Executive Summary

This paper tries to assess the impacts of political instability to the economic development of the country and rate of trade. Trade lead to economic integration this is the process of bringing together different national economies. The paper explains into details different ways that the political instability in a country adversely affect the economic performance of a country. Political instability is defined by economists as the propensity of a government collapse; this is because it will most likely lead to the failure of government no matter how strong it’s economic background is.

For there to be any meaningful business in the country, the citizens should be assured of their security. Since security is a paramount reason for comfort, any case of breach of citizen’s security will hinder economic activities in the country. From the paper, it is evident that a country that experiences a higher rate of political instability will as a result, experience lower trade as the environment will not be conducive to conducting business. As a result of poor trade, the country will have lower growth rates in GDP. It is also evident that the political instability will lower the rate of productivity growth and hence result to human capital accumulation.

Table of Contents

Cover page……………………………………………………………1

Executive summary……………………….………………………………2

Table of contents…………………………..………………………………..3

Introduction……………………………………………………………….4

Relationship between politics and trade…………………………………5

Conclusion…………………………………………………………………21

References …………………………………………………………………….23
Introduction

Political environment is one of the most important environments of business; it is said to be one of the macro environments of business since they are at a national level. The problem is that the political environment is completely external, and it will be beyond the control of the business. Businesses have to adapt to the current political conditions no matter how harsh or un-conducive they are. A study of the politics relation to business is important to help establish the level of control the political environment has over the business, size and amount of trade within the citizens.

Political instability is regarded by economist and other business people as the main discomfort that is dangerous to the economic performance of a country. Political instability will shorten the horizon of policy makers as the future will be always unpredictable (Darzel 2000, 290). Having a low scope into the future and being unpredictable is dangerous in a country as it will mean that all policies that are adopted must be on short term basis. Short term plans on a country can have negative impacts on it as investors will be afraid to invest as the future of the country remains unknown.

The phenomenon of political and policy instability has become widespread especially on third world countries which are still maturing politically. This widespread poor performance of the economy has captured the interest of economists who have been interested to know the relationship between the political stability and the rate of trade on particular countries and the world as general. Out of the study, the economists have been able to give the negative impacts of political instability to trade and other macroeconomic variables including GDP growth and trade.

Relationship between Politics and Trade

Political environment will either affect a business positively or negatively. However, political instability of the country will never affect a business in a positive way. Political unstable government will either have strong opposition from its basis on weak ideas or will be run by dictatorial leaders. On the other hand, a country that has given its citizens the freedom to choose its leaders will thrive as the government will be able to implement government policies with ease.

On dictatorial and unstable government, investors will not be able to invest any amount to the business; this is because they are not sure on what is going to happen in the future. Trade is mainly contributed by investors who will offer to invest their money to buy goods either on international or local markets. If they are not sure on whether they will gain returns on the amount they invest, they will consider the risk of investment to be too high and, as a result, reduces or even in worse cases completely fail to invest on the businesses.

Politicians will mainly control trade directly. Politicians are the policy makers in the country. They will choose business relations that a country has with its fellow countries. If a country is unstable, it will result to mean that there will be no policies being made and old terms of trade review will not be made. Lack of review on trade terms on countries to be involved with in trade can be dangerous. This is because it will lock out a country from the latest market for its products. Lack of review on new countries to trade with will also result to loss of chances to get the latest materials with the latest technologies in the market.

A country that is politically unstable will be discriminated on the international market. Countries that are constantly fighting will experience sanctions from the super power countries. Sanctions on a country can be a major setback. These are because it will limit trade opportunities with other countries by reducing international market for their products and at the same time inhibit the importers from importing their products.

Poor political relationship will lead to limited trade. Countries will not allow their citizens to trade even one on one with each other if they are not in good terms. Limited trade due to a poor relationship is dangerous to the people of a particular country. This is because, despite the production or demand for a product that will be available in the country, there will be no acquiring or selling of the materials between the countries involved.

Also, in a country where the leaders are weak and vulnerable, the citizens will focus more on overthrowing the leaders. Weak leaders in the system are a major setback to the economy since it will compel the citizens of that country to focus on removing the weak government. The government may be weakened by weak ideologies that it stands for or maybe weakened by a very strong opposition that has a backing of the people. People in such a government will devote all their energy to stabilizing the government. If this happens, very few people will involve themselves on trading activities. On the other hand, a strong government will make the citizens more focused to make developments as they are assured of their security. Citizens in such a country will devote more time in focusing on trade.

An unstable government will focus more on stabilizing its government. A shaky government that doubts its control and powers will less likely focus on pleasing the lobby groups, it will focus more on acquiring more power so as to gain effective control. This government can be also risky as it will have no time to create smooth trade lines either on its land or international trade. No countries that will associate with politically unstable government and the diplomatic relations with all other countries will be very weak and hence leading to loss in possible trade ties. Citizens of the country will also feel uncomfortable doing business on their own land if they know that their security and the security of their business is at risk.

A political unstable government will be characterized by corrupt individuals. Individuals who will hold office during the span of a politically unstable government know they can lose their offices anytime. If the government is unstable and a coup or citizens overthrow is likely to happen, those in office will only be interested in their own part. They will embezzle all funds meant to develop trade in a country. This will limit and discourage investors who will be pulled away by the little government commitment to develop the trade industry.

If it is evident that a country government will collapse, there is a chance that it will not affect trade adversely. This is because the investors will have made their plans before the government collapses. However, it will be difficult to make any plans in case it is unclear of who will be the successor. Investors will be afraid to invest in case they are not sure who the successor of the incumbent government is. This is because different people have different views on trade, and hence it might be desirable if the incoming leaders develop good international relations or adverse if the new government fails to make relations and leads to sanctions. A perfect example in this case can be taken as Egypt. Different people were of different views about the political situation and who was responsible for it but one thing was clear; that the economic situation was not going to improve without political stability. On previous regimes, there was widespread corruption in the government which was highly attributed by the lack of accountability of the leaders. The country was under many sanctions, and they were limited to the number of countries they could trade with. This increased the rates of poverty and unemployment. In addition to that, the purchasing power of the citizens greatly reduced. This was attributed to the fact of unemployment. This greatly repelled any investors that were considering grasping any opportunity and opening a business in Egypt. Also, there was poor development of infrastructure both on roads and airlines. The government spent very little in the development of infrastructure and hence this clearly meant that there was no trust among employees on the flexibility of the transport system. There was no way trade would have been possible with the absence of good roads and developed air transport.

Citizens in the country could not make long lasting decisions because they were not certain about the future. Citizens were not aware of what to expect next, and hence they could not make perfect purchase decisions on what to purchase first. This greatly reduces the market for the goods as people prefer to purchase less amount so that just in case of anything bad happening, they will not experience great loss.

The rate of currency was dropping at an unpredictable rate. Currency of the country with political unrest will never be stable; it will fluctuate with time worsening as the country political system worsens. This can be very dangerous to the trader who might have invested a lot to the business. The investor cannot operate his or her business with a foreign currency since it will not be available. This said; it means that the trader stands a chance to lose all his investment to inflation. If an investor had invested all the money on the stock and then the currency deteriorates, it means that the goods will lose value. This is an unfavorable condition to do business since not on all inflations is one assured of getting the money invested back. The situation might worsen as the instability continues and hence exposing the investor to more risk if the goods do not get a ready market.

No investor is ready to lose the goods in the market as a result of inflation brought about by the political reasons and hence many investors will avoid countries with political instability to mitigate they’re loses through inflation.

Mostly, countries with political unrest will have cut all sources of foreign currency. Foreign currency is the main source of income and the main contribution to the economy of a country. A country with no foreign currency means that it has no great source of purchasing power as the foreign currency is the main source of this power. Foreign currency will mostly tend to heal the deteriorated economy of the country and act as a cover to ensure that it survives on tough times. However, during times of political instability, all sources of foreign currency that are mostly tourism will be cut off and hence cutting off the sources of currency. This is a major blow to the economy as it means that the economy has less consolation.

In a politically unstable nation, the demands of the opposition will be different from those of the opposition in a political stable government. Opposition in a government is supposed to keep the government on track and make sure that it does everything according to the right procedures. In a stable government, opposition will have a great role to play in the development. They will demand betterment of the trade systems advocating for the removal of trade barriers so that trade can easily be carried out. On the other hand, opposition in a politically unstable government will have to reduce its demands if they are to remain relevant. Mostly, opposition on these countries will focus more on constitutional changes so as to offer the citizens a better platform to express themselves and also a better and more democratic government. This is a major blow to the trade sector which will have limited options and it will have to deal with what will be available. This will be mostly what was available before the political unrest and the channels that were established before the instability began. The political channels could have been weakened by the political instability with investors fearing any loss in case they were caught up in between the struggle for power.

A politically unstable government will be characterized by numerous political rallies and looting of property. The citizens will demonstrate on streets to show their disapproval of the top government. This will be dangerous to all businesses as there will be indiscriminative looting of property. Investors will be afraid of losing their investment in case of the protests, and hence they will prefer to stay away from the politically unstable country until the situation gets better or if it does not get better, or it worsens, then there are lower chances of getting new people on board to invest.

In an unstable government, it is more likely that the government will focus on short term plans that will increase its chances of survival. An unstable government is less likely to focus on keeping itself on power. It will aim at spending money on the sycophants who will ensure that they remain on power. Focus on the wrong side will affect the trade adversely by minimizing any meaningful developments that might be available. Money that could have been used in investing on trade activities will be diverted to other places.

An unstable government is less likely to invest on infrastructure. Infrastructure is a major backbone of the trade. Poor infrastructure will discourage investors to invest on a particular place for fear of loss. For example if an investor is thinking of investing in the horticulture industry, the first thing that he or she will evaluate is whether the transport will be a problem. If the infrastructure is well developed, he or she will be attracted more to join the business. If a country is unstable politically, many countries will issue travel advisory against its citizens. This can be a blow to a country trade bearing in mind that even the business people will be locked out.

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