Between 1981 and 1987, direct foreign investment in the Third World plunged by more than 50%. The World Bank was concerned about this decline and wanted to correct it by improving the investment climate in Third World countries. Its solution: Create a Multilateral Investment Guarantee Agency (MIGA) that will guarantee foreign investments against expropriation at rates to be subsidized by Western governments.
a. Assess the likely effects of MIGA on both the volume of Western capital flows to Third World nations and the efficiency of international capital allocation.
b. How will MIGA affect the probability of expropriation and respect for property rights in Third World countries?
c. Is MIGA likely to improve the investment climate in Third World nations? Explain.
d. According to a senior World Bank official (Wall Street Journal, December 22, 1987, p. 20), ‘‘There is vastly more demand for political risk coverage than the sum total available.’’ Is this a valid economic argument for setting up MIGA? Explain.
e. Assess the following argument made on behalf of MIGA by a State Department memo: “We should avoid penalizing a good project [by not providing subsidized insurance] for bad government policies over which they have limited influence.... Restrictions on eligible countries [receiving insurance subsidies because of their doubtful investment policies] will decrease MIGA’s volume of business and spread of risk, making it harder to be self-sustaining.’’