Private Investment vs. Foreign Aid

RAMAN, N. PATTABHI

FINANCING DEVELOPMENT Private Investment vs. Foreign Aid By N. Pattabhi Raman Though the need for foreign aid has hardly diminished, the program is in trouble. And this, plus faith in...

...True, many nations which have recently escaped from colonial exploitation are wary of uncontrolled foreign investments...
...companies during the three-year period ending June 30, 1963, were in Western Europe...
...Certainly the transfer of private equity capital cannot be expected to rise by 85 per cent in the foreseeable future...
...What is really needed, however, is improvement in the basic economic viability of the less developed countries...
...The servicing of foreign loans is difficult enough...
...According to the Development Assistance Committee of the Organization for Economic Cooperation and Development, its 13 members advanced $8.4 billion in "aid" in 1962 for such financing...
...if private enterprise is to finance development abroad, the savings have to be directed into its hands through changes in the tax structure...
...Canada (324) and Japan (294) were the only other countries to receive a relatively large number of investments...
...They should be encouraged to the extent that their positive contributions to the economy of a capital-receiving country outweigh or at least balance their costs...
...The survey also showed that licensing— which usually implies the absence of capital transfer—accounted for a larger percentage of the new activities initiated in the less developed countries than it did in Western Europe or Canada...
...And this, plus faith in private enterprise as a tool of economic progress, has led many influential people to suggest that the possibility of employing private equity capital to finance projects in the developing countries be carefully examined...
...This has an advantage over loans in that the repayment burden on the recipient is not fixed in amount, but is related to the productivity of the investment...
...foreign aid is financed from tax receipts...
...To put it another way, even if a developing country welcomes foreign investment without any reservation, it does not follow that foreign private capital will flow in automatically in amounts adequate to fulfill the host country's foreign exchange needs for development...
...It is more flexible both for this reason and because it is directed by private response to profit motivation...
...There can be no arguing against this recommendation, unless one is simply ideologically opposed to private enterprise...
...But what made these advances possible was the supply of critically needed foreign exchange and technical assistance in the form of public aid by friendly foreign countries (particularly the U.S...
...But the question is, how much reliance can be placed on private enterprise capital as a source of development financing...
...On the contrary, a report by the UN Secretary-General on the "International Flow of Long-Term Capital and Official Donations, 1960-62,' recently observed that "The contribution of private capital to the total flow of long-term funds to developing countries declined in relative importance.'" In addition, it should be noted that the bulk of foreign private investments are being made within the developed part of the world itself...
...What must also be kept in view is the fact that an increase in private equity investments commensurate with reduction in government-to-government assistance would require drastic changes in the financial policy of the capital-lending country—particularly in the case of the United States...
...Foreign private capital, unassisted by foreign public funds, can perhaps help in making the economies of the less developed countries viable, but that is a big "perhaps...
...One way to relate international capital flows more closely to growth in the capacity to service debt is to put them on an equity investment basis...
...But "hostility" or an attitude of circumspection on the part of the newly independent nations is only one element in the situation—and in countries like India or Nigeria it is no longer even that...
...They look for political and financial stability...
...relative freedom from government control and restrictions...
...At present, U.S...
...Secondly, only public aid can be expected to finance the import of a variety of goods that cannot be identified as strictly pertaining to a single development project (maintenance imports, for example...
...According to J. L. Robertson, "the greatest obstacle to more reliance on this form of capital flow is the hostility toward foreign private investment in many parts of the world.' This, however, is an oversimplification of a complex issue...
...It is extremely doubtful that private foreign capital would have been willing—or able— to finance these improvements...
...This is so because foreign investors look beyond a gilt-edged invitation into other factors which will affect the security and profit potential of their investments...
...Loans and grants from government sources and international lending institutions remain essential for the development of the poor countries...
...companies numbered only 232 in Asia (including 84 in India), 165 in Oceania (including 155 in Australia), and 95 in Africa...
...And perhaps the most important one, as indicated above, is that aid is frequently essential to create the very conditions which are necessary to attract foreign private capital...
...There are at least three reasons why foreign aid is better suited than private foreign investment to be the major instrument of development financing...
...and international agencies like the World Bank, the International Development Association and the UN Special Fund...
...substantial, expanding markets...
...and profit—in fact a larger margin of profit than they can obtain in their home countries...
...Finally, there is the problem of "cost...
...The credit for this must go to the relative development of the infra-structure of the country's economy, the expansion of steel and power production and transportation facilities, the establishment of manpower training schools, and the creation of many other facilities as part of the Five-Year Plans...
...N. Pattabhi Raman covers the U.S...
...And given such factors as inelasticity of demand for the major export commodities, declining prices for these commodities, and import restrictions set by the advanced countries, the expansion of exports is a very slow process indeed...
...Foreign financing benefits a country," Robertson maintains, "only if it leads to increases in output large enough not only to cover the cost of servicing and repaying the debt incurred, but also to pay for the cost of transferring labor, domestic capital and the use of natural resources to the new types of production...
...But the obligations that go with allowing foreign investments can be still more onerous for a poor country already saddled with foreign exchange difficulties, especially if such investments are very large...
...Yet while few would quarrel with Robertson's emphasis on productivity, the extent to which he would have development financing rely on private enterprise capital is unrealistic...
...Roughly half the amount came from the United States, and only about 15 per cent of the total figure was provided by private investments...
...The point is, however, that it is unrealistic to expect foreign private investments effectively to replace foreign public assistance...
...And such drains are apt to occur when a country's economy is in trouble and thus most in need of assistance...
...They also seek assurances that the host country's external finances and policies will allow the unfettered repatriation of their investments in the original currency and the free remittance abroad of their earnings Thus, as the Brookings Institution report on the U.S...
...This is not to suggest that the "decapitalizing" aspect of foreign investments should bar their encouragement...
...These trends in the flow of foreign private investments need to be kept in view while estimating the future flow of private equity capital into the less developed areas of the world...
...India's economic conditions today, for instance, are more amenable to successful business investment than they were some 15 years ago...
...A survey by the Chicago management firm of Booz, Allen and Hamilton, for example, shows that 1,739 (or 51 per cent) of the 3,418 new foreign activities undertaken by U.S...
...The lines in this debate were most sharply drawn by J. L. Robertson, a member of the Federal Reserve System's Board of Governors...
...Far from it...
...Better explanation of the advantages of foreign equity investment where necessary, and the improvement of policies and attitudes in the less developed countries toward foreign investment, can help this situation...
...It is not impossible for the financial drain of dividends and royalties to outweigh the value of the initial gains from new capital investment and knowhow...
...a climate of growth...
...Except for grants to finance advances in public and private management, the acquisition of new skills, and improvements in public health and education—all programs which have an uncertain and often delayed effect on productivity—Robertson declared that he preferred private equity investment over government-to-government loans and grants...
...Outside of Japan, new foreign activities undertaken by U.S...
...So long as the export earnings of the poor countries are insufficient to finance the imports required for full production and development, this impediment will continue to exist...
...balance of payments points out, "investments in developed countries will appear safe while those in underdeveloped countries will continue to be suspect...
...and the United Nations for the Express Newspapers of India...

Vol. 47 • March 1964 • No. 6


 
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