Aid—Or Investment?

December 16, 1963

Some bewildering contradictions have developed in our foreign economic policy. The government wishes to continue to give away, for example, some $4 billion a year in taxpayers’ money to aid foreign countries. It insists that this aid is having only a negligible adverse effect on our balance of payments. At the same time it is opposed to American citizens investing their own money at their own risk in foreign countries. It contends that such investments are a serious threat to our balance of payments. So it has proposed an almost prohibitive tax on them.

The government’s theory is fallacious and the facts are against it. In the long run the outflow of American capital to foreign countries is more than balanced by the inflow of income earned by that capital. From 1958 through 1962, income from all private foreign investment amounted to $15.4 billion compared with an aggregate net outflow of new investment of $16.6 billion. In 1962 alone income amounted to $3.8 billion compared with a net outflow of $3.3 billion.

In a message to Congress last summer, President Kennedy called attention to this. “Our payments deficits,” he pointed out, “measured in terms of our loss of gold and the increase in our short-term liquid liabilities to foreigners, have consistently been equaled or exceeded by the growth of our long-term high-yielding foreign assets—assets which have been and will continue to be an increasing source of strength to our balance of payments.”

SHORTSIGHTED TAX

Isn’t it shortsighted, then, to stop the further growth of these assets? Isn’t it obvious that, regardless of any immediate result, the proposed tax must adversely affect our balance of payments in the long run?

It is clear from the very nature of the transaction that a large part of our exports are made possible by foreign investment. With the dollars they obtain from American purchases of their securities, foreigners buy our goods. Our exports must tend to be reduced by the same amount as we reduce our foreign investment.

But though the government objects to private foreign investment, for fear it will hurt our balance of payments, it insists upon continuing to give away some $4 billion a year in foreign aid. And it argues that this will not substantially hurt our balance of payments. A cut of $1 billion in our total foreign-aid program, government officials maintain, could save only $100 million in our balance of payments, but would cost us $900 million in exports.

It is hard to see just how the government could go about proving this statistically. But to the extent that it is true, why doesn’t the same logic apply to our foreign investments? Why are they a threat to our balance of payments while foreign aid is not? Why wouldn’t cutting off $1 billion in foreign investments also cost us $900 million in exports?

LOANS CREATE EXPORTS

The truth is that it would. In the long run, in fact, cutting off $1 billion in foreign investment must cost us, other things remaining unchanged, $1 billion in exports. The real difference is that the exports made possible by foreign investment are real exports. Foreigners pay for them. The exports resulting from foreign aid are sham exports. We pay for them. Sound foreign investments build American economic strength. Foreign giveaway sets back our own capital development and economic growth.

The truth is the exact opposite of what our foreign economic policy assumes. Foreign investment creates exports and so creates jobs for Americans. It creates assets, and in future years must benefit our balance of payments through payments of interest, dividends, and return of capital.

Private foreign investment, also, really develops the countries into which it is put. For them it is wealth-creating and income-creating. It is, in fact, by far the quickest and most efficient means to their economic progress. And if a government, as in Argentina, is shortsighted enough to think it can seize past foreign investments in its country without killing off future investments, or even losing our foreign aid, it ought to be promptly taught the opposite.