For the time being financing for rearmament has in a large measure taken the place of other forms of capital movement to Europe. But this provides only a partial and temporary solution to the problem with which in recent years this country has tried to cope through large-scale governmental loans and grants. These may have been the most appropriate ways of dealing with the acute transition and restocking problem immediately after the war. But nothing illustrates better the ineffectiveness of intergovernmental lending as a remedy for Europe’s long-term problems than the fact that shortage of capital today is still almost as serious an obstacle to the revival of private business in most parts of Europe as it was five or six years ago.
There can be little doubt that, were it not for the political uncertainties, ample opportunities would exist in Europe for profitable investment of American capital. Nor can it be questioned that it would be to the economic and political interest of both sides that this should occur. But it seems also certain that it will not, unless conditions change drastically. Some persons may regret this but conclude that there is nothing this country can or ought to do about it. If there are real opportunities, they will argue, let the European countries create conditions attractive to American capital. And if only economic issues were at stake, I should be inclined to agree.
But there is a reason, other than the returns to be expected, why it seems desirable that otherwise lucrative investments should take place; their success would go far to reduce those very dangers which now act to deter potential investors. There is, in addition to private interest, a genuine public interest in successful investments of this kind — a public interest that should in some measure offset the political risk the private investor undeniably runs.
At the moment there appears to exist some quite unwarranted confidence that this country has forsworn for good the mistakes of the recent past. I do not believe that the pernicious effects of the past practices of intergovernmental lending can be exaggerated. Indeed, I doubt whether it is yet fully appreciated how harmful they were; and I shall in a moment have more to say about them. Yet there seems to me a real danger that, if they are abandoned without deliberate provision for some alternative, before long alarm over the deterioration of economic conditions in Europe will stampede this country into the very mistakes it meant to abandon. If the recovery of the European economies is to continue at a rate that will prevent social upheaval, capital must continue to flow there at a political risk which the private investor cannot be expected to shoulder.
Political Decision vs. Economic Efficiency
This, however, is by no means an argument for the United States government to step in as the provider of such capital funds. The case against this seems overwhelming. The burden it imposes on the American taxpayer, severe as it is, is only a small part of the argument. It is now generally recognized that funds that are distributed on political grounds cannot be distributed with economic efficiency. Nothing is less possible for a government providing funds for other governments than to discriminate effectively on the grounds of economic efficiency. To all intents and purposes it is politically impossible to differentiate between countries according to whether they follow a wise or a foolish economic policy. So long as the distribution of funds rests on a political decision, they must be spread more or less evenly and indiscriminately, and they are as likely to further the continuation of harmful policies as the adoption of good ones.
In the past, the need to attract foreign capital automatically had the effect of keeping the economic policy of the borrowing country on relatively sound lines. This check disappears almost entirely when the lending is done between governments. There is little chance that funds which have to be distributed according to political considerations will go where they will be most effectively used.
Even this, however, is not the most decisive objection to this form of capital export. Its most harmful effect is that it invariably produces in the borrowing countries tendencies to develop in the very opposite direction of that which it is in the interest of the United States to further. There can be no doubt that, because of American financial assistance, governments of many countries now control economic activity to a much greater extent than would otherwise have been the case. Because of the form in which the United States has chosen to provide capital for these countries, their governments, in turn, have become the main dispensers of capital.
When a government thus becomes the main source of investible funds, it inevitably speeds up the process of government domination of business. It is an irony, of which the American public has hardly yet become aware, that in many countries to which American capital has gone, it has been used largely to extend state control at the expense of private enterprise. There is more than a germ of truth in the gibes that the United States has been financing the socialization of Europe. Socialist parties have successfully insisted that nationalized industries get the lion’s share of American funds!
This is more or less inevitable with the methods which have been employed. It could hardly be expected that capital thus expended would be invested mainly in sound business propositions. Yet, let me repeat, I don’t think anyone who has watched the recovery of the European economies can seriously doubt that plenty of opportunities for profitable investment exist. There is also no lack of able and trustworthy private borrowers. Nor can it be seriously questioned that the individual American financier would be a better judge than any governmental agency of the prospects of any individual enterprise. The great deterrent, which at the moment precludes any prospect of a rapid revival of private lending, is not lack of economic prospects but political risk.
“There is more than a germ of truth in the gibes that the United States has been financing the socialization of Europe.”I am speaking not so much about the risk of war as about the ever-present fear that earnings may be blocked, or that there may be discriminatory taxation or expropriation. If the American capitalist had to worry only about the ability, honesty, and opportunities of his prospective borrowers or partners, there would be no lack of outlets for the advantageous placing of funds in Europe. But he certainly cannot be expected to run the risk of political developments which he cannot foresee and against which he is helpless.
Guarantee for American Investments.
There seems to me here a strong case for a division of functions between American business and government. Let the American government, while withdrawing entirely from direct lending, at the same time assume, for a limited transition period, the role of guarantor of private loans to private foreign borrowers against political risks, and especially against the risk of the nontransferability of the proceeds of such investments. The economic risk of the particular investment — of the borrower’s paying interest, or dividends, and repaying the capital in his own country — would still remain entirely with the private investor. The United States government would merely guarantee that any money thus paid to his credit in the borrowing country would become available in free dollars.
Such a guarantee should of course be given only on loans and other investments made while the borrower’s country abided by the understanding on which the arrangement should be based. The appropriate foundation would be an agreement between the United States and the country concerned, in which the latter undertook to refrain from imposing any obstacles to the transfer of returns from such investments, from levying discriminatory taxation, and from acts of expropriation or confiscation affecting such investment.
The country concerned would, in addition, agree to assume full responsibility for any debts on which, through its failure to live up to its obligations, the guarantee of the United States government became effective. Standard terms for such treaties, to apply uniformly to all countries willing to enter into them, would probably best be laid down by Congress.
The country concerned would thus know that the United States guarantee against political risk for American investments within its territory would apply only to investments made while it abided by its obligations; and that the flow of capital would come to an abrupt stop as soon as a country, by violating the terms of the agreement, forced the United States government to discontinue the granting of further guarantees.
Available Alternatives
So far as I can see, there appears to be no case for extending such a guarantee beyond transactions between private American lenders and private European borrowers. I do not suggest, for example, that private loans to foreign governments or government-owned agencies should be included. Nor does there seem to be any reason, so far as loans are concerned, to include currencies other than US dollars. There are, of course, special problems where investments that are not straight loans are concerned. In these cases the only safeguard the investor can ask would seem to be that the country in which he invests should be bound to maintain a free market in its currency. This should, therefore, be one of the terms of the agreement on which the guarantee would be based.
Before the reader dismisses this suggestion as just another proposal for government interference, I should like to ask him seriously to consider the available alternatives. There is every possible difference between the effects of this kind of arrangement and of the political lending to which we have become accustomed. I believe I object as much as anybody to any direction by government agencies of economic activity. And I should certainly prefer a world where this kind of thing could be avoided altogether.
But, unfortunately, this country is vitally concerned in areas where it has no control over economic policies. The scheme proposed here is intended to bring about exactly what, in normal times, competition for American funds would gradually and slowly establish — conditions under which foreign investment by Americans is guided entirely by the productivity of such investment. But we cannot wait now for the operation of the slow process which in the end might create such a situation. The interval might be fatal.
No Less Alarmed
Thoughtful people in Europe have been no less alarmed about the corrupting effect of past American policies than American observers have been. But they are justly afraid to express their apprehensions, lest the stream of American capital dry up entirely. I have no doubt, however, that responsible Europeans would welcome a scheme under which future American investment were determined, not by political priorities, but by considerations of where the capital would bring the highest return. This means, practically, where it would make the largest contribution to the national product.
Under this plan workers should be no less interested than management in making their particular industries attractive for foreign investors. At the same time, the fact that foreign capital would be available only for paying propositions would go far to eliminate the demoralizing effects which the quasi-charitable dispensing of capital has had in the receiving countries. In the last resort, the borrower feels less dependent on the provider of funds when he knows that the investment is a sound business proposition and that he pays for the services he receives, than when the whole transaction has the character of a political subsidy.
There is no need to have illusions about the amounts of private capital such a guarantee would set into motion, to expect from it highly beneficial effects. One of its principal advantages would be that less capital would go much farther. That the amount available would be more widely and, at the same time, probably more unevenly spread would also be desirable. What most of the countries concerned need is neither ambitious schemes for large-scale developments, nor indiscriminate subsidies to all their industries. They need moderate amounts of capital for those particular firms that promise gradual and progressive expansion.
There is a problem in the fact that most of the really desirable investments would be rather small by American standards. For this reason I could scarcely conceive of anything more beneficial to the capital-importing countries than to be required, as part of the arrangement, to allow American financial institutions to operate unhindered within their territory. However, the misrepresentation that would surely ensue from such a requirement makes it probably undesirable to try to impose it.
What is the cost, or risk, which such a scheme would involve for the United States government and the American taxpayer? In purely financial terms it would, at the worst, be much less than that of any scheme of intergovernmental lending. Both the amounts involved and the likelihood of the default of the debtors would probably be much smaller. But this reduction in the possible financial losses would be only a small part of the actual saving. It is impossible to estimate the direct damage done by the methods employed in the past and the waste inevitably involved in them.
I will not contend that this scheme is free from all the defects inherent in government interference with economic affairs. But it is free from its worst feature. Government control usually means that the use of resources comes to be determined entirely by political considerations. But under the scheme here proposed, the political benefit would be largely a consequence of its economic soundness.
Instances occur from time to time when for noneconomic reasons the government must provide the means for some end which national policy requires. It is a mistake, however, to argue that wherever part of the cost of a necessary activity must be borne by the government, the activity itself had best be undertaken by the government. The contrary is often the case. The present seems to be an instance where much could be gained in efficiency by a clear division of functions between government and business. We do not have to choose between the government’s continuing as large-scale lender and the prospect of the recovery of private lending, in the course of time, as foreign governments gradually mend their ways sufficiently to attract private funds. Here is a development that would be economically sound. On political grounds, the government would like to see it take place. Therefore the political risk is one that it is not inappropriate for a government to assume.
There may be better arrangements than the one sketched here. But it seems certain that the problem is one which calls for immediate examination and on which a clear policy ought soon to be formulated.
This article first appeared in The Freeman (April 6, 1953).
