FOREIGN CAPITAL IN EASTERN EUROPE BETWEEN THE WORLD WARS*

Abstract

THE CONCLUSIONS OF THIS study are derived from a comparative analysis of the amounts and character of foreign capital in Czechoslovakia, Hungary, Poland, Estonia, Latvia, and Lithuania. The gains and costs due to international capital transactions are evaluated in terms of changes in national incomes, productive structures, and external balances. Aside from analyzing specific historical developments, the monograph aims to determine the nature of responsiveness of small developing countries to changes in international capital flows under alternative policies. Consequently, an attempt is made to use modern economic theory to analyze problems of efficiency, balance, and growth when a small country engages in international capital transactions. In Eastern Europe, overconcern with the maintenance of price stability before the Great Depression prevented a full utilization of foreign capital as the base for drawing underemployed resources into the productive system. Cessation of capital inflows during the early 1930's contributed to domestic depressions via the commercial and state monetary institutions. Poland relied on classical remedies and thus protracted her depression. Similarly, Czechoslovakia insisted on maintaining a net creditor position on current account and thus impeded her growth. In contrast, more positive monetary and fiscal policies adopted by Estonia, Latvia, and Hungary successfully stimulated investment and tended to uphold full employment of domestic resources. Capital was allocated most efficiently in Estonia and Latvia, where governments guided the allocation of funds in the desired direction, and in Hungary, where an efficient banking system prevented foreign capital from establishing secluded enclaves in the economy. Poland's permissiveness in regard to foreign interests hindered balanced growth. Correction of the productive structures by stimulating new investments was more economical than piecemeal interferences with the market mechanism. The evidence indicates that, in order to en-