The Impact of Political Instability on North Macedonia’s Growth

Abstract

This study explores the obscure connection between political instability, patterns of public expenditure, and North Macedonia’s economic growth. By examining the effects of both internal and external political crises on fiscal policies and GDP growth from 2003 to 2023, the research uncovers how turbulent political environments have reshaped the country’s economic trajectory and influenced government expenditure decisions. Utilizing a Vector Autoregression (VAR) model, the study reveals the nuanced effects of political instability, demonstrating both immediate negative impacts and delayed positive adjustments. Findings indicate that political instability disrupts public expenditure, redirecting resources from growth-enhancing sectors like infrastructure and education toward crisis management and defense. This reallocation undermines long-term sustainable growth. Important factors like inflation, trade openness, and economic freedom are also examined, revealing intricate relationships with GDP growth. The study concludes that political stability and good governance are prerequisites for effective public expenditure management and economic development. Recommendations include fostering institutional reforms, ensuring efficient allocation of public funds, and promoting socio-political stability to create an environment conducive to sustained growth. This research contributes to understanding the complex interplay between governance and economic performance in transition economies, with implications for both policymakers and scholars.