Whenever I talk business or investments I almost always discuss it in terms of risk. The risk a plan might not work, the risk the market goes down and money is lost, the risk that a deal or company goes bad.
Risk frames everything we do and in many cases is more important than the returns. With low risk we live to fight another day — only high risks can deliver a knock-out blow.
But there are a lot of risks that are very hard to quantify. ‘Political Risk’ is one of those. Sure, we all know that there is “risk” in investing in some banana republic. But there is political risk in developed economies as well.
We in America are fortunate to live in a democracy. But democracy creates risks as well namely, the risk that “popular” opinions drive business and economic decisions. The best part of democracy is everyone gets to vote. The downside to democracy is that everyone gets to vote! Regardless of what they know or believe about business, what their interests are, their education levels and how much they even understand the issues that are being decided.
This is probably preferable to any other system — but doesn’t mean that it doesn’t create problems. The Economist had a great article about these that I think is worth checking out.