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Is the economy an election issue? Do economic policies matter?
View(s):Despite the economy being a peripheral issue in the current presidential election campaign, the leader who is elected would fashion future economic policies and there could be significant differences in economic policies depending on who is elected. Will there be continuity of economic policies, continuity with change or a break from recent economic policies? Elections of the past have resulted in all three scenarios. What will it be this time?
Although the central focus in the run-up to the election will not be economic policy issues, but the need to change the country’s constitution, the election will have serious economic implications. Even though the nexus between the executive presidency and the economy may not be brought out explicitly in the election campaign, the relationship between a government by an executive president and one by a cabinet is at issue. Besides, the incumbent in each also matters.
Election rhetoric
The presidential election result would have an important bearing on the economy, for better or worse. Election promises are not necessarily a guide to what may happen as extravagant promises that cannot be implemented will no doubt be a feature of this campaign once again. It is the post-election political developments that would have a critical influence on the economy in the coming years. The economic future of the country is inextricably linked with post-election developments. Fundamental economic problems have to be tackled in 2015.
Fundamental issues
Whoever is elected and whatever government comes into power, the fundamental issues discussed in this column from time to time have to be addressed. Ensuring law and order, guaranteeing property rights, fiscal consolidation, lowering the foreign debt, better prioritisation of government expenditure, larger allocation for education, health and social welfare and reforms in many areas that would improve the business environment and increase domestic and foreign investment are among the critical economic issues that have to be addressed.
The perceptions and understanding of these problems and the approach towards addressing them would vary. A vital prerequisite towards their resolution would be recognition of the problems and the determination to resolve them.
Sustaining economic growth
Sustaining economic growth has been a concern owing to fundamental macroeconomic weaknesses, lack of economic reforms, poor governance, uncertainty in economic policies and inadequate investment in technical and scientific education. These and other concerns have to be addressed by whoever is elected at the forthcoming election to achieve macroeconomic stability and economic growth.
Immediate impacts
Irrespective of the final result, the run-up to the election and its aftermath are bound to have economic repercussions. The uncertainty of the election result, disruptions caused by the election and varied expectations would determine performance of many economic activities till political stability and normality is restored after the election.
Stock market
There has already been an impact on the stock market owing to uncertainty, speculation and expectations created by holding the election. No sooner the election was announced the stock market fell around 200 points and then recovered about one half of it. Fluctuations have characterised market behaviour since then as market sentiments and speculations keep changing.
Government agencies that are important players in the market may have a different set of criteria for buying and selling shares. Foreign investor perceptions that are also important may adopt a ‘wait and see’ position, reduce their holdings of stocks and refrain from new investments. Fluctuations on a declining trend of share prices are most likely till some certainty and political stability is visible.
The stock market is very much based on market sentiment and speculation with foreign traders playing a key role. However, the asset values and performance of companies trading in the stock exchange are not likely to be affected by the election. For this reason, contrary to public opinion, the behaviour of the stock exchange in the next few weeks is not of much long run consequence. There could be a divergence between market sentiment and fundamental share values. Keynes, who made a fortune on the London Stock Market, compared the stock market to a casino: speculation on a sea of uncertainty. This is what we are witnessing these days.
Tourism
The booming tourist industry is likely to be affected adversely for a short while. During a period of elections some tourists are likely to cancel their planned visits. Consequently, tourist arrivals in December and January are likely to fall somewhat. It is unfortunate that these two months are in the height of the tourist season. Western and Japanese visitors are most likely to be cautious. Other Asian and Middle Eastern tourists may be less concerned with the election. Peaceful conditions and law and order are vital to ensure a continuation of the increasing trend in tourist arrivals.
Foreign investment
Foreign investors are likely to resist investing till the political picture is clear. The winner would matter to investors as they may have different perceptions of the two candidates and the governments they lead. The business climate of the two regimes could be different. This period of the election is one of uncertainty that the business community dislikes. It is not a time conducive for foreign investment.
Prospect
What is important for the economy and the nation is that the elections are conducted peacefully with the least disruption of economic activities, that law and order is maintained and the electoral process is fair. If these conditions are achieved then domestic and foreign confidence in the country would be established and economic growth could be sustained.
Hopefully, the election would usher in an era with law and order, rule of law and security of property rights, certainty and predictability of economic policies, good governance and prudent economic management. If these preconditions are ensured, then it would increase investment and enhance economic growth. Once the election is over, it is essential that once again the focus would be on economic issues to ensure the acceleration of economic growth.