Continued Strong Foreign Investment Seen

WASHINGTON —  Private investment in emerging markets surged 33% in 1996 and is expected to remain strong even if interest rates edge up in the U.S., World Bank Chief Economist Joseph Stiglitz said Sunday.

Stiglitz, who joined the Bank last month after serving as the chairman of President Clinton’s Council of Economic Advisors, said he expects rates to go up but not to levels that would significantly divert investment from developing countries.

The World Bank, in its annual report on global development finance, said private investment in 1996 surged for the sixth consecutive year, jumping $60 billion to a record $244 billion.

In the past, investment in emerging markets had leveled off when interest rates in less-risky, wealthy industrial countries have become more attractive.

“They’ll [the rates] go up but they’ll not go up much,” Stiglitz said in a briefing for reporters. “The United States is not in the midst of an overheated economy.”

Many analysts expect the Federal Reserve Board to raise rates when policymakers meet Tuesday to help keep inflation from stirring as U.S. economic expansion enters its seventh year.

“The growth of private capital flows in the 1990s should continue as more developing countries improve macroeconomic management and open their markets to competition from the rest of the world,” Stiglitz said.

He declined to say if the increase would match the 1996 jump, but said all signs point to a rise for the foreseeable future.

Driving the increases, the report said, are investors eager to diversify their portfolios in search of higher profits in the markets of the emerging economies.

Developing countries were improving their economic management, strengthening financial institutions along with legal and regulatory regimes. The door in many countries is also open to foreign investment as never before.

The report said investors had generally shaken off the shock that followed the 1994-95 Mexican peso crisis, suggesting increased sophistication and skill at picking and choosing investments.

At the same time, the Bank criticized wealthy countries for continuing to turn their backs on providing long-term development aid for the poorer countries.

So-called official development finance from wealthy countries as well as the multilateral development banks fell to $40.8 billion last year from $53 billion in 1995.

Concessional finance to the poorest countries is also in retreat, falling by nearly $1 billion to $44.4 billion, as budget-strapped countries cut back on help to such agencies as the World Bank’s International Development Assn.

Although the vast amount of private capital still finds its way into just 12 emerging economies, the percentage that these nations attract has dropped to 73% in 1996 from 84% in 1990 as other countries have also become attractive.

The 12 emerging countries most favored by investors are China, Mexico, Brazil, Malaysia, Indonesia, Thailand, Argentina, India, Russia, Turkey, Chile and Hungary.

But even Africa, which is still largely shunned by investors despite a strong record of reform in some nations, has been getting capital flows that are 10 times greater than they were at the beginning of the decade, the Bank said.