Page 644 - The Principle of Economics

662 PART ELEVEN
THE MACROECONOMICS OF OPEN ECONOMIES
N The perceived economic and political risks of holding assets abroad
N The government policies that affect foreign ownership of domestic assets
For example, consider U.S. investors deciding whether to buy Mexican govern- ment bonds or U.S. government bonds. (Recall that a bond is, in effect, an IOU of the issuer.) To make this decision, U.S. investors compare the real interest rates offered on the two bonds. The higher a bond’s real interest rate, the more attractive it is. While making this comparison, however, U.S. investors must also take into account the risk that one of these governments might default on its debt (that is, not pay interest or principal when it is due), as well as any restrictions that the
IN THE NEWS
It’s the 21st Century, Do You Know Where Your Capital Is?
WHEN YOU HEAR ABOUT A FACTORY BEING built in Asia or Latin America, have you ever wondered who is financing that project? The answer might surprise you.
The World’s New Financier Is You
BY EDWARD WYATT
Investors flocked to Eastern Europe after the Berlin Wall fell in 1989, eager to scoop up bargains in what they were sure would be a quick economic revival. A year later, the technology boom drew their money to the Far East. Then Latin America heated up—that is, until the Mexican peso went bust, which sent investors scurrying back to the Pacific Rim. Russia got sexy as an investment early [in 1997], and more recently South
America has had allure.
Billions of dollars are sloshing back and forth over the globe with seemingly little rhyme or reason, chasing invest- ments in once-obscure markets from Santiago to Kuala Lumpur. But there is at least some method to the madness—de- spite occasional debacles like the recent Bre-X gold mining fraud, in which mutual fund managers poured scads of money into what amounted to little more than holes in the ground in Borneo.
To begin with, foreign stock and bond markets are growing much faster than those in America, providing much higher returns to investors. In 1970, for- eign markets accounted for only a third of the value of the world’s stock and bond markets, with the United States alone accounting for the other two- thirds. But by last year, they had grown to nearly 60 percent of the total.
Stock markets in newly emerging economies like those of Turkey, Ar- gentina, and South Africa now account for 14 percent of the world’s total stock market value, up from 4 percent 10 years ago.
Investors have flocked to them as global economic trends have shifted since the end of the cold war. Central- ized, state-planned economies have been scuttled for ones favoring private ownership of industry. With the trans-
formation, the resulting vibrant new economies no longer need to rely on international development agencies or giant New York banks for foreign invest- ment, as they did in the 1970s and 1980s; instead, much of their seed capi- tal since 1990 has come from a sur- prising source: millions of average Americans who invest in mutual funds.
“This is a trend that has been led by America, which pushed the international lending agencies to encourage the de- velopment of private enterprise, to open up these markets and get the hands of government out of industrial ownership,” said J. Mark Mobius, who oversees sev- eral Templeton mutual funds that invest in emerging markets. “That led to the development of capital markets—bond markets and stock markets—in many of these countries, and now to people like me trying to invest all the money that is flowing into our mutual funds.” . . .
And these days, when the finance minister of a developing country wants to encourage foreigners to invest in his country, he is less likely to court the World Bank or the Agency for Interna- tional Development than someone like Mr. Mobius.
SOURCE: The New York Times, May 25, 1997, Week in Review, p. 3.