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The Social Cost of Self-Insurance: Financial Crisis, Reserve Accumulation, and Developing, Countries

By Kevin P. Gallagher and Elen Shrestha
Global Policy Journal
November 2012
Download the article

This paper examines the extent to which foreign exchange reserves were accumulated or sold during the global financial crisis and what the social costs of any excess accumulation has been. We find that far fewer nations drew on their foreign exchange reserves to defend their currencies and economies from the volatility that ensued during the crisis. What is more, in the wake of the crisis many nations have continued to accumulate reserves. Finally, we estimate that the social costs of foreign exchange accumulation in excess of what is deemed adequate for insurance purposes could be as high as 1.8 per cent of GDP for the developing world, and could be higher than 3 per cent of GDP for China. According to our calculations, the developing world may have between US$98 billion to US$266 billion in assets in excess of what is needed to protect themselves from shocks, or 5 to 16 times the amount of benefits that could be made available by liberalizing world trade under the Doha Round at the World Trade Organization. The recognition within the economics profession and in international financial institutions that capital controls can be effective may provide an opportunity for developing nations to buffer their economies from external shock and free up opportunity for productive investment for development purposes.

Download The Social Cost of Self-Insurance: Financial Crisis, Reserve Accumulation, and Developing, Countries

NOTICE: Author Posting. © Global Policy Journal, 2012. This article may be used for research, teaching, and private study purposes. Any substantial or systematic reproduction, re-distribution, re-selling, loan or sub-licensing, systematic supply or distribution in any form to anyone is expressly forbidden.)

Read more on GDAE’s work on capital flows.


The Global Development and Environment Institute’s Globalization and Sustainable Development Program examines the economic, social and environmental impacts of economic integration in developing countries, with a particular emphasis on the WTO and NAFTA's lessons for trade and development policy. The goal of the program is to identify policies and international agreements that foster sustainable development.

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