George Soros is richer than I am, and Joseph Stiglitz is more academically distinguished than I am, but that does not mean that they are beneath criticism. With much rhetorical flourish, Stiglitz expresses contempt for free markets and praise for Soros.
I strongly agree with the spirit of two of his proposals—the more advanced industrial countries should absorb more risk...
U.S. lenders want to be repaid in dollars rather than in local currency. Developing country enterprises earn revenue in local currency, not in dollars. Thus, they have to absorb the risk.
In my opinion, there is no way around this. If the foreign country tries to use dollars as domestic currency, you have the Argentina problem. If you force lenders to accept payment in local currency, then they need to charge a higher interest rate to compensate for the currency risk. If you want to enact a subsidy for loans to developing countries, fine. But neither the financial genius Soros nor the economic genius Stiglitz can come up with any way to eliminate the risk premium by magic.
Soros rightly notes the marked slowdown of flows of funds to the emerging markets after the 1998 crisis. "Taking resident lending, portfolio investment, and private credit flows together, there has actually been a net outflow from emerging markets since 1997, going from positive $81.7 billion in 1996 to a negative $106 billion in 2000, offset by slightly larger inflows of foreign direct investment and by official financing." This is an odd situation, and for anyone who believes that the key problem of development is lack of finance, it is deeply troubling.
Stiglitz says that developing countries are in a box. They need capital inflows. Capital inflows necessarily imply trade deficits. Trade deficits create loss of investor confidence, leading to reduced capital inflows.
The problem with this story is that it is pure macroeconomics, without any micro. From a microeconomic perspective, foreign investment works if and only if the investments are sound. If the investments are sound, then the earnings from the investments will sustain investor confidence.
If what developing countries lack is finance, then those few investors who do put money in developing countries would earn outstanding rates of return. The fact that they do not do so probably reflects internal market failures in the developing countries. Often, these are regulatory restrictions and excessive government involvement.
Capital inflows don't enrich countries. Profitable investments enrich countries.
Discussion Question. Both Stiglitz and I have used rhetoric to state our positions. Where can one find evidence to help evaluate which of us is correct.
