Often we hear about how uncertainty prevents businesses from expanding or hiring new people. Why is that? Any time a business decides to do something new, they are taking a risk. Business owners know they must take risks to increase profits, but they are not willing to take a risk unless they understand the risk they are taking.
When the government is unclear about the future of taxation, regulation or spending; businesses hesitate to take a risk since they don’t understand how those changes may impact them. Still, this doesn’t halt business activity altogether, it just impedes growth. Surprisingly, our system operates with a fairly high degree of efficiency because businesses are fairly confident they can enforce contracts that are needed to buy, sell and trade products and services.
A large reason businesses tend to flourish better in developed economies is the certainty of contract enforcement. While we may feel our malaise of fiscal policy slows down economic growth, our economic system still manages to operate more efficiently than others because businesses and financial institutions can enforce contracts. Do you think banks and credit unions would lend money if they couldn’t use the court systems to take collateral or hold people accountable for debts?
And yet, this is exactly the problem many people face in several countries throughout the world. When a business is unable to enforce a contract, then the business will only engage in activities with people they deeply trust, and they will not be willing to take risks with people they do not know. It is not hard to see how this limits economic activity, since it greatly reduces the number of opportunities a business has.
It’s not that these countries don’t have laws in place, but their enforcement becomes highly questionable. Often, public officials can be bribed to ignore laws or to apply laws unfairly to competitors. If the judicial system cannot be relied upon to be fair, or if the law only works for the biggest briber, it becomes clear why contracts cannot be relied upon and economic development is stifled.
Uncertainty regarding contract enforcement is also an obstacle towards economic development on the Native American reservations throughout the Dakotas. Often the uncertainty of how contracts and laws will be applied, or how this may change with the election of new leadership, creates an uncertain business environment. For this reason, many businesses are hesitant to invest in these areas.
It is surprising how much we take for granted because our contracts and laws can be easily enforced. People buy and sell real estate all the time without fear of public records being tampered with. People can apply for business licenses without passing money underneath the table, and most people fear breaking laws believing it will be highly unlikely that police officers and regulators can be readily bribed. We may not think about it often, but our ability to enforce contracts is truly a cornerstone to a strong functioning economy.