Private Investment and Economic Development

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THIS year's debate on the amounts and kinds of public assistance which the United States should provide to foreign countries has been particularly intense. Much attention has been directed to the question of the proper rôle of our Government in stimulating long-run economic development abroad. Some have argued the need for an increase of several billion dollars in foreign economic aid; others contend that United States assistance should be tapering off.

This difference of opinion is at least partly due to disagreement about the capacity of private investment to promote economic development abroad. And it seems clear that the present debate has not taken fully into account new analysis and factual information becoming available on the amounts and results of private investment abroad. The purpose of this article is to review the new evidence and to discuss the relation between government actions and private investment in economic development abroad.

The impression is widely held that United States private investment abroad has been running below a billion dollars a year, with little of that amount being invested in the underdeveloped areas. Yet conservative estimates suggest that last year capital expenditures abroad by United States investors were actually on the order of $5 billion. Between 35 and 40 percent of this amount was invested in underdeveloped areas. These capital expenditures have been rapidly expanding and in 1956 were about two and a half times the amount of United States economic assistance abroad.

The impression that private investment abroad is relatively small stems in part from the practice of measuring foreign investment in terms of a net balance-of-payments figure. This tells simply the size of the net flow of private investment dollars out of the United States. In calculating this figure the amounts considered to be new flows of dollars from the United States have been reduced by the amounts returned to the United States from the proceeds of liquidating old investments. Whether or not this figure is valid for balance-of-payments purposes, it is not adequate as a measure of the contribution of private investment to economic development.^[i]