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U.S. FOREIGN INVESTMENT IN
UNDERDEVELOPED AREAS
By H. W. SINGER
United Nations
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474 AMERICAN ECONOMIC ASSOCIATION
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U. S. FOREIGN INVESTMENT IN UNDERDEVELOPED AREAS 475
tries since trade has -also led to foreign investment in those countries
and has promoted capital formation with its cumulative and multiplier
effects. This is also how the matter is looked at in the economic text-
books-certainly those written by nonsocialist economists of the indus-
trialized countries. That view, however, has never been really accepted
by the more articulate economists in the underdeveloped countries
themselves, not to mention popular opinion in those countries; and it
seems to the present writer that there is much more in their view than
is allowed for by the economic textbooks.
Can it be possible that we economists have become slaves to the
geographers? Could it not be that in many cases the productive facili-
ties for export from underdeveloped countries, which were so largely
a result of foreign investment, never became a part of the internal eco-
nomic structure of those underdeveloped countries themselves, except
in the purely geographical and physical sense? Economically speaking,
they were really an outpost of the economies of the more developed in-
vesting countries. The main secondary multiplier effects, which the
textbooks tell us to expect from investment, took place not where the
investment was physically or geographically located but (to the extent
that the results of these investments returned directly home) they took
place where the investment came from.3 I would suggest that if the
proper economic test of investment is the multiplier effect in the form
of cumulative additions to income, employment, capital, technical
knowledge, and growth of external economies, then a good deal of the in-
vestment in underdeveloped countries which we used to consider as
"foreign" should in fact be considered as domestic investment on the
part of the industrialized countries.
Where the purpose and effect of the investments was to open up new
sources of food for the people and for the machines of industrialized
countries, we have strictly domestic investment in the relevant eco-
nomic sense, although for reasons of physical geography, climate, etc.,
it had to be made overseas. Thus the fact that the opening up of under-
developed countries for trade has led to or been made possible by for-
eign investment in those countries does not seem a generally valid proof
that this combination has been of particular benefit to those countries.
The very differential in productivity between the export sectors and
the domestic sectors of the underdeveloped countries, which was pre-
viously mentioned as an indication of the importance of foreign trade to
underdeveloped countries, is also itself an indication that the more pro-
ductive export sectors-often foreign owned-have not become a real
part of the economies of underdeveloped countries.
'Often underdeveloped countries had the chance, by the judicious use of royalties or
other income from foreign investment, to use them for the transformation of their internal
economic structure-a chance more often missed than caught by the forelock!
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476 AMERICAN ECONOMIC ASSOCIATION
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U. S. FOREIGN INVESTMENT IN UNDERDEVELOPED AREAS 477
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478 AMERICAN ECONOMIC ASSOCIATION
1919-39; over the same period, agriculture increased only by 23 per cent, anthracite coal
mining by 15 per cent, and bituminous coal mining by 35 per cent. In the various fields
of mineral mining, however, progress was as fast as in manufacturing. According to data
of the National Bureau of Economic Research, the rate of increase in output per worker
was 1.8 per cent p.a. in manufacturing industries (1899-1939) but only -1.6 per cent in
agriculture (1890-1940) and in mining, excluding petroleum (1902-39). In petroleum pro-
duction, however, it was faster than in manufacturing.
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U. S. FOREIGN INVESTMENT IN UNDERDEVELOPED AREAS 479
sidered as the same body of people. The producers are at home; the
consumers are abroad. Rising incomes of home producers to the extent
that they are in excess of increased productivity are an absolute burden
on the foreign consumer. Even if the rise in the income of home pro-
ducers is offset by increases in productivity so that prices remain con-
stant or even fall by less than the gain in productivity, this is still a
relative burden on foreign consumers, in the sense that they lose part
or all of the potential fruits of technical progress in the form of lower
prices. On the other hand, where the fruits of technical progress are
passed on by reduced prices, the foreign consumer benefits alongside
with the home consumer. Nor can it be said, in view of the notorious in-
elasticity of demand for primary commodities, that the fall in their rela-
tive prices has been compensated by its total revenue effects.
Other factors have also contributed to the falling long-term trend of
prices of primary products in terms of manufactures, apart from the
absence of pressure of producers for higher incomes. Technical prog-
ress, while it operates unequivocally in favor of manufactures-
since the rise in real incomes generates a more than proportionate in-
crease in the demand for manufactures-has not the same effect on the
demand for food and raw materials. In the case of food, demand is not
very sensitive to rises in real income, and in the case of raw materials,
technical progress in manufacturing actually largely consists of a re-
duction in the amount of raw materials used per unit of output, which
may compensate or even overcompensate the increase in the volume of
manufacturing output. This lack of an automatic multiplication in de-
mand, coupled with the low price elasticity of demand for both raw
materials and food, results in large price falls, not only cyclical but also
structural.
Thus it may be said that foreign investment of the traditional type
which sought its repayment in the direct stimulation of exports of pri-
mary commodities either to the investing country directly or indirectly
through multilateral relations, had not only its beneficial cumulative
effects in the investing country, but the people of the latter, in their
capacity as consumers, also enjoyed the fruits of technical progress in
the manufacture of primary commodities thus stimulated, and at the
same time in their capacity as producers also enjoyed the fruits of
technical progress in the production of manufactured commodities. The
industrialized countries have had the best of both worlds, both as con-
sumers of primary commodities and as producers of manufactured ar-
ticles, whereas the underdeveloped countries had the worst of both
worlds, as consumers of manufactures and as producers of raw ma-
terials. This perhaps is the legitimate germ of truth in the charge that
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480 AMERICAN ECONOMIC ASSOCIATION
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U. S. FOREIGN INVESTMENT IN UNDERDEVELOPED AREAS 481
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482 AMERICAN ECONOMIC ASSOCIATION
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U. S. FOREIGN INVESTMENT IN UNDERDEVELOPED AREAS 483
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484 AMERICAN ECONOMIC ASSOCIATION
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U. S. FOREIGN INVESTMENT IN UNDERDEVELOPED AREAS 485
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