Why is Political Stability Important for an Economy?

Political stability is very important for an economy. In this post, we will discuss Why is Political Stability Important for an Economy?

Previously we have discussed the Effect of political instability on economic growth and development. Today we are going to discuss about why is the political stability important for an economy?

There is one thing that all the business leaders, entrepreneurs and investors hate that is political instability. Businesses operate according to forecasts and scenarios about the future that comprise surprises as well as certainties. Though there are lots of uncertainty in businesses but, the one thing that all the businessman wants to avoid at any cost is the instability in the macro environment that results from political disagreements or failures. The election of a politically stable government is crucial for good governance, national solidarity and economic development. Only a stable government can ensure social harmony, law and order, the rule of law and good governance that are prerequisites to economic development. An unstable government would not be in a position to take bold and often unpopular decisions for the country’s economic advancement. Because of political instability many emerging markets in Asia and Africa either attract or repel foreign investors. For instance, until recently, African countries were shunned because of the civil war like situation there whereas some Asian countries were similarly avoided by businesses because of the political uncertainty as a result of regular government changes and even takeovers.

There are few political factors that can effect in the business and economy of country. They are,

  • Bureaucracy
  • Corruption level
  • Freedom of the press
  • Tariffs
  • Trade control
  • Education Law
  • Anti-trust law
  • Employment law
  • Discrimination law
  • Data protection law
  • Environmental Law
  • Health and safety law
  • Competition regulation
  • Regulation and deregulation
  • Tax policy (tax rates and incentives)
  • Government stability and related changes
  • Government involvement in trade unions and agreements
  • Import restrictions on quality and quantity of product Intellectual property law (Copyright, patents)
  • Consumer protection and e-commerce
  • Laws that regulate environment pollution

IMPACT ON ECONOMY

The political situation of a country affects its economic setting. The economic environment affects the business performance. For example, there are major differences in Democratic and Republican policies in the US. This influences factors like taxes and government spending, which ultimately affect the economy.

The reasons for businesses favoring political stability is that once they get the permits and the license to operate in regions and states, they invest a lot of money in setting up facilities. Further, even during the process of acquiring land and other assets, they need the cooperation of the government to facilitate the same. Apart from this, political instability hurts them as their employees are often forced to skip work because of strikes and other protests and this impacts the profits of the businesses negatively. Here the main point is that political instability damages everything like, daily operations, working conditions of the employees, even the profits also. That’s why the businesses avoid it. The other characteristic about political instability is that key laws and regulations are often delayed because of the legislatures and the parliaments and key approvals are stuck in bureaucratic delays. Finally, it is indeed the case that capital is country blind and region blind and migrates and flows to wherever it is welcome and wherever the macro situation is conducive.

CHANGES IN REGULATION

Governments could alter their rules and regulations. This can also have some effects on a business. After the accounting scandals of the early 21st century, the US SEC became more attentive on corporate compliance. The government announced the Sarbanes-Oxley agreement regulations of 2002. This was a reaction to the social environment. The social environment insisted a change to make the public companies more accountable.

POLITICAL STABILITY

The absence of political stability in a country effects business operations. This point is mainly correct for the multinational companies. For example, an aggressive takeover can overthrow a government. This can bring up rebellions, robbing and other general disorders in the environment. These disrupt business operations. Sri Lanka was in a similar state during a civil war. Egypt and Syria faced disturbances too.

MITIGATION OF RISK

Political risk insurance is a way to reduce political risk. A lot of multinational companies use such insurance to reduce their risk exposure. There are few key factors that can give an idea of the risk exposure in certain countries.

After all these discussions above we can easily say that political stability is a must for every country if they want to develop. Without political stability no government can achieve their goal.


Author: Mahfujur Rahman

Mahfujur Rahman is one of the top contributors of GotAbout Business Strategy and Analysis. He has finished his BBA from North South University and currently doing his Masters of Business Administration in Dhaka University. He has a strong interest in Finance and Investment.

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