The effect of politics on the economy

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This article first appeared in my weekly column with the Business Daily on January 31, 2016


Politics in Kenya has a ripple effect on the economy. Due the post-election violence that followed 2007 election, the country’s GDP growth fell from a high of 7 per cent to a low of 3 percent. Earnings from tourism halved and according to The Economist, post-election violence led to financial losses in economy of approximately £145 million, around 1% of Kenya’s GDP. Further, studies estimate the post-election violence had long term effects and over the period 2007-2011 per capita GDP was reduced by an average of 86 USD per year, which is massive considering Kenya’s per capita averaged about $980 over that period. Another study suggests that in 2009, per capita GDP in the Kenya was estimated to be about 6 percent lower than if the instability had not happened in the first place.

(source: https://nothingbutmyemotions.files.wordpress.com/2013/02/kenya-pev.jpg)

The World Bank is of the view that political risks to economic growth are ranked equally to growth risks posed by shocks in the global economy such as the debt crisis in the European markets. So what happens in Kenya’s political arena has economic consequences. And the effects are not only related to GDP growth, other economic effects result from politics. The Eurobond debacle that started last year where government was accused of the mismanagement of the proceeds from the Eurobond is bound to make financing for the government more expensive. Yes there are other factors at work such as the recovery of the US economy which will make financing more expensive in general, but it would naïve to assume that the politicization of the Eurobond issue has not negatively affected perceptions of the credit worthiness of the government.

When one has a young economy juxtaposed with a young democracy, there are bound to have a relationship where activity in one affects the other. More mature economies tend to be more resilient to political instability and if politics does have effect it will tend to be more closely associated with changes in policy of economic import. In fact an analyst interviewed on Bloomberg stated that in the USA, the impact of politics on the economy, except when people really mess up, is overrated. This is partly due to the fact, that as studies have shown, economic institutions such as property rights, regulatory institutions, institutions for macroeconomic stabilization, institutions for social insurance, institutions for conflict management are more mature in older economies and these are major sources of economic growth across countries. A young economy has less mature economic institutions with practitioners still figuring out what institutions, regulations, rules, practices and standards can best bolster growth.

(source: http://www.dolfinwise.com.au/wordpress/wp-content/uploads/2013/06/Volatility-in-financial-markets-450×300.jpg)

In terms of democracy and politics, more mature democracies have a longer tradition of arbitration between political parties; they also tend to be defined by ideology which makes economic policy expectations more predictable. Compare this with Kenya which has a culture of personality and tribe driven politics where there is no clear idea of the economic ideology of political parties until that party comes into power. In addition, in Kenya it has often been informally observed that the tribes that constitute a certain political administration may have members that engage in opportunistic behaviour that favour their tribes while ostracizing others; there is bound to be economic fallout from such habits.

The effect on politics on economics is not unique to Kenya however; a study by the Brookings Institution found that political institutions matter greatly for incipient or young democracies, not for consolidated or mature democracies. Why? Well mature democracies have already internalized the effect of political institutions whereas new democracies need the felt presence of political institutions as part of the democratic experience. As a consequence, the impact of politics on economic performance is more visible. With this in mind, it is important that both government and opposition appreciate the import of their role and influence over the economic trajectory of the country.

Anzetse Were is a development economist; anzetsew@gmail.com

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