Risks and Rewards in Emerging Market Investments

In light of the recent currency crises in East Asia, this article questions the accepted wisdom that emerging market securities deserve to be included in global portfolios primarily because of their low correlations with more conventional asset classes. The authors suggest that the basic cycle of emerging market loans and securities appears to have been compressed, and its swings accentuated, by the herd-like behavior of global institutional investors. This is not the irrational behavior of crowds infected by investment euphoria, but the rational behavior (however volatile) of a large number of institutional investors with huge stakes in the market, each trying to outperform or at least keep up with the others. While stressing the benefits of foreign capital for emerging nations, Smith and Walter also point to the adverse consequences of abrupt shifts in investor sentiment and capital flows. Citing a recent World Bank study, the authors suggest that the effect of portfolio equity inflows on many developing economies has been a “glut” of foreign exchange and liquidity, which tends to cause inflationary pressure and appreciation of real exchange rates. Such currency appreciation can in turn have unwanted “real” effects, such as increases in trade deficits. Going somewhat “against the grain of the Washington Consensus,” the authors suggest that emerging nations undertake a gradual, though steady movement toward adoption of freemarket policies. In particular, they cite with approval attempts by more successful emerging nations such as Chile and South Africa to limit portfolio capital inflows to avoid this problem of excess liquidity. As the authors conclude, “At no point in their development did now-established countries like Japan, Germany, South Korea, Taiwan, Singapore, Spain, and Chile adopt a totally free-market approach. They moved purposefully over decades in that direction, but only at a pace that could be accommodated by the accompanying political thinking and infrastructure-building.”     

Intertemporally Consistent Population Ethics: Birth-date Dependent Classical Principles

This paper shows that, in a partially welfarist framework that permits discounting, perperiod social evaluations can be consistent with a timeless social ordering only if social principles lead to the repugnant conclusion . The same result applies if per-period social evaluations are replaced by forward-looking evaluations (social orderings that, in a given period, depend on present and future utilities only). This is the case because geometric classical generalized utilitarian principles are the only social principles satisfying these intertemporal consistency conditions together with some basic assumptions. The conclusion to be drawn from this paper is that history must matter to some extent if social-evaluation principles are to be ethically acceptable.
JEL Classification Numbers: D63, D71     

Procrastination, Obedince, and Public Policy: The Irrelevance of Salience

A bstract . Modern economics assumes that individuals are rational maximizers, who, in the presence of costly information , sometimes make mistakes. Recently, George Akerlof has challenged this presumption. He proposes that people sometimes fail to maximize their long-run utility , due to the phenomenon of "salience." This refers to the alleged systematic distortion in individual perception where events closer to a person (in time and in space) seem bigger and more important than they really are. The salience phenomenon is claimed to interfere with the process of rational maximization , rendering some individual choices, in effect, irrational. This paper subjects Akerlof's suggestion to critical scrutiny. It is argued that the examples Akerlof offers of the effect of salience are not the anomalies he claims but instead represent behaviors which can be readily explained within the framework of the standard economic model. All of his major examples are considered in this light and it is suggested that the work of Israel Kirzner holds more promise for improving the analytical power of the standard economic model than does the idea of salience.     

An alternative proof for the linear utility representation theorem

Summary The paper presents an alternative short proof for the linear utility representation theorem. In particular a generalization of the theorem of Blackwell and Girshick (1954) and a special case of the theorem of Herstein and Milnor (1953) are proved by exploiting the topological group structure of finite-dimensional Euclidean vector space.I thank two careful referees for their helpful remarks.