Monthly Article

October 2013 Article – U.S. Political and Economic Risk

U.S. Political and Economic Risk

by Jerry Pacheco

As I write this article, the U.S. federal government remains in partial shutdown mode, as the factions in Congress fight among themselves and with President Obama over the federal budget and the funding of the national healthcare system, commonly known as Obamacare. Democrats and Republicans blame each other for the shutdown, while hundreds of thousands of federal workers throughout the nation look on in disgust. Workers whose jobs are deemed critical or essential remain in their jobs. However, many workers in health and safety inspection, military bases and in the National Park Service have been sheltered away at home waiting for an end to the impasse.

On the heels of the shutdown looms the October 17 date after which the U.S. government will run out of cash to pay its bills if Congress doesn’t raise the nation’s borrowing limit (commonly referred to as the debt ceiling) of $16.7 trillion. As elected officials fight amongst themselves, the nation is headed towards the possibility of not being able to pay its bills after this date. The government shutdown and debt ceiling are certainly national crises that have caused many Americans to lose respect and faith in their government. However, they also are having the effect of damaging the nation’s reputation and trust abroad, and this could have even longer lasting effects than the damage domestically.

Successful international investors and companies expanding into new foreign markets always conduct due diligence before investing any money. This due diligence includes thoroughly investigating the target market, competition, distribution channels, and price points. A major part of due diligence also includes examining a particular country’s political and economic risk.

Political risk relates to the stability of a government and how solidly it performs its governmental functions. Investors examining political risk study the history of the country’s political system to see if any crises such as coups, one political party illegally usurping power, forceful government overthrows, or outright corruption can put an investment at risk. However, political risk can also be present when governments cease to perform their functions due to political fighting among political parties or branches of government.

Economic risk relates to any instability within a country’s economic system. This could include the country being too reliant on a resource such as petroleum to generate national revenues, a weak private sector that doesn’t weather economic cycles very well, oligopolies and monopolies that tend to limit competition, and a large public sector that discourages entrepreneurs. Every country’s economy goes through economic cycles, but how well the public and private sectors handle these cycles can either encourage or scare potential investors.

A foreign investor, considering the government shut down and debt ceiling deadline in the U.S., would have to more carefully examine investing money in a country whose Congress and president cannot work together to keep government agencies running or agree on how to pay the nation’s debts. A foreign company that invests in the U.S. does so with the expectation that the capital it invests to establish production plants, purchase equipment and to train employees will hold its value over time, thus adding to the company’s bottom line and future success.

The domino effect of what the government shutdown has done to many companies in the private sector which have government contracts or are supplying government contractors whose work has severely decreased has to make any foreign investor second guess the viability of bringing capital to this country. Watching the U.S. inching closer to a deadline after which it may not have money to pay its debts certainly would not make me feel any safer about investing here.

It’s true that we don’t suffer the government overthrows or outright economic collapses that have beset many countries, but in the modern world where every country is competing for investment, having your federal government shut down because of the refusal of political parties to compromise sends a message to the world that our political system is broken. The American form of democracy has always been dependent on building coalitions among different political parties that can cooperate with each other for the good of the country. When did we reach the point that politics for politics sake supersedes the interests of the nation as a whole? Americans and the rest of the world want to know the answer to this question.