In between lies the different transitional period in which a good deal of Asia, the Middle East and Africa finds itself. In economic terms, an extremely high percentage of investment in this transitional period must go into social overhead capital. At the local end this means a high proportion of government investment. At the American end, this means a high proportion of inter-governmental loans, unless the pre-1914 private market for foreign government bonds suddenly recreates itself. Moreover, in these transitional periods, while the new corps of modern industrial businessmen are emerging it is likely to be a simple fact of life that civil servants and politicians (and, sometimes, soldiers) will perform more of the functions of entrepreneurship than American experience would find normal. Economically, this stage can give way to a more familiar and congenial balance between public and private sectors only when the whole modernization process has gathered momentum. American advice and negotiation can help in this evolution; but economic progress itself is the decisive variable.
The nature of this intermediate stage explains why governments— and inter-governmental loans—may have to play temporarily a disproportionately large role even outside the area of social overhead capital. The risk of investment—and the time before payoff becomes possible—does not lie in the nature of the individual project or its intrinsic soundness by conventional banking standards. The question is: When will the economy as a whole enter the stage of self-sustained growth? Private investors understandably draw back from gambling on the timing of such profound historical changes. Governments—theirs and ours—must live with and operate on precisely such risks; because, without adequate governmental investment, the take-off may not occur rapidly enough to meet the political pressures for it.
The nature of this intermediate stage explains also why such devices as dollar loans repayable in local currencies make sense. Many nations moving forward—whose take-offs are in the American interest, but which have not yet occurred—can use capital productively but they cannot generate sufficient foreign exchange and international credit-worthiness until they achieve the stage of self-sustained growth. Soft loans are one way of covering this interval whose length cannot be predicted with confidence. The temporary accumulation of local currencies is, thus, a minor embarrassment in an essentially rational course of action.
Politically, in between the two relatively comfortable stages for foreign private enterprise, occurs the passage of local history in which a modern centralized government is created and effectively takes hold. It is to be expected on the basis of history that at some stage in the political transition the nationalist emotions which drive local politics create a somewhat critical, if not hostile, atmosphere towards foreign investment, notably if the foreign positions in the economy became entrenched during a colonial or semi-colonial past. Knock-down, drag-out crises in the status
of foreign enterprise are, of course, not inevitable; but changes in relationship and attitude are inevitable as the new nations take shape and become increasingly conscious of their sovereignty. A wiser and more forehanded free-world policy towards, for example, Indonesia and Egypt in recent years might well have prevented or softened the current crises in the status of foreign enterprise there; and Western oil companies (and their governments) would do well to avoid clinging rigidly to old formulas in the Middle East. But it is in the nature of the historical process taking place that a certain amount of awkwardness and readjustment will be required.
Thus it will take an understanding of what it is like to move from a traditional to a modern society—a sense of history and patience as well as a vigorous collaboration between American public and private authorities—to see us through into the stage when most men and governments in the world come to perceive that private capitalism, domestic and foreign, has an expanding role to play in the new nations capable of reinforcing their larger political and social objectives.
India provides a critical focus for our economic development policies for the next decade, and a test of their meaning. There are a number of reasons for this. In the first place, the population of India includes about 40 percent of all the people in the underdeveloped countries of the free world. Politically and strategically India is even more important than the numbers of her people would suggest. The success or failure of Indian development efforts will affect the course of events from the Celebes to Morocco. We have not yet devoted the attention and resources to Indian development problems that the American interest requires.
There are compelling technical economic reasons why, at the moment, we should be concentrating a much larger share of our capital assistance on India than even her size would dictate. To allocate development assistance to countries in proportion to their population or their relative claim on our sympathies is to misconstrue the relation between capital and the development process. The requirements for outside capital of countries seeking development vary widely depending on the stage of development they have reached. In the early precondition stages in which many of the underdeveloped countries find themselves, the amounts of capital they can productively absorb are sharply limited by shortages of skill, education, administrative capability, essential social overhead such as roads, ports, communications and the like, and by the absence of the attitudes, motivations and political leadership that make growth possible.