The price for freedom

“The time to buy is when there’s blood on the street,” the eighteenth-century banker Nathan Rothschild famously advised. Yet where Rothschild made a fortune during the chaotic times of the Napoleonic wars, it is fair to say business does not like political turmoil. According to the Egyptian finance minister, Samir Radwan, the Egyptian economy lost $310 million a day during the recent unrest. The demonstrations shut down businesses, scared off tourists and caused international credit rating institutions to downgrade the country’s creditworthiness. Hosni Mubarak, in what now seems like the most out of touch reaction to revolutionary demands since Marie Antoinette, stressed the importance of restoring order arguing that only this would bring back economic stability.

While this economic slowdown is certainly not too high a price to pay for freedom, it is interesting to explore the relationship between political uncertainty and the economy. Political processes determine a government’s economic policies and its ability and willingness to extract the necessary resources from its citizens, thus defining the perceived environment for investment and economic activity. The idea that economic performance is dependant upon politics dates back at least to the political philosophers of the 17th century. Thomas Hobbes, under the influence of the tumultuous English civil war, stressed the importance of a strong monarch to provide the security that human life needs to flourish. Human beings will only cooperate; nations can only develop in a stable environment.

While Hobbes saw an absolute sovereign as the guarantor of stability, his countryman, John Locke, writes on the importance of the rule of law and the restrictions upon executive powers to protect “life, health, liberty, or possessions.” Stability can only be achieved where there are reliable laws, yet an absolute ruler can change law at will. Many scholars argue that it was the glorious revolution and the resulting limitation of the king’s power that led to the industrial revolution in Britain. The fact that the monarch was restricted from exercising power as he pleased encouraged people to accumulate capital. Checks and balances in governance create a stability that a single strongman cannot provide.

Granted, investors will take a stable dictatorship over a chaotic democracy any day. International markets will react to political uncertainty even in well-established democracies. Elections will move stock markets and bond yields, because investors loathe uncertainty. However, consolidated democratic societies are better equipped to react to change. In a consolidated democracy, government change without altering the system. The 1990s Asian financial crisis saw the Indonesian regime fall, while the more democratic South Korea was in a much better position to deal with the aftermath of financial turmoil. The problem with a strong decisive leader is that no one can prevent him from making the wrong decisions.

Hosni Mubarak is gone. The guarantor of stability as he saw himself has lost his power. While no one can be sure what the future holds for Egypt, I am convinced that a democratic structure will allow the country to reach its full potential amongst the world’s economies. Investors might shy away from demonstrators and rioters but an economy of 80 million mainly young people, free to pursue happiness as they see fit, does not seem like a bad place to bet your money on.

By Joel Schoppig

Published: Tuesday 15 February 2011 Updated: Tuesday 15 February 2011