Why should the portfolios of mandatory, private pension funds be captive? (The foreign investment question)

A model of portfolio optimization, which takes account of the difference between the private and social cost of foreign investment, is used to analyze the relationship between capital shortages and the international diversification of mandatory, private pension funds in developing and transition countries. The socially optimal rate of foreign portfolio investment may be positive, even when access to international capital markets is limited. I propose replacing investment limits with a tax on foreign investments, equal to the difference between their social and private cost. The use of international pension swap is seen to be formally equivalent to the imposition of such a tax.