Political instability and its bearing on business
Does political instability really matter for business? This a key question for Northern Ireland. I am going to look at the experience of the USA, Democratic Republic of Congo, Italy and Austria to tease out some lessons.
Still, on some measures, the world’s largest economy, and certainly one of the richest — but the USA also struggles with major social problems. The Harvard Business School in its annual review of the USA’s competitiveness performance argued businesses are increasingly unable to raise productivity levels sufficiently to support higher wage levels.
And, what does Harvard identify as the principle cause of that failure? A political system so gridlocked it cannot make difficult decisions about education, health and fiscal balance. Harvard may be unduly optimistic about how far legal/technical changes to the political institutions would change outcomes but it is striking how much emphasis they place on the necessity of getting the political system right.
The USA is one of the world’s richest countries. Congo is one of the poorest. As in the USA, some commentators stress how the poor quality of political decision making has contributed to current problems. One of the most notable examples is the way in which at independence in 1960 and then again after the mid-2000s peace agreements, Congo’s politicians took the opportunity to vote themselves massive pay increases.
This is an extreme example of what economists call ‘rent seeking’ — income earned not from market-based economic activity but through advantages gained by control of institutions or political decisions. It is a reminder that whilst businesses may seek larger profits and consumers may (sometimes) maximise their ‘utility’, politicians and civil servants also have their interests. Ideally, the political system should align such interests to the common good. This does not always happen.
Italy, with a new Prime Minister almost every year, has been a byword for instability. Post-1945, a substantial degree of patronage politics was tolerated. The main parties — Christian Democrat, Socialist and Communist — each dominated in their own fiefdoms and were able to distribute some of the spoils. Notwithstanding this, 1950s-60s Italy enjoyed an economic miracle as marked as that experienced north of the Alps in Germany. GDP, exports and manufacturing output all soared.
Italy almost proves the case that businesses can prosper in spite of the politics but there is a qualification. Since 2000 the economy has slowed to a crawl. Unemployment has climbed, many businesses can no longer compete and especially within the euro zone, government debt increases alongside a fragile banking system and the public sector remains unreformed. As Prime Minister Renzi’s recent failed referendum may demonstrate, fundamental reform seems almost impossible.
Perhaps Italy is a cautionary example after all. It shows what happens when the can is repeatedly kicked down the road — economic problems do not go away but accumulate. Italy may be becoming a milder version of the Congo — the political economy of dividing up slices of a shrinking pie.
The Sound of Music is a wonderful film but only partly describes what Austrian politics were really like in the 1930s prior to the absorption of Austria into Hitler’s Third Reich. There was a suppressed civil war between the ‘Blacks’ (conservative, Catholic and predominantly rural) and the ‘Reds’ (social democrat and Marxist and mainly in Vienna). Post 1945, the inheritors of those two political traditions — the conservative People’s Party (OVP) and the Socialist Party (SPO) — deserve some credit for putting a sometimes violent past behind them to work together.
Whilst Austria did not have mandatory coalitions, most governments were Black-Red coalitions. Interestingly, cabinet ministries, civil service positions and even public sector and commercial posts were allocated to OVP and SPO members in proportion to votes cast. This was the so-called Proporz’ system. In stabilising a previously very divided country, that system worked. At the same time the economy boomed — especially in the 1950s Austrian economic growth exceeded the European average.
Of course, there is room to debate how far the economic success was attributable to the stability or how far it could it be explained by pre-existing strengths.
However, post-1945 Austria is not entirely a case of ‘climb every mountain…’ As is often the case, sometimes good things come at a price. The merit principle — the best person for the job — was certainly not being applied. It is possible the Proporz system facilitated corruption, especially with respect to procurement contracts.
Ironically, as the OVP-SPO predominance declined some of new entrants into Austrian politics may also have engaged in the culture of corruption. In conclusion, the glass may be half full and half empty. Accountable and functioning government is an intrinsic good but there is also some evidence that businesses can prosper in spite of the politics.
That said, in the long run certain types of political institutions may constrain growth. Philosopher Adam Smith summed it up well: “Little else is required to carry a state to the highest degree of opulence from the lowest barbarism, by peace, easy taxes and a tolerable administration of justice”.
In next week’s Economy Watch, we hear from Neil Gibson of the NI economic policy centre