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S E L F -H E L P , TR A D ITIO N A L IN V ESTM EN T AND FO R E IG N ECONOMIC A ID * Virgil Salera,1 senior economist, American Enterprise Association, and professorial lecturer in economics, the American University I n t r o d u c t io n I f one cuts beneath the luxuriant underbrush of words and figures on the economic development of underdeveloped countries, he finds that the issues involved largely boil down to the age-old economic problem of making the best use of resources. Another related gen eralization that may help to put the issues in perspective is th is : Every economy th a t classifies itself as underdeveloped, and most of the world’s nation states so regard themselves, is making a poorer use of its resources on the average than it is capable of making in the light of usable, low-cost techniques of production and economic organization. The economic performance of such economies leaves something, often much, to be desired. In the typical case, such an economy actually is capable unaided of effecting substantial improvements in its eco nomic performance both over the short and long run. Resources made available from the outside are welcome, of course, either as supplements to a feasible local effort or as substitutes for it. This raises a key question: Under what conditions are outside re sources likely to supplement, rather than work as a substitute for, an appropriate local effort ? I contend that we stand the best chance of avoiding a (wasteful) substitutionary role only if our scarce resources are made available, save in genuine case of emergency, on the basis of the same market-type tests as those which have governed international long-term capital movements in the past. The above remarks are intended both as a summary of, and intro duction to, my position regarding the general problem of underde veloped areas and America’s economic relations with them. Field work abroad, including an advisory role with respect to the develop ment policy of foreign governments, and a study of the relevant liter ature persuade me that it is in such a general context th at we should view the question of foreign aid in relation to the growth and stability of the American economy. G e n e r a l iz a t io n s A bout R eso urce U se In the profusion of analyses of economic development, perhaps more so than in other areas of economic discourse during recent years, it has been common to find writers and speakers mixing oasic and side issues in all manner of combinations. Let me indicate some typical 1 Statem ents In this paper do not necessarily reflect the views of the Institutions w ith which the author la affiliated. 620 ECONOMIC GROWTH AND STABILITY 621 side issues. They would include suck matters as comparative national economic wellbeing and related discourses on the numerous variants of egalitarianism,2 the much-exaggerated problem of disguised unem ployment,3 the country distribution of the more valuable manufac tured exports in world trade, the largely irrelevant and unmeasurable secular terms of trade,4 and balance of payments considerations, includ ing that hardy perennial, the so-called dollar problem. These stead fastly must be viewed for what they really are—side issues and thus items which have little or no place in the basic discussion. W hat do the underdeveloped countries require in the way of re sources from us ? In attempting to answer this question we have been writing developmental prescriptions without having completed proper and thoroughgoing diagnoses. The W orld Bank, to be sure, has pointed up a number or important things. And some independent analysts have likewise done useful work of a limited sort. Still, Americans have failed to take a sufficiently hard look at the basic issue, which is whether the underdeveloped countries have been doing all they can reasonably be expected to do to help themselves both at the individual producer level and in the sphere of government-producer relationships. American analysts must know a great deal more than they now know about the main technical aspects of the economic performance of the underdeveloped countries. In particular, we need to know a lot, country by country, concerning the effectiveness with which the coun tries are using their own resources. To this end, I would like to point up some relevant considerations, which will be set forth as generaliza tions for the sake of brevity. Generalizations, in this as in other contexts, do not, of course, fit 'all cases. In framing the following inter related comments, I have sought to throw light on the way resources are used today in a typical underdeveloped nation and to indicate, at least by implication, that which has to be done to improve economic performance. Lest my position be misunderstood, let me add that I do not counsel perfectionism before action is taken in the financing of economic development. First, we must not lose sight of the fact that the great bulk of the people make a living in agriculture. Let us note that which is usually emphasized in this connection: I t is that per capita output is low, 2 Numerous difficulties, as yet not sufficiently appreciated by many writers, stem from international comparisons based on the concept of income as conventionally measured. For instance, the much-lamented widening of the inequality of (conventionally measured) income per head as between the underdeveloped countries and the developed ones disregards the benefits stemming from a reduction in the death rate. A reduction in this rate, of course, increases the ratio of productive to unproductive workers in the society, an obvi ously beneficial change. Comparisons of income per capita can be seriously m isleading in another respect. Im proved economic conditions may easily result in the death rate declining more rapidly in the underdeveloped countries where per capita income conventionally measured is less than the median or average for all nations. A discussion in such situations which centers only on the conventional measurement w ill be quite m isleading because it will emphasize the an alyst’s (sta tistica l) fabrication, namely, widening inequality, rather than the im portant change— the real economic improvement in the countries in question. Among recent works. Dr. 6 . Myrdal’s An International Economy is open to a great number of objections of th is kind. 3 The la test w riter to make exaggerated statem ents about th is (em otionally charged) issue is R. Nurkse, Reflections on India’s Development Plan. Quarterly Journal of Economics, May 1957. 4 For example, the United N ations Economic Commission for Latin America has pub lished all manner of untenable propositions under this heading which purport to show that the industrial countries owe a large but unspecified debt to the underdeveloped nations. For an exposure of some of the shoddy statistics th at have been used by the proponents of the view under discussion, see P. T. Ellsworth, The Terms of Trade Between Primary Producing and Industrial Countries, Inter-American Economic Affairs, summer 1956. 97735—57------41 622 ECONOMIC GROWTH AND STABILITY save in export sectors. Much more im portant, however, is the feature which usually gets little attention, perhaps because most of the writers know little about underdeveloped agriculture and particu larly the fact th at most rural areas have only recently emerged from subsistence production: such output is capable of substantial expan sion at relatively small cost in terms of scarce resources, especially foreign capital. Everywhere, moreover, agricultural employment can be markedly upgraded, and sometimes it may even be expanded quan titatively, with individual and national gain. The potential for im provement in agriculture is perhaps the most im portant single gen eralization that may be made about the problem of underdeveloped economies. The second generalization closely parallels the first. I t is th at in most underdeveloped areas typical rural producers labor under at least several serious handicaps, each removable: a deep distrust of local (county) officialdom owing to longstanding abuses of the peas ants—for example, the stealing of chickens and pigs; a neglect of long-range livestock improvement at the farm, community and na tional level, with the result th at output is small in relation to scarce feed inputs; a common neglect of the simple techniques of cereal pro duction, especially soil-crop correlations, seed selection, soil drain age, and fertilizer-output relations; poor or nonexistent facilities for procuring production credit; insufficient low-cost storage capac ity; the absence of trusted market news services, which handicaps small producers particularly in the marketing season; a host of landtenure difficulties, chief of which perhaps is the frequent absence of any incentive for the operator to effect improvements on another man’s land, so th at the economy suffers a significant loss of capital formation. Third, import requirements for food and fiber frequently are higher than necessary5 and indigenous capital formation in most sectors of the economy is much smaller than the underlying situation would make possible. Though something like a hen-and-egg sequence is involved, a good case can be made for placing prim ary responsi bility with the rural sector (itself a reflection basically of defective govemment-producer relations); that is, for the view th at rural capi tal formation lags behind its potential more than is the case in any other sector. The behavior of the rural economy thus leads to the loss of substantial capital to the economy as a whole; in consequence, otherwise attainable economywide cumulative growth goes unrea lized. In contrast, other basically agricultural economies which en joy better intergroup rural economic relations and operate within a close distance of optimum technical levels of production deploy their rural resources with much better effectiveness. Not unexpectedly, they show results that count in terms of impressive rural economic growth and an expanding national market for nascent industry which badly needs local outlets for output derived from plants of economic, rather than subeconomic, size. In this connection, let me emphasize that for the majority of underdeveloped countries the most effective route to industrialization is by way of a vastly strengthened agri culture. In contrast, the direct route, because of the want of econ* “ This results In a n et loss of resources to the underdeveloped areas in view of the fa c t th a t the Indicated im ports often originate outside such areas. ECONOMIC GROWTH AND STABILITY 623 omywide underpinning and the existence of inappropriate or imma ture institutions, is almost certain to be characterized by haste and waste, This route will generally involve haste and waste, let me add, no m atter how much sophisticated sloganizing is used; for example, in the form of the plea that the United States underwrite what is vaguely referred to as the underdeveloped countries takeoff to self sustained growth. There is a fourth important, but I believe overplayed, consideration. I t is that basic public-service facilities—such 'as roads, irrigation proj ects, vocational education facilities, and agricultural experiment stations—are insufficient and/or poorly distributed in relation to areas of comparatively high potential output. Outside resources should be able to make a sizable contribution in this sector of development, at least in the earlier stages of growth. I return to this m atter later on. Fifth, government-private sector relations usually leave very much to be desired from the critically important standpoint of realizing a maximum activation of latent human and material resources. I t is here that we find case after case of ideological considerations over powering both commonsense and relevant records of achievement among the western countries now classified as “developed.” 6 Bad or inadequate government-private sector relations seldom take the same shape in any two underdeveloped countries. B ut the following may be said to point up the issue: Many governments have seriously en croached upon the private sector, not uncommonly at the expense of neglecting investment and/or maintenance in the area of public-service facilities proper; 7 corruption often takes a high toll, in the economic sense of diverting funds (resources) having high investment potential to extra-legal consumption by the bureaucratic “elite” ; industry is overregulated, not infrequently to serve narrow political ends; govern ment-run enterprises often use labor in extremely wasteful ways, thus saddling the economy with such things as burdensome costs and dis couraging minimum essential capital maintenance or greatly reduc ing feasible capital formation in such enterprises; tax policy fre quently seeks to absorb such a high proportion of increments to income, especially business income, as to deter or prohibit private investment which (1) gives a higher yield per unit of capital than typical govern ment investment, and (2) is more flexibly attuned than governmentrun operations to changing market demands and problems of efficiency in resource use; 8 and the protection of property is often so deficient as to require innumerable instances of import-originating, small-scale private capital formation th a t is without social net advantage, merely to provide minimum physical protection of the sort that is achieved at low resource cost in developed countries through public action; moreover, because of the absence in many underdeveloped nations of 6 To Illustrate ju st one facet of this m atter, a recently deceased U nited Nations economist— a specialist on the Middle E ast and adviser to governments—has emphasized in a professional journal th a t because the Middle E ast countries have to use organized measures to conserve w ater resources individual farm ers should operate only as employees of the state. ’ Mr. Black, president of the World Bank, summarized this view a t the recent annual m eeting of the World Bank and M onetary F u n d : ‘‘I deplore the decisions of governments which tend to reduce investm ent In their own legitim ate spheres of activity to branch out into fields where private enterprise, domestic or foreign, is willing to do the job.” 8 In a number of instances, however, the tax system is quite regressive. Looked a t In isolation, this is a factor favorable to capital form ation. Incidentally, our own tax system w as regressive during all of the stages of economic growth now included w ithin the vague concept of an underdeveloped economy. 624 ECONOMIC GROWTH AND STABILITY an environment favorable to private property and free enterprise, we find that a sizable amount of capital belonging to the citizens of such countries is invested abroad. Sixth, tariff and other forms of protection against imports often channel scarce resources either into fields which are inappropriate to the country’s basic endowment or prematurely into certain industries which could be developed at a later date either without protection or with small amounts thereof. The result is that the yield of scarce capital is reduced, generally with cumulative adverse consequences for local capital formation. F o r e ig n C a p it a l : I ts R ole a n d t h e P F orm in W h ic h I t S hould B e r o v id e d : Clearly, the contribution required of outside resources is small in re lation to the total job. Yet there is an important role to be played by foreign capital. This may be indicated under two headings. First, there are the capital-intensive areas of early-stage development in which foreign capital traditionally has made significant contributions. These are largely confined to the field of public service facilities. Most of the necessary capital has to originate locally, but some well-chosen projects will justify recourse to outside capital. Second, private for eign capital, which has long contributed significantly to the develop ment of many underdeveloped economies, awaits only an appropriate investment climate before it surges ahead increasingly with innumer able, highly catalytic direct investment activities (extractive and in dustrial) in every comer of the free world. In fact, there is no reason why existing private and public sources of direct-investment and bona fide loan capital in countries such as the United States cannot supply all the truly necessary outside re sources. This is not to say that the maintenance of recent levels of such foreign investment will necessarily suffice, impressive9 as such investment has been. We should expect a substantial increase in ex ports of American long-term capital to the underdeveloped countries when and if many of them effect marked improvements in the general areas outlined above. In this connection, too. “nothing succeeds like success.” Why should American policy seek to have outside resources originate exclusively10 with direct-investment and bona fide loan capital ? There are a number of reasons. No other system remotely approaches it in apportioning scarce resources consistently with established prin ciples of resource allocation. I t operates in terms of economic tests,11 not unworkable political ones. I t puts a premium on good economic performance in both the private and public sectors of underdeveloped • See, for example, American P rivate Enterprise, Foreign Econom ic Developm ent, and the Aid Programs, American Enterprise Association, pp. 1 -6 , a study prepared for the Special Committee To Study the Foreign Aid Program, U. S. Senate, 1 957; and Collado, E. G., and B ennett, J. F ., P rivate Investm ent and Economic Developm ent, Foreign Affairs, July 1957. 10 Largely because of its importance in the area o f technical education, w e probably should continue our bilateral technical assistan ce program a t about existin g levels while continually striving to upgrade the quality of the personnel representing the country abroad. , 11 C ontrast th is w ith, for example, the M. I. T. group’s noneconomic criterion of “absorptive capacity,” a w holly unworkable engineering concept. For a critique of th is concept, and the alleged “lim ited capacity” of the underdeveloped countries to absorb foreign capital even on a gift basis, see my “MITAID— Waste, International Bickering and Some Developm ent,” Inter-American Economic Affairs, autum n, 1957. ECONOMIC GROWTH AND STABILITY 625 countries as a precondition for winning the use of foreign resources. I t minimizes the role of diplomacy in deciding how American re sources are to be used abroad, an important consideration when it is remembered that diplomats usually prefer the easy way out th at is available to them when they have the power to make or recommend gifts. In favors those forces in the underdeveloped lands who genu inely believe in the efficacy and flexibility of a strong private enter prise approach to economic growth. Contrast this position with the views of people who favor very large grant-aid and grant-like “soft-’ loans for development, with emphasis on government-to-government relations and an indifference to social istic development policy in underdeveloped lands. Perhaps the best illustration of the opposing view is that of the Center for International Studies of M. I. T. In a report submitted to the Special Senate Com mittee To Study the Foreign Aid Program, the M. I. T. writers urged that very large grant and other aid be given a country without strings attached whenever it was found to be making what is vaguely referred to as an “additional national effort” toward economic development. The looseness of, and dangers inherent in, such an arrangement are well revealed by the M. I. T. procedures for determining whether an additional national effort is being made. Only two rules of thumb are prescribed. First, the Government must “launch measures to capture a good fraction of increases in income for the purposes of further investment” ; and second, the “country’s leaders [must] have worked out an overall development program.” 12 I t is a revealing commentary on this type of thinking to note that the United States could never have qualified as a country making an “additional national effort” according to these criteria. Significantly, the only nations that satisfy the M. I. T. tests in full are the Com munist countries, all of which, as their long-suffering consumers will attest, employ stern measures “to capture a good fraction of increases in income for the purpose of further investment” and ruthlessly pursue “overall development programs.” Clearly, there are right and wrong ways of assisting other countries in their economic development. The last thing we should do is to encourage them—by providing easy access to our Treasury—to accept some of the central features of the Communist ideology in the guise of “development imperatives.” Yet we should be doing pretty close to that if we liberally assisted nations which take the ideological position that they must exercise comprehensive control and direction of the economic life of their citizens. The upshot of this discussion is that foreign economic aid should not be regarded as a policy variable with respect to governmental actions having to do with the growth and stability of the American economy. Rather, such aid should be terminated as soon as feasible. We have better tools with which to work, even if foreign government officials long accustomed to receiving economic aid publicly deny this in the hope of keeping “costless” resources within their grasp. The United States has the capital and, more importantly, thoroughly tested institutions and mechanisms capable of being adapted to foreign re 12 The Objectives of United S tates Economic A ssistance Programs, com mittee print, 1957, pp. 57, 58. I have dealt critically w ith the MIT study in my “MITAID * * op. cit. 626 ECONOMIC GROWTH AND STABILITY quirements with which to assist the economic growth of friendly coun tries on mutually satisfactory bases. We should proudly put our case in such terms. In doing so, we should be ever mindful of the truly great fact th a t it is our type of system rather than the collectivist brand which, as the long record of human experience shows, yields both efficient growth and economic and political freedom.
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