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9. International data show a positive correlation between political stability and economic growth. a. Through what...

9. International data show a positive correlation between political stability and economic growth.

a. Through what mechanism could political stability lead to strong economic growth?

b. Through what mechanism could economic growth lead to political stability?

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Answer #1

Political stability allows greater control over firms and florurishing relationships which promotes government spending and private spending together and enhances reliability in structural reforms and keeps laws and protocols constant which reduces compliance burden and helps firms to expand businesses and generate employment opportunities which in turn boosts national income and personal consumption. Thus, aggregate demand grows which promotes economic growth.

Similarly, other way round economic growth leads to higher public confidence and investment sentiment and embeds trust in existing government and thus public vote in favour of existing government which leads to political stability.

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