The Best Way To Cut U.S. Foreign Aid

PRIVATE CAPITAL ABROAD

REGARDLESS of the drive to cut the Administration's $3.9 billion foreign-aid program--and the chances are that it will be cut deeply--many a businessman feels that it is high time for a new and different approach to foreign aid. The most promising: encouraging greater activity abroad by U.S. private enterprise. Secretary of State Dulles told Congress that the Administration would prefer to see private capital eventually replace foreign-aid funds in overseas economic development. So far, however, the Administration has presented no overall plan for encouraging a greater flow of U.S. private enterprise abroad.

Private capital cannot, of course, supplant the $2.1 billion of foreign aid that goes for military purposes. Nor can it be expected to undertake agricultural reform and flood-control projects now financed by the Government. But it could replace some of the most controversial part of the foreign-aid program -- the 15%-20% devoted to outright economic aid. Private dollars are far more effective than Government grants or loans because they act faster and more directly to stimulate local economies and generate new capital. Businessmen estimate that $1 in private capital does as much work as $3 in Government aid. U.S. firms now operate or make investments in more than 50 foreign countries, have annual foreign sales (including exports) of nearly $50 billion. The outflow of private direct investment reached $1.6 billion last year, more than double the 1955 figure, and U.S. investment in foreign stocks and bonds totaled another $1.2 billion. Private enterprise has invested $30 billion abroad to date, not including profits that firms plow back abroad each year.

Yet this is little compared to what U.S. industry could do. Only 300 major U.S. corporations are active abroad, and U.S. investment has concentrated mostly in Canada, Latin America and Western Europe. Largely overlooked are the underdeveloped nations that now receive the bulk of U.S. foreign aid. A major reason is that many U.S. companies are not aware of the opportunities abroad. The Government itself employs fewer than ten full-time officials at the job of stimulating foreign investment, leaves most of the task to overworked Government personnel abroad. Many foreign-aid experts feel that the first step in expanding U.S. investment overseas should be a broadened Government program to seek out investment projects, sell their attractions to U.S. firms.

One of the easiest ways to encourage investment abroad would be to ease the tax burden of overseas firms, which often are hit by double taxes. But such a reduction has been largely blocked by businessmen themselves. U.S. companies deriving 95% of their income from foreign nations in the Western Hemisphere have to pay only 38% corporate tax v. 52% paid on profits made in the rest of the world. The Administration has been trying to have the lower rate extended to all U.S. firms doing business abroad. But shortsighted U.S. firms have disagreed so strongly over who should qualify that little progress has been made. Even without tax relief, the Government can help to entice U.S. business abroad in many other ways, such as joint investment with private capital in risky areas, use of more firms as foreign-aid contractors, expansion of protective treaties.

On the other hand, foreign nations themselves have not done nearly enough to create a more favorable business climate. Chief deterrent to many U.S. firms has been fear of expropriation; unfavorable exchange regulations and discriminatory tax and labor laws have also discouraged U.S. investors. But when a nation has the right climate for U.S. capital, it reaps a rich harvest. Canada, for example, has drawn a total of $6.5 billion in direct U.S. investment v. Mexico's $485 million largely because it has treated American investors far better than the U.S.'s southern neighbor. Capital-hungry countries can also set up central offices to encourage and facilitate private investment, as The Netherlands has done so successfully, organize development banks and investment corporations to encourage local capital to enter partnerships with U.S. investors. Even state socialism or nationalism need not be a deterrent to private investment. Socialist-minded India, for example, guarantees foreign investors against socialization for a stipulated period, e.g., 25 years for oil companies, arranges in advance for compensation if nationalization comes.

The more U.S. capital that goes abroad, the better are chances for easing the U.S. foreign-aid load. For U.S. business itself, expansion abroad is simply business foresight. Says William Blackie, executive vice president of Caterpillar Tractor Co. "The whole world is starting to consume at an accelerated clip. Americans have to face the possibility of being shut out of foreign markets unless they build plants overseas."

This file is automatically generated by a robot program, so reader's discretion is required.