FOREIGN PRIVATE INVESTMENT AND THE GOVERNMENT'S EFFORTS TO REDUCE THE PAYMENTS DEFICIT

Abstract

AFTER YEARS of urging U.S. business to contribute through investment to the recovery of Europe and to the economic development of emerging nations, the Government is now requesting curtailment of overseas investment and holding out the hope of early removal of such constraints. At the same time it does not want the curtailment to affect the economies of Canada, Japan, or the United Kingdom; even more, it wants an increase in the outflow of funds to the developing countries. The present attitudes and programs are set against a background of increased antipathy toward overseas operations reflected in the Revenue Act of 1962 and an announced policy of removing some developing countries from the less developed categories. The background includes also assertions by top officials that the recent constraints were necessitated by the alarming outflow of private capital into foreign securities in 1963 and the abnormal level of overall private capital outflow in late 1964, topping off fifteen years of deficits amounting to $35 billion.' This background suggests that a potential investor cannot know what the Government's posture on overseas operations in advanced countries will be, whether a given country may be classified as one not to be adversely affected by restraints or dropped out of the LDC class, or whether some new abnormality might lead to still further Government constraints. I submit that this posture is one which weakens rather than strengthens the U.S. economy. Further, it is a result of not identifying the problem correctly, thus leading to solutions which waste resources. A professor of mine once cautioned that otherwise sensible men frequently perpetrate the greatest of nonsense when they move into the field of international finance. We have not been without a good deal of nonsense in the past several years in this field. To be objective, I must either admit that you may hear more such nonsense during the next few minutes, or, maybe I can claim not to be an otherwise sensible man. But I would like to try to focus attention on what I consider to be the errors in U.S. policy, including the understanding of the nature of the fundamental problem itself, and then how we should go about reversing gears. There are three main reasons why we should reverse our stand: first, our tactics of constraint are inequitable and damaging to our long-run interests internationally and vis-a-vis business and economic policy; second, our strategy