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By Luc Loranhe (2007)
Explanatory note, added October 2006: In this article, I argue that policies for wealth creation in Third World countries should focus on making these countries attractive options to live in, rather than just offering profit-taking opportunities. As a rule of thumb, countries are attractive to live in if they allow for optimal personal freedom in as safe an environment as possible. This excludes many Third World democracies for 2 reasons: 1. because Third World democracies provide almost always a less safe environment than do Third World countries ruled by strong governments. 2. because typically, in Third World democracies, populist politicians target successful minorities (who, because of having the economic means, enjoy a better life), making them the scapegoats for whatever ills a society suffers from.
By contrast, Third World countries ruled by an elitist political party, or even an authoritarian government, with either being dedicated to wealth creation, can provide a very attractive environment, both for local elites and foreign wealthy individuals, thus initiating a definite trend of attracting wealth.
Below the original article.
It is really funny how many politicians, especially in Third World countries, apparently believe that rich people in Western countries would be genuinely interested to create wealth, by means of foreign investments, in Third World countries in which they have no personal interest.
Most foreign investment in a country that is made by people who are not interested in settling permanently in that country is temporary and just geared towards profit-taking. It is not a form of long-term asset creation or even just long-term asset management. As practically all profits are repatriated (to be consumed somewhere else), such foreign investment does not create wealth in Third World countries. (And, as will be argued below, the little wealth that initially seems to be created in the Third World country anyway will be moved to developed countries when rich locals emigrate.)
Especially all foreign investment that finances the exploitation of natural resources in Third World countries is likely to be a net drain of a Third World country's wealth. Capital that is brought into a Third World country to exploit natural resources for export is not wealth. This capital just finances tools which, after a short while, are only of scrap value.
The only certain case of a transfer of wealth from one country to another country is the transfer of wealthy people. And that trend does not point in the direction of Third World countries, but the opposite way.
Wealthy locals in many Third World countries typically are busy transferring their own wealth to developed nations.
The super rich from the Third World bring the money they made from the West back to the West
The rich getting even richer in the Third World
Merill Lynch World Wealth Report, attesting that the World’s rich are ever more flexible in moving their money
Most children of really rich people in most Third World countries go to private schools in the UK, Australia, New Zealand, the US, or Switzerland.
Every international student contributes ?6,000 on average to Scotland's economy
Selling education to overseas students has become a major industry in New Zealand
Often enough, these children of Third World elites sooner or later become permanent residents, or citizens, in those rich countries. Any citizen of a Third World country who has amassed a fortune in the range of 0.5 to 2 million US dollars has an easy time applying for a residence permit in most developed nations.
Invest 1 million pounds in the UK, and become a UK permanent resident http://www.workpermit.com/uk/investor.htm
Invest 500,000 dollars in the US, and get a Green Card
People with a net worth of 800,000 Canadian dollars can easily immigate to Canada
Migrating to Australia, based on a net value of 500,000 Australian dollars
That they do so is the secret behind much of African, and Third World, poverty. And this won't change by allowing Third World countries better access to the markets in the developed countries. While such easier access may cause a larger number of traders in Third World countries to become rich, these traders will anyway bring their wealth back to the developed countries once they emigrate to one of them.
Thus the much touted policies of better market access for products of Third World countries will, at the end, create wealth in developed countries (the emigration destinations of rich locals from Third World countries), and not for the Third World countries themselves.
There is only one way to reverse this trend: Third World countries have to make themselves more attractive to wealthy people. And how can they do that? They can't compete with France on the quality of their food, and not with Switzerland on the beauty of their skiing resorts. The UK and Canada have the better educational systems, and the US still is trendy among rich Third World emigrants, though this is bound to change.
Traditionally, Third World countries could offer to their local elites that these elites were, to a certain degree, independent from the law. In many Third World countries, rich people could pretty much do what they wanted. Now, if I can have this, that's a real piece of quality of life. (As long as local elites enjoy privileges, they at least keep the wealth that is created by corrupt practices within the country.)
But more and more Third World countries are more and more limiting this independent-from-the-law aspect of quality of life of their local elites, often enough upon the request of the international competitors of these local elites. International competitors obviously are interested in having the privileges of local elites curtailed.
But that's not what these international competitors say. Instead, these international competitors claim that curtailing the privileges of local elites (eradicating corruption) will help the economic development of a country, thus creating wealth.
It won't. It will only make the local elites leave, and take their wealth to Europe or America. And international competitors won't genuinely transfer wealth if they don't become local residents. Typical showcases for such downward trends are the Philippines and Indonesia.
While the legal systems traditionally have been much less interventionist in Third World countries (as they just dealt with fewer aspects of life), many Third World countries are catching up, passing laws at record speed, and often enough laws that are stricter, and more repressive, than the laws of developed countries.
If the governments of Third World countries are concerned about the inward and outward transfer of wealth (which is more relevant than the question where the wealth is actually generated), then they will have to focus on the quality of life they can provide to their own wealthy citizens as well as potential wealthy foreign residents. And in the quality of life arena, they can compete with the likes of Switzerland, France, the UK, and, most of all, Canada only on grounds of allowing more personal freedom and sexual opportunities.
If Third World countries aren't attractive for the above two reasons, then, in today's increasingly globalized world, their own rich citizens will leave, and they will have a hard time attracting wealthy foreign residents.
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Copyright Luc Loranhe