During the last two decades American foreign investment rose sixfold and foreign investment here increased twentyfold. In the same period the volume of trade doubled for the U.S., Japan, and Europe. The technological changes which have connected the world to this vast market have unleashed fierce global competition not only among businesses intent on attracting capital but among governments determined to retain and enrich their capital base. Yet as Richard B. McKenzie and Dwight R. Lee show in this provocative study, the technology which has enabled business to move money at the touch of a button has made the job of funding government, and therefore governing itself, far more difficult.
In their detailed examination of trends in public economic policies throughout the world, McKenzie and Lee show that governments are clearly attempting to attract capital by competitively reducing taxes, privatizing and decentralizing services, and relaxing trade production. The authors argue that any government that tries to raise taxes or impose new regulations must reckon with the threat that quicksilver capital will instantly disappear to more hospitable lands. Quicksilver capital has played a role in rocking the economies of Eastern Europe, Soviet Russia, and the rest of the world, thus contributing to the demise of communism as well as to the Reagan and Thatcher revolutions.
In setting forth their theory of competitive governments, McKenzie and Lee concur with other distinguished observers who say that rapid capital mobility will be the most important political and economic force of the coming decade. But they part company with those who are calling it in a benign but misguided way for governments to spend more money on manpower training and public works to attract investment. The authors reject these arguments, pointing out that capital is moving far too rapidly for clumsy industrial policies to capture and contain it. Instead, they show that governments must follow the lead of businesses by adapting to technologically driven capital mobility through restructuring, decentralizing, and streamlining the delivery of all its services. They appeal to legislators to hold the line on taxes, regulations, and trade protection, thereby nurturing an atmosphere in which people can exercise the greatest entrepreneurial initiative. While the authors regard increased global competitiveness as a threat to government sovereignty, they see it as an opportunity for people to improve their well-being and that of their nation.
Richard B. McKenzie is Hearin-Hess Professor of Political Economy at the University of Mississippi. Dwight R. Lee is Ramsey Professor of Economics at the University of Georgia.