By Emad Mekay
WASHINGTON, Jan 24 2005 (IPS)

Private capital flows to developing nations doubled in the last two years as investors fled the weakening dollar for greener pastures in China and Russia, says a global association of financial firms.

But some economists argue that the influx will not do much good as long as it remains speculative and fails to boost productivity, access to technology or foreign markets. One economist suggested that the money going to Russia mostly targets the oil and energy sectors.

According to a recent report by the Institute of International Finance (IIF), which represents more than 340 banks around the world, net private capital flows to the so-called emerging markets in 2004 grew to an estimated 279 billion dollars.

This is a major increase over the 2003 volume of 211 billion dollars, and more than double the 2002 total of 125 billion dollars. The IIF notes that these figures are also the highest since the 1997 Asian financial crisis, when investors deserted regional markets en masse.

A substantial part of those inflows were portfolio investments that went mostly to Asian countries.

The financiers’ group routinely surveys investment prospects in 29 "emerging markets". This term was invented by the World Bank’s International Finance Corporation as a way to entice investors to venture into countries that otherwise would be shunned as "developing" or "Third World" markets – labels that connote high risk and political instability.

International financial institutions like the World Bank and the International Monetary Fund, as well as a number of regional bodies, prescribe policies and advice to poor nations that encourage the inflow of foreign investments.

But many critics and independent development groups say that foreign investment needs to contribute to lasting growth in poor nations’ economies.

"Foreign capital doesn’t necessarily do any good unless it actually increases a country’s productive capacity," said Mark Weisbrot, co-director of the Centre for Economic and Policy Research in Washington.

"And in most cases the capital we are talking about is not going to do that," he said. "Some of it is going to be used for productive investments but a lot of it is just speculative."

The IIF report forecast that Asia would remain the primary recipient of those inflows. Net private capital flows to Asia are projected to account for 46 percent of total net flows to emerging markets this year, down from 52 percent in 2004.

Portfolio investment, a substantial part of the total net private capital flows, reached an 11-year high of almost 36 billion dollars in 2004, and is expected to decline moderately with emerging Asian countries continuing to attract the bulk of these flows.

Some believe this is worrisome because that kind of speculative investment triggered the 1997 Asian crisis, and also believe the money is not essential.

"The Asian countries now have pretty high savings rate, most of them, and they do not really need the foreign capital," Weisbrot said. "If it is for direct investment you can make an argument that it brings technology and brings access to foreign markets and other things, but most of this is portfolio investment and it doesn’t necessarily bring any of those things."

The IIF, which represents banks, security firms, fund managers and other financial services institutions, says that the increase in capital flows showed growing investor confidence in the performance of a number of "important emerging market" economies, such as Russia, Brazil and Turkey.

In the Middle East and North Africa, Egypt, Algeria and Morocco were the recipients of the major capital flows. In Asia Pacific, they were China, India, Indonesia and Malaysia. Argentina, Brazil and Chile were among the large markets in Latin America for foreign investors while Bulgaria, Hungry and Poland were among the leading ones in Europe.

Total net private equity investment, including portfolio equity flows, rose sharply last year to 165 billion dollars from 122 billion dollars. A further surge to 177 billion dollars is projected for this year.

Direct investment means the foreign ownership of local assets such as factories or hotels, while equity flows include mutual funds and other stock market mechanisms.

Commercial bank net lending almost doubled last year to reach 49 billion dollars from 26 billion dollars in 2003, and the IIF projects that the 2005 total will surpass 42 billion dollars.

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