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The manager of the world's biggest bond fund says investors will favour developing economies until developed nations fix fundamental economic problems.

Bill Gross, of Pacific Investment Management Co. in Newport Beach, Calif., says developed countries must start making goods again that the world wants.

"Unless developed economies learn to compete the old-fashioned way - by making more goods and making them better - the smart money will continue to move offshore to Asia, Brazil and their developing economy counterparts, both in asset and in currency space," he writes in his monthly investment outlook.

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The problem is made more acute by the current economic malaise in which the global economy is suffering from a lack of overall demand. Unemployment in the U.S., for example, is stuck at 9.6 per cent, which is the highest level in more than a quarter century.

"With insufficient demand, nations compete furiously for their share of the diminishing growth pie," Mr. Gross says.

"The United States and its developed economy counterparts face an unfamiliar crisis of unrecognized dimensions and potentially endless proportions. Politicians and respective electorates focus on taxes or health care when the ultimate demon is a lack of global demand and the international competitiveness to thrive. The solution for more jobs is seen as a simple quick step of extending the Bush tax cuts or incenting small businesses to hire additional workers, or in the case of Euroland, shoring up government balance sheets with emergency funding. It is not."

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