As economists and policy makes ponder the lessons of the last two turbulent years, many troubling questions remain. What went wrong? Why did policy makers fail so abysmally to take preventative action? Why were economists so completely taken by surprise?

Should the portfolios of mandatory, private pension funds in developing countries be invested exclusively in the home country? Or should their managers be free to make prudent investments anywhere in the world? Traditional portfolio analysis gives a clear answer from the point of view of the...