THE ROLE OF POLITICAL STABILITY AND ECONOMIC INEQUALITY FOR SUSTAINABLE GROWTH: ANALYSIS OF SOUTH ASIAN COUNTRIES

Abstract

The recent economic growth of upper-middle income countries has not helped to lower the inequality of these nations, and the growth episodes of last two decades have not decreased the gap between top and bottom. This lays a big question mark about the generalizability of the Kuznets hypothesis.  In this study we focus on the role of inequality and political instability on economic growth, using a simple endogenous growth model including human capital as moderator in the south Asia. We have used panel data of selected south Asian economies. Our estimation procedure is pooled EGLS. Analysis shows that the income inequality obstructs the socio-economic structure of the economy and political stability is crucial with economic growth to overcome the issue of differences between rich and poor. The results indicate that the human capital plays a regressive role in the nexus between inequality and political stability. However, inequality hampers growth; both directly and indirectly. The elasticity coefficients of growth to all the variables are very sensitive to the inclusion and exclusion of the control variables. Our results imply that the policy makers in developing South Asia have to solve the economic puzzle of choices between slow growth leading fairer distribution and the fast growth with more inequality. Current inequality may impede future economic growth through the channels of political instability and restlessness.