004. "Political and economic determinants of private investment," Journal of International Development, John Wiley & Sons, Ltd., vol. 16(4), pages 589-604.
    7. Diana Weinhold & Paul J. Zak, 2005. "The Choice of Institutions: The Role of Risk and Risk-Aversion," Others 0508004, University Library of Munich, Germany.
    8. Chetan Ghate & Quan Vu Le & Paul J. Zak, 2003. "Optimal Fiscal Policy in an Economy Facing Sociopolitical Instability," Review of Development Economics, Wiley Blackwell, vol. 7(4), pages 583-598, November.
    9. Jong-A-Pin, Richard, 2009. "On the measurement of political instability and its impact on economic growth," European Journal of Political Economy, Elsevier, vol. 25(1), pages 15-29, March.
    10. Pei, Yun & Xie, Zoe, 2016. "Government Commitment and Unemployment Insurance Over the Business Cycle," MPRA Paper 76563, University Library of Munich, Germany.
    11. Le, Quan Vu & Zak, Paul J., 2006. "Political risk and capital flight," Journal of International Money and Finance, Elsevier, vol. 25(2), pages 308-329, March.
    12. Alcántar-Toledo, Javier & Venieris, Yannis P., 2014. "Fiscal policy, growth, income distribution and sociopolitical instability," European Journal of Political Economy, Elsevier, vol. 34(C), pages 315-331.
    13. Ghate Chetan, 2003. "The Politics of Endogenous Growth," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-18, August.
    14. Bang, James T. & Mitra, Aniruddha, 2011. "Brain drain and institutions of governance: Educational attainment of immigrants to the US 1988-1998," Economic Systems, Elsevier, vol. 35(3), pages 335-354, September.
    15. Paul J. ZAK, 2002. "Institutions, Property Rights and Growth," Discussion Papers (REL - Recherches Economiques de Louvain) 2002014, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).

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    More about this item

    JEL classification:

    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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