Using sources such Barrow 1991, Tabassam et al. 2016 and Dalby 2018 we explore in this ‘sooo not boring’ article how economics and political science dance in the world’s ballroom.
Contrary to how it may seem, the word Politics does not originate from Poly (meaning many) and Ticks (blood-sucking parasites). It originates from Aristotle’s paper Politiká which is Greek for affairs of the cities. There is a modern irony in the word affairs when it comes to some former ministers! Fear not. There will be no preaching or political ideology – however, we do need to add some context without naming parties and Prime Ministers.
Great British Scandals
Scandals are nothing new in British politics. All the great and not-so-great PMs had them. Since the Marconi scandal of 1912, we’ve had the Profumo affair, the Westland affair, a Salmonella scare, Cash for Questions, Parliamentary Expenses, Iraq WMDs, Pig Gate, and Downing Street Debt Collectors, to name just a few. The halls of Westminster are littered with the fall-out of sexual misconduct, infidelity, bullying, harassment, and substance misuse. The halls of every other parliament and chamber across the world are tainted by the same moral detritus. Westminster has already accumulated 50% more scandals in the last 22 years than the entire 20th century. Modern politics is a revolving door sucking in new fodder and spitting out tongue-tied thespians who fell on their own (or someone else’s) sword. Frequent and unexpected power changes create political flux. Britain is now staring down the barrel at its 4th prime minister in 6 years. Despite all that, our island has a stable political system by world standards.
When the incumbent PM announced their resignation as party leader in July 2022, the value of the Pound to the US Dollar rose by 0.5%. Just 24 hours earlier, the Pound had fallen to a 2-year low. The FTSE 100 share index greeted the news with a near instant 1.2% rise in the value of Britain’s biggest Plc businesses. Other FTSE indexes followed suit. It’s not the first time the markets have reacted positively to a PM tapping out during a turbulent descent. Them’s the brakes indeed! The competence of an inbound government is assumed to be higher than that of the outgoing administration. Initially, at least, the markets found waiting for a new PM a more tenable prospect than the previous flight path.
Remember the Circle of Life from Lion King? Politics and Economics are similarly co-dependent. An unstable political system creates an unstable economy which in turn creates more instability. Likewise, a stable political system creates a stable economy and reinforces stable governance. A Harvard research paper from 1992 suggested just such a correlation between frequent transitions of power in government and slower economic growth. Looking at the 21st-century economy, we can see economic growth is more consistent in countries where power changes hands in an organised and predictable manner. Growth encourages political stability because everyone wants more of the same.
Unstable on Both Accounts
The younger generation is tomorrow’s key workers and business leaders. In powder keg economic and political environments, the ability to nurture home-grown talent evaporates. Investors, entrepreneurs and foreign workers like to back as close to a winner as they can. For that reason, few are brave enough to take the plunge when the government can spontaneously combust at any moment. In a heartbeat, a newly crowned leader can switch from low tax to high tax, devolution to nationalisation, shun imports in favour of domestic production and shock the stock markets. From the 20th century onwards, we see a definitive link between high political instability, low public investment, low growth and civil unrest. History teaches us that gaining a stranglehold on power in a volatile state is normally at the expense of civil rights and freedoms. Malnutrition, disease and famine are more prevalent in unstable political systems. Violent revolutions, assassinations and military coups are predominantly found in countries with impoverished and unstable economies. In short, an unstable economy fuels an unstable political system.
Fumbling bumbling democratically elected governments rarely take the economy down with them. In theory, at least democracies allow the most qualified and competent to lead rather than being appointed through cronyism. The presiding government will always be under the influence of lobbyists, unions, focus groups and opinion polls to varying degrees. The UK’s Civil Service oversees policy implementation on behalf of the day’s government. Often seen as a body to sanity check policy or even the real power behind the throne, the CS ensures governments follow the rule book of protocol which is notoriously difficult to rewrite. The checks and balances in place at Westminster make achieving a revolution, declaring martial law or birthing a dictatorship a near impossibility. The UK’s protocol and process-driven CS insulates the economy from sudden annihilation when power changes hands in Downing Street. Strong and stable governments create growth and a belief those in power know what they are doing.
An autocracy exists up to the point where a single person or small group of ruling elite abolish constitution restraints such as a government. It then becomes a dictatorship. The self-styled people’s democratic dictatorship of China (and other autocratic states) has a strong, stable centre of power and comparable economic growth. In contrast, weak rulers are more likely to be overthrown through revolution or coup (USSR, Venezuela, Myanmar). Oppression is no substitute for a crackpot dictator bringing economic stability or stasis in order to secure their power base. Surprisingly there is not a huge difference in GDP growth between stable democratic economies and stable dictatorship economies. Cabinet hirings and firings are a barometer of who the top dog fears and favours. Ministerial resignations are a major statement of losing faith in the leader, to the point where a PM might look to place an order at Ikea desperately seeking a cabinet! At this point, we must note that dictatorships have a poor record of human rights and equality.
Acts of God
It’s no coincidence that some of the world’s most volatile political systems are in areas prone to natural disasters such as floods, famine and earthquakes. A natural disaster pours conflict and division into even the most democratic and amenable of political systems. East Africa and those worst affected by the Pacific Ring of Fire are key examples of this. There are exceptions to every rule, such as in Japan, New Zealand and America’s west coast.
Italy – Quick Change
Since 1945 the average Italian government has lasted just 1.1 years, falling over when compromise and coalition support fails. Economic and political reform gets lost in the dash to implement quick fixes (policy myopia) before the government is deposed. Italy’s economy is stable because their Quick-Change PMs and Yes Governments don’t survive long enough to see through radical policies. Unlike the UK, there simply isn’t enough time to repair electoral faith and reap the rewards of taxes and tariffs later in the government’s term.
Pakistan – Potential in Poverty
The loved and loathed 22nd PM of Pakistan, Imran Khan, was removed from office in April 2022 after four years in power through an unprecedented no-confidence vote. He was the 4th longest serving PM in Pakistan’s history. GDP fell in Khan’s reign, much like it had done with the boom and bust cycle of his predecessors. The political uncertainty in an already struggling economy produced double-digit inflation and currency devaluation and sent the stock markets tumbling. Social unrest ensued. Pakistan is inherently politically unstable. It remains one of the poorest countries in the world. Repeated military rule has prioritised weapons over wheat. The country has huge untapped economic potential despite its susceptibility to natural disasters.
Turkey – A New Start?
Türkiye (née Turkey) is a country troubled by national debt, sporadic interest rates, tariff retaliation, and military coups. In 2018 the constitution migrated from a bickering parliamentary system to a presidential one. It has afforded much-needed stability, regulation and economic freedoms. Policies designed to entice investors back are working. Pre-pandemic Türkiye was growing faster than any other European nation. Their forward-thinking millennial-dominated workforce has little appetite for old ideological principles and a hunger to embrace modern consumerism. With enough political stability and the upcoming reforms, there should be scope for the EU to resume membership negotiations.
Sri Lanka – Sleeping Lion Pride
Sri Lankan president Rajapaksa fled office in July 2022, ending more than two decades of dynasty rule. Earlier in the year, Sri Lanka defaulted on its debts for the first time. Theirs is a story of short-sighted economic band-aids and metronome policies. Sri Lanka was heading for insolvency long before terrorist attacks and Covid decimated tourism. Civil unrest and political instability accelerated economic decline. If the new president and government can unite political divides, Sri Lanka has every chance of recovering from crippling debt, underinvestment, inflation and commodity shortages.
The Art of Compromise
Britain has one of the most heavily regulated debt recovery industries in the world, largely thanks to our time-honoured political institutions. The balance of power between creditor and debtor is a stable equation and a largely amicable affair for the company, individual or government official. Debt collection agencies are armed with legislation instead of iron bars and AK47s. The cinders of debt have been known to set light on a new government’s mandate as civil war breaks out in the cabinet. The art of compromise is never so overlooked when a PM has crushed the opposition at the ballot box. However, a substantial majority is no guarantee of pushing through reform or legislation. Government spending on infrastructure, transport and communication creates economic growth, increases the national debt, and entices international investors. If done right, it breeds economic and political stability – something which HS2 and Sizewell C are yet to achieve.
Political stability can be achieved through oppression or through not having a credible threat to rule. Even stable regimes encourage people to work, invest and save. With stability can come complacency and stagnation, having the opposite effect of what stable governance aims to achieve. At worst, this descends into corruption and abuse of power. In stable democracies, cabinet scandals and opinion polls will collapse a government from the inside. For good reason, governments like ours prioritise economic growth to both reinforce political stability and increase the chance of extending their reign. The 1992 American presidential election gave the world one phrase and, for all intents and purposes, sums up how to ensure stability and retain power – it’s the economy, stupid!