Foreign Relations of the United States, 1955–1957, Foreign Economic Policy; Foreign Information Program, Volume IX

131. Memorandum From the Deputy Assistant Secretary of State for Near Eastern, South Asian, and African Affairs (Jernegan) to the Deputy Assistant Secretary of State for Economic Affairs (Kalijarvi)¹

Washington, April 14, 1955.

SUBJECT

• Stimulation of Private Investment in Underdeveloped Areas²

Section 6 of your Outline of the OCB program of action under NSC 5506,³ underscores the importance of private investment in our Foreign Economic Policy. Very appropriately, all of us have devoted a great deal of attention to the investment climate in the underdeveloped areas. On the basis of the facts and certain evaluations of the facts, it is possible, however, that we are neglecting another vital consideration in the use of private investment for the promotion of U.S. Foreign Economic Policy objectives. I refer to the positive stimulation of private capital and entrepreneurs in their consideration of investment opportunities in the underdeveloped world.

In our concern about investment climate and attractions in the “host” country, we may lose sight of the fact that investors in the United States are confronted with equally, or relatively more, attractive investment opportunities at or near home. In some cases, this obstacle is supplemented by something of a psychological blockage with regard to the consideration of investments of their or their stockholders’ funds in areas near to the “communist heartland.”

The hard fact is that, even with FCN treaties, double taxation treaties, the investment guaranty agreements and certain feasible efforts to legislate an investment climate, investment is not likely to flow into the underdeveloped areas in sufficient quantities in the foreseeable future. The countries of the area know this fact, and this knowledge retards the enthusiasm with which they approach our programs for the promotion of a more favorable investment climate in those countries.

In any case these countries may tend in their critical situations to look to forced-draft, public sector development as an immediate means of moving toward their essential developmental objectives— no matter how inadequate that means may be in the long run.

A. Asian Attitudes and Problems

While I would not attempt to speak authoritatively for other areas, I believe that Asian attitudes and problems underlying the general need for positive and rapid U.S. stimulation of American investment in the underdeveloped areas of the world—and Asia in particular—can be highlighted by specific examples drawn from recent events in India. In overly-brief form the situation may be outlined as follows:

1. Admiration and Disillusionment in China:

Prime Minister Nehru⁴ returned from his visit to Peking both disillusioned and impressed. Before going to Peking he was concerned with the need for economic progress to support and further the democratic institutions of his newly independent country. He returned from Peking with what appears to be a “firming up” of his dislike for the communist dictatorial methods and system. He was impressed with what might be called “monuments” of economic progress in China—the dams, the roads, the railroads, etc. He was disillusioned by the lack of concern for the people as individuals and the lack of economic development which reaches down to those people.

2. Systems on Trial:

He returned to India with the firm view that the democratic system, which India espouses, and the communist dictatorial system are in competition—and that the Indian system is on “trial” with regard to the progress and benefits it can produce for the people.

3. Unequal Bases of Competition:

Although Nehru has not specifically stated as much, it would seem fair to observe that our competition for the minds of the people of free Asia is handicapped (in one sense) by the harsh fact that the free peoples’ comparison of the two systems will be made in large part on the basis of the “monuments” or more ostentatious economic achievements which they see or hear about. Increases in national product in free Asia must be reflected in immediate perceptible benefits for its free peoples while providing investment for “monuments” of longer-range benefit to the people. This means that free Asia must far surpass any actual economic development in communist countries in order to show a competitive advantage. The task, therefore, is doubly difficult.

4. Forced-Draft Development:

After his return from China and up to the present time, Nehru’s statements have evidenced his redoubled concern for the “trial” facing Indian democracy in the competition with the communist system—a concern which may have led him into faulty courses of action. He has reemphasized the need for rapid economic progress in India. It is probably fair to say that in casting about in his own mind for means of achieving this rapid progress, he came to the tentative conclusion that the most ready means of achieving forced-draft development lay in the hands of the Government—the public sector. However, his statements tend to indicate that, despite a distinct socialist turn, he is troubled and somewhat undecided about the approach to progress by the people through the private sector of the Indian economy. For example, Nehru has reiterated his inability to define his so-called “Socialist Pattern.” He states that the private sector of the Indian economy is important to economic progress and that a private sector to be effective cannot be a private sector in name only. In sum, he and his Government have shown some ambivalence on the role of private investment in Indian economic development.

5. The Challenge of the Private Sector:

The Indian Government’s present emphasis on the public sector is based in part upon the facts that (a) private investment in India has not been able to meet its anticipated goals under the first five-year plan, and (b) that foreign private investment would probably not be forthcoming in sufficient quantities in the foreseeable future even with a more favorable investment climate. While this picture appears bleak, it offers a certain challenge and opportunity in that India’s second five-year plan calls for a surprising increase in private investment, raising the private sector to the equivalent of almost $4.5 billion, or some 40 to 50% of the present tentative figure for the entire second five-year plan.

6. Probable Consequences of a Private Sector Failure in Future Development:

While there may be some differences of opinion as to whether the above facts and evaluations constitute a situation which is a challenge and an opportunity to United States foreign economic policy, it is certainly possible to forecast that, in the event of failure of the private sector in the second five-year plan, India will definitely shift to a “Socialist Pattern” which will place complete reliance upon the public sector for further economic development.

B. Proposed U.S. Action:

In view of the above facts and evaluation it would appear important, while continuing our programs for improvement of investment climates, to consider also the means of stimulating American private investment in specified areas. I would appreciate your views on the following suggested line of action which might constitute a step toward positive stimulation of American private investment in those underdeveloped areas.

1. An adequate fund would be established under the Eximbank (or as an entity) to make loans to reputable and competent American firms for investment in specified areas in order to promote our foreign economic objectives within a framework of democratic institutions.⁵

2. For optimum effectiveness, loans from this fund might be used on the following terms and conditions:

a. Loans would be made at, say, 1% interest—charging off to the cost of our foreign economic aid programs the difference between the cost of the loan to the U.S. and whatever low incentive rate of interest is charged.

b. The individual loan would constitute up to 60% of the specific total investment in the specified, underdeveloped area.

c. The investing firm would be required to advance from its own funds at least 30% of the total investment including the loan.

d. The American investor would be required to mobilize indigenous capital participation in the country of investment in an amount equal to at least 10% of the total investment.

3. This loan program would be integrated with the investment guaranty program which would be expanded to cover all risks (civil disorders, etc.) aside from the risks of managerial inefficiency.

4. The above aspects of the program would be combined with exoneration from U.S. taxes on income earned in the investment for, say, a period of five years, if the host country grants the same concession to that investment.

While I am not wedded to the above terms and specific figures, I believe that in keeping with our Foreign Economic Policy Objectives, (a) something along these lines is needed and would induce an adequate flow of private U.S. investment to specified, underdeveloped areas, and (b) this approach will provide a necessary and effective complement to the proposed, internationally-controlled IFC.

1. Source: Department of State, Central Files, 811.05100/4–1455. Limited Official Use. Drafted by J. Robert Fluker of the Office of South Asian Affairs.
2. A note on the source text reads: “I am cool to this.”
3. NSC 5506, “Future U.S. Economic Assistance for Asia,” January 21, 1955, was adopted at the 235th NSC meeting, February 3, and approved by President Eisenhower, February 5. (Department of State, S/S–NSC Files: Lot 63 D 351, NSC 5506 Series)
4. Jawaharlal Nehru, Prime Minister of India.
5. A marginal notation reads: “no—XM can already do—IFC also—also have guaranty pr[ogram]—subsidy to for[eign] private investment.”