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In advanced economies, is political inertia a benefit?

November 5, 2014

Yesterday’s mid-term elections did nothing to resolve the underlying political inertia that has gripped the US for years now. The inability to enact any meaningful political reform, together with the adversarial social divisions between Democrat and Republican voters, promises a continuing vacuum in meaningful legislation.

The UK is in many respects in a similar position, with coalition government and the need for consensus having inhibited action beyond that of deficit reduction.

So it is interesting and worth noting that the US and the UK, among developed nations, are leading the way in terms of economic growth. Countries like France, with a highly interventionist government, are struggling to come out of recession.

On the other hand, high growth countries in the developing world often show opposite traits. A country like China flourishes as a result of government policy and intervention (though it might be argued that the growth actually results from a relaxing of control, thereby supporting the point that economic expansion is directly inverse to levels of government activity). But in many of these countries, strong government is needed to provide stability and the foundations for investment and productivity.

So what can we conclude? It seems to me that the US and UK have sufficient social strength to flourish without political intervention – indeed, politicians actually create disruption by many of their actions. A big difference in these countries is the strength of the rule of law, itself relatively independent of politics. Since Common Law does not depend on statute, it can offer a stable yet evolving framework for commerce. In many emerging economies, the principles of law – and especially commercial law – are weak and uncertain, often open to corruption. Therefore strong government becomes essential for business confidence.

Hence the continued deadlock in US politics is probably a good thing for US economic growth and overall world trade. Similarly, the probability that no single party will emerge with a majority in next year’s UK elections may also be good news for business.

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