The Corrosive Effect of Nationalistic Thinking

by Don Boudreaux on January 29, 2006

in Trade

My friend Brian Summers sent me this Reuters report out of Davos, Switzerland, with these opening lines:

Massive flows of capital from the emerging to the developed
world are unsustainable and risk damaging both poor and rich countries, some of
the world’s top finance officials said on Saturday.

Speaking at the World Economic Forum
in Davos, European Central Bank President Jean-Claude Trichet said that the
current global investment pattern was "profoundly abnormal" and in no
country’s interest.

"It is not sustainable in the long run that the
emerging world would finance the industrial world. It doesn’t correspond to the
interest of the emerging world, neither to the interest of the industrialised
world," he said.

Why are such investments “unsustainable”? If, say, West Virginians invest more in New York and Texas than
they invest in West Virginia,
is that pattern unsustainable?  If
residents of Fairfax County, VA, invest more in Loudon County, VA, than they invest in Fairfax County, is that pattern
unsustainable? If I invest more in my
neighbor’s business than I invest in my own business, is that pattern
unsustainable? Are such patterns
“abnormal” (profoundly or otherwise)?

Yet again we find evidence of the corrosive effect that
nationalistic economic thinking has on thought. People who invest in American firms or who use their dollars to create
their own firms here in the U.S. do so because, in their estimate, the investment climate here is the best one
currently available to them. And surely
part of their calculation has to do with the “sustainability” of their
investments. No one would invest in America if they
believed that all or even much of the value of their investments would soon

To the extent that these investors do not invest in, say,
Niger or Venezuela, the reason is that they reckon that investments in such
places won’t be as profitable as investments in the U.S., probably because
governments in these poor countries are too likely to reduce the value of
investments through excessive taxation or regulation, or through corruption, or
even through outright confiscation.

In other words, debilitating corruption and the heavy hand
of government are what make countries unattractive to investors.  And there’s nothing at all unsustainable or abnormal about citizens of those countries with money to invest investing in the U.S. and other industrialized countries that offer higher expected rates of return.

It is simply silly to say that it’s “unsustainable” or “abnormal” for someone in
a poor country to invest in richer countries. Is it “unsustainable” or “abnormal” for the Boudreaux family of Burke, VA,
to invest in Microsoft? Bill Gates and
his firm are much richer than the Boudreaux family – and yet my wife, son, and
I are likely to become more prosperous by investing what little wealth we have
in rich companies such as Microsoft, Dell, and 3M than by using this wealth to
create a business of our own.


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