2. Between 1981 and 1987, direct foreign investment in the ThirdWorld plunged by more than 50%. TheWorld Bank was concerned about this decline and wanted to correct it by improving the investment climate in ThirdWorld countries. Its solution: create aMultilateral 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 ofWestern capital flows to ThirdWorld 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 economists, there is more demand for political risk coverage than can be delivered through private sources. Is this a valid economic argument for setting up MIGA? Explain.