Emerging Markets and Major Political Systems
As you consider investing in emerging markets and start researching your options, you’ll encounter a variety of political systems. If you know what a country’s underlying method of making decisions is, you’ll have a better idea of how profits are made, opportunities are created, and risks are distributed, so it pays to become familiar with the major political systems.
Political systems often operate in combination with one another, as most countries are blends of different systems. Think of the information here as guidelines for how things happen in a country, and remember that the actual operating rules vary greatly:
Autocracy: A government ruled by a single person, autocracy is a fancy way of saying dictatorship. (A dictator is a person who wields absolute power in a country.) When power is concentrated in a single person, the quality of decisions depends on the quality of the person in charge. Autocracies are more common in pre-emerging markets than in emerging and frontier markets, although many countries such as Russia and Saudi Arabia have elements of autocratic rule in practice.
From an investor’s perspective, an autocracy can be a good thing if it makes the country stable. However, unless the rule is benevolent, the result is often simmering civil unrest that can make it difficult to get business done. And if the autocrat dies or is forced out of power, investors may face a great deal of risk if the country doesn’t have a system of orderly transition.
Democracy: In a democracy, the citizens vote on their representatives in government. Effective democracies are powerful because the people have a direct stake in the government, and the people in charge know that they have to be transparent and accountable if they hope to stay in office. But democracies can also be messy, with the people unable to reach a consensus or accept hard truths about reality.
Democracy isn’t synonymous with capitalism. Some pre-emerging markets are democracies, but they don’t make the list of emerging or frontier markets because of their investment climate.
Socialism: Under socialism, many of a country’s assets are owned collectively by its citizens. Human capital is often strong because the government uses the profits from its assets and high tax revenues to fund healthcare and education. Because the country has a strong safety net, people may be willing to take increased risks with business and technology. However, they may also feel that they don’t need to work and production and economic growth can be quite low.
Communism: A form of socialism that starts with a violent overthrow of the existing power players, communism creates equality through a strong central government. In reality, the sense of equality is often created by asset seizure and by a lack of incentives to accomplish anything.
Communism is often associated with a demoralized population, suppression of human rights, and politicians who are more interested in power than in the well-being of the citizens. But that’s certainly not always the case.
Monarchy: Emerging markets often have strong family dynasties that control much of the national wealth. The government is run by a person who inherited the job and who may or may not be qualified to do it. Some monarchs are incompetent dictators, others are thoughtful and intelligent people who love their country and want to do right by their people. Many monarchs serve as head of state, delegating the role of head of government to someone democratically elected, which often creates investor-friendly stability.
Theocracy: A government run along strict religious lines, in a theocracy, the head of government may be elected or may be a king, but in either case is accountable to religious leaders who set the laws and settle disputes. These nations are often stable and predictable, but they may leave little recourse for outsiders who don’t share their values. The members of the dominant religion have priority over everyone else. Many nations in the Middle East are theocracies, governed by the dictates of different denominations of Islam.