Abstract

The relationship between political instability and economic growth has been extensively discussed, with scholars identifying instability as a critical barrier to sustainable economic development. This study aims to examine how political instability impacts Nepal’s economic development by disrupting governance, deterring investment, and weakening institutional effectiveness. This study incorporates extensive political and economic history of Nepal, building the foundation for the theoretical framework comprising the IS-LM Model for short-term macroeconomic analysis and the Solow Growth Model integrated with a Cobb-Douglas Production Function for long-term structural assessment. The research provides comprehensive insights into the economic repercussions of political volatility in the context of Nepal.

Furthermore, the empirical analysis, employing fixed-effects panel regression using World Bank and Polity IV datasets (1996–2023), confirms that political stability significantly enhances investment growth and economic resilience in Nepal. In contrast, traditional economic variables such as inflation and trade openness demonstrated limited predictive significance, highlighting governance and institutional stability as paramount to economic progress. Additionally, comparative analysis within the South Asian context further validates these findings, emphasizing effective governance over mere regime durability.

Given these findings, the study recommends institutional reforms, enhanced governance mechanisms, and long-term policy consistency as essential strategies for fostering sustainable economic development in Nepal. By addressing governance weaknesses and promoting political stability, Nepal can potentially overcome its economic stagnation, reduce dependency on remittances and foreign aid, and stimulate diversified economic growth.

Advisor

Haider, Erum

Second Advisor

Krause, Brooke

Department

Economics; Political Science

Disciplines

Comparative Politics | Econometrics | Growth and Development | International Relations | Political Economy

Publication Date

2025

Degree Granted

Bachelor of Arts

Document Type

Senior Independent Study Thesis

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