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” — meaning private equity firms and their sisters, hedge funds — are fast-growing players in the world of development economics.

Direct investment is hard to quantify. Still, the United Nations made a stab, and the numbers are impressive. It found that private equity firms invested $13.5 billion in the developing world in 2005 via mergers and acquisitions alone, about 10% of total cross-border private equity M&A activity. By way of comparison, the World Bank disbursed a total of $22.3 billion in loans in 2005.The private equity investors tend to steer their cash toward existing enterprises that have been underperforming due to poor management or undercapitalization. This marks a departure from the more common perception that foreign direct investment means building brand new factories.

The U.N. report raises questions about alleged “short-termism” on the part of the new breed of investors and suggests that further study is needed to assess differences in the “strategic motivations” of such firms compared to the transnational corporations that traditionally have been responsible for the bulk of foreign investment.

The United Nations is engaged in typical technocratic caterwauling. “UNCTAD is about as credible a spokesperson about FDI as Paris Hilton would be about chastity,” is how William Easterly, author of “The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good,” puts it to me.

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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 — 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 — 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. At least, that’s one theory proffered by Michael Strong, who runs a nonprofit, FLOW, that encourages entrepreneurial approaches to economic development. “Quicksilver capital will not only reward quickly, it will punish quickly as well: Nations that impose harmful economic policies, or that reduce economic freedom, will find capital flowing outwards more quickly as well,”Mr. Strong says.”Hedge funds and private equity funds will move capital around far more quickly. Many in economic development, and many more on the left, hate market volatility.”

In other words, private equity and hedge fund investments in the developing world, by their very mercurial nature, might finally introduce the regime of accountability technocrats have talked about for years but have never been able to impose.”While one could blame the wicked investors for removing their capital from a poor struggling country,” Mr. Strong says, “I think it is high time we focus the blame on those leaders who are not committed to expanding economic freedom in their countries.It is increasingly clear that good policies lead to increased FDI which leads to higher per capita income.”

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Besides, “what’s the alternative?” as Mr. Stocker asks. Private investors have born the brunt of the blame for calamities like the Asian financial crisis of the late 1990s, but that explosion resulted from bad policy, not from investor evilness.A lot of volatility is driven by the public policy environment, both Messrs. Stocker and Strong note. Instead of targeting private investors, Mr. Stocker suggests, the United Nations would be better off focusing on poor government policy choices.

Otherwise, not only will the development technocrats have failed in spurring development themselves, they will risk cutting off one of the more promising private avenues for encouraging economic growth in poorer parts of the world. “There is nothing wrong with hedge funds and private equity funds being available to developing countries,” Mr. Easterly says. “These countries need more investment and more choice in different financial instruments for investment, not less.” The discipline introduced by the profit motive won’t hurt, either.