EFFECTS OF POLITICAL CHANGE TOWARDS FINANCIAL DEVELOPMENT

JAMES MGAYA – Art in Tanzania internship

Political changes may change in regime of ruling, due to new philosophies in leadership, ruling parties, country policies, laws and rules, diplomacy, and democratic changes. While financial development is all about improving and expanding financial services and resources to boost economic growth. 

Democracy is one of the significant forces that lead governments to undertake reforms to enhance financial development, as in the period of SAP’s (structural adjustment programs) attempt to correct economic imbalances, to improve efficiency of developing in transitional economies, thereby setting the state for further development. This institutional improvement (i.e., democratisation) stimulates financial development. We all agree in the era of the Late President Benjamin Mkapa, his improvement in the institutional quality is associated with increases in financial development at least in the short run. During this era many investors were attracted leading to a rapid establishment of new companies, NGO’s, financial institution, and governmental institutions like the TRA.

Democratic transitions are typically preceded by low financial development, much work has been done to explore the relationship between institutional improvement, especially in political liberalisation and economic growth. Which is followed by a short-run boost in financial development and greater volatility of financial development.

How do democratic processes improve institutional quality and influence financial development?

By facilitating property rights protection, contract enforcement, and encouraging investment. President Samia Suluhu who insists in institutional improvement could serve as one channel in which trade openness could boost financial development and growth. Although there are positive feedback effects and interaction effects between economic and political liberalisation, institutional reform under an open economic environment could exert an additional boost to investment and economic growth.

The financial sector development plays an important part in economic growth as it can reduce the cost of acquiring information, conducting transactions, and facilitating savings mobilisation. By providing these services, the financial sector can enhance resource allocation and increase aggregate savings. Credit provided to the private sector seems to follow a path with increased influence associated with a decreased income level and seems to be important for convergence and a country’s economic growth.

How Political Climates Affect the Financial Development?

  1. A change in government often means a change in ideology for the country’s citizens, which usually means a different approach to monetary or fiscal policy, both of which especially the former, are big drivers of a currency’s value. The hope is that a new leader might make changes that boost a country’s economic growth potential or improve its financial outlook. Bureaucracy and interference in the financial service industry by the government and pricing regulations are mechanisms for financial and taxation for tax rates and incentives

Conclusion

The financial development generates a good portion of its revenue for an economy to remain stable, it needs to have a healthy financial sector and an open economic condition for more capital projects and investments. When this occurs, the financial sector benefits due to economic growth. Political factors play a significant role in determining the factors that can impact financial development and long-term profitability in a certain country or market. This allows for success in a dynamic financial industry by diversifying the systematic risks of political environments in Tanzania, but financial developments expose itself to different types of political environment and political system risks.

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