NOTES

INTRODUCTION

1. See on this the extremely interesting joint treatise by FRAN90IS PERROUX published at the Institut de Science Economique Applique in Paris, i.e. under the aegis of the scientist who coined and developed the term "economie dominante". See Plans Monetaires Internationaux, Vols. 4 and 5, Paris 1952.

2. At that time, i.e. in 1952, JACOB VINER stated in the introduction to his book International Economics: "The world has changed greatly, and is now a world of planned economics, of state trading ... The classical theory is not directly relevant for such a world, and it may be that for such a world there is and can be no relevant general theory." (Glencoe, Illinois, p. 16).

3. RAGNAR NURKSE, Internationale Kapitalbewegungen (Vienna, 1935). 4. CARL IVERSEN, Aspects of the Theory of International Capital Movements (Copen­

hagen, London, 1936). 5. HERBERT FRANKEL states in this connection: "Thus some of the assumptions and

criteria on the basis of which (foreign) investment took place in the nineteenth and twentieth centuries are no longer valid; others are no longer accepted as valid and still others are completely misapprehended, in both the underdeveloped and advanced societies". See H. FRANKEL, Some Conceptual Aspects of International Economic Development of Underdeveloped Territories (= No. 14 of the Essays in International Finance of Princeton University, 1952) p. 16.

6. This is no contradiction to the thesis set out above that a "re-economisation" of international capital movements is under way. Even capital movements dictated by purely economic motives will have political effects.

7. The problems of political economy have been outlined by EDGAR SALIN in his essay "Politische Okonomie - heute", Kyklos, Vol. VIII, 4, 1955, pp. 369-387.

8. In its 10th Annual Report the World Bank stated: "Economic progress not for the first time in history, has proved to grow out of a state of mind: out of the knowledge of people that a better life is, in fact, attainable; and out of a determina­tion of the people to win it by their own work". International Bank for Reconstruc­tion and Development, Tenth Annual Report 1954-1955, p. 39.

9. The term "less developed countries" which requires further elucidation will not be dealt with until Chapter V, since it fits better into the general context there.

10. In the case of direct investments abroad (more fully discussed in Chapter III) capital exports and capital goods exports will in practice frequently be identical, so for instance when a participation is acquired by way of providing machinery. For this and other reasons confusion frequently arises between the terms "export of capital" and "export of capital goods". The question whether the transfer of purchasing power is necessarily followed by a transfer of goods is of great impor­tance to the discussion of the role of capital exports for balance of payments equilibrium. See Chapter IV.

11. See, inter alia, DONALD B. MARSH, World Trade and Investment (New York, 1951) p. 57 et seq.

12. It was in fact BERTIL OHLIN who, in elaborating on ELI HECKSCHER'S theory, finally threw overboard the Ricardian assumption of the international immobility of production factors which had until that time hardly been criticised. Thus he

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CAPIT AL EXPOR TS TO LESS DEVELOPED COUNTRIES

paved the way for the further elaboration of the theory of international trade. See particularly OHLIN'S main book Inter-regional and international trade (Cam­bridge-Mass., 1933).

CHAPTER I

1. See W. H. ARNDT, "Economic Development: Some Lessons of Australian Expe­rience," in Weltwirtschaftliches Archiv, Vol. 73, 1954, Part 1, p. 162 et seq.

2. It should be noted that the "end of colonialism" was not due solely to the upheaval of former colonial peoples. Some industrial countries themselves recognised that the colonial territories had come of age and drew the right conclusions. Perhaps the most striking example of this was Clement Attlee's Indian policy toward India.

3. The terms "Government" and "private" are used here with respect to the capital exporting country regardless of the fact, whether the capital importer is a Govern­ment or a private individual (or body).

4. In actual fact the real value of private capital exports from 1945 to 1955 was far less than in the twenties of this century. Since then, private capital exports have made a remarkable recovery, particularly as the economic strength of Europe increased.

5. After the liquidation of railway investments in the USA by British firms during World War I, this process continued during the thirties and during World War II. India, the Argentine, and other countries, particularly in South America, bought up British owned railways, partly with accumulated sterling balances.

6. Much will depend on how Government capital exports are made. Where budget funds are passed through specially created development banks or some similar institution. the chances of careful investigation of projects are greater than where they are invested by the Ministries themselves.

7. We should further note that these investments in less developed countries usually represent a larger percentage of total investments than they do in developed countries.

8. The American suppliers of capital, for example, clearly favour Canada, South America and the oil countries of the Middle East.

9. The most important of these is the Export-Import Bank in the USA. There are also: In Great Britain: The Colonial Development Corporation, and the Commonwealth Development Finance Company. In France: The "Fonds d'investissement pour Ie developpement economique et social des territoires d'outre-mer" and the "Caisse centrale de la France d'outre­mer". In the Federal Republic: The "Ausfuhr-Kredit-Anstalt" (AKA), and recently, primarily the "Kreditanstalt fiir Wiederaufbau", which was originally established to deal with internal financing problems.

10. We shall not discuss here the granting of credits by the International Monetary Fund to developing countries since the Fund grants only short and medium term credits - and is restricted to these by its statutes - which do not serve investment financing. Stabilisation programmes carried out with the help of the Fund's credits are, however, frequently the indispensable basis for the starting of develop­ment projects in those countries.

11. See also, in addition to chapters on the World Bank in almost all American text­books (ENKE and SALERA, KlNDLEBERGER, MARSH, etc.) the Bank's own publica­tions and annual reports, e.g. "The International Bank for Reconstruction and Development 1946-1953", Baltimore 1954; also, OTTO DONNER, Zeitschrift fiir

144

NOTES

die gesamte Staatswissenschaft, Vol. 112, Issue 1, 1956, p. 1-19, and ALEC CAIRN­CROSS, "The International Bank for Reconstruction and Development", Essays in International Finance, Princeton University, No. 33.

12. Each country contributes a quota (calculated on the basis of its national income, foreign trade etc. of which 2 % have to be paid in gold or dollars and a further 18 % in its own currency; the balance of 80 % represents the so-called liability capital, which can only be called on in the case of need.

13. In all these types of private participation there is a kind of distribution of activity between private capital and World Bank capital, in that the private capital suppliers take up the shorter term maturities (l-5t years) and the World Bank provides the definite long term funds.

14. The Bank had to leave more or less aside, however, such projects in which profits cannot be made (non self-liquidating projects). A group of United Nations experts proposed some time ago that a special institution should be set up to finance this part of the basic development and should primarily place at the disposal of less developed countries loans without repayment obligations. This institution was to be called "Special United Nations Fund for Economic Development" (SUNFED), which would be responsible for building schools, hospitals, workers' dwellings, government buildings, etc. Recently, however, events have taken a new tum. Whilst the SUNFED proposal has faded into the background, another new institution, which is associated with the World Bank, has come into being, i.e. the International Development Association (IDA), which we propose to discuss briefly in our final chapter.

15. Today, three years after the publication of the German text of this book, we must admit that the IFC has not become as important as the author assumed it might at the time. We cannot elaborate here on the reasons but can only say that this was at least partly due to the rigidity of the lending principles of the IFC and to a certain lack of flexibility in its general policies. New efforts are being made presently to overcome these handicaps.

16. In this connection the World Bank also performs a very important function as an international Information Centre as well as adviser to individual governments and central banks. Since mid-1955 the World Bank, on the basis of reports from the capital exporting countries, publishes the global medium term indebtedness of the various capital importing countries and provides creditor countries with confiden­tial information in this respect.

CHAPTER II

1. These figures include reinvestments of profits from subsidiary companies etc. Source: United Nations, The International Flow of Capital, 1956-1958 (New York, 1959) Tables 2 and 7.

2. In this connection it should be noted that during the period prior to the first World War direct investments were preferred in private capital exports of the USA, i.e. the same position as today. On the other hand, in Great Britain before World War I fixed interest securities investments quite definitely predominated.

3. In American statistics "direct investments" cover participating interests of investing firms or private individuals in which 25 % of the shares of the project are in the hands of the investor. This agrees with the German definition of "partici­pation". Naturally the percentage alone is in practice not a good guide since the

145

CAPIT AL EXPORTS TO LESS DEVE LOPED COUNTRIES

extent of control exercised is dependent upon the distribution of the shares. From the technical point of view direct investments can take a multitude of forms; apart from the "standard" form of cash transfer there is for instance the use of export earnings (this is frequently used illegally to counteract exchange controls,) contributions in kind, sales of patent rights and licences etc.

4. The following analysis is largely based on conditions in the United States where the advance of direct investments was particularly marked and thus easiest to examine. The conclusions - with the exception of point 8 - are, however, generally applicable. In recent years one could not speak any longer of a recession in security invest­ments. Direct investments are, however, today still the dominating type of investment.

5. The position has markedly improved since 1956 both in respect of international and nationaicapital markets, although the less developed countries have not profited much by this improvement. We shall come back to this development in our final chapter.

6. Of the grand total of USA direct investments during the period 1950-1957 ($ 14.500 million), 50 % were reinvested profits.

7. Recently the creation of the European Common Market has resulted in a sharp increase in American direct investments in this area. Here it is not a question of evading high customs tariffs but of the benefits of obtaining a footing in a preference area with no customs barriers inside.

8. It is even possible that a capital exporting country will one day import goods produced abroad by a home firm in exchange for currency because they are cheaper than the goods produced at home. Recently the considerable increase in American firm's production abroad has been regarded with mixed feelings in the USA since this tends to increase the deficit in the balance of payments. Thus in a report to Congress the remarkable disclosure was made that sales of goods produced abroad by American firms - a "lucrum cessans" for the American balance of payments - had increased between 1948 and 1958 from $ 12.000 million to $ 30.000 million whilst currency earning exports had over the same period only increased from $ 12.000 million to $ 16.300 million.

9. The PALEY Report - an investigation by American experts ofraw material supplies in the USA and the probable price trends of raw materials to 1975 - stated that, on the assumption that the U.S. economy would continue to expand, there would probably be an increasing shortage and a rise in the price particularly of metal raw materials. The experts reckoned that production in the USA would about double by 1975 and that raw material demand would increase by 50% to 60%. See WILLIAM S. PALEY, Resources for Freedom, A Report to the President by the President's Materials Policy Commission (1952).

10. As an example we might point out that even during the great depression period America still made direct investments abroad whilst no foreign loans could be placed on the American market during that period.

11. See H. W. SINGER, "The Distribution of Gains between Investing and Borrowing Countries" in: American Economic Review, Papers and Proceedings, May 1950.

12. The phrase "dual economy" was coined to describe this situation. It is designed to emphasise the lack of proportion in the production structure of those economies. (This question will be more fully dealt with in Chapter VII).

13. This does not apply to Latin American countries (except Venezuela). Here Ameri-

146

NOTES

can firms have primarily invested in manufactured goods industries. Naturally, the main interest of American direct investors in Europe and Canada is also centred on industrial production.

14. Exchange control legislation in capital importing countries frequently discriminates very clearly between "welcome" and "unwelcome" investments when admitting foreign investments.

15. The implications of such a policy have been recognised in a number of South American countries in which heavy medium term indebtedness has resulted in serious financial crises.

16. In this respect the World Bank is certainly the most suitable information and co­ordinating centre. It bases its information, as already explained, on reports from creditor countries and deals with data on export debts covered by Government insurance and guarantees and on debts on Government credits with a period of up to ten years. It has not therefore to date dealt with purely private debts or long term credits. The extension of these activities is, however, under consideration (see Chapter I, note 16).

CHAPTER III

1. See particularly the essay by ERICH PREISER "KapitaIexport und Vollbeschiiftigung" in Jahrbucher fUr Nationalokonomie und Statistik, Vol. 162, and lectures by HAL B. LARY, RANDALL HINSHAW, EVSEY D. DOMAR, WALTER S. SALANT and others, at meetings of the American Economic Association in 1946 and 1950, published in the Papers and Proceedings of the American Economic Review, May 1946 and May 1950. The main theme of these papers is: Foreign Investment and Domestic Employment.

2. See NORMAN S. BUCHANAN, International Investment and Domestic WeI/are (New York,1945).

3. See KONRAD ZWEIG: "Strukturwandlungen und Konjunkturschwankungen im englischen Aussenhandel der Vorkriegszcit", Weltwirtschaftliches Archiv, 1929, Vol. II.

4. In this connection the Federal Republic of Germany was formerly often called the "poor capital exporter". If we mean the period up to about 1956, this might be true, though somewhat exaggerated, since the position in the Federal Republic, unlike that in the less developed countries, was marked not by a true "shortage of capital" but by a shortage of finance funds in relation to the extremely high investment demand for reconstruction (see Introduction, B). See also particularly, HORST MENDERSHAUSEN, Two Postwar Recoveries of the German Economy (Amster­dam, 1955) p. 115.

5. This question is of particular importance to the problem of whether it is possible to achieve balance of payments equilibrium through capital exports - this is dealt with in Chapter IV.

6. It is this fact that has again brought to the fore the question of tied loans. In view of its high balance of payments deficits and the continuing gold loss, the United States in the autumn of 1959 has converted its Development Loan Fund procedure to the tied loan method. In December 1960 further steps have been taken in the same direction. It was stated then that there is now no necessity to finance European exports by United States credit. Indication was given, however, that the tied loans method would be discontinued once the US balance of payments would be back nearer to equilibrium.

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CAPITAL EXPORTS TO LESS DEVELOPED COUNTRIES

7. These structural changes are particularly apparent in the textile industry: Whilst in developed countries textile exports are decreasing in importance India has, for instance, become the largest exporter of textiles in the world. Naturally, it would not do to overemphasise the importance of this change as far as the foreign trade of developed countries is concerned; generally only a relatively small proportion of their exports - about a fourth or a fifth - will be to less developed countries.

8. Less developed countries of course also need capital for investment projects - particularly at the start of their development - which produce no direct profits, for instance road and water installations etc. Some of these financial problems have been assumed by the World Bank and will in future become primarily the concern of the International Development Association.

CHAPTER IV

1. See CHARLES P. KINDLEBERGER, International Economics (Homewood, Illinois, 1953) pp. 461 et seq.

2. In parenthesis we might note that this capital surplus can be calculated only from "ex ante values" (Le. from demand and supply movements in the capital market) and not from the "ex post values" of national accounting. The fact that, with a surplus in the current account of the balance of payments, there is necessarily a surplus of savings over investment in national accounting, should therefore not be misinterpreted. The causal interconnection between these two "surpluses" is not immediately apparent from the overall calculations.

3. Naturally the balance of payments will always be in equilibrium since the balance on both sides of the account must cancel out. However, in international terminology the balance on one side is referred to as the surplus or deficit of the balance of payments. Here we shall use the "classic" balance of payments conception which will mean that we measure surplus or deficit in the so-called current account.

4. When the German text of the treatise was published it could not be foreseen that this question would become the centre of a lively discussion of economic policy in the Federal Republic. The main exponent of the theory that capital ex­ports were not a suitable means of compensating the balance of payments was Prof. ALBERT HAHN, whereas the German Central Bank, The Deutsche Bundesbank, favoured capital exports as being one appropriate means - among others - of compensating a balance of payments surplus (see, inter alia, ALBERT HAHN, Zahlungsbilanz und Kapitalexport = (Lecture to the IFO, Institute for economic research, Munich, on 15th June 1959), and OTMAR EMMINGER: "Kapitalexport als Mittel zum Ausgleich der Zahlungsbilanz" in ZeitschriJt fur das Gesamte Kreditwesen, Issue 18 XII, 5th September 1959.

5. Great Britain can be considered a fairly typical example of Land A; but today it is also the USA that we have to count as an example of this type. Though to date the USA have been able to maintain permanent current account surpluses, their capital exports (including military and economic aid) exceeded them considerably from 1958, onward.

6. A "good creditor" policy can be interpreted in two ways. A country with perma­nent balance of payments surpluses is today usually considered a "creditor country". In this case one of the primary requirements for a good creditor policy is: more capital exports! This case has been dealt with in the previous section. Here, however, we are dealing with a creditor country - and with a good creditor

148

NOTES

policy - in the sense that this country has claims by reason of earlier genuine capital exports which the debtor country must repay. However, the requirements (b) and (c) which we shall now cite naturally apply also to a creditor country in the first mentioned category.

7. The need to import will naturally decrease with the extent to which capital ex­porters reinvest profits abroad (see pp. 28 and 32) with the result that a good credi­tor policy will probably be considerably easier to maintain where private direct investments form a considerable part of total capital exports.

8. The readiness to accept surplus goods from less developed countries (e.g. rice from Burma or cotton from Egypt) in large quantities at stable prices and on a long term basis is clearly one of the Soviet Union's trump cards in the recent economic race for the favour of these countries (see p. 17), particularly since the USA also have an urgent need to find markets for their own surplus products. However, the partners of the Soviets in these deals have often found them in actual practice less advantageous than anticipated and consequently refrained from entering into further arrangements.

CHAPTER V

1. EDGAR SALIN produced a very impressive critical assessment of this problem in his essay "Unterentwickelte Lander: Begriff und Wirklichkeit" in Kyklos, Issue No.3, 1959, p. 402 et seq.

2. We might mention among those, e.g. 1. NORMAN S. BUCHANAN and HOWARD S. ELLIS: Approaches to Economic Devel­opment, New York, 1955, and 2. W. ARTHUR LEWIS, The Theory of Economic Growth, London, 1955 3. P. T. BAUER and B. S. YOUNG: The Economics of Underdeveloped Countries, London, 1957.

3. On the basis of the various country reports by the World Bank we could take the upper limit of per capita income as being roughly $ 200 per year. Most of the less developed countries will, however, only show a per capita income figure of $ 100-150, and for the South-east Asian countries it may be only slightly above $ 50 (India's per capita income in 1954 was only $ 55).

4. Two works on the development problems of the "less developed countries": FRANKEL'S The Economic Impact on Underdeveloped Societies (Oxford, 1953) and NURKSE'S Problems of Capital Formation in Underdeveloped Countries (Oxford, 1953), expressly underline the point. Both authors consider it highly undesirable to establish dividing lines or emphasise existing differences where it is important that the sense of "inter-dependence" of former "motherlands" and "colonies" should be strengthened. That does not mean that under certain circumstances we have not to differentiate, e.g., in GATT negotiations to determine what countries should be listed under Article XVIII (special tariff protection for less developed countries).

5. See N. KasTNER: Some Comments on Prof Nurkse's Capital Accumulation in Underdeveloped Countries (Cairo, 1953).

6. Naturally other subdivisions are possible. For a very original suggestion see that in the EDGAR SALIN essay already mentioned in note 1.

7. We have deliberately used the term "population" and not "labour force" as is usual when referring to the factor proportions of a country. In countries with a large population in relation to land and capital there is usually only a small

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CAPITAL EXPORTS TO LESS DEVELOPED COUNTRIES

labour force, i.e. the ratio of effective labour force to total population is low -this is one of the main problems facing these countries (see below).

8. These will primarily include the recipient Colombo Plan countries, i.e. Ceylon, India, Pakistan, Malaya, Burma, Indonesia, Thailand, Laos, Cambodia, Viet Nam and the Philippines. The countries of south and south eastern Asia contain about one half of the total world population but production is only about 10 % of world production. The consumption of manufactured industrial products is about $ 7 per head per year as against $ 104 in developed countries.

9. Henceforth we shall use the phrase "underemployment" rather than "unemploy­ment" the term used in developed economies.

10. Apart from Great Britain, the Colombo Plan "money contributing" countries are Australia, Canada, New Zealand, and recently Japan. The USA also contributed considerable sums.

11. Taken on its own, the population rise in South America is larger than in any other area.

12. With United States foreign investments in South America there are of course also considerable political motives, i.e. the endeavour to immunise these countries against Communism or "Fidelism".

13. In addition to the standard works referred to at the beginning of this chapter (Note 4) we might mention a book by W. W. ROSTOW: The Process of Economic Growth (New York, 1952), an attempt to establish a general theory of devellopment. We should, however, particularly refer in this connection to the work of HERBERT FRANKEL, who emphasised the wide range of development problems and above all the role played by man, in contrast to the technical quantitative view expressed by many authors. Without this "counterpoise" there is in an analysis of economic development always the danger that theories will imperceptibly tend to become mechanical thinking of the planned economy type or a pure world of formulas of econometricians. See HERBERT FRANKEL: Some Aspects of International Economic Development (Princeton, 1952).

14. RAONAR NURKSE, ibid., p. 4. 15. Here and in the following chapters we shall always base our remarks on the assump­

tion that the provision of capital required for the proposed investments by means of bank credits in the absence of corresponding increases in saving or of simulta­neous capital imports would result in serious inflation. We shall, however, still have to prove this in our analysis of the investment process in Chapter VIII.

16. Conversely, the normal flow of foreign capital has a considerable initiative effect. Where foreign capital participates in a project it will inspire the confidence of native finance. It causes greater confidence that adequate returns will result. Thus capital imports may result in a dissolution of hoards of local capital owners and mobilise local investment capital.

17. This is the basic idea of the "theory of peripheric economy" which PAUL PREBISCH advanced as a dynamic development theory for South American countries. (PREBISCH, formerly Professor of Economic Theory at the University of Buenos Aires, is to-day Secretary General to the United Nations Economic and Social Ad-

,visory Board for Latin America (CEPAL». 18. See W. W. ROSTOW: "The take-off into self-sustained growth", Economic Journal,

March 1956, 25-48. 19. The countries with large oil deposits are an exception; most of them have been

provided with adequate capital from the outset. Thus to-day we find a relatively

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NOTES

adequate supply of capital in the Persian Gulf countries, side by side with extreme verty in the Mediterranean area.

20. There are of course special reasons for the large American investments in Canada, e.g. their close proximity and to some extent taxation benefits.

21. To obtain an approximate idea of the extent, we should mention that this demand has been estimated by the UN at $ 15.000-20.000 million yearly for all less devel­oped areas (on the assumption that the yearly rate of increase per head of national income in these countries should be 2 %). We consider this figure too high. But even should we set the demand considerably lower there will be an appreciable gap between demand and the sums actually reaching the developing countries. It would of course serve no purpose for the Western world to base capital export plans on such calculations and to find that the necessary funds were not in fact available. All that these calculations can and should do is to demonstrate to those responsible the extent of the problem in order that they may regard an increase in their assistance to the less developed countries as a permanent task, at least for the next few decades. On the other hand we should not deduce from the discrepancy between the "target" and "realisation" of development aid to date that the 2 % per capita increase rate aimed at has nowhere been attained. In many countries the per capita rate has even been temporarily higher though inflation has sometimes distorted the picture (e.g. South America).

22. To cite an example, we might mention that the development of Japan into an industrial nation which is generally considered to have been particularly speedy nevertheless covered a period of about sixty years.

23. To some extent the lack of sound development planning has prevented the effective use oflarge capital sums. Here the World Bank and - to a less degree - individual "consulting engineer" firms have in the meanwhile been able to help matters.

24. This has been well expressed by HERBERT FRANKEL as follows: "[This] process, like all growth, takes time. Each of the life-giving forces of structural development has its own time-scale which men can disregard only at their peril. Mechanistic devices which quicken the pace unduly in one direction will but destroy those deeper mutual harmonies of man in nature to which alone she will yield her blessings." HERBERT FRANKEL, ibid., p. 11. See also, the essay by GUSTAV RANIS: "Economic Development: A Suggested Approach" in Kyklos, year XII, 1959, vol. 3, p. 428 et seq.

25. The efforts of less developed countries to obtain technical advice from industrial countries naturally increased on the one hand as development plans became more complicated with technical progress, and on the other as the immigration of technically trained labour formerly associated with capital imports declined.

26. The supply of capital within the framework of foreign investment is today almost inevitably associated with the provision of the "know-how" and management. This inter-relationship has been most clearly demonstrated in an essay by HUNTER. See J. N. HUNTER : Long-Term Foreign Investment and Underdeveloped Countries, in the Journal of Political Economy. 1953.

CHAPTER VI

1. The great difficulty is that in genuinely less developed countries the administration's ability to solve the many development problems, is sometimes itself in "an early

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CAPIT AL EXPORTS TO LESS DEVELOPED COUNTRIES

stage of development". This also helps to explain the "vicious circle of poverty" already mentioned.

2. That the scope of Government intervention extends in many less developed coun­tries far beyond these legitimate actions is one of the serious bars to private capital exports.

3. There is of course no clear dividing line between the two categories. If, for instance, a large dam scheme is required for agriculture, as is the case in a great number of developing countries, this is also a basic development project.

4. English speaking authors use the term "social overhead capital" for this type of capital employment.

5; We should note that wages will rise in the course of development - in fact we might even say that it should be one of the objectives of development gradually to eliminate this initial advantage.

6. The influx of capital could on occasions release employed labour, at least during a transition period. Where this occurs it only rarely results in fresh unemployment. It is rather that existing hidden unemployment, which was disguised as lower working hours and duplication of appointments, is brought out into the open. Even where labour is released, capital imports will almost always create additional demand for technically trained experts, engineers, etc., who are difficult to find in less developed countries. Thus capital imports can initially prejudice the position in the labour market of overpopulated countries in two ways: foreign capital and foreign experts are complementary, foreign capital and local unskilled workers are up to a point interchangeable. Since this situation would soon result in increasing opposition to capital imports, it is particularly important that capital imports and the technical training of local labour should go hand in hand. There should also be training for suitable young people for later employment in key positions for, sooner or later, the capital importers will demand this from their foreign partners. This also is a type of basic development.

7. This temporary special protection has been granted to less developed countries under Art. xvm ofGATI.

8. It is also possible to lower costs without higher capital investment: (a) by improving the management; (b) by a better distributive organisation; (c) by eliminating as far as possible favouritism induced by monetary considera­tions which will always occur where there are shortages and rationing.

9. See Particularly RAONAR NURKSE: Problems 0/ capital/ormation in underdeveloped countries, pp. 6 and 21.

10. In a number ofless developed countries, particularly in Central America, the local market will of course remain relatively small even with progressive development and this would make the establishment of large industrial undertakings hardly a paying proposition (unless the country were to specialise in a definite export product, as, e.g. Switzerland). For these countries the association as a common market would probably be as clearly advantageous as it is for Western Europe. Only in this way can it be hoped to avoid using the small amount of capital -particularly foreign capital - to create overcapacities in the same sector in neigh­bouring countries.

11. See especially ALBERT O. HIRSCHMAN in The Strategy 0/ economic Development (New Haven, 1958). JACOB VINER also demonstrated, in his lecture to the First International Economic

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NOTES

Association Congress in 1956, a few of the disadvantages -largely as regards costs­of balanced growth and external economies. This criticism can, however, hardly be said to prove that it would be better for less developed countries not to follow these principles.

12. We should note that the exchange earnings of any investment must be considered on a net basis since, in the production of manufactured goods, the importation of the raw materials required for the production process will absorb part of the exchange receipts in advance. It is frequently forgotten in discussions that the so­called "raw material countries" may also have to import raw materials since few countries are self-sufficient in this respect.

13. We should again note that the repayment problem varies for loan financing and for direct investments (see p. 31).

14. That actual conditions are in line with this stipulation has been shown by a recent investigation by H. MEIER. This author established that of the 84 development countries subjected to investigation, no less than 61 had permanent import surpluses during the period 1950-57. See H. MEIER: "Welche Merkmale kenn­zeichnen die EntwickiungsHinder" Konjunkturpolitik, vol. 7, 1959.

CHAPTER VII

1. This point of view was voiced, inter alia, by WILHELM ROPKE in his already mentioned essay "Unentwickelte Lander".

2. We have to thank RAUL PREBISCH for a comprehensive and theoretically substan­tiated elucidation of this point of view; see The Economic Development oj Latin America and its Principal Problems (U.N., New York, 1950). On PREBISCH'S Theorie der peripheren WirtschaJt, see also the similarly titled essay by ROBERTO T. ALEMANN in WeltwirtschaJtliches Archiv vol. 74, 1955, Part 1, p. 7 et seq.

3. A United Nations study (Postwar price relations in trade between underdeveloped and industrialised countries, New York, 1949) produces statistical evidence that the ex­change ratio between raw material and foodstuff prices on the one hand and manufac­tured and semi-manufactured goods prices on the other has continued to deteriorate between the basic period (1876-1880) and 1948 for raw materials producers, in fact, by about 37 %. Similarly, SINGER attempts to show, in another UN publication (Rel­ative prices oj exports and imports oj underdeveloped countries, New York, 1949) that the terms oftrade of raw material countries have deteriorated since pre-war days. Both of these contentions conflict with the above mentioned theory (p. 90) of the "secular deterioration of the terms of trade of industrial countries". We might remark that price comparisons over long periods are, for various reasons, highly problematical and that thus also terms of trade calculations, which are based on an arbitrarily selected year, are of only very limited value. It is therefore difficult to decide which of the two views is the "correct" one, but it seems to the observer that there is more of a deterioration than an improvement in the terms of trade of raw material countries.

4. This argument is all the more important since all efforts to stabilise raw material prices by international trade agreements or other devices have so far not proved very successful (see p. 58).

5. See CHARLES P. KINDLEBERGER, idem, pp. 358 and 463, and CHARLES E. ROLLINS, "Mineral development and economic growth", in Social Research (New York, Autumn 1956).

153

CAPITAL EXPORTS TO LESS DEVELOPED COUNTRIES

6. We should, however, make the reservation that all countries are not equally suited to industrialisation. Denmark, to take one example, shows that this need not be regarded as a disadvantage.

7. Speedy development carries certain disdavantages such as the loss of cultural values, the creation of an unfettered industrial proletariat, etc. WILHELM ROPKE has very clearly demonstrated these disadvantages of development. W. ROPKE: "Unentwickelte Lander", Ordo, Jahrbuch fur die Ordnung von Wirtschaft und Gesellschaft, vol. 5, Dusseldorf, 1953. The London Economist, commenting on this subject, stated: "Every community, at every time, has to face the conflict between progress which can only be secured through disturbing change, and security for its existing patterns of life. It is not a conflict that can ever be solved by the doctrinaire assertion of either principle against the other; the right balance between them differs from time to time and from place to place."

8. Economic methods of Soviet Russia are considered an example by many less developed countries, particularly by its Asiatic neighbours, since in their opinion the Soviet Union only recently faced exactly the same problems.

9. Naturally, in the actual development there are no such distinctly marked phases. They tend to overlap and we shall usually find characteristics of one or other phase simultaneously in the same economy. Taking a broad view of the whole course of development, the outline might nevertheless be approximately correct. For a different type of development plan based partly on political considerations, we would refer to a treatise by W. W. ROSTOW: The Stages of Economic Growth Cambridge, Mass., 1960. All these schemes are based on the classic example of FRIEDRICH LIST'S Stufenlehre.

CHAPTER VIII

1. The problems of the investment process and the income effect of investments should chronologically come before those of the capacity effect of investments (i.e., the period following their completion) which we have already discussed. We chose this unusual sequence because it seems easier to explain the specific difficul­ties of the investment process in less developed countries after having discussed the general problems of development.

2. Experience shows that in a large number of less developed countries price rises have not occurred merely temporarily during the course of development, but there has been a chronic state of inflation. See interesting examples cited in the article: "Inflation and Economic Development" in the August 1959 issue of the Monthly Review, Federal Reserve Bank of New York.

3. See ERICH PREISER, "Geldschopfung oder Sparen", ibid., p. 253 et seq. 4. As has been stated repeatedly, investment programmes in less developed countries

ought to be financed - and are financed in reality - with foreign and local capital. It is only for the sake of simplicity of our analysis that we assume here "pure" foreign financing.

5. It is of course possible that exports will decline temporarily during the course of development. Theoretically we have to distinguish here again between a direct and an induced effect as we did with imports. The direct effect will be that raw materials so far exported are now used for new industrial production. The indirect effect will be that foodstuffs and simple consumer goods which were sold abroad

154

NOTES

will be absorbed by the home market owing to rising incomes. Since, however, import demand will be reduced to the extent to which additional demand is satisfied by home consumption of goods formerly exported, this decline in exports will probably not result in an increased strain on the balance of payments. It could thus be included in our theoretical analysis as one of the factors of the net increase in imports brought about by the development process.

6. Frequently it is particularly investments that have a very high "import content" which improve the balance of payments position considerably. Thus the short term and long term effects are apparently contradictory.

7. Should the Government of the less developed country absorb part of the new income by taxes this will, as far as our present model goes, have the same effect as voluntary saving, i.e. it will tend to decrease induced import demand.

S. The import content of investments in less developed countries will, according to experience to date, vary between 0.2 and 0.7. It is lowest with construction invest­ments (about 0.2); with agricultural investment it will be about 0.5 and with industrial investments it reaches the figure of 0.6 or 0.7. The average may be about 0.45. The import content of investments will decrease as the differentiation of the country's production structure increases.

9. This seems in fact the case in a number of countries. For example, the total imports of India and Pakistan in 1952-1954 were about 7 % and 9 % respectively of national income (it was not possible to calculate marginal rates for these countries). In the Argentine and Brazil the corresponding figures were about 7 % and 12%; the marginal rates (income increase: national income increase) were twice as high. In these cases investments could actually be more than three times as high as capital imports (Source: Monthly Bulletin of U.N. Statistics). We should, however, note that these empirical (ex post) figures represent import ratios and not genuine (ex ante) import propensities since imports are more or less strictly controlled by administrative measures in almost all of these countries.

10. "Project tied" capital imports (project loans) should not be confused with "tied" capital imports (tied loans) which we discussed earlier in this treatise (p. 46 et seq.). Project tied capital imports do not as a rwe carry the obligation that goods shall be imported from the capital supplier's country.

11. See KINDLEBERGER'S criticism, ibid., p. 337. ALEC CAIRNCROSS has convincingly replied to the critics in a treatise: The International Bank of Reconstruction and Development, published as No. 33 of "Essays in International Finance", Princeton University, Princeton, 1959.

12. Any existing trade surpluses have been disregarded for the sake of a simplification of the method. It is, however, important to note that in many less developed countries the strongest stimulus to expansion is due to this source and not to investments and that the rising import demand can to a considerable extent be met by using export returns.

13. See W. ARTHUR LEWIS ibid., p. 20S. See also JURGENSEN'S study: Die Funktionen des Kapitalimports fur Entwicklungsliinder (Berlin, 1959).

14. Reports on economic development in Latin America show that their social product rose on an average by only 1.5 % per head in 1954, with a gross investment ratio of 15 %. It has been calculated that, for South America, investments must represent about 20% of the social product to achieve a per capita development rate of 3%.

15. Where the demonstration effect operates in such a way that the consumers con-

155

CAPITAL EXPOR TS TO LESS DEVELOPED COUNTRIES

sciously save in order to contribute to the establishment of home industries - on the lines of "people's capitalism" - so that at a later date they will be able to "keep up with the Joneses" in purchasing manufactured goods, this could considerably encourage and speed up development.

16. The International Monetary Fund has, in fact, in recent years to an increasing extent used its funds for loans in connection with comprehensive stabilisation programmes (primarily in South America). The Monetary Fund's annual reports give the best information on the extent and details of this financial assistance.

17. SeeJ. J. POLAK, ibid., p. 486. 18. For simplification, the "import content" of investments has been disregarded.

(See p. 106). 19. If for the import content of investments we use P = ml . dI, the above equation (3)

would be: m +s

(3a) dI = + x K m ml X s

20. According to this example direct imports would be 2/5, induced 3/5 of the total import increase. It is, however, doubtful whether in actual practice the direct import demand will not absorb more than half of the available funds.

CONCLUSIONS

1. In an essay, "The Mind of Asia", M. R. MASANI stated: "The struggle cannot be successful unless the dynamism of Communism is countered by the dynamism of democracy, expressed in the spoken and written word, in economic aid and in the willingness to take risks". In Foreign Affairs, vol. 3, issue 4, July 1955, 565.

2. This does not, of course, mean that capital exports should be made merely to anticipate such a situation. For various reasons, we might, on the other hand, ask whether countries within the Soviet sphere of influence and particularly the Soviet Union itself should not themselves contribute to the development of the less developed countries.

3. Quoted from the Statist, 19th March 1955. 4. In this as in many other respects a clearer conception has been formed in the

Western world since this book was written (at the beginning of 1957). For further reference see our Epilogue.

5. In this connection see also the famous letter from BLACK to the Indian Government which very eloquently expressed the fear that the importance of private entrepreneur­ial activity was underestimated. (Reprinted in the Financial Times, on 12th October 1956). Here again we comment in our epilogue on the remarkable and welcome change in trend.

EPILOGUE

1. International Bank for Reconstruction and Development Report no. EC-83a "External Indebtedness and Servicing - Problems of Low-Income Countries 1956-58", pp. 1-5.

2. OEEC-Study "The Flow of Financial Resources to Countries in Course of Economic Development 1956-1959", p. 6.

156

BIBLIOGRAPHY

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161

INDEX OF NAMES

ADS, H. 122, 130 Al.EMANN, T. 153 ARNDT, W. 144 ATTLEE, c. 144

BAUER, P. 149 BLAcK, E. 4, 126, 132, 156 BUCHANAN, N. 40, 147, 149 BUTLER 5

CAIRNCROSS, A. 145, 155 CLARK, C. 90

DoMAR, E. 147 DoMER, O. 144

ELLIs, H.147 EMMINGER, 0.148 ENKE 144 ERHARD, L. 94, 126

FONTANE 128 FRANKEL, H. 85, 143, 149, 150, 151 FRANKS, O. 61, 130 F'RIEDMAN, I. X

GARNER, R. 24 GRANDVILLE, K. X

HAHN, A. 56, 148 HEcKSCHER, E. 143 HICKS,J.7 lIn.FERDING, R. 51 ~vv, R. 147 HIRsCHMAN, A. 152 HUMPHREY, G. 5 HUNTER, J. 151

IVERSEN, C. 2, 82, 143

JACOBSSON, P. 139 JURGENSEN 155

KEYNEs, J. 2, 12, 39, 83, 90, 97, 106 KINnLEBERGER, CU. 40, 53, 144, 148,

153, 155 K6sTNER, N. 62, 64,149

LARY, H.147 LENIN, V. 51

162

LEvns, W. 110, 149, 155 LIST, F. 154 LUXEMBURG, R. 51

MACHLUP, F. 116 MARSH,I>. 143, 144 MASANI, M. 156 MCCLOY, J. 21 MEIER, H. 153 MENDERSHAUSEN, H. 147 METZLER, L. 83 MYRDAL, G. 3

NURKSE,R.2,40,49, 68, 143, 147, 150, 152

OHLIN,B. 9,44, 83, 143, 144

PALEY, W. 31,90,91, 146 PERRoux, F. 143 PoLAK, J. 156 PREBISCH, R. 150, 153 PREISER, E. 7, 101, 147, 154

RADBRUCH, G. 83 RANIS, G. 151 RATZEL 79 REmEL,I>.X RICARDO, R. 44, 143 ROLLINS, CU. 153 Rt)pKE, W. 153 ROSTOVV, W. 150, 154

SALANT, W. 147 SALERA 144 SALIN, E. 143, 149 SAY, J. B. 80 SCHUMPETER, J. 68 SINGER, H. 32, 33,91,92, 146, 153 SPROUL, A. 15, 130 STERNBERG, F. 51

TOYNBEE, A. 4, 129

VINER, J. 143, 152

YOUNG, B. 149

ZVVEIG, K. 40, 147