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Private 'Foreign Aid' Offers Challenge to United States

Trade: Broad shift toward capitalism abroad raises concerns over trade deficits, jobs, even 401(k) plans.

September 09, 1997|ART PINE | TIMES STAFF WRITER

WASHINGTON — Not long ago, the only way most poor countries could stay afloat was to beg for ever-larger amounts of foreign aid. Western governments poured billions into costly development projects. Private industry and capital were almost nowhere to be seen.

No more. Richer countries, feeling strapped for cash themselves, have cut back their foreign aid. At the same time, however, many of the impoverished nations have abandoned socialism and embraced capitalism. As a result, private capital has become the economic mainstay in many poorer countries.

By most reckonings, that turnabout is good. Not only is private investment more productive than foreign aid, but the mere fact that foreign investors are interested shows that the countries themselves are taking solid steps to get on their feet.

But the emergence of some of the world's onetime economic basket cases also presents the United States and other industrial countries with some new dangers, including widening U.S. trade deficits and increased competition for jobs.

There are also some risks for Americans who have invested in the stocks and bonds of the world's newest bastions of free enterprise--a group that includes just about everyone who has some savings in mutual funds or 401(k) retirement plans.

Moreover, Jeffrey E. Garten, a former U.S. trade official, foresees clashes between the United States and the "newly emerging markets"--as the fastest-growing developing countries are known--over trade barriers, human rights and rules governing labor and the environment.

As a result, Garten contends in a new book titled "The Big Ten," dealing with these countries--which range in size from China and India to Peru and the Czech Republic--"will be the key to our economic well-being and to our security in the decades ahead."

The surge of private capital into poorer countries has been relatively sudden. As late as 1991, net "official" capital flows--foreign aid and World Bank loans--still exceeded private investment.

By last year, however, investors in industrial countries pumped a net $244 billion into poorer countries while net official flows fell to $41 billion.

The effect has been staggering. Foreign-owned firms account for 90% of Singapore's exports. Foreign consortiums pump $12 billion a year into Poland's industry. One-third of the money in Mexico's stock market comes from abroad.

The push for new profits in emerging-market countries takes a multitude of forms--a new Boeing Co. aircraft-importing firm in Beijing, a Fidelity Investments mutual fund that specializes in Third World stocks, a buyout by General Electric Co. of a lamp-manufacturing plant in Hungary.

Worldwide trading in stocks and bonds issued by emerging-market countries totaled $5.3 trillion in 1996, according to the Emerging Markets Traders' Assn., and it is expected to top $6 trillion this year--more than eight times the level of four years ago.

David D. Hale, economist for the Zurich Group, recites a litany of attractions that such countries offer: Together, they account for 45% of the world's economic output, 70% of its land area, 85% of its population and 99% of its projected long-term growth.

But with only 15% of the world's equity capital, they are hungry for more. To get it, they are paying investors about double the rates of return available in the United States and other major industrial countries--a tempting prospect for those who want to diversify their portfolios.

Yet while many countries, such as Singapore and Indonesia, are attractive from an economic standpoint, they are plagued by a wide array of institutional problems, including intractable corruption, weak financial structures and uncertainty over who will succeed the current leader.

Recently, surprising crises in star performers Thailand and Mexico provided dramatic evidence of the fragility of the emerging-market economies. Both involved policy mistakes that later spawned currency crises. And both required huge, costly bailouts by other countries.

Although the governments that stepped in to help partly sought to protect foreign investments in these countries, they were also concerned that the currency crises might spread to other emerging-market countries.

The threat of such contagion is potentially serious. The inability of Mexico to repay Western banks in August 1982 led to a global debt crisis that clouded the world economy through the end of the 1980s.

Still, analysts contend that mounting private investment in both securities and businesses overseas poses less of a threat than bank lending did in the 1980s because losses are more diffuse, spread among thousands of small investors and less likely to threaten the global economy.

Collectively, U.S. mutual funds and pension funds have only about 2% of their capital invested in emerging-market countries.

Major Changes in Foreign Investing

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