$174bn five years ago. $1 trillion in private funds was invested in developing countries in 2007.
Poor countries get '$1 trillion'
By Steve Schifferes
Economics reporter, BBC News
Billions of dollars are flowing to developing countries
The flow of private funds to developing countries has risen rapidly in the past 5 years, according to the World Bank.
Over $1 trillion in private funds was invested in developing countries in 2007, up from $174bn five years ago.
There has been a particularly striking increase in foreign investment in stock markets and bank and debt lending.
But the World Bank warns that in the wake of the credit crunch, these flows are beginning to slow, as interest rate spreads rise, reflecting greater risk.
The World Bank's report examines the amount of money flowing into all developing countries from world's leading financial centres.
See how financial flows have grown
That group of developing countries, of course, is extremely diverse.
Some relatively better off countries including Brazil and China, receive the bulk of private funds, while other very poor countries in sub Saharan Africa receive very little.
But even in the fastest growing developing counties such as China, the average person's income is only one-tenth of that in the rich countries.
Growth decoupling
The booming economies of Asia are getting the bulk of the funds
At the moment, funds are flowing into developing countries - especially the bigger emerging market countries such as China and India - because they are still growing fast despite the slowdown in the US and Europe.
"Strong growth in the developing world is certainly helping to offset the sharp slowdown in the US," said the World Bank's Uri Dadush.
"But at the same time, rising global inflationary pressures - especially high food and energy prices - are hurting large segments of the poor around the world."
Those rising inflationary pressures are leading central banks around the world, both in rich and poor countries, to either begin raising interest rates or warn that may have to in order to slow the rate of inflation.
And interest rate increases could, in turn, make the world economic slowdown deeper.
The World Bank predicts that global growth will slow from 3.7% in 2007 to 2.7% in 2008.
And it predicts that global capital flows to developing countries will fall back by $200bn in 2009.
Private flows
Private sector funds are far more important than foreign aid helping poor countries grow.
The credit crunch hit Wall Street hard as banks were forced to close
Official development assistance (ODA) totalled $103.7bn in 2007, down from $107.1bn in 2005, despite pledges at the G8 summit at Gleneagles that year to double aid budgets.
However, private investment is distributed far more unevenly among developing countries than government aid.
While government aid tends to flow to the poorest countries, private investment goes to those developing countries with the greatest short-term growth potential.
So sub-Saharan Africa loses out, except for those countries with substantial mineral or oil resources.
By contrast, fast-growing Asian countries such as Thailand and Indonesia, as well as Latin American giants including Brazil, receive a lion's share of the money.
The largest single recipient of private investment though is China, as it has been for the past twenty years since it opened its markets to foreign investment.
There is some evidence, however, that the pace of foreign investment in China is slowing down, as China builds up its own domestic manufacturers, and foreign multinationals look for cheaper labour in places like Vietnam.
Huge debts
The report also finds that foreign residents owe Western banks $3.2 trillion, up from $1 trillion in 2002.
Fuel price increases in booming economies like India are causing distress
This is about equal to the total amount of developing country foreign exchange reserves - but most of those reserves are held by just a few countries in East Asia.
The report warns that countries with heavy external financing needs (i.e. debt repayments) are potentially most vulnerable to a credit crunch, "particularly where private debt inflows into the banking sector have contributed to rapid expansion of domestic credit, stocking inflationary pressures".
Although they do not cite any countries by name, they are referring to some of the smaller Eastern European countries, Latin American countries such as Argentina, and a "selected few in the Caribbean and sub-Saharan Africa".
Need for regulation
The World Bank also highlights the risk for developing countries if their financial markets are not tightly regulated.
The food crisis is said to have pushed 100 million people into hunger
"The ripple effect of shocks from the US and European markets to certain developing country financial markets highlights the need for better and more coordinated financial regulation, liquidity provision, and macro economic management," it says.
However, the battered financial stock markets in India and China are probably in no mood for a lecture from the World Bank.
Their governments, however, would prefer to encourage direct investment by companies rather than the vagaries of hot money going into stock markets and currencies.
At present there is very little international regulation of these flows, and no agreement on whether countries should have the right to do so.
Rules to regulate foreign investment in developing countries were proposed as part of the Doha round of trade talks, (they were known as the Singapore issues) but rejected by developing countries during the Cancun trade summit in 2003).
However, the Organisation for Economic Co-operation and Development is attempting to get some of the major developing countries, such as China, India and Brazil, to sign up to its voluntary codes of conduct which govern investment rules among rich countries.
Even without such agreements, the urgent need for capital to rebuild infrastructure in the fast growing emerging market economies, and the lack of high returns available elsewhere, means that the private flows are likely to continue at high levels for some years to come
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