Four ways political events can impact the economy

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SINGAPORE (July 25): To distinguish between political developments that really matter to the economy or financial markets and others that are just noise, we need to understand which dimensions of politics actually impact businesses, and then assess whether the political flashpoints that we know are coming contain enough of these dimensions to cause permanent or far-reaching dislocations.

Typically, the political events that matter have the following characteristics:

1. A change in political leaders or parties that lead to a big ideological shift

A political change will matter if it represents a fundamentally different way of treating markets or private businesses or private property.

2. Wars, invasions and violent disruptions of business activity

Outright military conflict affecting regions that provide key resources such as oil or through which critical transportation routes go or that house vitally important manufacturing or other business activities.

3. Impaired foundational frameworks underpinning political order and economic cooperation

An example is the US invasion of Iraq which upset the political order in the Middle East. Anything that results in the division and weakening of Asean, the lynchpin of regional stability, would also be a substantial negative.

4. General rise in uncertainty hurting confidence

Finally, the series of coincidental but unrelated political stresses in recent months is leading to a general sense of unease. This tends to raise the risk premium, causing businesses to hesitate about investing or hiring workers or undertaking risky research and development initiatives.

Further details on which looming political flashpoints fit this framework can be read in Manu Bhaskaran’s full story in The Edge Singapore (“How much should businesses and investors worry about political risks”, week of July 25, pg 22), available at Singaporean newsstands now.