World Unrest Creates Flight Capital

  • “May you live in interesting times” – Often referred to Chinese curse. It was actually thought to be the first of three curses. The other two being: May you come to the attention of those in authority and May you find what you are looking for.

These days the world seems to be filled with tragedy. Recent events in Japan which defy description have dovetailed political unrest and revolts in the Middle East. If we set aside the humanitarian element to these occurrences there are substantial economic consequences which will have long term effects to be considered. Political unrest chases wealth to new locations faster than the heaviest handed tax collector. Investors always look unkindly at any location that does not have its own house in order. The equation comes down to a simple analysis of risk vs. reward. Therefore, with these forces at work as a driving force flight capital will be economic reality for sometime to come.

Flight Capital

This is defined in economics as an occurrence when money rapidly moves from one country to another to seek refuge. Flight capital is most frequently caused by a dramatic increase in tax or political uncertainty. Wealth disappears from the effected country which is usually accompanied by a sharp drop in the exchange rate. The decrease in purchasing power makes it significantly more expensive to import needed goods and devalues a country’s assets. .

Historical Perspective

History is littered with examples of flight capital. The Iron Curtain, the Nazis of World War II, human rights violations in China, Cuba under the Castro regime, the fall of Vietnam, North Korea are all examples of tyrannical behavior having a major influence over investment. Investors, however, will make a move offshore for far less. Hong Kong offers a clear and relatively recent example of this type of political flight.

After more than 150 years of British rule, Hong Kong reverted back to the Chinese on July 1, 1997, causing grave concern at the time about its future. Millions of dollars became flight capital and left this location. Canada became a huge benefactor of this exodus. Many investors not only moved their money but established second citizenships in this North American location. The mere perception that once mainland China regained control it would institute strict economic controls resulted in huge sums of money leaving and the migration of thousands of people.

Today this strategic location in the Asian Pacific region remains one of one of busiest harbors in the world and the third largest financial center, behind only New York and London. The Sino-British Joint Declaration, signed by both Great Britain and China in 1984 provides for a transitional policy of “one country, two systems” until 2047 and it seems to be a success. Hong Kong appears to have come to its crossroads and successfully managed to carve out a new identity. As China has opened its doors to the world, new investment capital has poured in to this city-state. Hong Kong is also interesting because it is an example of how a country can reinvent itself numerous times as the world changes. Prior to 1841, it was an island with a tiny population of approximately 3,000. Hong Kong became a textbook case of a nation short on natural resources; where poverty and crime could have easily over run this nation. Instead, low taxes and nonintervention in business became a source of enormous prosperity. By embracing this “laissez-faire” philosophy, Hong Kong positioned itself for the long term success it has enjoyed

Conclusion

Unfortunately, citizens in some parts of our world face a deep concern over their nation’s current political environment while others are dealing with dreadful natural disasters. This is a sad fact which holds true throughout history and across borders. In response to these events the harsh certainty is that investment capital will move. Nations which position themselves to be competitive on an international basis will prosper from this capital seeking refuge. Anyone active in either international business or investing should remain aware of these realities and accordingly make decisions. For those countries facing the economic reality of loosing investment capital, the Hong Kong example offers hope and methodology to recapturing it.

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