The predictability paradox

In the longer term, accountability matters too

A few days ago European Commission President Ursula von der Leyen set out the EU’s offer to the world in the light of the market turmoil precipitated US President Donald Trump’s - at the same time both heavy and ever-changing - tariff regime.

I am currently having countless talks with heads of state and government around the world who want to work together with us on the new order,” … Everyone is asking for more trade with Europe — and it's not just about economic ties. It is also about establishing common rules and it is about predictability,”

It’s easy to see that right now this is an attractive offer. Businesses and business organisations will always tell you that there’s nothing they want more than predictability, even more than tax cuts or subsidies. As anyone who’s been in business knows, how can you plan for long-term investments if you don’t know what sudden new rules or costs you’re going to have to face? For their part, diplomats will tell you that the countries that demonstrate predictability - a stable and consistent tax regime, the fair application of the law, the absence of arbitrary government decision and so on - are normally the easiest as far as getting your country’s investors to take a look. For anyone trying to attract business, predictability is clearly a competitive advantage. This can work not just for nation states, but for larger regions like the EU, but also for smaller ones, hence the Indian concept of “competitive federalism” where the 29 States that make up that huge country are judged against one another by investors looking for attractive conditions including, of course, predictability.

Sadly though, if predictability’s the ideal, it’s not one you can always have. And, despite the lobbying of business organisations, it’s not one you always need. Sometimes, when I’ve challenged a minister about the business conditions in his or her country, what I’ve heard in reply (sometimes in terms, sometimes a bit more indirectly) is essentially “Yes, Ambassador, that fine talk about predictability and the rule of law is all very good, but we’ve got other competitive advantages; if your businesses find it offputting, others are still coming…”.

The minister has a point. It’s a pretty good guess that the world will still trade with the US, even though it will be a long time before we’ll be able again to predict with confidence what Washington’s next move will be. Similarly, closer to home, tax policy has hardly been predictable over the past few years, but business has not ground to a halt. Up to a point. There is a cautionary tale for governments here: if you make it too difficult for business, don’t be surprised if business goes away. The minerals may be attractive, labour may be cheap, the schools may be great, the sun may shine or whatever your comparative advantage may be, but too much bad governance will catch up with you in the end.

Stability is particularly attractive for large incumbent operators and for countries that can, for the foreseeable future (how long?) rely on natural resources or other durable comparative advantages. For disruptors and where the conditions are less inherently favourable, too much stability is not such a good thing, as it can inhibit innovation, make it harder for outsiders to enter the market and can militate against transparency. The incumbents won’t complain, but it doesn’t necessarily make for the best outcome.

That brings us to countries where the system is, let’s say, built for stability. An autocratic (in one way or another) system not subject in any meaningful sense to democratic checks and balances may be able to offer long-term predictability. The leadership can do a deal in private with an investor and simply announce it as a success, creating if necessary a so called “lex specialis”, a bespoke legal framework to accommodate whatever’s been promised. No need to subject onesself to parliamentary scrutiny or face noisy demonstrators. I’m sure you can find your own examples.

Once again, however, even that route to predictability may not be as straightforward as it looks. Foreign investors can easily get into difficulties if they count on the expectation that a government that looks quite autocratic can get away with whatever it likes. Negotiate a deal with the leadership and it’s done: no need to worry about public opinion, just go for a few smiling photo opportunities with the minister. But most of those less-than-fully-democratic governments which have the intention to stay in power for as long as possible still worry constantly about the public opinion that might, somehow, rise up one day and spoil the party. The moment of greatest threat to a regime of that kind can be when the internal forces on which it depends, convinced that the public mood has turned, abandon it in favour of what they hope will be a more durable alternative. Public opinion still plays a part, and opposition to foreign investors “stealing our inheritance”, “abusing our people” or “plundering our environment” can be a potent cause. The moral here is to be suspicious of too much predictability and to invest in understanding, and maybe even (!) engaging with, public opinion even if it initially seems a waste of time.

Whether we’re talking about democratic European countries or some of those more autocratic systems, there’s a tricky tension between predictability and accountability. Everyone is accountable to someone eventually, however long you might try to postpone the moment of truth. So it’s essential to understand the dynamics of accountability. After all, the recent political turn in the US and, indeed, in some parts of Europe is due in no small part to a sense that the system had become too unaccountable to many of the interests of a large part of public opinion. The message for those operating as much in democracies as other systems is clear: don’t focus exclusively on predictability at the expense of accountability, because in the long term - which might actually be just around the corner - accountability can come to bite you.

It might be easier to understand the threats and opportunities if we have a clear understanding of the short- and long-term dynamics in political and business decisions. Oddly, businss and government both accuse each other of being too short-termist, which makes it harder. I’ll come back to that next time.