Politics

Political Risk

Political Risk Jonathan Poland

Political risk refers to the potential for losses or other negative impacts on an organization as a result of changes in political conditions. Political risk can arise from a variety of sources, including changes in government policies, political instability, and conflicts or wars.

Political risk is a concern for businesses that operate in countries with volatile political environments, as it can affect the stability and predictability of the business environment. Political risk can also impact businesses that are dependent on specific political conditions, such as favorable trade policies or access to natural resources.

To manage political risk, it is important for businesses to have a clear understanding of the political environment in which they operate and to continuously monitor changes in political conditions. This may involve developing contingency plans or diversifying operations to mitigate the impacts of political risk. Businesses may also consider purchasing political risk insurance to protect against losses resulting from political events.

In conclusion, political risk is a significant consideration for businesses operating in countries with volatile political environments. By effectively managing political risk, businesses can minimize the potential impacts of changes in political conditions and protect their operations and financial performance. The following are a few types of political risk.

Trade Barriers

Trade barriers such as tariffs can decrease margins or make it impossible to compete in a foreign market. In many cases, trade barriers are the result of local politics or trade wars between nations.

Taxes

Changes in taxes can reduce the profitability of a business and affect the price of assets such as stocks. Complex tax rules can also be a burden on small businesses who may need to invest limited resources in understanding and complying with new rules.

Legislation

New legislation can result in compliance costs as businesses may need to make changes to operations, products or business processes.

Administration

Political turmoil can result in administrative delays. For example, a government may start to delay business critical approvals such as building permits.

Political Instability

Political instability such as terrorism, riots, coups, civil war, and insurrection can completely disrupt business operations in a country for long periods of time.

Economics

In many cases, politics can influence economic management such as the interest rate decisions that impact asset prices and business costs.

Capitalism

Capitalism Jonathan Poland

Capitalism is an economic system based on the principles of economic freedom, private ownership, and the creation of wealth through the pursuit of profit. In a capitalist system, individuals and businesses have the right to own and control their own property, and to use that property to create wealth. This can include starting and running businesses, investing in stocks and other financial assets, and buying and selling goods and services.

Under capitalism, the market is the primary mechanism for coordinating the economy. Prices, supply and demand, and competition are all determined by the forces of the market, rather than by government intervention. This allows for the efficient allocation of resources and the creation of wealth, but it also means that capitalism can be subject to boom and bust cycles and other market failures.

While capitalism has been successful in creating wealth and economic growth, it has also been criticized for its potential to create inequality and social injustice. Critics of capitalism argue that it is a system that primarily benefits the wealthy and powerful, and that it can lead to exploitation and oppression of the poor and marginalized. Despite these criticisms, capitalism remains the dominant economic system in many parts of the world. The following are some concepts within capitalism.

Overwhelming Dominance

Any nation that produces most of its GDP with the profit motive and competitive markets can be viewed as capitalist. In this context, most nations, including former communist and socialist states such as China and Vietnam, are capitalist. There are degrees of capitalism as some industries are still nationalized in some nations. However, capitalism produces most global GDP and is the defacto economic system of most nations.

Private Property

Capitalism is based on property rights whereby if you build something, you can own it, sell it, use it and so forth. Under capitalism, the government doesn’t own and control industries but rather lets them emerge with the ambition and needs of the people.

Profit Motive

Capitalism produces significant productivity, growth and innovation as property rights allow people to profit from value creation. This is known as the profit motive and doesn’t exist in a system of forced sameness whereby outcomes are guaranteed to be the same regardless of contribution or results.

Competitive Markets

A market is a system where agents freely compete to close translations. For example, a market for goods or a market for labor. These generate competition that improves things. For example, a competitive labor market rewards those who acquire the talents, knowledge and skills needed by businesses.

Anti-competitive Practices

Pure capitalism, known as laissez-faire capitalism, is a system where governments don’t interfere in the economy in any way. This doesn’t exist at any scale and probably can’t exist at any scale because without government regulations and enforcement, a monopoly would quickly emerge that would resemble a communist government in that it would eventually control all capital. As such, capitalism can only exist where governments prevent anti-competitive practices that would eventually destroy competitive markets.

Social Classes

Capitalism is based on keeping the value that you can capture or create. Without this, the profit motive doesn’t exist and it’s not capitalism. As such, capitalism inherently leads to social classes such as the upper class, middle class and working class. Governments in developed nations commonly use taxation and limited income redistribution to reduce or prevent poverty.

Social Market Economy

Currently, all developed nations are some variant of a social market economy whereby capitalism is the primary economic system that generates income and wealth but taxation is used to provide some level of redistribution of income, often in the form of free public services such as education. Social market economies should not be confused with socialism as they are capitalist systems that simply use taxation to provide government services and entitlements. Socialism on the other hand, implies that a nation attempts to own and control all or most industries.

Inequality

Capitalism is based on free and open competition. As such, those who produce and capture the most value can end up with a large share of the world’s resources. In practice, most capitalist societies are social market economies that use taxation to redistribute some of this wealth with public services such as education, healthcare and basic income. However, it is common for the wealthy to use aggressive tax structures and strategy to avoid taxes resulting in a high tax burden for the middle class and less resources for those in need.

Consumerism

As capitalism efficiently produces products and services that people want, it is often blamed for social ills related to greed, materialism and consumerism. For example, some feel that capitalism convinces people to be greedy and materialistic with mechanisms such as advertising. It could be argued that as an economic system capitalism fulfills its role of producing goods and it is culture that shapes behavior.

Commoditization

Commoditization is the process by which things that were once viewed as unique become viewed as indistinguishable parts. For example, the commoditization of labor is the process by which firms begin to view workers as interchangeable. This begins with an education system that produces standard skills as opposed to unique humans with special talents.

Monopolies

Under capitalism, firms compete to grow market share. With time these firms can control markets such that competition ceases to exist. When this occurs, customers have no alternatives such that prices rise, quality declines and the firm may impose unfair terms on customers. In order to preserve capitalism, governments may break up firms that control markets. Otherwise, capitalism would begin to resemble socialism whereby a single entity controls all capital.

Monopsony

A monopsony is a large firm that is the only customer for a product or service. This also applies to firms that are the only employer in a particular geographical area or profession. For example, a town that only has a single employer such that the employer can drive down wages and impose poor working conditions as workers have no alternatives. Socialism makes this problem worse by imposing state control of all employment.

Anti-Competitive Practices

Many of the problems with capitalism have to do with anti-competitive practices whereby firms prevent fair competition. For example, a firm that controls what software may be installed on a large number of mobile devices thus preventing open competition for games and other apps†.

Undermining Democracy

Capitalist interests that work to undermine the power of people to shape their own societies. For example, global agreements and backroom deals that have governments ban traditional farming practices in order to push the interests of large agrochemical and biotechnology firms††.

Rent Seeking

Rent seeking is a behavior that seeks to capture value without creating value. For example, an individual who buys medical supplies in the midst of a shortage to resell them at a higher price online.

Crony Capitalism

Crony capitalism is undue influence over a government exercised by firms. Capitalism works when the government serves as a balance to the excesses of firms by regulating and taxing them. Crony capitalism subverts this and allows firms to profit at the expense of the public. For example, a government that conducts spending programs not aimed at improving anything for the people but rather aimed at assigning contracts to friends of the government.

Economic Bads

Economic bads are negative results of the production of economic goods. In many cases, nobody pays the costs of economic bads such as air pollution that damages quality of life. For example, a factory may produce widgets worth $8 that each create $42 in environmental damage. This could be addressed with markets for economic bads whereby producers and consumers pay to damage the environment with total damage capped at a sustainable level. However, these markets are currently missing.

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