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World Capital Shortage a Myth?

By David R. FrancisStaff writer of The Christian Science Monitor / April 4, 1991



BOSTON

IS a world shortage of capital developing? Many economists say it is. Morgan Stanley & Co., for example, reckons the total demand for capital by Eastern Europe, Latin American, the Middle East will exceed the Western world's supply by more than $200 billion a year in the next few years.

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But to Thomas McIntyre, vice president of Dessauer Asset Management, it's a ``myth.'' He lists a number of factors freeing up funds. One is the end of the cold war. That is expected to reduce arms spending by the major industrial powers by tens of billions of dollars in coming years. Another is the decline in real estate speculation, mergers and acquisitions, and other capital-costly adventures in the United States. A third is the anticipated decline in the US budget deficit after the current fiscal yea r.

Nine years ago, he notes, a popular view was that the growing budget deficit would crowd out private borrowers, forcing up interest rates. Instead, yields on corporate bonds fell from 15 percent in 1982 to 8.5 percent in 1986.

At the moment, interest rates have declined with recession in the US and other English-speaking countries and a slowdown in growth in other major industrial nations. This slower pace reduces the demand for business investment. And consumers tend to save more.

The capital shortage is not expected for a few years, when major reconstruction projects are fully under way in Kuwait, East Germany, East Europe, and eventually the Soviet Union.

But the large sums involved will be ``spread out over years,'' McIntyre says. Kuwait, for instance, will probably not be able to absorb much more than $10 billion to $20 billion per year. Further, once the oil wells are producing again, they will generate enough new wealth to cover the cost of such a spending program.

McIntyre points out that prior to the invasion last August, Kuwait was planning to build two entire cities at a total cost of $30 billion. That project has been scrapped or put off for a decade, reducing the demand for capital.

``There is always a big difference between what a nation would like and what it can afford,'' notes Dessauer's Journal. ``The lessons from the Latin debtor nations are remembered ... Demand for reconstruction financing will be balanced against the nation's immediate economic prospects and the cost of borrowing.''

Further, McIntyre says, sound investment itself eventually generates more capital.