Money from tens of millions of individuals in the United States and other industrial countries is joining capital from commercial and investment banks to buy stock and bonds, finance factories, and raise office buildings in Asia, Latin America, Eastern Europe, Russia, and Africa.
The result is what Charles Dallara, managing director of the Institute of International Finance, calls a "new era" in international finance.
Private money has become far more important to economic development in many poorer countries than "official" money. This year private flows will exceed by 16 times the amount sent to "emerging markets" by rich nations as foreign aid and by numerous international development banks.
"It's a lot more than big banks making loans as in the early 1980s," Mr. Dallara says.
In 1996, the flow of money into 31 "major" emerging markets should reach a record $224.8 billion, up from $208 billion in 1995, according to a forecast by the IIF, a group representing 220 of the world's most powerful financial institutions.
That compares with $14.1 billion from all official sources, including the World Bank, the International Monetary Fund, regional development banks, and United Nations agencies.
All these numbers are "net," that is, with repayments of loans or income and dividends subtracted from the gross flow. The official net flow was depressed this year by Mexico's advance repayment of a large portion of its crisis loan of 1995.
Finance ministers or central bankers from such nations as China, Indonesia, Mexico, Argentina, South Africa, and the Czech Republic have been lining up to speak to the IIF's annual meeting in Washington Sept. 29. They want to present as positive a picture as possible of their economies to the IIF's members.
That's because IIF financiers represent big money, really BIG money. They have assets worth many trillions of dollars. And they are investing a small chunk of that money in emerging markets.
Experts note several implications of this increase in private money flows:
*Americans with 401(k) pension plans, insurance policies, or mutual fund shares are putting a small portion of their investments, directly or indirectly, into faster-growing developing countries in hope of a higher return than they would get at home. The investment also comes with higher risk, political or commercial.
*Developing nations that want foreign investment have become subject to the rigors of private markets.
If a nation messes up its economic policies or foreign exchange rates, foreign private capital will rush to leave when possible or cease to put in new investment. The result could be a financial crisis, as in Mexico in 1995, or economic stagnation.
"Private markets have become in part the disciplinarian," says Morris Goldstein, an economist with the Institute for International Economics, a Washington think tank.
"Mistakes can be punished quite severely," Dallara says.
*The role of such multilateral institutions as the World Bank and IMF have become relatively smaller. "They are no longer the principal providers of finance to these countries," Dallara notes.
The IMF helps its member nations devise economic-reform programs and policies and comes to the financial rescue of countries in trouble. The World Bank makes loans for population control, health, and education development, and some infrastructure (dams, roads, water projects, railways, airports, telecommunications, etc.). It remains highly important in the poorest nations of Africa and Asia where private capital is often hesitant to invest.
These two key institutions have also played an important role in helping the nations of Eastern Europe and the successor nations to the Soviet Union shift toward free enterprise. They provide financing when tight national budgets make contributions from the industrial nations difficult if not impossible.
The "key challenge now facing the international community is how to sustain and expand these record flows," Dallara says.
In a letter to the ministers of finance and central bank governors who will be attending the joint annual meeting of the IMF and World Bank starting Oct. 1 in Washington, Dallara noted that there is a convergence of views between the private financial institutions and the official community on the need for a market-based approach to development.
He would like the IMF to make public the annual surveys it conducts of its members' economies, perhaps purged of some market-sensitive material. He calls for a greater dialogue between the two groups to avoid crises or settle them when they occur. He wants the World Bank to involve private money more in infrastructure projects through loan guarantees covering political or regulatory risks, not commercial risk.
These institutions, he says, "need to adopt quickly to their new role" as a catalyst to sustain private money flows.
The IIF's capital flows report shows a quick recovery of investor confidence after the Mexican crisis. Investment in stocks and bonds this year is forecast at $33.8 billion. Direct investment in plant and equipment is put at $76 billion. Commercial banks will lend $64.2 billion, down from $90.8 billion in 1995. Nonbank private creditors are providing about $51 billion this year. That is mostly from bond sales and is up from $17 billion last year.
All this money, Dallara says, should help boost living standards in the developing countries. Though the money flows create a "more competitive" world, "it's a good thing," he adds.