Politics plays a vital role in the economic performance of a country. Many people, however, fail to establish the link between politics and the state of the economy of a nation. These are some of the effects of politics on an economy.
Performance of the private sector
According to economic research, any country that desires to realize improved national economic growth must ensure that the private sector is thriving. Private sector’s growth is key to the economic prosperity of a nation. Government policies can drive growth in the private sector by making it easier for individuals and companies to set up businesses. Such policies can also make an investment in the private sector attractive by offering tax breaks and creating tax regimes that encourage them to start.
The private sector employs the most substantial portion of people in the labor market, effectively reducing the level of unemployment in a country. Increased employment rate spurs economic growth and development. With economic growth comes improved living conditions. Politics, therefore, impacts on the growth of the private sector through the economic policies introduced by the political class.
Political stability and investment
Investors often conduct feasibility studies before making investment decisions. These studies are meant to reduce the risks associated with making certain types of investment. One of the risks that are usually considered by investors before making investment decisions is the political risk. This type of risk focuses on the political stability of a country and the willingness of the political class to create an environment that is conducive to business.
A country that experiences relative political stability is more likely to attract foreign investors compared to one that is characterized by political upheaval. This is an especially important consideration for multinational corporations that look to exploit growth opportunities in foreign countries. Foreign direct investment benefits the economy of the host country through increased employment, new technology, and tax income. Political stability, therefore, increases investment and the rate of economic growth of a country.
Transparency and economic growth
The political will to stem out corruption has a significant impact on the performance of an economy. A lot of taxpayers’ money is lost when money meant for development is not put to proper use. Mismanagement of public resources hinders economic growth and development. According to Transparency International, countries with high corruption indices experience poor economic growth compared to nations with low corruption levels.
The culture of corruption results in inefficiencies in public offices and makes it difficult for a nation to achieve economic prosperity. Important government functions such as building infrastructure and the delivery of essential services are significantly impaired when there is lack of transparency and accountability in public management. However, a political regime that is willing to deal with corrupt officers entrenches the culture of transparency and accountability which is key to economic growth.
Political ideology and economic growth
Political ideologies of the ruling class impacts on the economic growth of a country. Some of the economic systems inspired by political ideologies include capitalism, communism, and socialism. Each of these systems has advantages and disadvantages that influence economic growth.
These are some of the effects of politics on an economy. They indicate that politics is at the center of the economic development of a nation.