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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 protection.
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
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.
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