Journal Issue
Finance & Development, December 1974

Book notices

International Monetary Fund. External Relations Dept.
Published Date:
December 1974
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Evaluating the effects

Reuber, Grant L. with H. Crookell, M. Emerson, and G. Gallias Hamonno, Private Foreign Investment in Development, London, England, Oxford University Press, xiv + 371 pp., $17.75.

This book is one product of a larger research effort sponsored by the Organization for Economic Cooperation and Development center on the effects of private foreign direct investment on economic development. The study is principally concerned with describing and evaluating some of the main economic effects of private direct investment in manufacturing industries within developing countries. Conclusions are based on analysis of earlier studies, as well as new data developed by the OECD Development Assistance Committee. In addition, a direct survey of more than 80 private foreign direct investment projects was undertaken through the investors’ home offices in North America, Europe, and Japan.

The effects of foreign investment are evaluated in terms of the cost of capital, technology, training, and foreign market access when obtained from alternative sources. In general, Mr. Reuber found that foreign investment in manufacturing added to the stock of physical and human capital available to the less developed countries, at a cost that is no higher than that incurred in developed countries. He concludes that the costs of training, skills, technology, information, etc., “seem to be at least as low and possibly lower than the costs entailed by alternative methods of gaining access to these factors and markets.”

At the same time, direct investment entails costs, particularly those due to policies which provide subsidies and protection to the foreign investor. Many of these policies have been adopted independently of considerations about direct investment, but the study suggests that the misallocation of resources arising from them may be carried farther by direct investment. In addition, foreign investment itself may induce policy changes that impose costs on the economy.

What steps can be taken, then, to increase the flow of direct investment to developing countries and the benefits that can be gained from it? At the international level, Reuber recommends the development of some widely agreed ground rules setting limits on the behavior of firms and governments as well as on procedures for settling disputes. In addition, it is recommended that coordinated agreements on specific issues such as subsidies, taxes, and transfer prices be worked out.

At the national level, it is mostly up to the LDCs to develop policies that will encourage direct investment. The study finds at the present time that most LDCs have a schizophrenic attitude toward foreign investors, simultaneously maintaining policies that encourage and discourage investment.

A more rational approach would be to reduce controls and special subsidies, particularly with respect to trade policy, and place greater reliance on the price mechanism to allocate resources. Within this general framework, a central agency to screen direct investment proposals on their individual merits could be set up. To the extent that it is desired to have foreign investors provide secondary services such as training labor and developing local technological capacity, subsidies can be provided for that purpose rather than relying on regulations.

In conclusion, this study provides one of the most comprehensive surveys available of the effects of foreign direct investment on economic development. The book is valuable both for the wealth of information it brings together from a wide variety of sources and the analysis it provides on this important subject.

Dale Weigel

Tackling the population problem

Brown, Lester R. with Erik P. Eckholm, By Bread Alone, New York, N.Y., U.S.A., Praeger Publishers (published for the Overseas Development Council), xvi + 272 pp., $8.95; International Labour Office, Population and Labour, Geneva, Switzerland, x + 163 pp., Sw F 17.50.

These two authoritative, well-documented yet popularly presented studies tackle the world’s population problems from two points of view, food and employment. Lester Brown (with Erik Eckholm) points out that man (to use an old-fashioned word) does not live by bread alone, but also by fruit, nuts, vegetables, meat, milk, eggs, fish, and a variety of other items. The need of people to have employment is touched on in a late chapter (15) in the book. The solution offered there is a “people-oriented” development strategy—one that encourages labor-intensive agricultural modernization in developing countries, land reform (that is, expropriation of landlords), and a “shift in power” from landlord to tenant. But the main part of the book is devoted to nutrition. On this subject Mr. Brown takes the strong line that citizens of the United States and of some other industrialized nations are eating (or throwing away) on average more food than is good for them anyway, and wasting resources generally. Affluent countries could therefore, perhaps with some direct advantage to themselves, free resources for the Fourth World, defined as countries currently receiving a yearly income of less than $150 a head.

The ILO study attacks directly the problem of employment. The outlook is gloomy. The magnitude of the shifts from rural to urban areas is shown to be so great that there is little chance that training for employment can be organized on a scale that will, in the next decade, make much contribution to need—if indeed it can be organized at all. The study quotes the estimate that out of 180 million additional jobs to be found in Asia (not including the People’s Republic of China) in the second Development Decade (1970-79), 34 million will be needed by workers aged from 15 to 34. A large proportion of these young people will need to become skilled or semiskilled. No general solution can be offered—other than the long-run alleviation that will result from declining fertility rates. Expanding social security and welfare systems may in time contribute to lower birth rates, but, as the ILO study shows, there are serious difficulties in developing social security schemes which run the risk of widening the gap between the modern and the traditional sectors of so-called dual economies.

These two studies cover many of the issues arising in regard to nutrition and employment, and bring together relevant facts from many sources. It is not the authors’ fault that they raise more questions than they answer. They emphasize that regardless of what the future may hold in the way of population growth, the upsurge in the present decade raises problems of the supply of food and jobs that are critical and insistent.

Lester Brown’s work contains some unnecessary repetitions, and a few unconvincing arguments. For example, when Brown alleges that India could not, in 1968, find one contestant fit to qualify for the Olympic games in any of the track and field events at a time when the Indian population numbered 525 million, (an irrelevant figure since some of these would have been disqualified by age)—and gives this as evidence of the effects of “widespread undernourishment”—the need for documentary evidence becomes rather pressing. The broad global picture of world food requirements that Brown provides is probably correct. The realism of his facts is more persuasive than the liberal minded optimism which makes him see his starving “Fourth World” as “the new moral and social frontier for makind.” The ILO makes the more effective point that we all live in one world, and that, in this one world we shall eat or starve together. Self-preservation may be a more effective spur to action than any number of frontiers offered to our moral susceptibilities. The concept of a frontier as a moral challenge is in any case a highly parochial one.

Ian Bowen

Religion in the system

Silk, Leonard (editor). Capitalism: The Moving Target, New York, N.Y., U.S.A., Quadrangle/The New York Times Book Co., 1974, xi + 159 pp., $1.95 (paperback).

Mr. Silk believes that capitalism is facing serious moral questions. The first half of this book is comprised of his own broad list of complaints, and the second half is a collection of essays—mainly from The New York Times— that are disquieting but essentially positive about capitalism.

The contributors include banker David Rockefeller, who contends that the system is a highly flexible and evolutionary concept and not a sitting duck for its critics but a moving target; writer Studs Terkel, who worries about workers’ alienation in the United States; and professors Galbraith, Samuelson, Sweezy, Leontiev, and Kuh, who respectively blame insensitivity, periodic wars, militarism, the lack of long-range planning, and large concentrations of wealth as basic problems of U.S. capitalism.

Silk, who is a member of the Board of Editors of The New York Times, argues that the serious problems of capitalism are very personal. “Great numbers of people are sick of anonymity and hunger for identity and community. A greater population, producing more and consuming more and more, pollutes the earth and exhausts its resources via an industrial system that is supposed to provide humanity with ever-increasing benefits.”

The editor is bothered particularly by the seeming incompatibility between capitalism and religion in the United States, although this aspect is ignored by the other essayists.

Silk concludes that it was not only the cost-profit rationality of capitalism that ultimately subjugated the religious faith with which it had allied itself but the very success of capitalist enterprise and the vast affluence it bestowed upon the elite that has made a mockery of the Protestant principles of asceticism, conservation, and sobriety.

D. W. Townson

Other Books Received

Islam, Nurul (editor), Agricultural Policy in Developing Countries, New York, N.Y., U.S.A., John Wiley & Sons, Inc., 1974, xxxi + 565 pp., $30.

Park, Yoon S., The Euro-bond Market: Function and Structure, New York, N.Y., U.S.A., Praeger Publishers, 1974, xii + 177 pp., $16.50.

Ghosh, A.P., Development Planning in South-East Asia, Rotterdam, The Netherlands, Rotterdam University Press, 1974, ix + 117 pp., $16.

Nayar, C.P.S., Chit Finance, Bombay, India, Vora & Co. Publishers Pvt. Ltd., 1973, xx + 190 pp., Rs 30.

Montgomery, John D., Technology and Civic Life, Cambridge, Mass., U.S.A., The MIT Press, 1974, 239 pp., $12.50.

Lubell, Harold, Urban Development and Employment: The Prospects for Calcutta, Geneva, Switzerland, International Labour Office, 1974, x +143 pp., Sw F 17.50.

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