Is Political Turmoil Bad for Business?

Conventional wisdom says that business dislikes uncertainty. That places politics in an important position. Political stability gives businesses a degree of confidence to plan and invest for their future. Political stability can come in various forms.

While most developed economies tend to be democracies, stability is not a characteristic of only democratic governments. China has shown that an authoritarian government can foster rapid economic growth. A recent article in The Economist reported on Turkey’s April 16, 2017 referendum that awarded new powers to the increasingly autocratic President Recep Tayyip Erdogan. As results came in, Turkey’s currency, government bonds and stock market all gained ground. “In Turkey investors may have feared turmoil if Mr. Erdogan’s proposals had been defeated.”

The past year’s political disruptions in developed countries could have been expected to destabilize national and regional economies. Instead, economic performance has improved for many countries, as they continued to recover from the recent recession. Some observers see this as evidence that markets are decoupling from politics.

An early 2017 Wall Street Journal online story noted events occurring in South Korea and reported “markets prosper amid political turmoil,” following the impeachment of the country’s president. The South Korean stock market, KOSPI, hit an 18-month high, attracting a billion dollars of foreign investment in the year’s first three weeks. Similarly, the lack of a real government in Spain through much of 2005 and 2006 did not hold the country back from a sharp economic recovery. The example of Turkey described above is another case of economic growth concurrent with political dissent. And in the U.S., since the beginning of 2017 the Dow-Jones Industrial Average recorded new all-time highs on dozens of days, while frequent demonstrations opposed the newly-inaugurated president.

The Great Recession beginning in 2007 severely altered the balance between economics and politics. Financial mismanagement necessitated government intervention to stabilize national economies. The U.S. Federal Reserve fundamentally changed how the economy worked. Ten years later renewed economic stability reduced the role of politics.

Then again, in August 2017, a dispute between the U.S. and tiny but belligerent North Korea riled equities markets. Threats of nuclear war between the two countries’ leaders wiped out nearly a trillion dollars from global equity markets in four days, according to an August 12th Reuters report.

These and other examples suggest that business can run normally in situations such as South Korea, where a transition in leadership occurs peacefully. But there is a limit to the extent to which political turbulence can occur before business pulls back.