A Shield for Business Abroad

--INVESTMENT GUARANTIES-

THE Middle East crisis and its threat to U.S. interests gave urgent importance to a vital but little known--and less used--safeguard for American companies abroad. The safeguard: a program under which the U.S. Government insures overseas investment against the classic risks of expropriation, blocked profits and war.

Started by the Economic Cooperation Administration in 1948 to encourage more U.S. firms to invest abroad, the program resulted in agreements with 37 nations, including Jordan, Iran and Turkey. Pacts with Lebanon and Iraq were being negotiated when the shooting started. Since 1948, 220 policies covering $207 million worth of foreign investment have been sold. But this is barely a drop in the foreign-investment bucket: U.S. investment abroad rose by about $3 billion last year to a total of $36 billion.

The main reason for this poor showing does not lie in the guaranty program itself. Any U.S. investor in a country included in the program--from Venetian-blind makers in The Netherlands to rayon manufacturers on Formosa--can apply for insurance covering the full value of the investment. Policies bear a relatively modest annual premium of one-half of 1%. In the event of a claim, the U.S. Government takes upon itself to save or recover the investment, gives full restitution to the U.S. firm before undertaking legal and diplomatic action to collect. Premiums paid by protected firms go into the U.S. Treasury to pay claims, in case of necessity would be augmented by funds from other Treasury assets.

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So far the program has not had to pay a single claim. One reason is that many really unstable countries, e.g., Indonesia, have not signed up. But the most significant reason is that the agreements impress member nations with a sense of responsibility before the world, help make them think twice before permitting or taking any wild action. Says Charles Warden, director of the program: "Our agreement with the country means that the government has taken the first step in recognizing the international morality of contracts. The presence of agreements has a very healthy effect. The absence is worrisome."

Participation in the program has been held back by a general lack of information about it among businessmen. Even Congress sometimes appears to be in the dark. Last winter, Wyoming's Democratic Senator Joseph C. O'Mahoney at first confused the insurance program with the U.S. Development Loan Fund, which gives loans to foreign businessmen, then claimed that it was aimed at helping only big business. It is true that big business is the chief participant, but only because most foreign investors fall into that category. Program officials would like nothing better than to encourage--and insure--small businesses. In fact, they would like more firms of any size.

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Some foreign investors feel that the insurance, although relatively inexpensive, costs more than it is worth. Others complain of difficulty in getting speedy approval from foreign governments, which can delay a policy for months with red tape. One important drawback is that the guaranty program does not insure against devaluation, by which a nation can halve the value of its currency--and a firm's profits. Nor does it protect against sudden policy shifts, involving unfair import quotas, unfavorable exchange rates, discriminatory tax and wage laws or even government-inspired labor unrest.

Nevertheless, the program's staunchest boosters are the companies working under its umbrella. Boston's Godfrey L. Cabot, Inc., which bought the first policy in 1948 on its British carbon-black plant, points out that an insured company gets a big boost in its credit rating. General Mills, after insuring a bean-processing setup in Pakistan, was so sold on the insurance that it made plans to insure all new foreign investments, "though we hope never to have to collect."

After 10 lean years, the program is finally beginning to put on some steam. Applications for insurance climbed from 46 in 1956 to 62 last year, are on the rise now. More important, new applications are coming in for underdeveloped nations once considered too unstable. In Jordan, Oilman Ed Pauley last year got a $6,000,000 guaranty for oil exploration, and there are applications for $23 million worth of expropriation insurance pending for Iran.

As more businessmen come alert to the promising future of underdeveloped countries, the guaranty program can do much to help those nations get the capital they need and to protect the investors who are helping to substitute private investment for public aid. But if it is to be a real shield for forward movement, the program needs a greater awareness of its function by both U.S. businessmen and the members of Congress.

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