Investment Service of Underdeveloped Countries
Author: David Finch

The proportion of foreign exchange receipts absorbed by the service of foreign investments has frequently been regarded as a criterion of the capacity of a country to accept and service successfully additional foreign capital. In this paper such information as is readily available on this proportion, henceforth called the investment service ratio, is presented for the early stages of development for a number of countries that were formerly underdeveloped; and for recent periods for a number of underdeveloped countries. The significance of the investment service ratio as a criterion is assessed briefly in the conclusion.1

Abstract

The proportion of foreign exchange receipts absorbed by the service of foreign investments has frequently been regarded as a criterion of the capacity of a country to accept and service successfully additional foreign capital. In this paper such information as is readily available on this proportion, henceforth called the investment service ratio, is presented for the early stages of development for a number of countries that were formerly underdeveloped; and for recent periods for a number of underdeveloped countries. The significance of the investment service ratio as a criterion is assessed briefly in the conclusion.1

The proportion of foreign exchange receipts absorbed by the service of foreign investments has frequently been regarded as a criterion of the capacity of a country to accept and service successfully additional foreign capital. In this paper such information as is readily available on this proportion, henceforth called the investment service ratio, is presented for the early stages of development for a number of countries that were formerly underdeveloped; and for recent periods for a number of underdeveloped countries. The significance of the investment service ratio as a criterion is assessed briefly in the conclusion.1

Investment Service Ratio

The investment service ratio may be defined statistically as the percentage of current foreign exchange receipts, exclusive of compensatory financing, absorbed by investment income payments. Compensatory financing is excluded from current foreign exchange receipts because it cannot be regarded as part of the receipts normally available for the servicing of debts. Compensatory financing comes into being only because the normal receipts are insufficient and the authorities take action to meet this situation.2

In calculating the investment service ratio, receipts from private capital movements and from official noncompensatory capital movements have been excluded from the denominator for a number of reasons. In the first place, they are not available for debt service to the same extent as other receipts. They are in large part directly spent on imports of capital goods. For example, receipts from a loan from the International Bank are wholly absorbed in this fashion. Ideally, a division of capital receipts into those used directly on imports and those available for debt service might have been attempted or, failing that, an attempt might have been made to calculate the lower and the upper limits of the investment service ratio according as capital receipts were or were not included in foreign exchange receipts. For statistical reasons, however, it was not possible to follow this procedure. Direct figures of private capital movements are usually unobtainable. Indirect estimates—obtained by identifying private capital movements with the difference between net official financing and net goods, services, and private donations—could be used, but would involve errors of unknown magnitude. Official noncompensatory capital movements are difficult to determine because the dividing line between such financing and compensatory financing is sometimes difficult to draw.

Ideally, a further deduction from foreign exchange receipts might also have been made for the import component of exports. To the extent that exports embody some imports, the full foreign exchange receipts from exports are not available for debt service. However, it is obviously impossible to adjust the statistics for this factor.

The numerator of the investment service ratio as here defined normally includes only investment income payments. Amortization payments have been excluded because adequate comparable statistics are not available. In the majority of cases, the amounts involved do not appear to have been substantial. Reinvested earnings have been included in investment income payments, where available.

Because of the difference in cyclical behavior between interest and dividends (or profits), it would have been desirable to make a distinction in the numerator between (1) contractual income payments on loans, bonds, and other fixed obligations and (2) residual payments on equities (preferred stock, common stock, branch accounts, etc.). In most cases the available statistics do not permit such a segregation, although account has been taken of these differences in interpreting the ratios for certain countries.

Countries Covered

Balance of payments information for a number of countries on a comparable basis has become available only in recent years. Accordingly, any historical study of the investment service ratio, even when defined as the ratio of investment income payments to current receipts, runs into serious statistical difficulties. These difficulties are increased, moreover, when the attempt is made to concentrate on underdeveloped countries. For a preliminary study of the subject, the analysis here has been limited to selected countries for periods for which the necessary data are readily available. Five more-developed countries, which at one time were underdeveloped, and two underdeveloped countries have been selected. Countries in the first category are the United States (1827-1926), Japan (1904-18), Canada (1900-48), Australia (1904-49), and Argentina (1881-1900 and 1926-48). In the second group are India (1929-39) and Indonesia (1925-39). In addition, figures for all the underdeveloped countries in Asia and Africa which are given in the Fund’s Yearbooks are summarized.

The more-developed countries covered by the analysis outnumber the underdeveloped countries for which the historical record is available. This is in part because the foreign investment in the more-developed countries in their earlier stages of development took the form of portfolio securities with published rates of return, rather than of private direct investments. Investments in the presently underdeveloped countries largely take the form of private direct investment by large companies which even today publish little information on their earnings classified according to country of investment.

The more-developed countries

The available statistics indicate that the investment service ratio of the United States was of moderate size when compared with the ratios for other more-developed countries, such as Canada, Australia, and Argentina. The highest U.S. ratio shown by the annual statistics is 14 per cent in 1869 (Chart 1). 3 Broadly speaking, the ratio grew until about 1870. From that time to about 1897 it appears to have remained fairly constant. From 1897 it fell quite slowly until 1914 when it fell rapidly with the great expansion of exports during the first World War. The record has been carried here only through 1926, since in recent years the ratio has been negligible and of little significance for the U.S. economy.

Chart 1.
Chart 1.

United States: Investment Service Ratio, 1821-1926

Citation: IMF Staff Papers 1951, 002; 10.5089/9781451971460.024.A003

The figures for Japan show a relatively simple pattern (Chart 2). Prior to 1904 there was a very small debt service. Borrowing at the time of the 1904 war with Russia led to a peak ratio of 14 per cent in 1906. The investment debt service remained at this general level, which was not considerable according to the standard of some other countries, until 1914. During the 1914-18 war there was a fourfold increase in trade which reduced the ratio to inconsiderable proportions. Since 1918 foreign debt service has been of little importance for Japan, and for the present study the record has been discontinued after that year.

Chart 2.
Chart 2.

Japan: Investment Service Ratio, 1904-1918

Citation: IMF Staff Papers 1951, 002; 10.5089/9781451971460.024.A003

Canada, at the beginning of the period studied, 1900, already had a fairly high investment service ratio, which tended to grow until 1914, in spite of a considerable increase in exports (Chart 3). From 1914 to 1917 there was a sharp reduction in the ratio, due primarily to a threefold increase in receipts. These receipts subsequently fell back from the high 1917 level; although the ratio then increased somewhat, it fluctuated around the moderate level of 15-20 per cent until 1928. The onset of the depression cut Canada’s receipts in half between 1928 and 1932, with a consequent doubling of the ratio to the very high level of 37 per cent. Since 1932 the ratio has fallen sharply. While it tended to level off at about 20 per cent in the late 1930’s it subsequently declined further, as receipts expanded during the second World War. The ratio since 1941 has been less than 10 per cent.

Chart 3.
Chart 3.

Canada and Australia: Investment Service Ratio, 1900-1948

Citation: IMF Staff Papers 1951, 002; 10.5089/9781451971460.024.A003

Australian investment service followed broadly a pattern similar to the Canadian, the principal difference being a somewhat higher level throughout most of the period studied, and a smaller and more delayed reaction to the two world wars. Australia had a high ratio of 26 per cent for the first year (1904) for which statistics are available. Moderate fluctuations then occurred, but the general level did not change markedly until 1929. The lowest ratio (15 per cent) in that period was in 1919-20 when a postwar increase in exports temporarily outpaced the growth in investment income payments. In the early 1930’s, the ratio rose sharply to the extremely high figure of 44 per cent in 1930-31. After that peak, the ratio progressively became smaller than the growth in exports, and by 1948-49 it was less than 8 per cent.

The data for Argentina show that in 1881 there was already a relatively high investment service ratio (Chart 4). It increased, with some fluctuation, to the amazing figure of 66 per cent in 1889, probably one of the highest ratios ever recorded. This increase was due primarily to extremely heavy borrowing which outpaced the growth in exports. The peak ratio was insupportable and a debt adjustment was carried through in 1891, which reduced the payments by half. Foreign investment in Argentina was resumed, however, and, despite the growth of exports, the ratio of income payments remained at a high level—almost 38 per cent in 1900. From 1901 to 1925 there is a gap in the available statistics, but in 1926 the ratio was at a more moderate level, comparable with the experience of Canada and Australia. The halving of export income in the depression led to a doubling of the ratio by 1933. Thereafter it fell because of large increases in receipts and, after 1946, because of a decline in investment income payments apparently due in part to blocking.

Chart 4.
Chart 4.

Argentina: Investment Service Ratio, 1881-1948

Citation: IMF Staff Papers 1951, 002; 10.5089/9781451971460.024.A003

The records of these five more-developed countries reveal the striking fact that each country incurred a relatively large debt service in the early stages of its development and subsequently progressed to the point where the burden became quite small, or even negligible. The change in the ratio for each of these countries has to some extent occurred gradually with the development of the country, but the major changes have been associated with the two great wars and their inflationary aftermath. For the period of the 1914-18 war, Japan and the United States show very rapid changes. Japan reduced her investment income payments from 12 per cent of current account receipts in 1914 to 3 per cent in 1918; for the United States the reduction was from 7 per cent in 1913-14 to 1 per cent in 1919. For the 1939-45 war period and the immediate postwar years, Canada, Australia, and Argentina show rapid changes. Canada’s ratio fell from 21 per cent in 1939 to 8 per cent in 1948; Australia’s from 26 to 8 per cent; and Argentina’s from 26 to 1 per cent. The declines for Canada and Australia were due to large increases in current account receipts associated with unchanged investment income payments; whereas for Argentina, an increase in receipts was accompanied by a decline in investment income payments due in part to exchange restrictions.

The experiences of Canada, Australia, and Argentina in the depression differed from those of the postwar years. From 1928 to 1932 Canada’s investment service ratio rose from 15 to 37 per cent, Australia’s from 26 to 36 per cent, and Argentina’s from 19 to 34 per cent. These increases were due largely to the rigidity of the investment income payments in the face of a decline in foreign exchange receipts—a rigidity due to the high proportion of bonds with their fixed interest.

Underdeveloped countries

The movements of the investment service ratios for two underdeveloped countries for which an historical record is available are shown in Chart 5. For India, whose record covers the years 1929 to 1938, the ratio follows a pattern similar to that observed for the more-developed countries. The onset of the depression caused a sharp increase in the ratio because current receipts fell while investment income payments remained fairly constant. After the trough of the depression, the ratio was reduced steadily as export proceeds recovered. The pattern differs from that for Canada, Australia, and Argentina in that the ratio for India was not much more than half that for each of the other three countries.

Chart 5.
Chart 5.

India and Indonesia: Investment Service Ratio, 1925-1939

Citation: IMF Staff Papers 1951, 002; 10.5089/9781451971460.024.A003

The ratio for Indonesia followed a pattern strikingly different from that of the other countries studied. It did not increase in the depression, but remained remarkably constant throughout the 15-year period (1925-39) for which data are available, in spite of large fluctuations in current receipts. This suggests that the foreign investment in Indonesia was predominantly of the equity type (with a variable return) rather than of the creditor type (with a fixed return). This hypothesis is supported by a classification of investment income payments into interest and dividends, which shows that the constancy in the ratio was due to the fact that dividends varied more in proportion to changes in exports. Even though interest payments remained fairly constant, following the pattern observed in other countries, the fluctuation in dividends was sufficiently marked to yield a relatively stable over-all ratio. The difference between the variations in dividends and interest is illustrated by the change in the proportion of dividend payments to total investment income payments, which was as high as 78 per cent in 1926 and as low as 18 per cent in 1934.

Ratios for a number of underdeveloped countries are given in Table 9 4 and, where reasonably comprehensive, the 1948 ratios for these countries are shown in Chart 6. The countries excluded from the chart are those for which investment income payments are believed to be substantially understated. The figures for the other countries, however, are not fully comparable. As pointed out above, reinvested earnings could not be estimated in all cases. Moreover, in some cases investment income of all sorts (creditor as well as equity) was wholly or partially blocked, so that no exchange transfer took place. In such cases, a balance of payments based on the exchange record shows no income payments. It is not possible, in general, to make quantitative correction for such factors. Consequently, care must be exercised in comparing the figures of one country with another.

Chart 6.
Chart 6.

Selected Underdeveloped Countries: Investment Service Ratio, 1948

Citation: IMF Staff Papers 1951, 002; 10.5089/9781451971460.024.A003

For this group of countries as a whole, the data cover the years 1946-49; for a few countries, however, 1938 figures are also available. A comparison of the ratios in the years after the second World War with those for 1938 is made possible by the following tabulation:

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For the Latin American countries listed, the ratio for some increased over the ten-year period, and for others it decreased. The combined pattern, however, indicates that investment income payments increased pari passu with the growth in current receipts. Since direct investment predominates in these countries, they have not experienced the fall in the investment service ratio characteristic of countries with investment income payments fixed in money terms. For each of the three Middle and Far Eastern countries, the investment service ratio dropped sharply in the period studied.8 Although such a limited selection of countries may not be representative of the area as a whole, the inference might be that political factors were limiting foreign investment in that region.

The outstanding feature of the investment service ratio of the underdeveloped countries is its diversity, which is brought out clearly in Chart 6. This diversity appears to be related less to broad geographical divisions than to the availability of exceptional natural resources suitable for development of export trade. The three countries with the highest ratios—Iran, Northern Rhodesia, and Venezuela—are primarily producers and exporters of mineral products. These countries have attracted very large amounts of foreign capital relative to the size of their economies.

Conclusion

The foregoing review, while perhaps suggestive, does not lead to any conclusion as to the amount of foreign borrowing a country can properly undertake for purposes of domestic development. Two broad questions are involved: (1) Will the borrowing add more to the country’s output in the long run than it costs, taking into account not only the direct service of the debt, but also the adjustments that it directly and indirectly effects in the country’s economic structure and its terms of trade? (2) In the short run, can the country meet the service of its debt year after year in the face of the wide fluctuations it may experience in its international receipts, taking into account the monetary reserves and other types of compensatory financing that it can bring to bear to cover deficits in its balance of payments?

The debt service ratios are hardly designed to answer the first question. The answer lies in the over-all effects of the borrowing. Foreign exchange to service the debt may be created in various ways. The investment of foreign capital may tend to create its own means of payment by expanding the country’s exports or replacing imports. This may be done directly; or it may be done indirectly by developing harbors, roads, public utilities, irrigation systems, etc., which foster industries that increase exports or replace imports. The replacement of imports may come about through the production of alternative, rather than identical, goods. Even if the investment does not, of itself, lead to a shift in the balance of payments sufficient to finance the service of the debt, it may add enough to domestic productivity to permit the monetary authorities to readjust the over-all economy to its world markets on a basis that will permit servicing of the debt while still enjoying a net addition to the national output from the investment. Whether in fact the authorities will be able to do this will depend not only on the direct impact of the investment, but upon elasticities of demand and supply and the effects of the readjustment on the country’s terms of trade. The basic problem is whether the investment will make a net addition to the country’s output, taking into consideration the whole complex of its effects. The ratios given have little relevance to this analysis. A low ratio such as that for the Philippines is no indication that a proposed investment will be productive from the standpoint of the national economy as a whole, and a high ratio, such as that for Iran, is no proof that further investment will be unproductive.

The ratios have more bearing on the second question. Even if the first question has been answered satisfactorily and it is evident that the investment will be productive in the long run, there remains a danger that the service of the debt will prove insupportable in a period when international receipts contract sharply. At such a time, the limiting factor (disregarding for the moment compensatory financing) is the extent to which imports can be squeezed down to fit the amount of foreign exchange left over after the debt service has been deducted from the sharply reduced total. A great many considerations must be taken into account in this analysis.

In the first place, the total receipts to which imports have to be adjusted are receipts from both capital inflow and current account. As was noted earlier, it has not been feasible to include the receipts from capital inflow in the computations presented in this study; hence the full scope of the adjustment forced upon imports at times when raw material markets abroad and capital inflow contract is not shown in the figures.

On the other hand, the debt service which has to be met from total international receipts is not necessarily a fixed quantity. Creditor capital calls for an almost fixed service, thus passing on to imports the full effect of a decline in receipts. Equity capital, however, must be satisfied with residual earnings and these are likely to contract sharply at times when raw material markets abroad and capital inflow shrink. The decline in service of the equity debt means that the full impact of the reduction in foreign exchange receipts is not passed on to imports. It follows that, from the cyclical standpoint, a country can safely assume a considerably larger service of foreign indebtedness if it is on an equity basis than if it calls for fixed interest and amortization payments.

Whether, given these various conditions, the country can stand the impact on its imports depends on their essentiality and the discipline of the community. It may be easy to dispense with luxuries or imports for which ready alternatives can be produced at home, or to reduce substantially the inflow of capital goods if the country’s expansion program can be smoothly curtailed. Just how far the economy can adjust to an abrupt decline in imports is a matter for special study in each case.

Finally, the answer to the second question has to be modified to take into account the possibility of compensatory financing. If a country can command sufficient compensatory financing, it can bridge over the temporary difficulties in its balance of payments without any break in service of the debt and without compressing imports unduly. It can continue to finance both by drawing on its gold and foreign exchange reserves, or on the International Monetary Fund, or by floating loans abroad or even negotiating grants to meet the temporary deficiency of foreign exchange in the market. Ideally, countries should put themselves in a position in good times to supply the compensatory financing required to carry them through bad times. They should build up their reserves, repay the Fund, and establish their government credit on such a basis that an international loan can be arranged even during a period of unsettled markets. In practice, this has often proved difficult. To the extent that countries fail in this objective and (1) are subject to wide fluctuations in their international receipts, (2) have a high ratio of creditor to equity indebtedness, and (3) are unable to compress imports sharply without serious repercussions on the internal economy—to the extent that these conditions are realized, a country with a high ratio of total debt service to total foreign exchange receipts will be vulnerable to year-to-year fluctuations in export receipts.

It is evident that the ratios here presented provide only one factor for determining whether a country may be overborrowing, and that no very useful ceiling can be set beyond which the ratio becomes unsafe. The ratios do, however, supply relevant information; and in cases where comparisons are made between countries in generally similar circumstances or between different periods for the same country, they may suggest preliminary conclusions that should be investigated by further study.

Table 1.

United States: Investment Service Ratio, By Periods, 1821-1914 and 1919-26

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Sources: 1821-1914: C. J. Bullock, J. H. Williams, and R. S. Tucker, “The Balance of Trade of the United States,” Review of Economic Statistics, July 1919, pp. 213-66.1919-26: U.S. Bureau of the Census, Historical Statistics of the United States, 1789-1945 (Washington, 1949), Series M15, 19 and 26. Gold production and silver exports: Ibid., Series G119 and M48.Notes:1. The dollar figures in this table are totals for the period specified. Until 1842 they refer to fiscal years ended September 30; until 1914, to fiscal years ended June 30; and thereafter to calendar years.2. Throughout this table silver has been treated as an ordinary commodity and not as a monetary metal.3. Gold production, recorded for calendar years, has been converted to a fiscal-year basis, where necessary, by averaging the calendar-year data.4. The figures for 1821 to 1914 are rough estimates. Current receipts do not include certain small items, such as port disbursements of foreign ships, tourist receipts and, after 1874, immigrants’ capital. Gold production for 1821-34 and silver exports for 1821-24 have been estimated from partial data. Investment income payments are based on estimates of the value of foreign investments in the United States and assumed over-all rates of return.5. The figure for gold movement included in 1919-26 current receipts is the Department of Commerce estimate of nonmonetary gold movement. This differs from the earlier figures in that allowance is made for domestic nonmonetary use of gold.
Table 2.

United States: Investment Service Ratio, By Years, 1860-1926

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For notes to table, see p. 75.NOTES TO TABLE 2Sources: 1860-78: F. D. Graham, “International Trade under Depreciated Paper: The United States, 1862-79,” Quarterly Journal of Economics, 1921-22, p. 231.1898-1914: P. D. Dickens, The Transition Period in American International Financing, 1897-1914 (unpublished doctoral dissertation, George Washington University, 1933).1919-26: U.S. Bureau of the Census, Historical Statistics of the United States, 1789-1945 (Washington, 1949), Series M16, 19, and 26. Gold production and silver exports: Ibid., Series G119 and M48.Notes:1. For 1860-78 and 1898-1914, the data refer to fiscal years ended June 30; thereafter, they refer to calendar years. Gold production, recorded for calendar years, has been converted to a fiscal-year basis, where necessary, by averaging the calendar-year data. A similar conversion has also been necessary, for 1898-1914, for the data on investment income receipts and payments.2. Current receipts for 1860-78 do not include certain minor items, such as tourist receipts, immigrants’ capital, and investment income receipts. The investment income payments, described as net of investment income receipts (which were presumably small) are based on a detailed investigation of primary sources. They differ quite substantially in particular years from the figures given in the text of the Review of Economic Statistics article (cf. source for Table 1), but the average ratio for the period 1860-78 indicated by the figures given in this table is 9.4 per cent, a figure not inconsistent with that given in Table 1.3. Current receipts in the period 1898-1914 include the minor items which were not included in the earlier estimates. The figures included for freight and investment income receipts are greater than those estimated for this period in the Review of Economic Statistics (op. cit.), and they appear to be more accurate. The investment income payments are based on a detailed investigation by P. D. Dickens (op. cit.), who suggests that the estimates for this period in the Review of Economic Statistics, overstate the payments by one quarter, the error arising principally toward the end of the period.4. The figures for gold movement included in current receipts for the period 1919-26 are the Department of Commerce estimates. They differ from the earlier figures in that allowance is made for domestic nonmonetary use of gold.
Table 3.

Japan: Investment Service Ratio, By Years, 1904-1918

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Sources: Foreign Trade of Japan—A Statistical Survey, T. Ishibashi, ed. (Tokyo, 1935). (Reprinted in The Industrialization of Japan and Manchukuo, 1980-1940, E. B. Schumpeter, ed., New York, 1940.)Gold production: R. H. Ridgway, Summarized Data of Gold Production (U.S. Department of Commerce, Washington, 1929).Notes:1. From 1904 to 1911, exports are described as being slightly undervalued because, although they include packing charges, they do not include other (presumably loading) charges. After 1911, exports are valued f.o.b. Transportation receipts are consistent with the valuation of imports on a c.i.f. basis throughout.2. Investment income payments consist in major part (normally around 95 per cent) of interest and dividends on Japanese securities, to which has been added an estimate of the income of foreign undertakings. This latter estimate has been made by taking half of the payments listed as “Income of foreign undertakings and services in Japan”; in the figures for 1923-27, this proportion of these payments was described as income of foreign undertakings.
Table 4.

Canada: Investment Service Ratio, by Years, 1900-1948

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Sources: 1900-26: F. A. Knox, Dominion Monetary Policy, 1929-1934 (a study-prepared for the Royal Commission on Dominion-Provincial Relations, Ottawa, 1939).Gold production, 1900-26: The Canada Yearbook (Ottawa).1926-48: Dominion Bureau of Statistics, The Canadian Balance of International Payments, 1926-48 (Ottawa, 1949)Notes:1. The estimates for the years 1900-13 are based on Jacob Viner, Canada’s Balance of International Indebtedness (Cambridge, Mass., 1924), with minor conceptual changes by F. A. Knox to make them more comparable with the latter’s estimates for the period 1914-26.2. Until 1926, current receipts include gold production as recorded in The Canada Yearbook; after 1926, they include nonmonetary gold as estimated by the Dominion Bureau of Statistics. These estimates differ from the gold production figures in that they exclude the small amount used by industry or the arts and are taken at the stage when the gold comes to the mint for refining (rather than at the stage of mine output).
Table 5.

Australia: Investment Service Ratio, by Years, 1904-1949

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Sources: 1904-29: Roland Wilson, Capital Imports and the Terms of Trade (Melbourne, 1931).Gold production, 1904-29: Official Yearbook of the Commonwealth of Australia (Canberra).1928-37: League of Nations, Balances of Payments, 1936 and Balances of Payments, 1938 (Geneva, 1937, 1938).1936-49: Commonwealth Bureau of Census and Statistics, The Australian Balance of Payments, 1928-29 and 1948-49 (Canberra, 1951).Notes:1. For 1904-13, the data refer to calendar years; for 1915-49, they refer to fiscal years ended June 30.2. Until 1938-39, receipts include total gold production; thereafter, they include total gold production less industrial absorption of gold (amounting, in 1939-40, to £A0.2 million).3. The League of Nations figures were expressed in terms of pounds sterling, which have been converted to pounds Australian for the above table by use of average annual exchange rates as given in the Monthly Review of Statistics (Commonwealth Bureau of Census and Statistics).4. The coverage and accuracy of the estimates have improved in the successive sources. The magnitude of the differences is indicated by the overlapping years.5. Reinvested earnings are included in investment income payments after 1928-29, in which year they were estimated at £A2.4 million.
Table 6.

Argentina: Investment Service Ratio, by Years, 1881-1948

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For notes to table, see p. 82.NOTES TO TABLE 6Sources: 1881-1900: J. H. Williams, Argentine International Trade Under Inconvertible Paper Money, 1880-1900 (Cambridge, Mass., 1920).1926-45: League of Nations, Balances of Payments, 1937 (Geneva, 1938) and Balances of Payments, 1939-46 (Geneva, 1948).1946-48: International Monetary Fund, Balance of Payments Yearbook (Washington, 1949, 1950).Gold production: R. H. Ridgway, Summarized Data of Gold Production (U.S. Department of Commerce, Washington, 1929) and U.S. Department of the Interior, Minerals Yearbook (Washington).Notes:1. The figures for 1881-1900 are values in gold pesos. Current receipts include only exports and gold production, but other receipts on current account (for which no figures are available) were probably very small. The export figures before 1892 are based upon official price lists rather than actual market prices. Investment income payments include regular amortization payments, which could not be separated in the source.2. The figures for 1926-48 are in terms of paper pesos converted at a rate of exchange which, to 1936, was the official selling rate and thereafter was the official buying rate. Current receipts for this period include estimates of other services but, until 1943, these are only on a net basis. Transportation receipts are entered on a basis consistent with the c.i.f. valuation of imports. Investment income payments include regular amortization payments and possibly some small amounts of private capital movements. The figure for investment income payments for 1948 is indicated by other sources to be too low. Investment income payments to the United Kingdom and the United States alone in that year amounted to approximately 140 million pesos, or 2.4 per cent of current receipts.
Table 7.

India: Investment Service Ratio, By Years, 1929-1939

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Sources: League of Nations, Balances of Payments (Geneva) for various years. Gold production: Statistical Abstract for British India (Delhi).Notes:1. The figures are for fiscal years ended March 31. They refer to India and Burma jointly until April 1, 1937, when Burma was separated.2. Transportation is entered on a basis consistent with the valuation of imports c.i.f.
Table 8.

Indonesia: Investment Service Ratio, By Years, 1925-1939

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Sources: League of Nations, Balances of Payments (Geneva) for various years. Gold production: U.S. Department of the Interior, Minerals Yearbook (Washington).Notes:1. Current receipts for 1925-31 include exports of silver coin which cannot be separated in the source.2. In 1925, a relatively prosperous year, reinvested earnings (not included in investment income payments) are estimated to have been 80 million guilders, or 22 per cent of interest and dividends paid abroad.
Table 9.

Underdeveloped Countries in Latin America, Africa, and Asia: Investment Service Ratio, By Years, 1938, 1946-49

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Refers to 1939.

Data are for fiscal years beginning in the year indicated in the column heading.

Refers to 1936.

Source: International Monetary Fund, Balance of Payments Yearbook (Washington, 1949, 1950, 1951).NOTES TO TABLE 9.1. Figures in parentheses are probably substantial underestimates.2. This table includes all underdeveloped Latin American, African, and Asian countries for which there is information in the Fund’s Yearbooks.3. Current receipts in this table differ from current receipts as shown in the Fund’s Yearbooks in that they exclude compensatory official grants. Of the countries listed here, this item is significant only for China.4. Current receipts in this table differ from corresponding estimates in earlier tables through the inclusion in nonmonetary gold movements of changes in private hoards. The difference is significant only for India in 1938, when such gold movements accounted for 10 per cent of current receipts.5. For many of these countries, investment income payments of direct-investment companies have been estimated indirectly. (For a general description of the method, see International Monetary Fund, Balance of Payments Manual, January 1950, Table B5.) For example, for Iran, investment income from oil has been calculated by deducting from oil exports (a) royalties paid, (b) exchange sold for local expenditure, and (c) imports paid for with own exchange.6. In some cases, a portion of the investment income accruing to foreigners is not recorded at all. Where this unrecorded portion is believed to be large relative to the recorded portion, the figures are given in parentheses.7. Detailed information on the coverage and methods used in the estimation of the investment income payments and current receipts for each country is available in the notes in the country sections in the Fund’s Yearbooks.
*

Mr. Finch, economist in the Balance of Payments Division, is a graduate of the University of Melbourne, Australia, and the London School of Economics. He was formerly a lecturer in the University of Tasmania.

1

This paper was prepared in accordance with the terms of Resolution 294 (XI) D of the 11th (August 1950) Session of the Economic and Social Council, which requested the Fund to assemble and analyze the statistical and other data bearing upon the capacity of underdeveloped countries to service investments of foreign capital, with special reference to the proportion of foreign exchange receipts absorbed by service on foreign investment.

2

For a complete discussion of compensatory financing and the items which may be so classified, the reader is referred to the introduction to the Fund’s first Balance of Payments Yearbook. Monetary gold exports are a form of compensatory financing, and the proceeds of monetary gold sales are, therefore, not included in foreign exchange receipts for the purpose of this study. On the other hand, proceeds of nonmonetary gold exports (i.e., gold production, gold scrap, and gold drawn from private hoards) are included in receipts since sales of such gold to the monetary authorities or to foreigners are essentially the same as merchandise exports. In reports to the Fund for the postwar years, such sales have been computed on a net basis by taking the difference between the monetary movement (i.e., change in official gold reserves of the reporting country) and the country’s international transfers of gold (i.e., exports, imports, earmark, and release from earmark). In the present study, net credits so computed are added to receipts from merchandise exports for the years and countries covered by data drawn from the Fund’s Yearbooks. In most other cases, only gold production is entered in nonmonetary exports since lack of detailed information (e.g., with regard to changes in gold under earmark and gold coin in circulation) makes it difficult to compile data comparable with those reported to the Fund for the postwar period.

3

The detailed statistics underlying these charts for the more-developed countries are presented in Tables 1-6, together with explanatory notes on their sources and on some of the qualifications concerning their comparability.

4

The countries covered are those included in the Fund’s Yearbooks.

5

Refers to 1939.

6

This figure is inflated through the inclusion of a liquidation dividend by a mining company.

7

Refers to 1938-39.

8

The postwar figures for Indonesia are possibly substantially understated because oil transactions are excluded in toto from the balance of payments. Even if full allowance is made for such understatement, however, there was still undoubtedly a substantial decline in the investment service ratio for Indonesia.

IMF Staff papers: Volume 2 No. 1
Author: International Monetary Fund. Research Dept.