Political Stability vs Economic Stability

Sam Koim 

Opinion :  By Sam Koim 

Is Political stability the main driver of investor confidence? I have been led, and I believe many are, to believe that political stability is needed to give investor confidence and growing the economy. This misconception of synonymising political stability to economic stability has it’s seldom appearances in public grandstanding and political discourses. This is what I've discovered in debunking this illusion.

Political stability talks about the length of time a government is in power. In terms of investor confidence, it means the investors can count on the current (negotiating) government for durability and certainty of the current position. Yes, in countries and time periods with a high propensity of government collapse (political instability), growth is significantly lower than otherwise but is it really political instability that really caused decline in growth?

Economists may articulate it more clearly than I, but I gather that economic stability is defined by factors like secure property rights to stimulate long term investment (the investors should not fear expropriation of their businesses); there is trade and financial openness that keeps markets properly informed and ensures that objectives and institutions are seen to be credible; the spaces for public discretion and arbitrariness are reduced, allowing impersonal rules regimes; stronger economic institutions regulating the economic sector prudently and impartially such as the Central Bank supervising the financial sector; and Debt management, liquidity management, amongst others. Allocation of rents extracted from natural resources may also be an important factor, as unequal distribution of the nation’s wealth can become a source of civil strife and instability.

Economic stability is reinforced by principles of democracy. For instance, in order for fiscal rules to reign and regulatory institutions to do their jobs without fear or favour, we need separation of powers; in order for private property rights to be respected, we need impartial Courts to enforce the laws. In order to minimise the chances of arbitrariness, the rule of law has to be observed.

The principles dictating economic stability and democracy are embodied in our Constitution and the subordinate laws. They provide the foundation upon which politics can be played. Governments are run on these strong foundations and within the confines of these tenets. Political stability in the hands of a government that observes these canons can grow the nation. On the contrary, political stability in the hands of a government that tempers with these tenets can be so destructive. In order to secure overall economic stability, Governments have to maintain fiscal discipline and run a government based on democratic principles.

LESSONS FROM OTHER COUNTRIES

Cameroon, one of the oil producing African countries that captured about 67% of rents from its oil extraction (by far the biggest portion of rents collected compared to all other African countries) turned out to have disastrous development outcomes. Although the country had a stable government with an autocratic President for many years, it had weak institutions, poor governance structures and rampant corruption that contributed to the disastrous consequences.

Venezuela is another oil rich country with the biggest oil reserves in the world that had many promises and hopes. The South American country had a stable socialist government led by President Hugo Chávez between 1999 and 2013. Although the Chávez rolled out social engineering projects to maintain populous support and remain in power, he had bad economic policies to run a sustainable economy. Today, Venezuela has the biggest inflation rate (over 100%) and is on the brink of economic collapse. Its downfall is attributed to weak economic institutions, political interference, corruption and bad economic policies.

On the other hand, Chile is an example of political stability that contributed to economic progress. Chile is the largest copper producer in the world, supplying about 43% of the world copper exports. Chile had its bitter past with autocratic governments and economic turmoils. The military took over the Chilean Government in 1973 and thereafter the country was under the military rule until 1990 when it returned to democracy. During the period the country was under the prolonged military rule, the Government under the leadership of General Augusto Pinochet Ugarte, introduced many reforms including privatisation of nationally owned companies, fiscal discipline and transparency, together with stronger institutions. These policies were unchanged when the country returned to democracy. Chile is today one of South America's most stable and prosperous nations.

Zooming it more closure to our closest neighbour, Australia. They had the most unstable political history recently with five different Prime Ministers in the last five years yet they have strong and stable institutions that continue to hold the economy stable and deliver for its people.

Countries that did not have stronger institutions and failed to translate the excess wealth into socio economic development have inescapably been trapped in the unholy resource curse called “Dutch Disease”.

A country can experience higher investment and growth rate with relatively high level of corruption. Studies conducted by the World Bank have found that countries with more predictable corruption have higher investment rates. Thus, countries with endemic but predictable corruption, such as Thailand and Indonesia, have had strong investment growths. “When business people have confidence that after paying a bribe a return will be provided as promised, there is less motivation to seek legal alternatives” (Lambsdorff, 2001b:14).It therefore indicates that when corruption is prevalent and predictable in a country such as PNG, economy can grow. The increase in investment can be a reflection of foreign investors exploiting the weaknesses and conducting predatory business and maximising capital flights out of the economy.

So when it comes to stability in the context of growing our economy and insulating it against economic shocks, we need the rule of law, strong institutions rather than powerful individuals, a responsive and efficient bureaucracy, low corruption and a business climate that is conducive to long term investment.