Political Stability and Economic Development: Institutional Sclerosis and the Moderating Role of Institutions

Abstract

This study investigates the non-linear effects of political stability on economic development and explores the moderating role of institutional factors. Drawing on panel data from 162 countries between 2007 and 2022, we employ a system generalised method of moments (system-GMM) estimator to test the hypothesis that political stability follows an inverted U-shaped relationship with economic growth. Our findings provide robust support for the institutional sclerosis hypothesis, which refers to the tendency of entrenched interest groups in overly stable political systems to resist reform and innovation. While moderate stability fosters growth, excessive stability leads to diminished returns, institutional rigidity, and reform inertia. Importantly, among the institutional moderators considered-economic freedom, government quality, and human capital-only education, as a proxy for cognitive capacity, significantly attenuates the negative impact of over-stabilisation. This suggests that educational capital functions not merely as a productivity input, but as a cognitive institutional force that enhances societal adaptability and resilience. These findings challenge the conventional wisdom that political stability uniformly promotes development and instead emphasise the contingent nature of stability's effects. From a policy perspective, the study underscores the need for institutional flexibility and strategic investment in education to counteract the stagnating effects of political over-stabilisation, particularly in developing economies.JEL Classification: O10; O43; C23