Defense In Depth
Why U.S. Security Depends on Alliances—Now More Than Ever
More rapid economic development for the less developed areas of the world is something which most of us in the United States want very much. We want it for humanitarian reasons and we want it because we believe it is in our national interest. There is, therefore, great public concern about our programs of assistance to developing areas, and in recent months there has been considerable discussion of the appropriate roles of public assistance and private international investment in contributing to economic development. These are important issues; but it is also important to keep them in perspective. What developing countries do for themselves is more important than what others do for them. In the majority of developing countries the adoption of a framework of law and regulations conducive to the full use by their citizens of productive resources that already exist would probably make a greater contribution toward their development than is now provided by all external assistance from both public and private sources.
It could be that in some countries nothing short of the shock of the cessation of all forms of external assistance will lead to a reconsideration of present policies inhibiting economic growth. Such a suspension of aid is not, of course, likely. Normally, measures to encourage the productive use of domestic resources serve also to attract private investment from abroad, and increasingly the national and international aid agencies are conditioning their programs of aid on the adoption by the receiving countries of constructive measures of self-help.
In fact, the policy discussions in the United States now focus on how our aid may best contribute to development when taking into account the effects of that aid on the developmental efforts of the countries concerned. The desirability of aid has not been at issue. Despite differing views on how large our aid appropriations should be, there does seem to be a consensus in the United States that it is wise for our Government to assist selectively the less developed areas of the world. There seems to be agreement also that among the objectives of such development are a broader distribution of rising economic benefits through planned measures for the improvement of "conditions of rural living and land use," "of housing and community facilities," "of public health" and of "the equity and effectiveness of existing tax schedules"-to use the words of the 1960 Act of Bogota adopted by the American states.
In my opinion, these measures are in most cases desirable and necessary. Yet, during the past year I have joined others in expressing a fear that their success was being jeopardized by two trends-both relating to the use by the developing nations of their own resources-which the United States aid program may unwittingly have been encouraging. Fortunately, the problem is increasingly recognized and some corrective steps have been taken. It is the purpose of this article to discuss the problem and the remedies.
The first of the disturbing trends of recent years has been the growth of an excessive preoccupation with the direct introduction of measures for social improvement and a consequent neglect of the bases for economic development on which such social improvements must fundamentally depend. The second trend has been the increasing introduction of governmental activity and control into fields of economic activity which could be more productively pursued by private initiative and which, when undertaken by governments, divert their limited administrative and financial resources from social development programs.
These tendencies have been commented upon not only by observers in the United States but also by responsible businessmen and political figures in the developing nations. Certainly one should expect some opposition in these countries to specific measures of reform, such as higher taxes affecting particular groups, but the concern expressed goes beyond this. In some countries private businessmen so far despair about the prospects for private initiative that at times the flight of capital has exceeded the inflow of public assistance from abroad. In these circumstances, it is not pleasant to be told by citizens of developing nations that our programs are contributing to the destruction of private enterprise and initiative in their economies.
Many changes in economic organization and past practices are required if these countries are to develop modern economies consistent with the best in their traditions and yet incorporating the flexibility and efficiency necessary to produce the rising standards of life demanded by their citizens. And reforms are needed to improve the social distribution of economic benefits. We must remember, however, that increases in a nation's output cannot be just legislated. They must be earned.
There are, of course, differences-both philosophical and practical-in the approaches to development followed by various countries. In some areas, however, so much attention is being paid to procedures for dividing the national output that there is a danger of not even maintaining the present size of the total output-and this in the face of the expanding requirements of rapidly growing populations.
Preoccupation with measures for social improvement schemes has been evident in many ways. A glance at the resolutions adopted at Bogota, at Punta del Este, and in the gatherings of the United Nations and its regional and specialized agencies, for example, shows that attention has been devoted primarily to detailed exhortations in the fields of social welfare and planning. At these and other international economic gatherings the prerequisites for optimum growth have occasionally been presented with force. Yet the typical speeches of the representatives both of foreign governments and, until recently, of the United States have stressed the need for more and more government activity. At the same time the neglect of the basic conditions conducive to private economic activity has been painfully apparent to businessmen, both local and foreign, who have attempted to operate in many of the less developed areas. Outright expropriation aside, unreasonable exclusions, controls and exactions have drastically limited the opportunities and incentives for private economic endeavor.
These tendencies have not been unrelated. They have all to some extent reflected a widespread intellectual belief that government should conduct an increasing part of a nation's economic activity. The origins of this belief are many. Some people have been influenced by the fact that in the past decade the Soviet economic growth rate, building on a relatively low base, has exceeded that of the United States. But they often fail to recognize the special nature of the Russian growth, dependent as it has been in large part upon the adaptation of existing technology to the tasks of economic reconstruction, and they have tended to ignore the higher rates of growth achieved in Japan and Germany.
The French record, though less impressive than that of Japan and Germany, has recently had its impact. Some economists in the less developed countries have been inordinately impressed by the alleged accomplishments of "indicative" planning as practiced in France; they have not questioned whether the primary impetus for French growth did not arise perhaps from the postwar opportunity to introduce a backlog of technical advancement into an economy with highly developed skills and institutions. And they have often shown little awareness of the special features-a tradition of centralization and of close contact between government and business technicians-which may have facilitated the planning procedures used in France. In suggesting the adoption of French methods these observers may not have taken sufficiently into account the tendency of "planning" in less developed areas to become direct governmental intervention in the working of the economy.
In many parts of the less developed world there has also been an unreasoned ideological association of private enterprise with conditions of political oligarchy and limited growth at times in the past. This view fails to recognize that, while private enterprise is not an automatic guarantee of political democracy and economic growth, it has been historically one of the most effective forces both for broadening the base of political power and for economic advance. In the century before the great depression of the 1930s (which had its source in the more developed areas in the world, not within the economic systems of the less developed nations), private enterprise did not reach every corner of the world and there were some performances by private firms-and by governments-that we would not condone today; but over vast areas private initiative broke down feudal social structures through a dispersion of economic power, and in many places economic advance occurred at rates which modern planners would envy.
It would also be wrong to conclude, as some have, that the economic slowdown, which has-at least temporarily-followed some efforts at currency stabilization in less developed nations, is proof of the need for increased governmental economic activity to spark development. If any generalization applies to these situations it is probably the reverse: that retrenchment has been relatively less in governmental outlays and disproportionately large in the volume of credit available for the expansionist, job-creating projects of private businessmen.
Despite the lack of persuasive theoretical underpinning, the intellectual climate favoring public enterprise in the less developed areas has resulted in a proliferation of state-owned businesses. In my own industry, that of petroleum, the resulting mismanagement and waste by some government agencies have been glaring, but the same tendencies have been exhibited in other fields, whether railroads in Argentina, truck factories in Indonesia, or fertilizer plants, steel mills or national airlines in a variety of countries. In some cases the predominant problem has been planning on a grandiose scale in the interests of national pride rather than economic reality; in other cases the problem has been political interference, overstaffing and operating inefficiency. But whatever the problem, state enterprises have generally attempted to mask their inefficiency by restrictions not only on the import of cheaper foreign products but also on the import of foreign capital into competitive enterprise within the country. And monopolistic practices have not been exercised solely at the border. Purely local firms as, for example, the private refiners in Brazil, have been prevented from expanding and competing. The general restraint upon the entire range of domestic private economic activity through discriminatory controls and taxes has probably been the most detrimental result of the general urge for increased governmental intervention.
Even those less developed nations now embarking on wide-scale programs of government enterprise normally produce the bulk of their economic output by private enterprises. It would seem clear that the road to economic advancement would be through building upon this existing base rather than adopting measures which stunt its performance. In many instances, then, the most helpful thing our Government could do to promote the economic future of a less developed nation would be to bring home to the leaders of that nation the need to preserve and build upon the private enterprise base which the nation already has. Yet in recent years there were times when the actions of our own Government seemed to display no conviction in the productive superiority of private enterprise.
The public speeches of our officials laid great stress on the right of every country to choose its own form of economic organization; but they did not couple such remarks with any recognition of the likely results of unwise choices upon economic growth. Our spokesmen concentrated on land reform, tax reform, planning and the alleged need for government action to push economies to an assumed "take-off." There was virtually no reference to measures to preserve the health of the productive private sector that already existed. There was no concerted effort to ensure that our aid loans and grants did not in practice serve to diminish the opportunities for private enterprise in the developing countries. There were, to be sure, commendable procedures to see to it that contracts for construction, supply and sometimes initial operation of aid projects were open to private bidders on an equitable basis, but there is a vast distinction between a contract for a "turnkey" job and a true equity interest in a continuing venture.
In recent years the international investor has been given somewhat more attention than the local private entrepreneur. The United States investment guaranty program has undoubtedly brought some newcomers into the foreign field and has resulted in the adoption of some beneficial projects which would not have been undertaken without this kind of insurance. At the same time the United States Government has adopted some oversimplified doctrines which have tended to discourage private investment in the developing areas. One of these doctrines is that strong preference should be given to joint ventures, and that normally aid should be considered for a project originated by a U.S. investor only if he takes in a local partner. Superficially this policy might seem designed to build up local enterprise, and this may have been the result in some instances; but the reverse has also been true. Private investment from abroad has a strong incentive effect in encouraging independent local firms to become suppliers and processers, further manufacturers, and sellers of the product of the foreign-financed venture. If limited local resources are forced into the ventures initiated by a foreign investor, there is less available for the truly independent and complementary local enterprise, and the nation's scarce foreign exchange resources may be depleted. The availability of a local partner may sometimes encourage an investment from abroad, but in other circumstances a prospective investor may wish to avoid the managerial problems, financing difficulties, disagreements on dividend and reinvestment policies, tax burdens and political favoritism that are sometimes involved in joint ventures. Each project needs to be judged on the basis of its own special circumstances. It is, therefore, unfortunate that the Government seems to have adopted such a hard and fast stand in support of joint enterprises. This policy has encouraged other governments to impose rigid requirements for local participation which have served to deter investment from abroad.
Also, the United States Government has probably acted to the long-run detriment of both private investment and economic development by its exaggerated acclaim for the settlements reached by several U.S. companies for properties in Brazil which had been seized or seemed likely to be acquired by governmental authorities. The managements of the companies concerned apparently felt that acceptance of the compensation offered was better than the practical alternatives facing them. But it should be remembered that these alternatives seemed to involve at best unreasonable governmental restraints which were likely to make profitable operation impossible; and the terms of compensation-which provide low valuation, partial down payment and decades for payment of the remainder-can only serve to excite the interest of nationalistic groups in other countries. Yet even with the limited compensation described, the Brazilian settlements will involve the use of foreign exchange by a country whose development is already hampered by a shortage of exchange and by unbelievable complexities of exchange control.
In recent months, however, there have been strong indications of a changing attitude within the United States Government. In Mexico City last October, on the occasion of the first annual review of the Alliance for Progress, the Secretary of the Treasury stated: "There is one area in which during the past year we have not only made no progress but where we have suffered a serious setback. Private investment, both domestic and foreign, has suffered damaging blows and has lost confidence. . . . The plain fact of the matter is that private enterprise has not always been made to feel that it is truly a part of the Alliance. And yet the private sector must become stronger and more vigorous every year if the Alliance is to flourish. Public funds simply do not exist anywhere on a scale adequate to finance the enormous needs of the Alliance." In March the Clay Committee stated its conviction that "it is the private sector, operating with the coöperation of a vital and democratic labor movement and enlightened management on the basis of essential government services and sensible policies, which will make the greatest contribution to rapid economic growth and overall development." In April, the President in his annual foreign-aid message to Congress stated that "the primary new initiative in this year's program relates to our increased efforts to encourage the investment of private capital in the underdeveloped countries. . . . I believe much more should be done . . . to urge more forcefully the importance of making full use of private resources and improving the climate for private investment, both domestic and foreign."
There are other signs of change as well. After a long period of opposition, government officials now appear to have an open mind on the desirability of the treaty proposed by our partners in the Organization for Economic Coöperation and Development which would state a few basic common-sense rules on the fair treatment of investment abroad. This is a treaty which would be forced on no one but which would be open for voluntary signature by any nation. It also appears that the Administration has come to recognize some of the advantages of the Hickenlooper Amendment which would deny United States aid to any nation expropriating United States property without proper compensation. At the same time aid officials have been working more actively to explore the possibilities of achieving development through more loans directly, or through development institutions, to private enterprises. So far, the actual disbursement of aid of this kind has been minor, but a hopeful new departure has been made, and there seems to be a new will to find ways of achieving close coöperation between public assistance and private enterprise.
When aid is given on a government-to-government basis, there are understandable administrative and political pressures for the large "showcase" project. On the other hand, when the assistance is provided to private projects, economic and political pressures help to assure that economically productive projects are chosen. Naturally only projects of a certain size can be directly assisted by an external public agency, but the use of local investment institutions which can channel funds to small private local firms has only begun to be explored. The managers of such institutions, unlike those of the large investment banks and underwriting houses of the developed nations, will have to be able to think small; they must dig deeply into the details of proposed projects, and they must continue their involvement in management once funds have been advanced. This is an area in which much is yet to be learned, but there is probably no other field in which foreign assistance can have a more catalytic effect.[i]
As further evidence of a new emphasis on the potential of private initiative in the developing lands, the President has suggested two legislative changes designed to encourage American private investment in these countries. He proposes an enlargement of the guaranty program and the granting of a credit against U.S. taxes equal to 25 to 30 percent of the amount of a taxpayer's new direct investment in the developing countries. When the full details become known, these proposals will merit careful consideration. We must, however, maintain a balanced program. We must not allow ourselves to be diverted from the importance of removing the obstacles which prevent private initiative in the developing areas from making its potential economic contribution. We must not, by overly generous subsidy, give the impression that private investment is a weak reed on which to rely.
Despite the difficult times through which investors have been living in many parts of the less developed world, the death notices on private investment are premature. Statistically this is easier to demonstrate for foreign than for local private investment, even though the latter is far greater in magnitude. It is true, for example, that in 1962 the flow of new U.S. private investment to the Latin American republics, as reflected in our balance-of-payments statistics, had halted and had in fact turned into disinvestment to the extent of an inflow of $24,000,000 to the United States. The impression given by this single statistic is misleading by itself, however, for two reasons. First, the flow of investment to countries other than Venezuela amounted to $158,000,000 net, but this was offset by a net disinvestment of $182,000,000 in Venezuela, where there is only limited scope at present for additional investments by the oil companies. Second, and more basically, it should be realized that the balance-of-payments outflow is of little use as a yardstick because it leaves out investments financed from the retained earnings of foreign subsidiaries and the funds available from depreciation and depletion of past investments. Excluding those financed by local borrowing, the total investment activities of U.S. businessmen in Latin America for the year 1961, when the balance-of-payments outflow was only $168,000,000, is estimated at approximately $1.03 billion-more than the total of U.S. economic aid to the area.
Serious damage may already have been done by the lack of understanding of the nature of the statistics on private foreign investment. A glaring statistical inconsistency was incorporated in the much publicized and often quoted goals adopted for the Alliance for Progress in 1961. At the Punta del Este Conference our Government promised capital assistance of $1 billion for the first year, and it has been generally anticipated that a similar amount would be provided in subsequent years of the decade. It was stated that this $1 billion would need to be supplemented annually by $300,000,000 in private U.S. investment. On the basis of these figures The New York Times editorialized recently that "the understanding reached. . . in Punta del Este. . . was that governmental loans and grants would play a far greater role" than private foreign investments in Latin American development. The fact is that the figure for government aid was on a gross basis, excluding repayments and other remittances. If the estimate for U.S. private investment had been figured on the same basis, the total would be, as mentioned above, more than $1 billion, despite the fact that such investment is only a fraction of what it could be under improved conditions. Yet the impression is now imbedded in many Latin American minds that private investment is just a small and delicate shoot and that real sustenance can come only from concentrating on a harvest of government largesse. My own experience in the oil industry has convinced me that private investment abroad is not such a fragile growth. A really determined government can render any soil barren, but I have seen private capital planted and patiently nursed into health in surroundings which were initially forbidding.[ii]
Despite all handicaps, total private investment in the less developed areas of the world is impressive. One estimate is that in 1961, when the balance- of-payments capital outflow from the United States to all less developed countries was $424,000,000, gross private U.S. investment activity was about $1.75 billion. European and Japanese businessmen probably provided at least as much again. Unfortunately, comparable statistics on private investment within the developing areas themselves are not available. From partial evidence I am convinced that in most countries the domestic private investment greatly exceeds that from abroad.
It is possible, moreover, to point to examples of impressive accomplishments by private enterprise in less developed settings. The story of Puerto Rico's growth in the decade of the 1950s, since the change from an earlier orientation to public enterprise, is now common knowledge. Fewer people know that in less than a decade private investors, primarily Peruvian nationals, have developed a fish-meal industry in Peru which now accounts for annual exports on the order of $100,000,000-the country's largest single source of foreign exchange. In Malaya, despite the problems of achieving independence and suppressing Communist insurrection, an economy with an overwhelmingly private orientation has achieved healthy growth without massive injections of aid. In the Philippines, in the 18 months since the new administration removed many of the restrictions which were inviting corruption and hampering growth, the economy has spurted ahead, and the prospects for further growth are good. In India the private sector over-fulfilled its plan targets long before the end of each of the first two five-year plans, despite increasing governmental restrictions. Even in Brazil, in the face of disruptive inflation and unsympathetic governmental policies, private enterprise has sparked significant economic progress, which in part has overcome the drain of some misdirected government enterprises. In short, there is evidence that the most powerful weapon which can be called into play in the world-wide campaign to raise the standard of living in the less developed nations is the productive capacity of private enterprise.
The tasks ahead are still staggering. Economic progress must be spread not only among nations but also among the regions within nations-not only to Paraguay but also to the northeast of Brazil. Stratified societies and rigid economies must be "unfrozen" and rendered flexible. In this task private enterprise can be both a prime agent of productive change and a beneficiary of more liberal opportunity. Competition among private firms with their many different approaches can be a mighty engine for change and development. A good climate for private investment cannot be created just by a stroke of a pen; a consistent pattern of fair treatment by government must be established over time, but success in removing traditional barriers to enterprise will lead to ever-increasing commitment of private resources for further development.
Even if far wider recognition of these truths can be obtained throughout the less developed areas, we cannot expect all unreasonable barriers to private initiative to be removed overnight. In our own country we can all point to governmental policies which are inimical to growth, and we know how slowly progress is made in amending them.
In the developing countries, particularly, more is needed than an educational effort; people must be persuaded by actions as well as words. Businessmen must work together on community projects. Already organizations such as Accion and the Community Action Institute in Venezuela are demonstrating the contribution that private enterprise can make to broad economic and social programs through projects aimed specifically at community needs for education, technical training and physical facilities. Business groups must also be ready to work together, as recently suggested by David Rockefeller, to assist and advise governments and aid agencies on their development programs. They must seek increasingly to enlist the coöperation of the free labor movement, for the support of democratic labor groups is essential for long-range improvement in the environment for private enterprise. A good beginning has been made in the generous contributions of business and labor groups to the initial programs of the American Institute of Free Labor Development.
Another promising undertaking, announced by Senator Jacob Javits, is the Atlantic Community Development Group for Latin America, an organization privately financed by grants from foundations and by United States, West European and Latin American businessmen. The purpose of this organization is to pull together private investment projects which pool the capital and talent of the three continents.
Here in the United States a fuller recognition of the importance of the environment for private enterprise does not mean that we should abandon other aspects of our foreign economic policy. Where public assistance would promote domestic decisions effecting development rather than serve as an excuse to avoid them, foreign aid should be used to accelerate the development process. Certainly there will continue to be many cases in which aid may properly be given to expand and improve education, health, roads and other basic public services.
At the same time our campaign for a broad international reduction in the restraints on trade should be pursued with determination. Reciprocal reductions should encompass both those trade barriers which in the less developed lands distort economic activity, raise the costs of production and lower the standards of life, and those barriers in the developed nations which particularly discriminate against the products of the developing nations. Many of the less developed countries could profitably barter away their expectations of future external assistance in exchange for elimination of the barriers-tariffs, quotas, "voluntary" restrictions, discriminatory excises, etc.-on their shipments of oil, sugar, lead, zinc, textiles, coffee and other products to the developed nations. Such a bargain would be beneficial to many less developed nations even if the aid foregone included that anticipated through the price support features of commodity stabilization schemes.
The efforts of our Government to arrange a judicious distribution of aid and to negotiate reductions in trade barriers must continue; they can contribute much to the economic development of the free world. But at the same time we should recognize that the potential for the most dramatic contribution lies in creating opportunities for the citizens in the developing nations to apply their own skill and resources productively without unjustifiable interference and restraint by governments. We can yet demonstrate the great force of private enterprise for creating conditions for human opportunity and dignity, and the evolution of stable and democratic institutions.
[i] Acting on this belief and in an attempt to contribute long-run strength to countries in which large investments are at stake, two affiliates of my company have established investment companies, the Creole Investment Company in Venezuela with an initial capital of $ 10,000,000, and Inversiones Esso de Colombia, S.A., with an initial capital of $5,000,000. In the respective countries these companies offer to provide not more than 49 percent of the equity finance required by promising new or expanding private ventures. No effort is made to run the show, but the projects are studied carefully and company representatives are placed on the boards of the companies to assist them and to assure that good management principles are followed. The results so far are most encouraging.
[ii] Last year, despite the unfavorable trends in many of the less developed nations, the Standard Oil Company (New Jersey) and its affiliates invested a gross amount of approximately $120,000,000 in Latin America alone and a total of about $250,000,000 in all less developed areas, primarily for facilities for producing, manufacturing, transporting and marketing of oil, chemicals and fertilizer products. Substantial additional amounts were spent in the search for oil. The company is well aware of many projects which would swell that total if simple steps were taken in various countries to remove outright prohibitions and impossible operating conditions for the foreign investor.