Changes in Political Stability Impact Business Environments in Emerging Markets

Emerging market economies (EMEs) have witnessed diverse changes in their political stability since 2010, with important implications for business environments and economic growth. While persistent and rising political turmoil has undermined investor and consumer confidence in countries such as Egypt and Ukraine, economies like Indonesia and Chile have seen growing capital inflows as a result of improvements in political stability and their business environments.

Key points

  • Since the early 2010s, emerging markets have witnessed different developments in their political environment. While some countries, such as Indonesia and the Philippines, made significant improvements, other countries like Egypt and Ukraine saw a rise in political instability, due to increased protests and conflicts. Egypt ranked low in the World Bank’s Political Stability and Absence of Violence index in 2013, at 189th out of 203 countries;
  • Political stability is important for business environments in EMEs, as it affects investor and consumer confidence, thus having a wider impact on the economy. A stable political setting has partly helped Poland to maintain a favourable business environment, as the country ranked 32nd out of 189 countries in the World Bank’s Ease of Doing Business (Doing Business) 2015 report. Meanwhile, rising political instability has undermined business environments in Brazil, India and Egypt;
  • Changes in political stability, therefore, have implications for investment, consumption and economic growth in EMEs. Thanks to improved political stability and business environment reforms, foreign direct investment (FDI) inflows to Indonesia grew by 66.5% in real terms during the 2008-2013 period. Meanwhile, due to Ukraine’s political turmoil, the country suffered from capital flight, with FDI intensity declining from 4.5% of total GDP in 2012 to 2.1% in 2013;
  • A rise in political instability has also hindered the growth potential of emerging markets like Egypt and Ukraine. Egypt’s annual real GDP growth slowed to 2.1% in 2013, compared to 5.1% in 2010;
  • Maintaining political stability will continue to be a challenge for EMEs in the coming years, due to rising income inequality; rampant corruption; and high unemployment rates in some markets. China’s Gini index – a standard measure of income inequality, with a higher value corresponding to higher inequality – rose from 40.2% in 2000 to 47.3% in 2013.

Mixed pictures for political stability in EMEs

  • Among the 25 key EMEs, Egypt saw the most significant deterioration in its political stability, as unrest and violence have lingered since the outbreak of the revolution and anti-government protests in 2011. In the World Bank’s Political Stability and Absence of Violence index, – an index measuring the perceptions of the likelihood that the government will be destabilised or overthrown by unconstitutional or violent means – Egypt’s ranking declined to 189th out of 203 countries in 2013, down from 146th in the 2008 rankings (out of 203 countries);
  • In countries such as Kazakhstan, Ukraine, Brazil and Turkey, the political situation also became less stable since 2010. In Kazakhstan, President Nursultan Nazarbayev has been in power since 1991 and was re-elected for another five-year term in April 2011, raising fears about his eventual succession. In Ukraine, ongoing conflicts in the eastern region and a move to an authoritarian government have hampered political stability. Ukraine and Kazakhstan ranked 159th and 132nd out of 203 countries in the Political Stability and Absence of Violence index in 2013 respectively, down from 110th and 65th in 2008 (out of 203 countries);
  • Several EMEs, including Indonesia, the Philippines, Vietnam, Argentina, Chile and the United Arab Emirates (UAE), have improved their political stability rankings during the 2008-2013 period, thanks to reforms and better governance. In Indonesia, a peaceful transition to democracy since 2004 has led to improved political stability, although the country still faces several ethnic conflicts. The UAE emerges as a politically stable country, as it remained largely immune from the widespread Arab Spring protests in the Middle East and North Africa region. Indonesia and the UAE ranked 143rd and 46th out of 203 countries in the Political Stability and Absence of Violence index in 2013 respectively.

Political stability closely related to the business environment

Political stability is an important indicator for businesses, due to its relation with business environments in EMEs:

  • EMEs enjoying political stability, such as the UAE, Chile, Hungary and Poland, often offer favourable business environments for firms, since good governance facilitates reforms and investments. Hungary’s ranking in the Political Stability and Absence of Violence index was 59th out of 203 countries in 2013, while it was positioned 54th out of 189 countries in Doing Business 2015;

Political Stability and Absence of Violence 2013 Index and Ease of Doing Business 2015 Rankings in Selected EMEs

Source: Euromonitor International from the World Bank

Note: (1) Political Stability and Absence of Violence index measures the perceptions of the likelihood that the government will be destabilised or overthrown by unconstitutional or violent means, with higher ranking corresponding to better governance. (2) The data for Doing Business 2015 are from June 2013 until June 2014. Ease of Doing Business presents quantitative indicators on business regulations and the protection of property rights that can be compared across economies. A high ranking means the regulatory environment is conducive to the operation of business.

  • India recorded a low performance in both its political stability and business environment rankings. It ranked 178th out of 203 countries in the Political Stability and Absence of Violence 2013 index and 142nd out of 189 countries in Doing Business 2015. Poor governance; uneven rule of law; severe infrastructure deficits; and corruption are among factors affecting the country’s performance in both areas;
  • In Egypt, persistent political unrest has held back necessary business environment reforms in areas, such as infrastructure, labour market and tax policy. Also, the risk of crime and violence can increase the cost of doing business and weakens FDI potential. Egypt ranked relatively low in the Doing Business rankings, at 112th out of 189 countries in the 2015 report, compared to UAE’s 22nd position;
  • Meanwhile, a stable and more accountable government in Indonesia has enabled infrastructure investments and investment policy reforms. Indonesia is positioned 114th out of 189 countries in Doing Business 2015 report, three positions higher than in the 2014 report. A high level of bureaucracy and corruption, however, continue to affect Indonesia’s business environment;
  • Thailand and Turkey are among few EMEs that continue to have relatively high rankings in their business environments, despite a rise in political instability over the 2008-2013 period. Thanks to open investment policies and substantial business environment reforms since the early 2000s, Thailand and Turkey were placed 26th and 55th out of 189 countries in Doing Business 2015 respectively.

Impacts on investment and economic growth

Recent changes in the political situation impact business environments in EMEs and thus have implications for FDI, tourism and other economic activities in emerging economies:

  • Rising political turmoil will undermine investor confidence and thus affect FDI inflows, while political stability will help to attract FDI. The aggregate FDI inflows to all 25 key EMEs reached US$511 billion in 2013, accounting for 35.2% of the world’s total FDI inflows, up from 29.7% in 2008;

Global FDI Inflows: 2008-2013

Source: Euromonitor International from UNCTAD

Note: (1) Emerging market economies cover 25 key countries that include Argentina, Brazil, Chile, China, Colombia, Egypt, Hungary, India, Indonesia, Kazakhstan, Malaysia, Mexico, Morocco, Peru, the Philippines, Poland, Romania, Russia, Saudi Arabia, South Africa, Thailand, Turkey, the UAE, Ukraine, and Vietnam.

  • Between 2008 and 2013, FDI inflows to Indonesia grew by 66.5% in real terms, supported by the country’s improved political stability and economic performance. Meanwhile, Ukraine witnessed a 51.7% real year-on-year decline in FDI inflows in 2013, amid the country’s growing political unrests;
  • The political environment also influences consumer confidence in a country, since rising instability will discourage consumption and vice versa. Due to an overall economic slowdown, growth in EMEs’ aggregate consumer expenditure already moderated to 5.3% (constant fixed US$ terms year-on-year) in 2013, compared to 6.2% in 2012;
  • In Egypt, annual economic growth has slowed significantly since the outbreak of political uprisings in 2011, reaching 2.1% in real terms in 2013 (compared to 5.1% in 2010). Ukraine’s economy expanded by only 0.2% year-on-year in real terms in 2013, partly due to capital flight and currency depreciation, on the back of the country’s political crisis;
  • Rising political instability will also pose a threat to the tourism industry in EMEs. Tourism plays an important role in some emerging economies, such as Thailand and Morocco. In 2013, tourist receipts accounted for 9.9% and 7.7% of total GDP in Thailand and Morocco respectively.

Prospects

  • Political unrest and geopolitical conflicts are expected to remain in some EMEs, such as Egypt, Ukraine, and Russia, in the short term, further weighing on their business environments and economic growth. Partly due to the ongoing conflict with Ukraine and economic sanctions from the West, Russia’s economy is forecast to grow by only 0.4% year-on-year in real terms in 2014, down from the 1.3% growth year-on-year in real terms in 2013;
  • Rising income inequality; high unemployment; and corruption will continue to threaten social coherence and political stability across EMEs, since they are major sources of social discontent. Vietnam’s Gini index is forecast to increase to 46.4% by 2030, up from 44.3% in 2013. In South Africa, 24.7% of the total economically active population remained unemployed in 2013. Among all EMEs, Ukraine ranked the lowest in Transparency International’s Corruption Perceptions Index 2013, at 144th out of 177 countries.

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