Political stability is crucial for economic growth, as it attracts investment and foreign direct investment. Without stability, entrepreneurs and investors are less likely to invest, leading to a reduction in GDP and a lower standard of living.
The relationship between economic growth and stability refers to how a nation’s political stability can lead to its economic growth. Such a relationship can be seen by analyzing the economic antecedents of politically stable countries versus those of countries where the political climate is more unstable. The common denominator and the clearest relationship between economic growth and stability is the fact that a stable environment is conducive to economic growth.
One of the ways that economic growth and stability are related is in the investment sector. No company or individual, whether local or international, will feel comfortable making any type of capital investment in any country where the political climate is characterized by upheaval and much uncertainty. This is because such a risky investment would go against the main objective of making profits as there would be a marked lack of assurance on the safety of the investments. When local entrepreneurs refrain from making significant investments in their economies, this situation will affect the economy as a whole.
Foreign direct investment also plays an important role in developing an economy. This shows a link between economic growth and stability because a country with a low stability rating will not be a source of attraction for investors looking for international markets to invest in. An example can be seen in the tourism sector because when there is a lack of stability in the economy there will be little investment in the form of hotels, tourist attractions and commercial airlines. The result is a reduction in the number of employees and a lower turnover rate for much-needed finances to facilitate economic development.
One of the effects of a lack of stability in a country is a reduction in gross domestic product (GDP) calculations and also a reduction in the general standard of living for the majority of the population. When entrepreneurship is very low due to uncertainty, this will affect the ability of a percentage of citizens to find work. If people cannot find work, they will not be able to spend money on various types of consumables, which will lead to a collapse of the economy or inflation. Inflation could be the result of lower production rates, which will lead to a lower supply rate, driving up the price of goods and services.
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