By Shilpa Alva
Students from the Spring 2010 "Integrative Leadership: From Theory to Practice" course, taught by Professors Jay Kiedrowski and Paul Vaaler, will post their reflections on integrative leadership throughout the course of the semester on the Time to Lead blog.
The discussion around Political Business Cycles (PBC) and the critical role integrative leadership plays in them was particularly interesting to me. Leaders in government have a responsibility to manage all the forces that affect their country - and even though this is always important, it has even more significance in an election year. The three most recent and significant crises in Latin America took place during a presidential or parliamentary election year. Elections in emerging countries have a huge effect on market spreads and thus on the global rating agencies. Political and electoral seasons usually bring a level of instability to a country, and with this instability comes increased economic risks. This is especially true in emerging markets where political agendas and financial turbulence are closely linked, especially since the governments are not stable or strong enough to withstand swings in investor confidence and the associated market spreads.
Governments need to manage investor confidence in their countries' economies and the perceived risks. The higher the market spread the higher the risk of economic instability. Based on the research of Vaaler, P., Schrage, B. and Block, S., prior to an election bond holders perceive greater investment risk in the form of larger bond spreads as the likelihood increases of a right-wing incumbent being defeated by a left-wing challenger. This is because the policies of the right-wing government are viewed as fiscally more friendly, therefore the move to a left-wing government suggests that these policies will be replaced by policies that are unfavorable to investors. In the situation where the right-wing replaces the left, the market spread will be lower as there is the perception of improved investor friendly policies.
In the context of Integrative Leadership, leaders need to manage the expectations of each constituent. In the case of Brazil, Lula needed to manage the local Brazilian supporters, the opposition party, the non-supporters, regional & global governments, investment rating agencies, etc. There are many active observers who almost have a codependence on the outcome of the election - especially since we were lookin at a situation where the long standing right-wing was going to be replaced by the worker's left-wing.
It is interesting to note, that Democracy does have a price. For example, countries like China who do not have to deal with a democratic environment are not challenged by the same opportunistic or partisan pressures that democracies go through every political season. They do not have to take short term opportunistic measures to boost voter confidence, and there is little risk of an opposing party taking over. However, even though these governments are spared by PBC risks, their form of governments present other risks and instabilities (dictatorial government decisions, military coups, etc.) that could cause widespread political and financial chaos. Analysts and investors in these situations are faced with different challenging influences.