How Political Instability Can Affect Your Investment

April 25, 2022

In 2015, member states of the United Nations adopted The 2030 Agenda for Sustainable Development as a blueprint for achieving peace and prosperity for people across the world. Yet, different parts of the world continue to witness the incidence of political instability in form of assassinations, riots, anti-government protests, terrorism, guerrilla warfare, coups, violent ethnic conflicts and frequent strikes. This article examines the impacts of these incidents on the factors of production and investments in the affected countries.

Impact of political instability on businesses

On Labour

Political instability creates an environment that is characterized by uncertainty, volatility and insecurity. Countries battling with political instability are bound to witness a massive exodus of skilled and educated people. Peace of mind and safety of lives and property are necessary conditions to attract and retain a strong labour force. The absence of adequate and qualified personnel will definitely affect the productivity of an organization. On the other hand, studies have shown that political stability enhances labour productivity.

Infrastructural damage

Infrastructures are important drivers of economic activities and growth. Damage to infrastructure is a common phenomenon in countries witnessing political instability. Electricity systems, transport and communication infrastructures are common targets of hostile groups. Attacks on these infrastructures can make the acquisition, accumulation and distribution of factors of production impossible as well as lower the rate of productivity.

Rising risks

Political instability negatively affects the ease of doing business and triggers so many other risks within an economic landscape. Specifically, it discourages local and foreign investors because it further raises the risks associated with investments. More often than not, there is an atmosphere of uncertainty and volatility, including the tendency for economic policies to be unstable and unpredictable. Rising risks will in turn distort projections and reduce investment.

Furthermore, in addition to increasing the risk of job loss due to the closure of operations by some companies, a volatile environment tends to change the buying attitude of consumers. Consumers will be highly reluctant to spend on products or services when there are safety concerns.

Political instability equally tends to make raw materials inaccessible as a result of the risks arising from pervasive insecurity. This is especially so in areas that are consumed by armed hostilities. Inability to access raw materials will technically ground production.

Collapse of critical institutions

One of the functions of political institutions is to provide a conducive environment for businesses to thrive. This is done partly by providing order, policies and laws that enable economic activities to take place within the approved norms of economic behaviour. Political institutions also create, maintain and protect other institutions.

However, political instability renders institutions prone to collapse, including the collapse of those institutions that form and regulate economic matters such as finance, labour, trade, insurance and agriculture.

In the absence of strong institutions, corruption, money laundering, misappropriation and various types of fraud will become rampant and crumple investments.

Final thoughts

Political stability is a necessary condition for viable economic activities and development. Instability has tremendous adverse consequences on local businesses and foreign direct investment (FDI) by contributing negatively to the ease of doing business. Potential investors should consider both local politics and the trend of foreign relations between their countries of interest and other countries before making investment decisions.

On many occasions, mild situations gradually but steadily worsen. Sometimes, they peak drastically. Therefore, early red flags should be taken seriously.

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