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July 01, 2023 ABA Task Force for American Democracy

The Financial and Economic Dangers of Democratic Backsliding

Layna Mosley, The Brookings Institution & States United Democracy Center

Summary

This article argues that continued assaults on American political institutions will have a profound negative economic impact both at home and abroad. Accordingly, institutional investors must begin to account for political risks in the United States and they should take a more public stance supporting electoral integrity.

Democratic backsliding is defined as the “state-led dehabilitation or elimination of the political institutions sustaining existing democracy.” The United States is currently undergoing such a ‘backsliding’ process as evidenced by recent increases in election-denying candidates and office holders. Investors and the financial community have a vested interest in reversing this trend. Political stability has long been a cornerstone of American investment. Given the United States’ centrality in the global economic system, a loss of confidence in this political stability could have global economic reverberations.

Key Findings/Messages

  • The level of democracy enjoyed by the average global citizen in 2021 matched 1989 levels. Improvements in governance of the last three decades have, on a global scale, been erased.
  • Countries with democratic political institutions possess a “democratic advantage” in the form of greater access to capital markets and lower interest rates at longer maturities. 
  • The U.S. economy has long been viewed as a safe haven from political risk for investors, and most portfolios are overweight in U.S. investment.  As a result, it is difficult for capital to flee to safety when the United States experiences heightened political risk, and the economic effects are magnified.
  • The 2008 Financial Crisis an example of how American economic issues can quickly spread into global problems.  

Key Recommendations Made

  • Utilizing investment frameworks that assess U.S. political risk.
  • Making explicit statements of the political risk resulting from democratic erosion.
  • Conveying support for business leaders who advocate for electoral integrity and respect for the rule of law.
  • Advocating for the full disclosure of corporate lobbying expenditures.