Global Changes Test Lenders

THE global economy is changing so rapidly that the world's major financial institutions are having a hard time catching up.

At the joint annual meeting of the International Monetary Fund (IMF) and the World Bank in Madrid, which concludes today, several major shifts have demanded the attention of the assembled finance ministers and central bankers who came from as many as 179 nations:

* Private capital has surged back into developing countries in the past four years after nearly a decade of relative stagnation following the external debt crisis beginning in 1982. Net private flows of bank loans, bond and equity purchases, funds, and foreign direct investment in developing countries totaled $30.8 billion in 1990, climbed to $68.6 billion in 1992, and reached $106.6 billion last year, according to IMF statistics.

The Institute of International Finance (IIF) in Washington, a global association of more than 180 major financial institutions, also estimates that the flows are huge, though not as high as last year. The IIF puts the capital flows into ``emerging nations,'' a term that includes former communist countries and developing nations, at $190 billion in 1993. Former communist countries are not included in the IMF tally.

Such amounts far exceed the lending of the IMF and the bank. The World Bank and its low-interest loan affiliate, the International Development Association, made about $21 billion in loan commitments in their latest fiscal year.

Private creditors predominate

In the case of major borrowing nations, such as Argentina, Brazil, China, India, Russia, Poland, and about 26 others, private creditors now account for 90 percent of all capital flows, according to the IIF. ``While the IMF now has a smaller role as a lender to these countries, it can and should take new steps to promote stability in these dynamic and evolving markets,'' says Charles Dallara, managing director of the IIF.

Some officials have been urging the World Bank to direct more of its loans to countries that are not on the receiving side of private capital flows.

The surge in private investment has been stimulated by a trend toward market-based policies and sounder fiscal and monetary policies in a number of Latin American and Asian countries. Some of these nations have developed relatively sophisticated securities markets within the past 15 years.

Mexico and China alone have received about $50 billion each of foreign money over the past four years.

The competition of developing nations for investment has become sharp. Investment Canada, a government agency set up to bring in foreign investment, estimates that there are more than 9,000 programs or initiatives of some sort around the world trying to attract foreign direct investment.

Asked whether the government-regulated return on foreign investment in Chinese power plants was adequate, Lewis Preston, president of the World Bank, commented: ``This world is competitive. If they want the capital, they may have to offer terms slightly better.'' China is competing with other nations in East Asia for private money, he noted.

* In some degree, economic power is shifting from the industrial world to the third world. Nations such as India and Brazil are becoming somewhat more assertive in world economic affairs.

At this meeting, these two nations led the fund's third-world members in blocking a proposal by the Group of Seven (G-7) industrial nations for a limited issue of Special Drawing Rights (SDR), an IMF asset given to nations for their international reserves. India's finance minister has disparagingly called the G-7 the ``directorate of the world.''

IMF managing director Michel Camdessus, came under fire from G-7 officials for siding with the developing countries seeking a larger issue of SDRs to all member nations. The G-7, however, are not likely to try to remove Mr. Camdessus, who has 27 months left in his second five-year term.

Shift to third world

But clearly an economic power-shift may be in the making. If the output of nations were measured according to purchasing power parities (what they could buy according to their market) rather than by a translation into United States dollars according to foreign exchange rates, the developing countries plus the former Soviet Union nations would already account for 44 percent of world output.

Since the population growth of most third-world countries remains high and some have higher growth rates in output than the industrial world, the third-world share of and relevance to the global economy will continue to increase.

* The astronomical growth of trading on the foreign exchange markets has left currencies more vulnerable to wild price fluctuation. For instance, the fall in the dollar to just under 100 yen last spring caused a fuss in financial circles. It also prompted suggestions that the international monetary reserve system return to a less flexible exchange-rate system.

* The shift of the former communist nations to market-based economies could inject an element of dynamism to the global economy in a few years.

The IMF role may evolve but it's likely to remain within its traditional brief as global problem-solver. In the 1980s, it dealt with the developing country debt crisis; in the 1990s, the G-7 brought it in to help Russia and other nations in transition from communism to market economies.

Meanwhile, the World Bank is trying to shift its loan emphasis toward private markets.