October 19, 2006
INVESTORS WAIT FOR THE END TO ARRIVE:
Crowding Out The U.N. (JOSEPH STERNBERG, October 19, 2006, NY Sun)
Private equity firms are moving into the developing world and that's a good thing, despite what the United Nations says. A report just released by the United Nations Conference on Trade and Development finds that "collective investment funds" â€” meaning private equity firms and their sisters, hedge funds â€” are fast-growing players in the world of development economics. [...]
Only a Turtle Bay bureaucracy could be puzzled about the "strategic motivations" of private equity and hedge fund investors. The investors themselves are certainly unabashed about their motives. It's profits, pure and simple. "One of the greatest roles [of such funds in developing countries] is following the profits," one hedge fund manager who invests in developing countries, Marshall Stocker, says.
That's precisely why the new breed of development investor is such a breath of fresh air. For 60 years and more, development economists have lurched from one fad to another in their attempt to allocate billions upon billions of dollars of development aid. The result has been little noticeable development. Mr. Easterly's first book, "The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics," is at heart a catalog of decades of such failures â€” a steady supply of African "bridges to nowhere."
In contrast, the private sector can "efficiently allocate resources whereas governments don't," Mr. Stocker says. Private equity firms and hedge funds have the expertise, not to mention the incentives, to identify genuine opportunities for productive investment. Doing so is what has transformed private equity into a multibillion-dollar industry in the first place. Nor do they make their profits in isolation â€” they do so largely by increasing the productivity of the firms in which they invest, which has the knock-on effect of improving life for the workers, for example.
Private equity investors and hedge funds also have the potential to do what the World Bank and other institutions have failed to do for six decades: force politicians in the developing world to implement sound economic policies, again by chasing profits. Mr. Stocker's fund is idealistically named World Freedom Select, but not even he makes any bones about his management philosophy.
"When countries liberalize economies, you see above-average investment returns," he says. Thus, the private capital market tends to favor freer countries. And, thanks to the "short-termism" about which the U.N. report matters, capital flows offer "almost instantaneous feedback" to policy makers, Mr. Stocker adds.
That might be one reason the United Nations sounds a little nervous about this trend.
Just another reason Islamicism is no threat. Posted by Orrin Judd at October 19, 2006 8:19 AM