How Politics Affects the Economy?

The EU flags in front of parliament

Political factors such as regime type, political stability, political management, corruption and trade laws all affect economic development. Government policies and administrative norms are the political factors that when enforced influence economic development. Politics influence economic development by either supporting or disrupting the process of development.

The Role of Political Factors


Political factors that generally impact significantly on economic development include the form of government within the country, whether it be democratic, authoritarian, communist, or something else. The type of government influences the policies that affect personal and public economic development, particularly through taxes and public spending since a greater level of government spending often stimulates the economy. Also, in a democratic nation, individuals can obtain small business loans and start their own company. A successful business can expand exponentially, with employees getting different rates of pay depending on the work they do. In contrast, in a communist nation, there are strict regulations which include paying all staff equally, which can impact how businesses operate and prevent growth that would increase economic development.

Government is also an unpredictable element in the economy since democratic governments have to pursue re-election every few years. Add in the effects of pressure groups which tend to change government policies, and it becomes clear that company leaders need to take responsibility to manage the impact of any new legislation that will affect their business.

Level of stability

Political stability means there is less risk to business; this is particularly relevant to those who operate internationally. Countries with a high risk of internal conflicts are less stable, which makes business operations expensive and risky. The currency exchange rate or the amount the country's money is worth when compared to that of other nations may deter visitors with economic development less likely. Companies need to be ready to deal with local and international outcomes of politics. Countries recently impacted include Egypt, Ukraine, and Syria among others.

Political management

How well the government monitors and enforces national and international policies or laws impact the wish of businesses to operate there. An increase in taxes for some companies or a decrease in taxes for others directly affect any business. Similarly, government interventions in interest rates can affect the demands the company may face. Therefore, business managers need to stay up-to-date with such political factors. Government failure to enforce laws may impact on a company’s ability to make money, increasing the risk of operating in the region.

Level of corruption

The level of dishonest, unethical, and illegal practices that are imposed on people and businesses operating in a region affects the economy. Corruption includes bribery of and by politicians; of local companies for materials; for the barring of competitors from entering the market. Corruption prevents further economic development and can cause a monopoly that makes services more expensive than they could be, and the success and growth of these companies are not based on the value they offer to consumers.

Trade laws

The local and international policies that impact the importation or exportation of goods are a political factor because governments and politicians develop the policies. Trade includes tariffs imposed on particular imports and exports. Some trade deals between countries can reduce trade tariffs, such as within the EU. Those without trade deals in developing economies face high taxes that can prevent them from participating in international trade.

There are some indices that give an idea of the risk exposure in certain countries. The index of economic freedom is a good example. It ranks countries based on how politics impacts business decisions there.

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