The FINANCIAL — Business thrives on consistency. From the smallest ice-cream entrepreneur in Shardeni to the largest bank investing in a hotel chain, companies need clear visions of tomorrow’s business and regulatory environment in order to plan for the future.
National elections create uncertainty, which can be tough on the economy. Any event that casts doubt over the future landscape will cause investment and business expansion to slow because of fear of the unknown.. This “fear of the future” is especially pronounced during an election cycle in emerging economies like Georgia’s, where foreign investors who are extra sensitive to any perceived instability are critical to continued growth.
Today, a great deal of business uncertainty is stemming from the upcoming October presidential elections, which are already affecting the Georgian gross domestic product (GDP). The International Monetary Fund’s recognized this fact in June, when it cited “political insecurity” as a major reason for downgrading its prediction of Georgia’s annual GDP growth from 6 to 4 percent.
Why do elections generate so much uncertainty? Managers know that even the smallest changes in government personnel or philosophy can impact operations. One coalition might say they want to encourage small business and provide incentives. Another ticket could plan to increase government spending but redistribute contracts. It’s comfortable for businesses to delay major decisions until they know which party will win and how the new government will dictate policy. Angst about political power shifts effect an economy both before the election, when rhetoric is at its highest as well as after the the election as businesses adjust to new operational realities.
Businesses have a variety of different tactics for pursuing the “wait-and-see” strategy. These strategies include hiring freezes, cash hoarding, inventory reduction, and moving liquid capital out of the country. Each technique allows businesses to increase their chance of surviving a major shift in environment by giving them extra cash to adapt to new challenges or opportunities. While this strategy makes sense for each business individually, on a large scale it contributes to a stale economic climate.
Back-to-back election seasons in Georgia have doubled this slowdown effect. Georgian economic growth began to stall in late 2012, before October’s parliamentary elections. The European Bank for Reconstruction and Development attributed this to “lower investment and uncertainty related to post-election political transition.” Because Georgian presidents hold office for five years, compared to legislators’ four, 2013 spans two continuous periods of slowdown. That’s over a year’s worth of hesitant decisions as business owners and investors try to anticipate a new party or administration’s policies. The next back-to-back election seasons will come in 2023-24.
Election uncertainty is normal among democratic nations. Australia, for example, experienced election’s negative effect on business earlier this summer. Commonwealth Bank surveyed business confidence in the financial industry at the time and found the figure at a six-month low. Seventy percent of businesses polled cited “government policy uncertainty” as the greatest obstacle to operations. A majority expected revenues to decrease or stay the same.
Brazil’s elections have been more economically troublesome. Though much larger than Georgia, Brazil emerged from a dictatorship only in the late 1980s, and hence may share similar challenges. Its financial reforms have attracted substantial outside investment, yet many observers (such as JPMorgan and CitiBank) have downgraded Brazil’s expected 2014 GDP growth to 2.3 percent from 3 percent, in large part because of the country’s October 2014 elections. Even the prospect of an upcoming contest can play a large role in economic predictions and investment.
Though elections may spook investors, they are still good for the economy overall. This benefit comes from the fact that democratic elections periodically re-balance society’s desires with government actions. Established, democratic societies with a history of peaceful transfer of executive and legislative power are perceived as more fundamentally stable than most other forms of government. A transparent, electoral system is foundational to building long term stability that encourages investment to flow and results in business and individual prosperity. The same June IMF report mentioned previously also predicted that Georgia’s GDP growth will return to 6 percent by 2014.
Any election cycle, regardless of who wins will always put a dent in a country’s economic output. However, as more peaceful elections pass, the dent will not be as drastic as Georgia’s dip in 2012. As time passes and elections ensure the continuation of sound economic policies, business owners will become more relaxed during political cycles, minimizing the effects of political infighting. Political candidates can help prevent this drop in GDP by clearly broadcasting their intentions to honor existing policies and smooth any post-election changes.
Elections are always challenging for any society. However, they can be economically beneficial for a savvy investor. Fearful responses, like hiring freezes or cash hoarding damage individual opportunity and the economy as a whole. The stagnation that accompanies election season is a brief storm that has to be endured before fair weather reappears.
Since fear of elections is holding investment and business back, I’ll leave you with a 2001 quote from Warren Buffett: “Investors should try to be fearful when others are greedy and greedy when others are fearful.”. While everyone else is waiting for October results, Today could be the perfect day to invest in Georgia.
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