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Is geopolitical risk always detrimental to economic growth?

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Abstract

In the recent past, geopolitical tension has taken center stage in defining macroeconomic dynamics. Given that, this study examines the impact of geopolitical risk on economic growth for 41 countries from 2000 to 2020. Our panel estimations using the feasible generalized least square (FGLS) technique show that geopolitical risk positively and significantly impacts economic growth. The results are consistent even after addressing endogeneity concerns using system GMM and auto-correlated explanatory growth variables using the PCSE estimation. Our results indicate that a percent increase in geopolitical risk increases economic growth to 3.3%. For the cohort of advanced and emerging economies, our result shows that the advanced economies can better mitigate any geopolitical shocks and experience favorable growth rates. On the other hand, emerging economies posit a detrimental impact of geopolitical risk on their economic growth, thereby indicating an asymmetric effect between the two sets of economies. Further, macroeconomic conditions and institutional factors play a significant role in determining the impact of geopolitical risk on the economic growth of 41 countries. In the presence of institutional factors like democracy and economic freedom, the relationship between geopolitical risk and economic growth remains intact. In the context of geopolitical risk, these institutional factors stimulate economic growth.

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Fig. 1
Fig. 2
Fig. 3

Source: Authors calculations and Caldara and Iacoviello (2018), ibid

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Notes

  1. See Fig. 2.

  2. The GPR index is a monthly index constructed by Caldara and Iacoviello (2022) from 10 leading newspapers. At the time of analysis the data on GPR is available for 43 countries only. Due to lack of few macroeconomic variables, we had to drop 2 countries restricting our analysis to 41 countries. A detailed explanation on GPR index is presented in Sect. 3.

  3. See Alesina et al. 1996; Collier and Sambanis 2002; Collier and Hoeffler 2004; Murdoch and Sandler 2002, 2004.

  4. These countries are Argentina, Australia, Belgium, Brazil, Canada, Chile, China, Columbia, Denmark, Egypt, Finland, France, Germany, Hong Kong, Hungary, India, Indonesia, Israel, Italy, Japan, Malaysia, Mexico, Norway, Peru, Poland, Portugal, Russia, Saudi Arabia, South Africa, South Korea, Spain, Sweden, Switzerland, Thailand, The Netherlands, The Philippines, Tunisia, Turkey, Ukraine, UK, and USA.

  5. We categorize advanced and emerging economies following the definition of IMF. Table 10 in the Appendix indicates the list of advanced and emerging economies. Figure 4 in the Appendix provides a visual presentation of average geopolitical risk and economic growth of 41 economies from 2000 to 2020. The link for the same could be assessed here https://www.imf.org/external/pubs/ft/weo/2022/01/weodata/groups.htm

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Acknowledgements

The authors thank Sohini Sahu, Siddhartha Chattopadhyay, and Vimal Kumar for their valuable suggestions and comments.

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Authors and Affiliations

  1. Indian Institute of Management Ranchi, Ranchi, Jharkhand, 834004, India

    Saakshi Jha

  2. Symbiosis Centre for Management Studies, Pune, Symbiosis International (Deemed University), Pune, MH, 411014, India

    Sunny Bhushan

  3. Jindal School of International Affairs, OP Jindal Global University, Sonipat, Haryana, 131001, India

    Nupur Nirola

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  1. Saakshi Jha
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All authors contributed to the study's conception and design. Material preparation and data collection were performed by Saakshi Jha and Sunny Bhushan. An econometric analysis was done by Nupur Nirola. The first draft of the manuscript was written by Saakshi Jha, and all authors commented on previous versions of the manuscript. All authors read and approved the final manuscript.

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Appendix: A

Appendix: A

The categorization of countries is based on the classification followed in the World Economic Outlook (WEO), published by International Monetary Fund (IMF). The WEO classifies countries into two categories: advanced economies and emerging and developing economies. See Table 10 and Fig. 4.

Table 10 List of countries falling under advanced and emerging economies
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Fig. 4
figure 4

Source: Authors' calculation. Note: The map presents the average geopolitical risk and economic growth of 41 economies from 2000 to 2020. The map shows that advanced economies, on average, experienced heightened geopolitical risks during the study period, whereas emerging economies experienced moderate geopolitical risks barring China and Russia. The map presented here is just for representational purposes

Geopolitical risk and economic growth of all countries.

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Jha, S., Bhushan, S. & Nirola, N. Is geopolitical risk always detrimental to economic growth?. Econ Change Restruct 57, 25 (2024). https://doi.org/10.1007/s10644-024-09585-1

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