Private Enterprise in Developing Countries

70 Pages·1966·2.329 MB·English

by  W. M. Clarke, R Brown, G. Chandler and W. A. Davis (Auth.)

Private Enterprise
in Developing Countries
BY
W. M. CLARKE
Editor o/The Banker and formerly Financial and Industrial
Editor o/The Times in association with the Overseas Development
Institute, London
PERGAMON PRESS
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Copyright © 1966 Pergamon Press Ltd.
First edition 1966
Library of Congress Catalog Card No. 66-24528
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PREFACE
No study of aid for development can afford to overlook the
contribution of private investment in the less-developed countries.
In the course of its studies of British aid the ODI became aware
that at the beginning of this decade government aid was almost
matched in amount by the private flow of investment.
But in recent years this flow of investment has fallen off very
sharply, partly because of the restriction on the outflow of
capital by H.M. Government. The result has been an unfortunate
squeeze on the developing countries, and particularly on the
private sector which has all too often been the Cinderella of
development.
The ODI considers itself very fortunate to have secured
William Clarke to undertake a study of this whole problem of
development in the non-governmental area. As Financial and
Industrial Editor of The Times (and now Editor of The Banker)
he was well acquainted with the people most closely concerned
with British overseas investment, and several of the firms which
are subscribers to the ODI went to great trouble in giving him
detailed factual assistance. We are grateful to them, and hope
that this lucid account of a much neglected aspect of development
will appear suitable reward for their efforts.
For myself, as Director, the association with William Clarke
has been as happy as our homonymity has been confusing to
others.
WILLIAM CLARK
vii
CHAPTER 1
THE role of private enterprise in the under-developed world is
coming under a searching spotlight. The flow of new industrial
money to these poorer countries is falling rather than rising; cases
of nationalisation of foreign enterprises with inadequate com
pensation continue to crop up. Yet the need for the spark of
enterprise, for know-how, and for technological advancement
becomes yearly more urgent. The moment of economic "take-off"
and of self-sustaining growth cannot be brought nearer by the
provision of government aid funds alone. If the restraints on
overseas industrial investment now being deliberately applied in
the United States and the United Kingdom (two of the major
sources of private industrial capital since the war) are not to lead
to a major setback among the under-developed countries, a new
approach to the relationship between rich and poor, especially
between the foreign industrialist and the developing country,
needs working out. Deep heart-searching is required on both
sides. This implies taking a hard look not only at the conditions
provided in the developing countries, but also at the flexibility of
private industry as potential investors. It should also imply ex
ploring the possibility of bringing public aid and private invest
ment into partnership. That is the prime object of this study.
In the past couple of decades most of the talk and discussion
has centred around government aid in all its forms: in grants,
loans and famine help. American government aid alone has been
one of the most powerful (and generous) economic factors of the
post-war world. Yet the subsequent results have led to a gradual
1
2 PRIVATE ENTERPRISE IN DEVELOPING COUNTRIES
realisation of the real size of the task involved as well as to some
disturbing second thoughts. Perhaps economic development is
not quite so automatic after all. Perhaps the time-scale has been
wrong. Perhaps some countries may have difficulty in ever reach
ing the point of "take-off". Certainly it has become clear that the
time taken to bring the poorer nations to the point of self-sustain
ing growth may be far longer than was too readily assumed in the
early 1950's. Governments too have begun to moderate their
optimism, and the British Government's White Paper on Aid,
issued in the Autumn of 1963, has formed a major part of the
subsequent reappraisal. "Although the era of aid", it pointed
out, "viewed in the perspective of history, may be a transitory
one, it does not follow that it will be short, still less that its end
is in sight. We have but to recall the long, hard years over which
the development of the industrialised nations was spread, in order
to put aside any false optimism."
This realism has been largely induced by the astonishing rise in
the indebtedness of the developing countries in recent years, more
than trebling from $9000 million to $33,000 million between
1955 and 1964. In this period the rising tide of interest payments
due on earlier loans just about offset the increase in new aid, at a
time when aid was still not producing the earnings expected of it.
These repayments, as we shall see,* are four times what they were
in the 1950's. This depressing situation has already led to a re-
examination of world development aid by the World Bank and to
major decisions to provide a growing volume of financial help on
"soft" terms.
It is only a small step from this to the realisation that the role
of private enterprise in the drive for economic development may
also need reassessment. Government aid and private investment
should go hand in hand, certainly in the mixed economies of the
Western world. If roads, railways, public utilities, water supplies,
power stations and all the things that go to make up the so-called
infrastructure of a new economy are to be provided with outside
* Chapter 5.
PRIVATE ENTERPRISE IN DEVELOPING COUNTRIES 3
help, this can only come in the form of government-to-government
loans. Without these things private enterprise would be operating
with one hand tied behind its back. Yet it is rarely in the position,
or even willing, to provide them. Thus government and private
industry have different (though complementary) roles to play in
providing help. The danger at present is that just when govern
ment aid is meeting increasing criticism in so many of the aid-
giving countries (America, Germany, France and, to a much lesser
extent, Britain), direct private industrial investment, which
ideally provides the most dynamic element in economic develop
ment, may begin to decline. Whereas the flow of official aid from
the members of the Organisation for Economic Co-operation and
Development rose from $3270 million in 1956 to $6048 million in
1963, total private long-term investment dropped from $2578
million to $1872 million over the same period. There was a strong
recovery to $2700 million in 1964 but, in view of American and
British restrictions on private investment abroad and of the higher
level of interest rates (tending to keep capital at home), future
prospects are for another decline. As OECD have pointed out, the
total may be "considerably lower".*
The British figures alone show much the same trend. Britain's
direct investment in less-developed countries, according to the
Board of Trade, fell from £91 million in 1960 and 1961 to £52
million in 1963 and, apparently, even lower in 1964. Although
there was some drop in the flow of private industrial funds to
Latin America, the main and significant decline was to the sterling
countries of Africa. From £33 million in 1961, direct investment
in the under-developed parts of Africa had dropped to a mere
£3 million in 1963 and, if all reports are accurate, there may even
have been a repatriation of capital since then.
This is not an encouraging picture; nor is it hard to pick out the
main points of deterioration. The difficulty is rather in deciding how
to put things right and to plant the seeds of further improvement.
* Development and Assistance Efforts and Policies, 1965 Review, OECD
Paris.
4 PRIVATE ENTERPRISE IN DEVELOPING COUNTRIES
TABLE 1
FLOW OF HELP TO LESS-DEVELOPED COUNTRIES
1960-4 ($m.)
1960 1961 1962 1963 1964
A. Development Assistance
Committee members
(OECD)t
Official flow 4898 6076 6052 6064 5921
Private flow 2513 2658 2088 1949 2734
Total 7410 8734 8140 8013 8655
B. Non-DAC countries J 393 560 630 660
Multilateral
organisations (net) -605 -726 -538 + 252 + 233
Grand total 7198 8568 8232 8925 9700 (approx.)
Source: Development Assistance Efforts and Policies, 1965 Review,
OECD Paris.
t Austria, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
Holland, Norway, Portugal, U.S., U.K.
Î Largely Australia, Finland, New Zealand, South Africa, Sweden,
Switzerland and Sino-Soviet block.
If the conditions at the receiving end of so much of this
industrial development money are looked at closely, it becomes
clear that several developing countries are either running into
serious economic difficulties or behaving in a way that frightens
private capital or both. Ceylon has been near economic bank
ruptcy for some years, and has continued to nationalise certain
foreign assets. Indonesia is in much the same position, giving
priority to arms at the expense of living standards and apparently
doing everything to antagonise foreign investors. The relations
between the Ghana Government and foreign companies and
banks operating there have been strained for some time. After
years of welcoming foreign capital (particularly American) the
Philippines are also beginning to show their independence in
ways that are not designed to repel foreign money but at the same
time are unlikely to lead to a positive tidal inflow. Both the
PRIVATE ENTERPRISE IN DEVELOPING COUNTRIES 5
Congo tragedy and the political uncertainties in parts of East
Africa have prompted second thoughts among many potential
investors in these territories. The Communist take-over in Cuba
and more especially the threat of similar episodes in Central and
South America have acted as a brake on developments in that
part of the world. Burma has turned its face against Western
economic influence and even India, which welcomes it, still
manages to introduce budgets that single out foreign industrialists
for exceptionally stiff tax treatment. The catalogue of difficulties
at the receiving end seems endless. Yet in the face of all these
troubles, foreign private investment has managed to continue at a
significant rate. What is really worrying is the thought that
industrial investors themselves, as well as their governments, are
also not helping as much as they might.
There is still too ready an assumption that the developing
country must make most of the adjustments to receive private
capital; and that the structure of private enterprise that is suitable
to developed Western economies is good enough for the poorer
nations too. It is an attitude that was easy to adopt and to live
with during the long period of colonial rule. It is not so sensible
at a time when the developing world is finding a corporate
political voice and when the number of newly sovereign countries
is increasing. The United Nations Trade and Development
Conference in May 1964 was a turning point. It marked the sudden
emergence of a new voice in the world: that of 77 less-developed
countries willing to speak as one within the corridors of power.
The unity of the 77 has not, of course, persisted. Strains have
appeared on several occasions since—on the question of the
UNCTAD Secretariat location, over the OAU summit confer
ence, the second Bandung meeting and Rhodesia—but these
countries can no longer be ignored.
The first Western industries to meet this power face to face
were insurance and shipping: and for the first time it became
clear that what Western industrial minds regarded as normal
business practice was looked on in quite a different light in
6 PRIVATE ENTERPRISE IN DEVELOPING COUNTRIES
Accra, Montevideo, Delhi, Singapore and Manila. This is a new
phenomenon to be added to the dangers of expropriation and to
the continuing threat of national bankruptcy based on grandiose
political schemes. It calls for still further flexibility among
private foreign companies operating in these territories, at a time
when their own domestic governments may be busy hacking
away at their lifeline either by the imposition of exchange control
on capital exports or by the introduction of tax discrimination
against overseas investments. Britain and the United States have
belatedly come to the conclusion that there is a limit to the
amount of private foreign investment they can afford: and have
acted accordingly. In short, conditions were already somewhat
hostile to direct investment in the receiving countries; now the
hostility is spreading to the country of origin. New problems
have been added to the old.
The difficulties of encouraging private enterprise in the poorer
countries were already hazardous enough. The poorer the
country, the more hazardous the prospect. Whereas poverty
would invite a substantial flow of public-financed aid, it might
equally deter private investment. The elements most lacking in
some of the developing countries, apart from capital, are naturally
the skills of a modern industrial society: technical know-how,
managerial ability or simply business acumen. Yet, because of
the uncertainty and the current low return on capital, the private
entrepreneur who would be the main teacher and catalyst was
often deterred from making any investment. Thus the vicious
circle of poverty tends to perpetuate itself. It is another way of
saying that public aid and private investment are stimulated by
quite different conditions. They have different motives and differ
ent driving forces. At its crudest the distinction is simply this:
commercial operations in a poorer country are conducted by a
company with a prime responsibility to its shareholders to see
that its capital is used profitably, whereas government help is
provided for a variety of reasons ranging from the humanitarian
to the political. In short, rich nations provide government funds
PRIVATE ENTERPRISE IN DEVELOPING COUNTRIES 7
in order to help economic development in the developing countries
in a way that is consistent with their own interests. The objects
may vary from the provision of expanding export markets or the
strengthening of the poorer country against Communist influence.
Private investment, on the other hand, is largely concerned with
profitability, the contribution to local economic growth, sub
stantial as it may be, arising largely as a by-product. It can be
argued that any profit-making activity is synonymous with
economic development. This may be so where profits are earned
and not simply a reflection of a monopoly stranglehold. But the
distinction between government aid and private investment holds
good. One will be attracted by poverty : the other perhaps just as
easily repelled.
What has to be faced, therefore, is how these conflicting
motives can be reconciled with the new conditions in so many of
these developing territories: particularly with their newly-found
sovereignty. In so many of them a different attitude towards
private property and private enterprise is already growing up.
Let Sir Paul Chambers, the Chairman of Imperial Chemical
Industries,* explain the situation from his own experience:
In some of these . . . countries, and I emphasise that it is not in all of
them, there is inherent in the public statements made that the indus
trialised countries have a moral duty to assist them to develop and that
this assistance should take the form both of Government-to-Government
aid and the investment by private enterprise. There is, however, less
regard for the conditions in which private enterprise can flourish. The
leaders of more than one of these countries have said to me from time to
time "What is British industry doing to help develop our country?"
They often want the private enterprise concerned to give them freely all
the technical advice necessary to build up whole industries and to train
their own nationals. They sometimes also expect the nationals from the
countries giving aid to withdraw when there has been a sufficient training
of local technicians, and they imply that control by the country of
origin, whether it is Britain, the United States or any other country,
should disappear immediately there is a chance that the enterprises con
cerned can be controlled locally. Paying royalties for know-how and
fees for technical assistance and help is often resented. So far as capital
* In an address to the Bradford Textile Society, January 1965.
B