The New Financial Order by Shiller Robert J

Author:Shiller, Robert J.
Language: eng
Format: epub
Publisher: Princeton University Press
Published: 2009-06-14T16:00:00+00:00

Magnitude of the Proposed International Agreements

These international risk management contracts would have to be large to be effective, potentially transferring significant fractions of national incomes across countries. Compare such transfers with those implicit in conventional foreign aid as it is offered to developing countries by developed countries. Foreign aid ranges from about 0.1 percent of U.S. GDP to 1 percent of some Scandinavian countries’ GDP. To be really significant, the potential transfers of income might have to be ten times as large, or even greater.

Moreover, the foreign aid we observe today tends to be directed to-ward a given country’s former colonies or to countries that serve the political interests of the developed country. Under no system at work in the world today is aid substantially given to the countries that have suffered the most in their economic progress.9

For foreign aid to be expanded to substantial levels and toward the countries that most need it—those that turn out to have substantial misfortunes—it is important that it be conceptualized in ways that are potentially advantageous to all involved countries, which is exactly what the international agreements I am proposing would achieve. While we might hope, alternatively, that efforts to develop an international sense of altruism could increase conventional foreign aid, this end is unlikely and is not the subject of this chapter. Countries would not enter into international risk management contracts from a sense of altruism; such contracts are advantageous to all parties from the perspective of pure self-interest.

International risk sharing certainly does not mean world government or the ceding of national rights to foreign bodies. It means only that governments undertake the same kind of financial risk sharing that I described earlier for individuals. It means that countries would adopt a genuine risk management perspective in their international relations.

These contracts differ from the minimal international risk-sharing pacts in force today in their magnitude and their more formal structure. Most potentially valuable are agreements to exchange unexpected national income between blocks of countries that are very different from one another in their economic activities and thus that have independent risks that can be swapped and thus reduced in their impacts.10

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