CAPITAL FLOWING INTO EMERGING ECONOMIES.

CAPITAL FLOWING INTO EMERGING ECONOMIES. The article in The Economist that I cited yesterday rejected a theory advanced by Michael Dooley, David Folkerts-Landau and Peter Garber, which argues that, in The Economist’s words, “Emerging economies with poorly developed financial markets are not good at allocating capital, so they buy Treasury bonds and let American firms do the domestic investment for them.” As I suggested yesterday, I think that it is just as rational for an investor to buy United States Treasury bonds for its portfolio as it is for an American company or institution to devote part of its portfolio to Treasury bonds. In effect, much investment in emerging countries comes via financial intermediaries. Joanna Slater and Serena Ng had an article in the Wall Street Journal for February 13, 2007 entitled “A Boom in ‘Emerging’ Bonds” that reflects some of this complicated pattern of capital flows. It contained this paragraph: “Last year, companies from emerging markets sold about $110 billion in fresh foreign-currency bonds, mainly denominated in dollars or euros. That is a 20% jump from the previous year and more than double the amount of foreign-currency debt issued by governments in those countries.”