Prosperity Has a Foundation – and It’s Beginning to Crumble – Why Investors Should Rethink Their Geographic Diversification

In a world grappling with rising geopolitical tensions, protectionist rhetoric, and the erosion of democratic structures, a fundamental question arises for any investor:

What are the true drivers of long-term economic success? What can we learn from the past? And what conclusions must we draw for the future?

For investors seeking both returns and stability, the answer doesn’t lie in the latest GDP figures or quarterly reports—but in the institutional foundations that shape economies: democracy, the rule of law, and open markets.

These three pillars—when present and functioning—create fertile ground for innovation, entrepreneurship, and growth. Where they are absent or undermined, even resource-rich countries fail.

This should be top of mind as we make investment decisions going forward. 

Democracy: More Than a Political Ideal

For investors, democracy primarily means risk reduction. Democratically elected governments are, by definition, more transparent and accountable to their citizens. Elections, freedom of expression, and independent media exert pressure on decision-makers and make abrupt, unpredictable policy shifts less likely.

Countries with established democracies consistently rank at the top in terms of economic freedom, institutional trust, and per capita wealth. They offer predictability—a priceless asset for long-term investors.

Rule of Law: The Backbone of Trust

In capital markets, trust is the true currency. And trust arises from enforceable rules. Legal systems that protect private property, enforce contracts, and combat corruption encourage both domestic entrepreneurship and foreign capital.

By contrast, economies lacking judicial independence or plagued by systemic corruption—no matter how dynamic their short-term growth may seem—carry permanently higher risk premiums. Investors cannot ignore threats such as expropriation, arbitrary regulation, or opaque corporate governance.

Open Markets: The Engine of Growth

Open markets do more than facilitate trade. They promote competitive efficiency, lower consumer prices, and drive innovation. Open economies have historically built world-leading industries.

Open markets also attract talent and capital. They enable companies to specialize, scale, and meet global demand—advantages that closed systems cannot replicate.

A frequent criticism of open markets is trade imbalances, often interpreted as a sign of economic weakness. But this view is too simplistic. In reality, not all trade deficits are harmful, just as trade surpluses are not inherently a sign of strength.

The U.S. has recorded persistent trade deficits for decades—yet maintained robust growth, low unemployment, and a strong currency. Why? Because the U.S. remains a safe haven for global capital. Foreign investors purchase U.S. assets—government bonds, stocks, real estate—which results in a capital account surplus that offsets the trade deficit.

From a macroeconomic perspective, a trade deficit is simply the mirror image of a capital surplus. Other countries regularly run trade surpluses due to strong export sectors and high savings rates. Neither position is inherently superior—the key is understanding why the imbalance exists and how it is financed.

Trade imbalances only become problematic when they are driven by unsustainable debt, overconsumption, or currency manipulation. In a rule-based, open global trade system, they often reflect comparative advantages, investment flows, or demographic differences.

Institutions Matter More Than Ever

For investors in an increasingly uncertain world, the conclusion is clear: Growth forecasts change, market cycles come and go—but countries with democratic governance, the rule of law, and open markets are structurally better positioned to deliver sustainable, long-term returns.

Anyone reconsidering their global allocations should look beyond macro data or yield curves—and focus instead on the strength of the institutional foundations underpinning each market.

The Erosion of the Pillars in the U.S.

Against this backdrop, current developments in the United States deserve particular attention. In recent years, the three core pillars—democracy, rule of law, and open markets—have come under increasing pressure.

Political polarization and institutional gridlock have eroded public trust in democratic processes. Legal norms, once seen as sacrosanct, have been tested by partisan pressure, selective enforcement, and the politicization of the judiciary. At the same time, skepticism toward globalization and openness has grown—evident in rising protectionism and regulatory uncertainty. This increasingly calls into question the U.S.’s traditional leadership role as the most attractive destination for global capital.

If we accept that these institutional foundations are the true drivers of long-term prosperity, we must also acknowledge that their erosion represents a structural risk.

This doesn’t mean investors should abandon U.S. assets altogether. But it may be time to reassess geographic diversification—and give greater weight to institutional resilience as a key factor in capital allocation. In today’s world, the safest long-term returns may lie where the pillars of prosperity remain intact.