This is a follow-up to the previous post on the benefits of international capital flows in helping to match risk demands between emerging markets and developed markets.
I think the idea that capital from the developed world is a beneficial input for production growth in developing economies is easy to intuit. But it seems somehow strange, or wrong, or at least not the result of some natural equilibrium, that so much emerging market capital would be parked in low risk securities in the developed world. After all, we don't need emerging market capital; they do.
But, I think it is easy to underestimate the value of low risk savings vehicles for emerging markets. For economies that exist within a context of high risk premiums and high uncertainty, relative to developed economies, I think we can see how there would be a demand for low risk investments.
But, I think the benefits of these savings outlets may be much deeper than is obvious. The rise of functional market economies, at their base, is a triumph of a set of cultural and institutional norms that is fundamentally entangled with the conflicted human relationship with risk. So many of the social impediments to market-based abundance are seated in a desire to avoid risk - the complex sharing norms of extended families in subsistence economies, political impositions of power of one group over another, limited access property rights, corruption in the service of protecting the existing control of land, production, captured demand, etc.
In many ways, these mechanisms that end up blocking the universal, individual right and access to property are the products of a demand for safety. At their worst, in political form, these mechanisms create safety for a limited class at the expense of others.
Could it be the case that the external availability of highly trusted low-risk savings vehicles helps to meet this demand for safety, and allows the more powerful, capital rich factions of developing economies to achieve a level of risk low enough that the demand for more corrupt versions of risk abatement is sated? I submit that this seemingly inapt escape of capital from the very places where capital would be most useful might be the most important leg of the set of international capital flows that have defined our era. Functional mechanisms for protecting prior gains in emerging economies might be replacing the dysfunctional mechanisms that have kept generations of peasants from access to the possibility of accumulation.