Eric Toussaint :
(From previous issue)
Insufficient savings and the need to resort to external funding. In neo-classical terms, savings should precede investment and are insufficient in the developing countries. This means that the shortage of savings is seen as a fundamental factor explaining why development is blocked. An influx of external funding is required. Paul Samuelson, in Economics |14|, took the history of US indebtedness in the 19th and 20th centuries as a basis for determining four different stages leading to prosperity: young borrowing nation in debt (from the War of Independence in 1776 to the Civil War of 1865); mature indebted nation (from 1873 to 1914); new lending nation (from the first to Second World Wars); mature lending nation (1960s). Samuelson and his emulators slapped the model of US economic development from the late 18th century until the Second World War onto one hundred or so countries which made up the Third World after 1945, as though it were possible for all those countries to quite simply imitate the experience of the United States.
As for the need to resort to foreign capital (in the form of loans and foreign investments), an associate of Walt W. Rostow’s, Paul Rosenstein-Rodan, found the following formula: “Foreign capital will be a pure addition to domestic capital formation, i.e. it will all be invested; the investment will be productive or ‘businesslike’ and result in increased production. The main function of foreign capital inflow is to increase the rate of domestic capital formation up to a level which could then be maintained without any further aid”. This statement contradicts the facts. It is not true that foreign capital enhance the formation of national capital and is all invested. A large part of foreign capital rapidly leaves the country where it was temporarily directed, as capital flight and repatriation of profits.
Paul Rosenstein-Rodan, who was the assistant director of the Economics Department of the World Bank between 1946 and 1952, made another monumental error in predicting the dates when various countries would reach self-sustained growth. He reckoned that Colombia would reach that stage by 1965, Yugoslavia by 1966, Argentina and Mexico between 1965 and 1975, India in the early 1970s, Pakistan three or four years after India, and the Philippines after 1975. What nonsense that has proved to be!
Note that this notion of self-sustained growth is commonly used by the World Bank. The definition given by Dragoslav Avramovic, then director of the Economics Department, in 1964, was as follows: “Self-sustained growth is defined to mean a rate of income increase of, say, 5% p.a. financed out of domestically generated funds and out of foreign capital which flows into the country…”.
Development planning as envisaged by the World Bank and US academia amounts to pseudo-scientific deception based on mathematical equations. It is supposed to give legitimacy and credibility to the intention to make the developing countries dependent on obtaining external capital.
There follows an example, advanced in all seriousness by Max Millikan and Walt W. Rostow in 1957: “If the initial rate of domestic investment in a country is 5 per cent of national income, if foreign capital is supplied at a constant rate equal to one-third the initial level of domestic investment, if 25 per cent of all additions to income are saved and reinvested, if the capital-output ratio is 3 and if interest and dividend service on foreign loans and private investment are paid at the rate of 6 per cent per year, the country will be able to discontinue net foreign borrowing after fourteen years and sustain a 3 per cent rate of growth out of its own resources”. More nonsense!
Chenery and Strout’s double deficit model
In the mid-1960s, the economist Hollis Chenery, later to become Chief Economist and Vice-President of the World Bank, and his colleague Alan Strout, drew up a new model called the “double deficit model”. Chenery and Strout laid emphasis on two constraints: first, insufficient internal savings, and then insufficient foreign currency. Charles Oman and Ganeshan Wignarja summarised the Chenery – Strout model as follows: “Essentially, the double deficit model hypothesises that while in the very first stages of industrial growth insufficient savings can constitute the main constraint on the rate of formation of domestic capital, once industrialisation is up and running, the main constraint may no longer be domestic savings per se, but rather the availability of currency required to import equipment, intermediary goods and perhaps even the raw materials used as industrial input. The currency deficit can thus exceed the savings deficit as the main constraint on development.” |21| To resolve this double deficit, Chenery and Strout propose a simple solution: borrow foreign currency and/or procure it by increasing exports.
The Chenery – Strout model is highly mathematical. It was the “in thing” at the time. For its supporters, it had the advantage of conferring an air of scientific credibility upon a policy whose main aims were, firstly, to incite the developing countries to resort to massive external borrowing and foreign investments, and secondly, to subject their development to a dependency on exports.
At the time, the model came under criticism from several quarters. Suffice it to quote that of Keith Griffin and Jean Luc Enos, who claimed that resorting to external inflow would further limit local savings: “Yet as long as the cost of aid (e.g. the rate of interest on foreign loans) is less than the incremental output-capital ratio, it will ‘pay’ a country to borrow as much as possible and substitute foreign for domestic savings.
In other words, given a target rate of growth in the developing country, foreign aid will permit higher consumption, and domestic savings will simply be a residual, that is, the difference between desired investment and the amount of foreign aid available. Thus the foundations of models of the Chenery-Strout type are weak, since one would expect, on theoretical grounds, to find an inverse association between foreign aid and domestic savings”.
The wish to incite the developing countries to resort to external aid seen as a means of influencing them
Bilateral aid and World Bank policies are directly related to the political objectives pursued by the USA in its foreign affairs.
Hollis Chenery maintained that “The main objective of foreign assistance, as of many other tools of foreign policy, is to produce the kind of political and economic environment in the world in which the United States can best pursue its own social goals”.
In a book entitled The Emerging Nations : their Growth and United States Policy, Max Millikan and Donald Blackmer, both colleagues of Walt W. Rostow’s, clearly described in 1961 certain objectives of US foreign policy: “It is in the interest of the United States to see emerging from the transition process nations with certain characteristics. First, they must be able to maintain their independence, especially of powers hostile or potentially hostile to the United States (…) Fourth, they must accept the principle of an open society whose members are encouraged to exchange ideas, goods, values, and experiences with the rest of the world ; this implies as well that their governments must be willing to cooperate in the measures of international economic, political and social control necessary to the functioning of an interdependent world community”. Under the leadership of the USA, of course.
Later in the book, it is explicitly shown how aid is used as a lever to orient the policies of the beneficiary countries: “For capital assistance to have the maximum leverage in persuading the underdeveloped countries to follow a course consistent with American and free-world interests the amounts offered must be large enough and the terms flexible enough to persuade the recipient that the game is worth the effort. This means that we must invest substantially larger resources in our economic development programs than we have done in our past”.
The volume of loans to developing countries increased at a growing pace throughout the 1960s and 1970s, as the consequence of a deliberate policy on the part of the USA, the governments of other industrialised countries and the Bretton Woods institutions, whose aim was to influence the policies of countries in the South.
Priority on exports
In one of their main contributions, Chenery and Strout claimed that resorting to import substitution is an acceptable method of reducing the deficit in foreign currency. They later abandoned this position, when maintaining import substitution policies as practised by certain developing countries became one of the main criticisms levelled by the Bank, the IMF, the OECD and the governments of the major industrialised countries.
This is how other studies by economists directly associated with the World Bank turned to measuring the effective rates of protection of economies and the resulting bias in terms of utilisation of productive resources and of profitability of investments. They favoured redirecting strategies towards exports, abandoning protectionist tariffs, and, more generally, a price-fixing policy more closely related to market mechanisms.
Bela Balassa, Jagdish Bhagwati and Anne Krueger systematised this approach and their analyses were to leave their mark on the international institutions and become the theoretical justification for opening up trade during the 1980s and 1990s. Anne Krueger wrote: “A regime promoting exports can free a country’s economy from the Keynesian yoke of under-employment since, unlike a regime of import substitution, the effective demand for its products on international markets may be virtually infinite, and thus it can always get closer to full employment, unless there is a world recession. A small export-oriented economy will be able to sell whatever quantity of goods it may produce. In other words, the country’s only constraint will be its capacity to supply the goods.” More eyewash.
(To be continued)
