The Perils of Political Instability and Uncertainty

If there is one thing that business leaders and entrepreneurs hate that is instability in the macro environment. Businesses operate according to forecasts and scenarios about the future that comprise surprises as well as certainties. However, as much as businesses factor in uncertainty, the one thing that wants to avoid at all costs is the instability in the macro environment that results from political gridlock, extremism, and political dysfunction. This is the reason why 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 due to frequent regime changes and even coups. As the case of India and China, which we shall discuss in detail in the next section, illustrate, businesses flock to regions and states where there is political stability.

Further, businesses like to operate in an environment that is not marred by frequent strikes, social unrest, and chaos as their operations would be hit adversely due to these factors.

The Contrasting Examples of China and India

Turning to the contrasting examples of China and India, the former attracts foreign capital and businesses, as the country is relatively stable politically and socially. Though there are sporadic instances of social unrest that recur in some volatile regions and provinces of the country, on the whole, the country is attractive to foreign businesses.

Indeed, the attractiveness is so intense that different regions of the country compete and vie with each other for businesses to set up their operations there. In contrast, India is in the recent past fallen out of favor with businesses that prefer doing business elsewhere and taking their investments to countries that offer political stability.

Further, the case of India also resembles China in so far as the competition for businesses to setup their operations is concerned.

Indeed, some states in India offer more stability than the others as well as continuity of policies.

The last point is very important as more than anything else; businesses prefer the policies that were followed during a government’s tenure to be continued even when there is a change of government.

In other words, India and the states where the incoming government changes the policies are certainly not acceptable to the investors who take their projects elsewhere.

Why Businesses Like a Stable Macro Environment

The reasons for businesses favoring political stability is that once they get the permits and the licenses 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. Moreover, businesses like a region that is friendly and welcoming towards them and not a hostile and unfriendly dispensation.

The point here is that political instability hurts everything from profits to operations to the working conditions of the employees and hence, businesses avoid it.

The other aspect about political instability is that key laws and regulations are often stuck in the legislatures and the parliaments and key approvals are mired in bureaucratic delays. All these factors conspire to create a situation that is not conducive for businesses.

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. This is the lesson that politicians of all hues must understand if they are to develop their constituencies.