Saving, Foreign Aid, and Growth; W. R. Allen

SAVING, AND FOREIGN AID, GROWTH "THE WORLD LOOKS [for] an early solution," said a Pak istan representative to the International Monetary Fund and the World Bank, to the problem of "the slums of the world, which are otherwise called backward areas." Unfortunately, there are no buttons to push which will overnight-or over a decade-transform a poor nation into a wealthy one. If there were, no nation would long remain poor. However, it now and then appears that some Ameri cans (clearly too anxious to do good) and some foreign ers (possibly too anxious to consume wealth which they have not produced) look upon United States aid as a close substitute for such a magic button. Eugene R. Black, President of the World Bank, bluntly told his Board of Governors, "I have noticed a tendency at times for development to be regarded as something which is due, as of right, from the more advanced nations to those less well developed. Whatever the rights and ob ligations of different nations may be, development is not something which can be imported from abroad. It is Dr. Allen is Associate Professor of Economics, University of Cali fornia at Los Angeles.

206 SAVING, FOREIGN AID, AND GROWTH 207 something which can only be won internally by accep tance of responsibility, hard work, and sacrifice." There are difficulties in both defining and measuring "economic development." But presuluably the crux of economic development is a "substantial and persistent" rate of increase in per capita income, perhaps with the proviso that the increased output of the community be "reasonably" widely dispersed. The ever enlarging flow of goods and services which provides economic better ment is not manna from heaven, nor is it produced from an unlimited supply of resources. The overriding eco nomic fact of scarcity thus calls for productive efficiency. And efficiency, in turn, calls for the devoting of some resources to capital goods-factories, equipment, dams, harbors, roads, schools. Assistance from abroad may be intended to help in the accumulation of capital. Capital accumulation doubtlessly is a necessary condition of economic develop ment, but it is not a sufficient condition. And foreign aid is neither necessary nor sufficient for an appreciable degree of capital accumulation-a degree which, how ever, many will deem inadequate on various grounds.

The value of American aid to underdeveloped coun tries, while scarcely negligible, is basically limited, be cause (a) growth requires more than capital, and (b) "saving" must be done by the growing country itself. We shall not pursue far the matter of growth pre requisites other than capital. Suffice it to note that such prerequisites are "social" and "political" as well as nar rowly "economic."

208 WILLIAM R. ALLEN Are there enough literate and energetic workers? Are there enough experienced and imaginative entre preneurs? Is there a favorable ratio of working force to other means of production? Are there adequate incen tives for efficient work-and appropriate penalties for inefficiency? Is the government sufficiently "stable" to maintain economic, political, and civil order, to generate confidence in a future for which plans may be made, and perhaps to undertake certain key production projects not attractive enough commercially to engage private enter prises? Are the mores and philosophy of the community cordial to "growth" activities? Are the people sufficiently flexible and mobile, geographically and occupationally? Can population increase be kept under control? Having thus suggested that the world is a complicated place, the emphasis here is on the second reason why American aid cannot by itself ensure foreign econom.ic growth: the would-be growers must, in a real sense, do their own saving.

Sources of Savings If, for the moment, we ignore receipts of foreign gifts and investments, an economy can accumulate capital only if it saves. There are two basic internal sources of capital. (1) Some resources which are now producing for current consumption may shift into production of capital goods. (2) The total output of the econoD1Y may be increased, with the additional output (or sonae of it) being channeled into capital production. In either SAVING, FOREIGN AID, AND GROWTH 209 case, total output is greater than consumption; the ex cess requires an act of saving and constitutes investment. Capital accumulation, then, involves currently pro ducing more than is currently consumed. Current pro duction in excess of current consumption makes feasible the devoting of output to capital goods. If there is an excess of production over consumption, the gap involves saving. For saving is usually defined as income currently received (earned in current produc tion) and not currently consumed. But suppose that country Alpha consumes all of her own output. Could she not then build up her capital with gifts from abroad or with borrowing? Under the definition of saving given above, the answer is yes. But a modified definition will clarify matters.

Let us now define saving as the gap between consump tion and the whole of the community's available re sources, including those supplied by foreigners through gifts and loans as well as those stemming from domes tic production. Then American aid will not contribute to Alphian capital accumulation if Alpha fails to save and instead uses the foreign resources simply for more cur rent consumption. Robinson Crusoe Consider the case of Robinson Crusoe. He catches fish by hand, fishing eight hours per day, catching one fish per hour. He may decide that fishing with a net would be more efficient. Building the net is a process of invest210 WILLIAM R. ALLEN ment and results in capital accumulation. How shall the process be carried out? What is the source of the capital? There are alternatives. First, Crusoe may continue to catch eight fish per day, but he might eat only six and store two. After gathering enough fish to feed himself for the necessary time, he could then stop fishing long enough to construct the net.

There is a more likely variation of this first possibility. Instead of doing nothing but catch fish for a while and then nothing but build the net, Crusoe might cut his fishing to six hours and devote the remaining two hours to working on the net. In either variation, the impor tant point is that current consumption (of fish) is re duced so that resources can be directed to accumulating capital (in the form of a net) . The second basic alternative involves a greater total output. For Crusoe, this means reducing leisure, working perhaps ten hours per day. He could then continue to catch and consume eight fish per day while devoting two hours to making the net. Total current consumption (of fish, but not of leisure) remains unchanged. Both of these basic alternatives have one crucial point in common: consumption must be less than total output. Whether we accumulate capital through holding total output constant and cutting consumption, or whether we hold consumption constant and increase output, there must be a gap between the two. The creation of this gap involves saving; and saving frees resources for capi tal accumulation. Saving makes "productive" investment possible. Whether the resources are wisely used is anSAVING, FOREIGN AID, AND GROWTH 211 other matter. Crusoe might devote his investment not to producing a net but to constructing a totem pole. In either case, the first step is saving.

Enter, Friday Thus far we have assumed that Crusoe is isolated. If he is to acquire a net, he must construct it with his own resources. The resources may have been diverted from catching fish for a time or may have come from working longer hours. Now perhaps Mr. Friday appears. With two economic units in the picture, there is the possibility of starting "international" flows of trade, loans, and gifts between them. Under these circumstances, what is the relation between saving and capital accumulation? Does international trade, investment, or aid enable a country to develop economically without being subject to the discipline of saving? Crusoe and Friday might engage in balanced trade, i.e.) the money value of Crusoe's exports equals the money value of his imports. In money terms, Crusoe gives up as much as he gets. He is presumably better off in terms of "welfare" or "satisfaction" -why else would he have bothered to trade? But is balanced trade a source of capital accumulation?

With trade (and the presumed production specializa tion on which it is based), Crusoe-and Friday, too-will have available more commodities than if there had been no trade. Trade makes possible a more efficient use of resources, so a greater output can be obtained from given 212 WILLIAM R. ALLEN inputs. But whether there will be capital accumulation depends on whether Crusoe devotes some of this addi tional income to investment or whether it all goes into consumption. Actual capital goods need not be imported; consumer goods may be bought abroad, substituted for domestic goods, and thereby allow domestic resources to be shifted to investment projects. Again we arrive at the conclusion: saving means fore going consumption out of current production and in come, and saving releases resources for capital ac cumulation. Consider another situation. Instead of exporting valu able goods in order to obtain desired items from Friday, suppose that Crusoe gets a loan or a gift from Friday.

Here, one might suppose, is an easy, burdenless way to achieve economic growth. Instead of Crusoe having to suffer the pains of saving, he will accumulate capital through gifts and loans from abroad. If Crusoe wants to be pedantic, he can claim that it is possible in this case of foreign assistance to accumulate without saving. For saving is generally defined, as we have seen, as foregoing some consumption of current pro duction; and Crusoe is not, of course, producing the goods which he receives from Friday as a gift or a loan. Assuming that his own production remains constant, Crusoe can maintain his old level of consumption-thus no additional saving, according to the conventional defi nition-and still accumulate. But in a fundamental sense, Crusoe would be kidding himself. If he gets a loan or a gift from Friday, he now has at his disposal additional SAVING, FOREIGN AID, AND GROWTH 213 commodities. This, in itself, neither constitutes nor guar antees capital accumulation. The problem obviously is what Crusoe does with his acquired command over for eign resources. Does he import tractors or solid gold Cadillacs?

It may be objected that if Friday has granted the gift or loan in order to aid economic development by Crusoe, he could specify, as a condition of the aid, that Crusoe buy tractors. But can Friday really thereby direct Crusoe to save instead of consume? Not if Crusoe is already do ing some saving. Unless Crusoe has been consuming all of his output, he could now import tractors, according to the order of Friday, and simply increase consumption of his own output. Thus "foreign saving" (i.e.) using the foreign loan or aid for investment in tractors in stead of in consumption of Cadillacs) is offset by re duced domestic saving (i.e.) increased consumption of domestic output). Can the Poor Catch UP? Loans and gifts from abroad make possible capital accumulation without curtailing consumption. Also, they make possible additional consumption. It is essential that consumption not rise by the amount of the foreign aid. The moral is clear: although assistance from abroad can help a country grow economically, such assistance does not excuse that country from the onerous chore of saving. Outside aid can supplement domestic saving but cannot supplant it.

In general, the underdeveloped countries save rela214 WILLIAM R. ALLEN tively small percentages of relatively small incomes-and, it should be added, they usually have, or threaten to have, relatively high rates of population growth, thus preventing the rate of per capita accumulation from rising much, if any, above zero. (With per capita income some ten times that of two-thirds of the world's people and a net saving rate of around 10 per cent of national income, the average American saves each year an amount equal to the annual income of most of the inhabitants of the world!) It should be appreciated by Americans, who, are fabu lously wealthy compared to most of the world's resi dents, that saving generally is more irksome for the rest of the globe. This is the case for two reasons: (a) when income is desperately. low, consumption cannot easily be cut, and if income is raised a bit, the temptation is tremendous to consume, rather than save, the increase; (b) the fact of income and consumption disparities in the world, while possibly inspiring the poor to save in order to "catch up," seems more likely to lead the poor to emulate the wealthy as much as possible in their consumption.

The people who need most to save, if they are to develop economically, are those for whom saving is most difficult. A few concluding words are in order. Over the past twenty-odd years, America has given economic assistance to the rest of the world in a manner and on a scale unique in history. The aid was vital in repulsing the legions of the Axis in the early 1940's; it may have been SAVING, FOREIGN AID, AND GROWTH 215 instrumental in keeping the Russian flag from the Brit ish Channel and the Mediterranean in the late 1940's. The aid has continued, not to help win a war or to clear the rubble after a war, but in large measure to al leviate the misery, the hopelessness-yes, the cancer-of appalling poverty which afflicts most of the world's peo ple. We need not be reluctant to say forthrightly (even if some are) that the basic objective and the ultimate test of American aid, or of any public use of our re sources, is American survival and general well-being.

But in a world in which progressing and prospering friends can be an asset, this objective and test has seemed to many to be consistent with our motivations of com passion and generosity. The main resources and the main effort for growth must come from the growing nations themselves. Ameri can aid can usefully complement, but can never replace, their own means and endeavors. Indeed, gifts and loans are not the major contribution we can make to eco nomic growth abroad. More important is that we main tain a fully and efficiently employed and expanding economy of our own and that we maintain free access to this economy by the rest of the world. In neither good sense nor in good conscience can we expend our resources on foreign aid while at the same time leaving clogged the channels of foreign trade and investment. Finally, we must appreciate that the world is a com plicated place. In important respects, it is far more com plicated and discouraging for today's economically un derdeveloped countries than it was for the underdevel216 WILLIAM R. ALLEN oped nations, including the U. S., of 150 or 200 years ago.

In America, the cultural background; the supply of acquired skills of workers and of experienced investors and managers; the legal, religious, and economic insti tutions; the climate; the endowment of natural re sources; the ratio of population to other resources-all were favorable to growth and, by and large, remain fav orable to continued growth. Not all areas of the world are so blessed. And even if they were, the living standard of this part of the world is now far higher than that of most regions-and it is very likely that the size of the gap will grow much larger during the next several decades. Without hope, nothing will be accomplished. And there is a basis for hope, for something can be accom plished. It may be a condition of our survival that much be done. But wishing will not make it so-nor will fer vent expressions of exaggerated expectations or spurious statements of grandiose goals.