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Elite Political Instability and Economic Growth: An Empirical Evidence from the Baltic States

  • Ladislava Grochova

    ()

    (Department of Economics, Faculty of Business and Economics, Mendel University in Brno)

  • Ludek Kouba

    ()

    (Department of Economics, Faculty of Business and Economics, Mendel University in Brno)

The growth theory of new political economics defines some factors that are necessary for economic growth among which political stability. There are distinguished two types of political instability - elite and non-elite - in topical literature. While non-elite political instability concerns about violent coups, riots or civil wars, elite political instability is represented with "soft changes" such as government breakdowns, fragile majority or minority governments. We don't doubt the importance of general political stability for successful economic development. Nevertheless, we don Ì t agree that elite political instability can be understood as an insuperable obstacle for it. The aim of the paper is to disprove the hypothesis that elite political stability is a necessary condition for economic growth. Equally with other papers, a number of government changes is used as a proxy of elite political instability. The disproof of the hypothesis is demonstrated on data from the Baltic states where a number of government changes takes place and still fast economic growth could be seen within last two decades. The model has a form of augmented production function and includes growth rates of investments, exports, and labour as independent variables and government changes as an elite political instability dummy variable. The data resulting from estimations applying GMM and GLS because of endogeneity and autocorrelation problems are statistically significant for all three countries and confirm our hypothesis that elite political stability is a necessary condition for economic growth.

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Paper provided by Mendel University in Brno, Faculty of Business and Economics in its series MENDELU Working Papers in Business and Economics with number 2010-01.

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Date of creation: Feb 2010
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Handle: RePEc:men:wpaper:01_2010
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