Friday, December 2, 2011

Why (younger) aid workers should have their pensions in emerging markets and why I lost my nerve

Until yesterday, all of my pension funds were in emerging markets. I had 50% in emerging market stocks and 50% in bonds.  Since my job is to improve developing economies, I should have my money where my mouth is. Alternatively, I should have incentives to put in effort, give good advice, produce good studies, focus most on relevant things etc. If my pension depends on developing countries developing then my incentives to to behave like this are best. It is in some ways equivalent to employees being partly paid in shares from their company that they can't sell for some set time. There is another reason why we should have our money in these places. We are supposed to care about these countries and they need financial resources to help them grow and develop. Aid workers who genuinely care enough to put their own money are more likely to be attracted to the field if pensions are in emerging economies whilst others will be put off.

It is good economics for other reason to. Firstly, imagine developing countries all become rich. Safe bonds and soaring stock markets. Sure, the market will go up and down but I can take that - I am fairly young - I will still have an amazing pension. Great! Except that, well, I work in development. If they all become rich, I might be out of a job. But I would have a great pension. Alternatively, if developing countries begin to behave like American or European politicians (ahem) they might just stay poor. Forever. In this case, I will have a very crappy pension. On the happy side though, my knowledge and skills will be in high demand and I will have a job for life! Great stuff! In fact, my strategy is the best in hedging bets.

There's another reason why emerging markets are best. I need my pension in young places. To be fair, this includes the US and excludes Russia but it is not a bad approximation. Why do I need this? Well, if I save it all in aging Europe, either I pull it out when everyone else does and the market all goes down. I lose my money. Alternatively, the market stays strong but I am buying goods with all that saved cash. Only there are few young folk to make it all so output is low. Result: prices rise and the real value of my pension goes down. Rather, I need it in a place where not everyone will pull their money out at the same time or that lots of old people are buying stuff. Brazil, India, South Africa, Turkey are good bets. And, until yesterday, I was betting that way.

But yesterday, I lost my nerve. I have finally crossed over whatever percentage barrier I had for the chances of an enormous crisis. I think it is still less than 50% but then I'm risk averse and anyway, it is approaching that threshold. If European banks fail to provide liquidity to emerging markets, stock markets will go down and government debts might become more risky. In an awful self-realising expectations way, I just pulled my money out of emerging markets. Until Europe sorts itself out, I see no safe haven...

(All judgements here are obviously personal.)


  1. Really thanks author for your nice site and great discussed about Pension.

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