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What Is the Relationship between Economic Growth and Stability?

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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 21 November 2016
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The relationship between economic growth and stability refers to the manner in which the political stability of a nation can lead to its economic growth. Such a relationship can be viewed by analyzing the economic antecedents of politically stable countries in relation to that of countries where the political climate is more unstable. The common denominator and the most obvious relationship between economic growth and stability is the fact that a stable environment fosters economic growth.

One of the ways in which economic growth and stability are related is in the area of investment. No company or individual, whether local or international, will feel comfortable making any kind of capital investment in any country where the political climate is characterized by upheavals and a lot of uncertainty. This is because such a risky investment would go against the main aim of making profits since there would be a marked lack of guarantee as to the safety of the investments. When local businessmen refrain from making any significant investment in their economies, such a situation will affect the economy as a whole.

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Foreign direct investment also plays an important role in the development of an economy. This shows a link between economic growth and stability because a country with a low rating in terms of stability will not be a source of attraction for investors looking for international markets in which to invest. An example can be seen in the area of tourism, because when there is a lack of stability in the economy there will be little investments in the form of hotels, tourist attractions and commercial airlines. The result of this is a reduction in the number of employed people 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 the Gross Domestic Product (GDP) calculations and also a reduction in the general standard of living for the majority of the population. When there is very little entrepreneurism due to uncertainty, this will affect the ability of a percentage of the citizens to find employment. If people cannot find work, they will not be able to spend money on various types of consumables, which will lead to either a slump in the economy or inflation. The inflation could be as a result of the reduction in production rates, which will cause a reduction in the rate of supply, making the price of goods and services increase.

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serenesurface
Post 3

@ZipLine-- Stock market falls because investors pull out of the market. No one wants to do business in a country that's unstable. Investors fear losing money and they're the first ones to flee the ship when political turmoil starts. This is why a growing, strong economy can turn into a depressed economy within days.

The good side is that if the political instability resolves and things start looking better, the investors will come right back.

ZipLine
Post 2

@anamur-- But why does the stock market fall when there is political instability?

serenesurface
Post 1

I had never quite understood the relationship between economic growth and stability until I looked at a country with conflict. This country had a good and stable economy with an impressive growth rate. Then, political unrest and nation-wide protests started. Within hours of the protests, the stock market started to fall and foreign currency started to rise. Industries started losing money.

I was looking at the fall in the stock market minute by minute as I watched the protests on TV and it was remarkable. Every new protest, lead to a bigger decline in the market. There is a very strong relationship between economic growth and stability, they go hand in hand.

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