Gimme Capital!

By John Greenwald

If capitalism has triumphed around the world, where will all the capital come from? That question is the latest to embroil the quarrelsome community of economists, raising fears that the victory could lead to a shortage of funds that will slow growth in the U.S. and abroad. With so many countries hungry for capital, say these experts, the demand will drive interest rates up. The increases in turn could choke off investments for new homes, plants and machinery. "This is the first time since the outbreak of World War I that every nation on this planet has a capitalist economic system or a market- oriented economy either in place or about to happen," says David Hale, a senior economist for Kemper Financial Services. "But because of that we'll probably have much higher interest rates over the next two or three years."

The Hale view has a potential ally in Federal Reserve Chairman Alan Greenspan, who last week hinted that he would soon raise short-term interest rates for the fifth time this year. In this instance, he blamed again the incipient presence of inflation. But Greenspan also sees a more global context for the pressure on rates. "If you get a significant increase for demand for capital in the world, real interest rates will tend to rise if the savings are not forthcoming to offset that," he told Congress in June.

To be sure, many respected economists flatly deny that any capital crunch is looming. Robert Eisner of Northwestern University argues that economic growth around the world will raise people's incomes and thereby provide the savings to finance new investments without jacking up interest rates. "Greater output means greater income, and that means greater savings," he says.

However, those who fret about a shortage say interest rates already seem to be rising faster than economic conditions would demand. Such economists note that so far in 1994, long-term rates -- those that companies pay to finance / new plants or that apply to home mortgages -- have jumped as much as 2 percentage points in the U.S. and other industrial countries. That kind of spurt normally reflects lenders' fears of inflation, but inflation has been dormant all year, thanks at least partly to the Federal Reserve's vigilance. "What's going on with interest rates is more a scarcity of credit than a big rise in inflation expectations," maintains Roger Brinner, chief economist for the consulting firm DRI.

This scarcity is partly due to the disappearance of lenders who were among the largest providers of capital to the world during the 1980s. One of these is Germany: unification has required it to borrow tens of billions of dollars abroad to rebuild its eastern sector. In Japan a severe recession and the collapse of the country's financial markets have forced banks and companies to all but halt new overseas investments. And oil-rich Arab states like Saudi Arabia, which once exported capital, are borrowing heavily to finance arms purchases in the wake of the Gulf War.

Growing competition for funds would naturally produce winners and losers. Experts say many of the likely winners would be in the Pacific Rim and Latin America, where rapid growth enables companies to pay higher rates of return than the U.S. or Europe can offer. Argentina's stock market rose 53% in 1993, for example, while Brazil's more than doubled in value. (By contrast, the Dow Jones industrial average gained just 14%.) Eastern Europe should also remain a magnet. In Poland the index of stocks on the country's fledgling exchange ballooned more than 700% last year. "I see the developing countries pulling in capital for a long time to come," says Robert Hormats, vice chairman of Goldman Sachs International. "The rates of return are going to be the highest because these countries are starting off from a low base."

As for possible losers, the U.S. and Europe seem to rank high among likely candidates. The U.S. is already the world's biggest debtor, and its low rate of savings and large budget and trade deficits will continue to make it a heavy borrower. U.S. companies could find themselves paying painfully high rates that discourage investment. "It will mean we will be building fewer houses and fewer cars," says Danny Bachman, a senior economist for the WEFA consulting group. If he and like-minded economists are right, the triumph of capitalism could condemn the richest and most powerful capitalist nation to a creaky standard of living.

With reporting by Bernard Baumohl/New York