Risk lies at the heart of all financial endeavor. Because risk is often as much a matter of judgment as hard evidence, differing perceptions of risk make markets. Official financial institutions such as ours are not always comfortable with the thought that mere perceptions can be so important. But we, the World Bank Group, must become more comfortable with risk. Spreading the burden is more necessary than ever because risk today can be global, huge and very volatile.
Capital flows are a vivid example.
Between 1990 and 1994 more than a trillion dollars flowed from abroad into developing countries. As the Mexican case has shown, however, capital flows can pose problems. There are risks on both sidesfor the recipients and the suppliers of capital. For recipients, possible problems include the relationship of capital flows to the balance of payments, the budget and inflation. In extreme cases, these relationships can culminate in loss of monetary and economic control.