My thanks again go out to the World Bank InfoShop for the opportunity to hear and meet former World Bank Chief Economist—and, indeed, Nobel Laureate—Joseph Stiglitz, who came to speak yesterday about his new book, "Freefall: America, Free Markets, and the Sinking of the World Economy". His trademark frank analysis was both refreshing and enlightening; especially interesting, if troubling, was his view that central bankers’ inflation-hawk instincts will increase the likelihood of a double-dip recession.
This was a very general presentation about some of the hubristic, anti-regulatory thinking that created the conditions for the recent crisis and the errors in countries’ responses to it. Stiglitz also excoriated the failures of political will and the power of the strongly entrenched, well-represented interests currently standing in the way of true reform. These are his views, of course—I make no claims to know enough about what “really” happened to be authoritative on the subject, other than to say that his arguments were persuasive and his examples illuminating.
One subject I was surprised to hear him discuss, however, was the role of interconnected global capital markets in financial crises. This was a key issue raised after the Asian crisis in the late 1990s; less so for the current “great recession”—although Stiglitz’s tag line that this was a crisis “made in America” and exported around the world reflects a common conclusion of much recent analysis.
Open international capital markets bring risks, of course, as well as rewards. Cross-border investments can yield huge benefits for investors and hosts alike, but as the Asian crisis demonstrated, these benefits come with serious risks, especially when bubbles develop and then pop.
Of course, open capital markets bring two very different types of investment: “hot” portfolio flows that can shift in an instant and steady, direct investments which establish productive assets on the ground over time and add to the base of capital in the medium to long term.
It is these latter investments that MIGA works hard to encourage and support, in large part because they represent the most stable and developmentally beneficial investments in emerging markets. Indeed, some of the very risks that Stiglitz identified—specifically political risks—are precisely those that MIGA seeks to mitigate. As long as such risks exist—or are perceived to exist—investors may want to consider political risk insurance as a way to catalyze their proposed productive investments, with all the attendant development benefits they may bring.