Unravelling the impact of political risk on industrialization: Evidence from Africa

Abstract

Despite the growing concern about the economic costs of political risk, relatively little is known about its effect on industrialization. This paper fills the knowledge gap by investigating the impact of political risk on industrialization and relative transmission mechanisms using data from 34 African countries over the 2000–2019 period. Findings from Driscoll and Kraay (1998), system GMM, and quantile regressions show that political risk has a direct negative impact on industrialization. When considering the sub-dimensions of political risk, results show that the increase in government risk, internal and external conflict risk, military politics risk, ethnic tensions risk, investment profile risk, corruption risk, bureaucratic quality risk, and socioeconomic risk adversely affect industrialization. Further, the mediation analysis reveals that political risk does not only have a direct effect on industrialization but also an indirect impact through its adverse effects on financial integration, financial development, and internet penetration. Finally, the net impact is negative and suggests that political risk hinders Africa's industrialization.