Latin America: Development Programming and United States Investments [Reprint 2016 ed.] 9781512804584

Table of contents :
Preface
Contents
The Historical Background
Enterprise and Development
Establishing Operations in Latin America: A Case History
Problems of United States Investments in Latin America

Citation preview

Inter-American Studies Occasional Papers

I. LATIN AMERICA: DEVELOPMENT PROGRAMMING AND UNITED STATES INVESTMENTS

The Northeastern Council for Latin American Studies and The Foreign Policy Research Institute, University of Pennsylvania

Latin America: Development Programming and United States Investments CLEMENT G. M O T T E N VIRGIL SALERA RICHARD L. DAVIES H. W. BALGOOYEN

UNIVERSITY Of

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WH? PHILADELPHIA: U N I V E R S I T Y OF PENNSYLVANIA PRESS

© 1956 by the Trustees of the University of Pennsylvania Published in Great Britain, India, and Pakistan by Geoffrey Cumberlege: Oxfprd University Press London Bofthay, and Karachi

Printed in the United States of America American Book-Stratford Press, Inc., New York

Northeastern Council for Latin American and Inter-American Studies Organization and Membership The Northeastern Council for Latin American and Inter-American Studies had its origin in two roundtable conferences held under the auspices of the Pan American Union at Columbia University in 1952, and at the University of Delaware in 1953. In October 1953 the Council was chartered as a non-profit educational organization under the laws of the State of Delaware. It held its organizational meeting at Princeton University in February 1954, its first annual meeting at Brooklyn College, on November 19-20, 1954, and its second annual meeting at the University of Pennsylvania on November 11-12, 1955. Its third annual meeting will be held at Princeton University, November 16-17, 1956. Membership in the organization is open to teachers, students, business, labor, the press, museums, and other cultural organizations. Purposes The purposes of the Northeastern Council are: 1. To promote inter-disciplinary research programs and v

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publications relating to the problems of Latin American and inter-American relations. 2. T o promote and facilitate the establishment of scholarships, grants, and the exchange of students and teachers. 3. T o encourage the development of Latin American studies programs, on both the undergraduate and graduate level, and the holding of inter-university seminars on the Americas. 4. T o work in cooperation with other regional councils, the Pan American Union, the universities of Latin America, and other interested organizations in order to stimulate the formation of an international association of specialists on Latin America. President

OFFICERS, 1955-1956

A R T H U R P. W H I T A K E R , University of Pennsylvania Vice-Presidents P R E S T O N E. J A M E S , Syracuse University H E R B E R T D O R N , University of Delaware Secretary-Treasurer P H I L I P S H E I N W O L D , Brooklyn College

BOARD OF DIRECTORS

In addition to the above officers H A R R Y B E R N S T E I N , Brooklyn College M I R O N B U R G I N , Department of State B A I L E Y W . D I F F I E , The City College of New York D A N A G. M U N R O , Princeton University C A R L E T O N S P R A G U E S M I T H , New York Public Library INTER-UNIVERSITY SEMINAR

Executive Secretary HARRY BERNSTEIN,

Brooklyn

College

Preface The importance of the problem of the world's underdeveloped areas to the United States was highlighted more than seven years ago by the famous Point Four passage in President Harry Truman's annual message to Congress in January 1949. Since then both the government and the people of the United States have devoted much thought and effort to this problem, but there is probably no one who would claim that it has been solved. Indeed, it has just been given added complexity and fresh urgency by the new turn of Soviet policy which has made Moscow a competitor with the economically advanced nations of the free world in the matter of aid to the underdeveloped areas. Among these areas Latin America is the one to which the United States is most closely bound by ties of all kinds, traditional and actual, spiritual and material. For one thing, it is the area in which the United States has its largest economic stake as measured by both trade and investments. Latin America is also the area in which the United States made the first beginnings of its foreign aid policy. As a result, while the political and military exigencies of the cold war have channeled most of the United States foreign aid into other areas, the experience in Latin America has now been going on long enough to provide perspective on that part of the worldwide problem of underdeveloped countries. Accordingly, "Latin America: Development Provii

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gramming and United States Investments" was chosen as the theme of the first day of the second annual meeting of the Northeastern Council for Latin American and Inter-American Studies, at the University of Pennsylvania on November 11 and 12, 1955. T h e four papers published in the present volume were read and discussed at the morning and afternoon sessions on November 11. Grateful acknowledgment is hereby made to the Foreign Policy Research Institute of the University of Pennsylvania, and particularly to its Director, Robert Strausz-Hupé, for aid in arranging and conducting these sessions and in facilitating the publication of the papers. Separate publication will be given the addresses delivered at other sessions of this annual meeting, including one by W. Rex Crawford, "Social Aspects of Latin American Economic Development," at the Council's annual dinner, at which Charles C. Griffin was toastmaster, and two at a meeting of the Council's InterUniversity Seminar under the chairmanship of Harry Bernstein: " T h e Adjustment Problem and the Theory of Economic Development in Latin America," by Herbert Dorn, and "Urban Development in Latin America," by Anatole A. Solow. The present volume is the first of a series of "Occasional Papers" which the Council plans to publish under the management of its Committee on Research and Publication, whose members for the year 1955— 1956 are as follows: Preston E. James, Chairman Harry Bernstein Charles C. Griffin Thomas Palmer, Jr. Carleton Sprague Smith

Contents Preface The Historical Background by Clement G. Motten Enterprise and Development by Virgil Solera Establishing Operations in Latin America: A Case History by Richard L. Davies Problems of United States Investments in Latin America by H. W. Balgooyen

The Historical Background by CLEMENT G . MOTTEN Associate Professor of History, Temple University

Latin America is an underdeveloped area, but the people who live there have given ample evidence that they do not wish it to remain underdeveloped. A t many conferences, ranging from the top level meeting of the Organization of American States at Caracas to a local seminar for visiting Latin American journalists held in this city, inevitably the question of Latin American development has come up. And Capital has been the magic word. Capital in the broadest possible sense of the word: investments, grants, credits, loans; cash, rebates, easements, technical assistance; anything that money will buy. At these meetings North Americans have been reminded of fortunes made in Latin America by United States investors, of dollar diplomacy, of the occasional overweening influence of American big business abroad, of boom and bust economic stories that grew out of war-time attempts to cooperate, of an apparently greater interest in our enemies than in our friends once the victory had been won. And now the cry is for more and more capital and we are being chided with our responsibility: "He that hath the capacity," so the saying goes, "hath also the responsibility." 1

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We have answered with murmurings to the effect that capital flows normally in the direction of greatest return, that when private investment, which must expect a return, goes into underdeveloped areas the potential return must be proportionate to the inevitable risk. We have pointed out that expropriations, nationalizations, and currency-export restrictions have underscored that feeling. Public monies may be a different sort of thing, but then maybe we should be calling it philanthropy and discuss the capacity of a people to support virtually unlimited giving. We demur by saying that perhaps we should first ask what other sources of outside capital are available. We find ourselves wondering if full use is already being made of Latin American resources and funds. Just how is our money to be used? What sort of development planning is going on and how does United States investment fit into the picture? That is our current problem. And we can best understand it by understanding the historical background of this situation. Hundreds of thousands, perhaps millions, of Americans dream about making that nest egg in Latin America. As early as 1800 North Americans were engaged in the highly profitable and then illegal South American trade, and Philadelphia, incidentally, was one of the most important points of departure. After the winning of independence individual norteamericanos drifted all over Latin America—men like Wheelwright, and Meiggs, and Keith—but generally they had little capital. Down to about 1890 it was the United States that was underdeveloped and we were building our nation with European gold. We already had technical assistance to export in those days but little capital, and

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3

so Latin America, for most of the nineteenth century, looked primarily to London for its investment money. By the time World War I broke out the situation showed definite change. The United States had become a creditor nation and we had begun to build up our Latin American investments. We were rather specialized—sugar mills in Cuba, meat-packing plants in Argentina, and railways, mines, and agricultural properties in Mexico comprised our principal interests. Inasmuch as I have here for the first time mentioned individual countries, now is a good time to point out that all investment and development considerations ultimately must be on a country by country basis. Needs, desires, customs, and laws change with every border. For any detailed work the generalization "Latin America" is much too vague, but inasmuch as this is a broad-stroke picture, I am going to use my individual brushes only when needed to clarify. World War I touched off our race to investment dominance in the Latin American area. This was engendered at first by a demand for raw materials. T o be sure, North Americans had been interested in these, particularly basic metals, before the war, but ample domestic production had made large-scale foreign operations not a particularly lucrative business. With the end of the war there occurred certain cutbacks, some of them spectacular like sugar in Cuba, but for the most part the 1920's were booming years for United States investment south of the border. By the end of the decade our total Latin American investment had reached the five billion dollar mark, equal to England's and surpassing all others. Our chief fields for direct investment were public

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utilities and transportation, petroleum, mining and smelting, agriculture, and manufacturing and distribution. Area-wise our greatest interests were in Cuba, Mexico, Venezuela, Colombia, Brazil, Chile, and Argentina. This was a time when substantial units of United States industry branched southward. Firestone, Standard Oil, Colgate-Palmolive-Peet, and International Harvester—to pick a few at random—joined pioneers such as Singer Sewing Machine, United Shoe Machinery, and Swift and Company. This movement was to have various interesting repercussions, but actually did not comprise a great share of our total investment picture and was certainly overshadowed by the snapping up of Latin American bond issues by United States investors. This type of investment, called portfolio to distinguish from direct where the investor usually exercises a control, was something of a phenomenon of the 1920's. Our holdings reached the figure of $1.6 billion by 1930. A high figure, but still substantially lower than the $3.5 billion direct investment figure. But the wholesale defaultings of the next decade reinforced United States interest in other types of financial activity.* The depression years depreciated almost all values of foreign investments, but particularly those in agriculture, mining, and railways. The end of the 1930's saw • There are several good texts covering this period. I have found Latin-American Trade and Economics by Paul V. Horn and Hubert E. Bice particularly useful. The figures and facts for the pre-World War II period have been checked against their Chapters 13 and 14.

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a tapering off of the decline and then World War II burst upon the scene. To try to work out an orderly story of just how much money that might be classified as investment capital went to Latin America during those war years is quite beyond the scope of this sketch. To the normal increases brought on by war-time expansion must be added United States government expenditures, including capital expenditures to increase production facilities, extraordinary purchases, lend-lease grants and other assorted credits. The important consideration in this whole business is that the Latin American body economic received massive injections of capital with proportionate stimulation. While the injections continued life was exhilarating, but the headache came suddenly with the end of the war and the abrupt shift of United States policies, interests, and spending. Latin America, asserting that she had given her all in an attempt to aid the war effort, was not prepared to be dropped as suddenly and summarily as she was. Seduction and rejection were the words that came to her mind and even more bitter ones followed and were shrieked when United States policy employed a Marshall plan to aid Europe but said that there would be no such grandiose scheme for our good neighbor allies. Consideration of the immediate and ultimate wisdom of United States policy at this time has too many sides to be discussed here. We can only note what happened and get on to a review of the post-World War II investment picture. Now I am going to skate out on the thin ice of statistics. To the person who does not normally use the figures compiled by experts in international finance, the picture can quickly become jumbled and meaning-

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less. Part of this is because different groups use different data for the accumulation of their figures—figures which may agree in general, if not in detail. Sometimes substantial differences may seem apparent because different groups use the same basic figures but adjust them to be more relevant to their particular uses. Unless otherwise noted, my figures are drawn from the United States Department of Commerce or from the United Nations Economic Survey of Latin America. As previously noted, the most important figure for our consideration of United States investment in Latin America is that which shows direct capital investment. In 1929 this figure, rounded, was $3.46 billion. The depression years drove it down to $2.8 billion in 1936, and it sagged to a recent low of $2.72 billion in 1943. By 1950, however, it had climbed to $4.74 billion and here we shall pause to do a bit of breaking down. Certainly the most important single type of investment was petroleum at $1.4 billion, nearly thirty per cent of all our direct activity in Latin America. Transportation, communication, and public utilities, old favorites, were in second place, just over one billion dollars. Two other old favorites, mining and agriculture, had slipped to fourth and fifth place respectively; only $628 million for the mines and $520 million for the farms. The new third place, indicating an investment change, was occupied by manufacturing at $780 million. A further breakdown shows the situation a bit more clearly. Although there seemed to be something of a trend away from the old raw materials-basic development pattern it was still the big story. Petroleum was the biggest single figure in this category and in the

T H E HISTORICAL BACKGROUND

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transportation-communication-public utilities field, although railroads were down, basic electric light, power, and gas accounted for $546.2 million investments. In manufacturing, chemicals at $205 million and food processing at $158 million, both quite basic, led the list.* One aspect of this investment picture does begin to change, though, and I would like to call attention to it. It is the trend toward the type of Latin American company which is associated with a United States concern, but is not nominally under its control, nor is it a real branch. The best example of this is the arrangement worked out for the manufacture of Westinghouse electrical products in Mexico. A company, with its own Spanish name, was set up, and under the plan onehalf of the capital was to come from Mexico, the other half from the United States. Local laws were to be followed and the company was to have full use of all Westinghouse patents and developments. This would seem to get around many of the old objections to yanqui big business. Things have not worked out entirely as hoped for; there seems not to have been fifty per cent Mexican capital even with some probable dummy holdings, and profits have not been as great as generally forecast; but this experiment does seem to be rather typical of a new trend in United States investment in Latin America. Now I am going back to figures. I stopped at 1950 because the best breakdown figures I had were for that date but I want to come now to the most recent totalpicture figures. Since the mid-century our interest in Latin America has continued to grow. By 1953 our • All figures for these two paragraphs were taken from The Statistical Abstract of the United States, 1955, p. 889.

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total private, direct investment had gone over the six billion dollar mark and in 1954 was $6.256 billion.* That seems to be quite a bit of money, but it is apparently not enough and the Latin Americans and some United States citizens are complaining that private capital is not flowing south in sufficient amounts. Inasmuch as our total foreign investment figure is over the seventeen billion dollar mark it is interesting to see how Latin American investments measure up against other world areas. Comparison figures show that Latin America is our special love. Even our northern neighbor Canada trails at $5.96 billion and Western Europe is an out-distanced third. There is evidence, though, that in the past two or three years the rate of capital flow to the north has increased greatly with a subsequent sharp decline in the southward flow. For example, in 1954 fifty per cent of our addition to foreign capital investment went to Canada and only fifteen per cent to Latin America. The International Development Advisory Board in its September, 1954, report, expressed this in a different way by claiming that since 1950 new capital has been going south at the rate of only $15 million a year. I »emphasize new, since reinvested capital already in Latin America is not included in this figure. That does not seem to me to be a completely fair argument; since reinvested capital is very useful, and when it is in the amounts left in Latin America it is substantial. But the Board had a point to make and it does raise the question: Why has not and why does not more private investment capital go to Latin America? The answer does not lie solely in Canada's boom; there * Survey of Current

Business, August, 1955, p. 12.

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is another side to the Latin American story which we must now take up. Foreign capital investment in underdeveloped areas has usually had something of the sporting element connected with it and Latin America is no exception. Plunging on El Dorado Unlimited was much more exciting than buying some nice, safe British bond. The return just might turn out deliriously better, but there was also greater risk to be hazarded. In the nineteenth century it might be at the hands of some capricious caudillo, in the 1930's expropriation became an ugly word for Standard Oil and March 18 became a national holiday for Mexico. A subsequent variation, more genteel in nature, has been called nationalization. Some potential investors probably have been frightened away from Latin America because of these wellknown tendencies toward what my broker friends call political unreliability. But it would seem that the over-all generous rate of return has kept the capital flowing freely until recently. With the over-all stability picture no worse than formerly and perhaps a bit better than in the old "two-for-one" days, it would seem that a new factor had entered the picture. A study prepared by the Industrial Conference Board in 1951 sheds some light on this. T h e board queried firms engaged in Latin American trade as to the nature of obstacles encountered doing business south of the border. Under "obstacles corresponding largely to difficulties specifically encountered by foreign capital" by far the most important was "convertibility" —that is, the ability to take out profits, and, if wanted, capital, too. This would seem to suggest one good reason why new capital has become chary of going to Latin America. T h e profits may still be there and the

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host country may be gaining increased capital investment by forcing profits to be plowed back, but the man with new capital to invest is clearly going to be wary of a situation where he will find it unusually difficult to withdraw or where he may have to go abroad to spend his profits. Now we come to the question of what the Latin Americans have been doing to help themselves. Have they tried any sort of development programming? They most certainly have. T h e best known organizations that have worked on this have gone under the general banner of Fomento. T h e most famous is probably the Corporación de Fomento de la Producción, Corporation for the Development of Production, in Chile. Established in 1939 this home-grown product has involved itself in over one hundred different projects ranging from the simplest to its shiny showpiece, the pride of all Chile, the Huachipato steel plant. T h e Fomento's primary function is the over-all development of Chile's economy. It is a planning board that is concerned with problems that are both basic to most of Latin America and also of special concern almost exclusively to Chile. It is governed by a board made up of representatives of both public and private organizations and has five key executive officers concerned with the major fields of mining, agriculture, industry, fuel and energy, commerce and transportation. Set up originally with tax money, Chile's Fomento has subsequently drawn resources from a variety of directions and is today at least supposed to be part of the national budget. It is not supposed, however, to function as an allpowerful political body. Ideally, it likes to give direction and aid to economic activity that fits into the

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broad development picture and then to retire from active participation as quickly as possible. Sometimes this has meant simply looking into a small business's problem, lending it the necessary funds for reorganizasion or expansion, and then keeping no more than an average banker's eye on its loan. Sometimes the participation has had to be greater. Fomento has joined companies as a sort of partner until a mutually agreed upon program had been carried out. But most interesting of all have been the actual companies which it has set up, such as the Compañía de Acero del Pacifico—the steel plant mentioned above—or ENDESA, the Empresa Nacional de Electricidad, SA., charged with basic electrical expansion. In these big affairs Fomento has tried to encourage private, domestic capital to drop its predilection for putting money back into land, and to come in and participate in the nation's growth. Along these lines it has not been as successful as hoped. The dream was that eventually Fomento would be able to pull out completely and go on to other tasks. This has not come to pass, but a start has been made in changing traditional Latin American investment habits. It would seem, though, that all ground gained here has probably been lost in the ruinous inflation of the past five years. T h e old Chilean diehards who invested in land probably still have their land and it is hard to see what anybody else can have by now. Before going on to mention other similar organizations, it must be pointed out that Fomento has received capital aid from outside. This has come from the Export-Import Bank in Washington and from the International Bank for Reconstruction and Development in

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Latin America. This general source of capital will be commented upon later. Although the present political situation in Argentina has made the picture a bit obscure, this neighbor of Chile has also had a development body known as the Argentine Trade Development Corporation. In recent years it has been concerned with Perón's five-year plans aimed at trying to make Argentina an important heavy industry power. Because the goals were somewhat impractical and the objectives of questionable nature, and, one might add, because the boss is no longer on the scene, the projects have not been as successful as on the other side of the Andes. In Peru, the Corporación Peruana del Santa has aimed at industrialization. Hydroelectric power, railroad expansion, and more recently an iron and steel industry have been the targets. Venezuela has its Corporación Venezolano de Fomento, whose objectives have been almost identical with those of Chile, somewhat broader in scope and more intense in activity than those of Peru. As befits its size, Brazil has a broad development assistance program, but, instead of concentrating functions in one board, Brazil has tended toward the creation of several mixed corporations, each with special tasks. A well-known example is the Companhia Siderúrgica Nacional, which was given the responsibility for the Volta Redonda steel plant in Minas Geraes. Other companies tackled such projects as alkali production, hydroelectric power and the production of airplanes and tractors. Sao Paulo had its own four-year plan. Petroleum development, exploration, refining, trading, and transport were placed under the eye of Petroleo Brasileiro. And so on.

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One last example—Mexico. Here the Nacional Financiera has undertaken a broad program of public works and social progress and then shifted to electric power and consolidation of established industries, and finally has taken to investing in desirable enterprises where private investment seems unwilling to make an initial venture. T h e Banco Nacional de México has taken over the other functions that Chile's Fomento handled under a one-body development program. All of these bodies and others I have skipped over are to be found in virtually all of the countries of Latin America. They have tried to mobilize resources and bring to bear what outside help they could. Yet, the continued cry for more capital, and what capital will buy, must furnish one measure of their lack of success. Another aspect of the problem is suggested in the figures of Latin American capital invested in the United States. I do not have the figures for Latin American capital invested elsewhere in the world, but the United States figures alone are thought-provoking. In 1946 Latin America had a total investment in the United States of just over one billion dollars. This figure has continued to grow, and in 1954 it reached the mark of $1,747 billion. While Latin America has been crying for United States investment, her own people have sent abroad one and three-quarter billion dollars, a considerable part of which could conceivably be employed at home. The rather unhappy question arises: Is not Latin America asking the United States and its citizens to undertake an aid program that her own citizens regard as too risky?

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Earlier I mentioned government monies for Latin America. This is not strictly investment, unless perhaps in a political sense, but it has meant considerable capital and much of that has been supplied either directly or indirectly by the United States. We must therefore review it briefly. This type of capital falls into three classifications: military grants and credits, non-military grants and credits, and loans from international governmental banks, a substantial portion of whose capital has been supplied by the United States. It is in the breakdown of world figures in the first two categories that Latin Americans have found their greatest source of resentment. By October of this year, 1955, the Survey of Current Business reported that we have made a total postWorld War II military disbursement of $14,663,000,000. Of this staggering figure, only $224 million has gone to the American Republics and most of that since 1952. T o be sure this does mean an average of more than $20 million a year has flowed south, and this has not been capital on which a profit had to be returned, nor investment which might be suddenly withdrawn. It is in fact almost a gift, but the Latin Americans quite forgivably look more at the comparison, thinking not of how much they got, but of how much was received by others who had not been such good neighbors. In the non-military area, although the funds have been made available on a somewhat different basis, including credits and loans in addition to grants, the story is similar. T o be sure the Latin Americas have received only about one-thirty-sixth of our total postwar disbursement, but this has amounted to the rather tidy sum of $1,008,000,000. Two countries, Brazil and

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Mexico, have profited most with $458 million and $221 million respectively. The figures, and comparisons too, become even more impressive when we move into the area of international organization fund distribution. Because there is a wide variety of these, such as the International Bank, the International Monetary Fund, the International Children's Fund, and the various organizations of the United Nations and American States, and because it is a bit difficult to calculate the precise share of the United States I shall cite only one. This is the Export-Import Bank, whose funds are supplied entirely by the United States of America. During the period June 30, 1945 through June 30, 1955, the post-war decade, the American Republics utilized credits from this bank totalling $1,174,434,000. I am not going to attempt a summation of how much United States capital of all forms has gone south, even since World War II. Any figure would probably be inaccurate, or so hedged with reservations as to be almost meaningless, but it would be impressively large. Not large enough however to impress the Latin Americans, already staggered by their own problems. They feel they need more United States capital. We can point to the mountainous sums they have had. Obviously the discussion of United States investment and Latin American development is more than just an academic question.

Enterprise and Development by VIRGIL SALERA

Pan-American

Union •

In this discussion I shall present essentially an oldfashioned approach to some problems of economic development in Latin America, realizing full well that I am unlikely to appeal to the taste for analytical elegance or intellectual novelty. My reading of the literature, coupled with experience in the field, persuades me that far from enough attention has been paid to the role of private initiative and the free economy in all of the quite voluminous discussion of development, or, alternatively, that there is an unjustified lack of enthusiasm for economic individualism in matters developmental. T o appreciate what this means imposes a requirement: it will be necessary to try to visualize the parts of what I have to say in the context of a very broad economic, political, and social whole. Anything less is likely to create misleading impressions and possibly to lead to the mistaken identification of constructive comment with destructive criticism. The full scope for the potentials of economic individualism and economic development itself in most of • The views expressed in this paper are entirely the author's, and do not necessarily represent the official views of his organization. 16

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Latin America largely awaits quite extensive governmental reforms. In saying this, I am not unmindful of the very complex human and social issues involved in accelerating economic growth in many areas of the world. Anyone familiar with Arthur Lewis' The Theory of Economic Growth, as yet the only mature general work, on the subject, will know what I mean. Nor am I unmindful of the socio-political problems of implementing a vast reform program, which might more appropriately be referred to—with apologies perhaps to President Eisenhower's script writers—in the more appealing terms of a Crusade for Production.

II At the risk of oversimplifying matters, we can summarize the strengths and weaknesses of the Latin American economies, from a restricted point of view, namely, the requirements of an intensive drive to expand per capita output. The factors of strength include a growing population and an increasing realization of minimum requirements for economies of scale, reasonably favorable land-population ratios, a fairly widespread desire for material advancement, inconsequential religious barriers to economic growth and innovation, liberal immigration policies in many cases, good export bases despite much of the inspired comment on the problems of the terms of trade, not inconsiderable entrepreneurial nuclei in both industry and agriculture, and close economic and political ties with the United States. This is a rather respectable list. Admittedly, the enumeration would not be the same if use were made

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of a different criterion, for example, the fashionable but elusive concept of "economic welfare." The weaknesses, or obstacles in the way of sizable expansion of per capita output, are not easy to explain without more extensive comment than is possible at this time. Again, for much of the documentation, I suggest a reading of Professor Lewis' new book, even though it is a general work that is not addressed specifically to the Latin American economy. One of the weaknesses is found in the administrative and political framework within which private enterprise functions. This situation does not necessarily characterize each of the countries, or show up in a uniform way where it is present. Reduced to its simplest terms, it amounts to loose administration of laws and regulations thereunder, with uncertainties, costs, and delays that materially increase the risks and burdens of enterprise. One effect is to make some persons in public administration non-risk taking, quasi-participants in private business, on burdensome terms that usually cannot be known in the planning stage. Initial capital requirements are also increased arbitrarily as a result. Another effect is to make it difficult to schedule production efficiently in all cases because license applications are granted or turned down on an unpredictable basis. An invisible effect may also be mentioned: income payments made under the system increase the attraction of consumption over investment, to the detriment of capital formation. A second obstacle to the rapid expansion of output per head is the relative dearth of capital. The effects of this of course are very generally known; they are also commonly exaggerated by persons who do not be-

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lieve in individualism, or who refuse to believe in the enormous capacity of the free economy. In the third place, technical knowledge is not widely distributed nor the means for imparting it available as yet on an extensive basis. T h e effects of this cause are less efficiency especially in non-export production, a lower tempo of innovation, a reduced volume of resources for development by virtue of the resulting higher level of non-industrial imports in relation to exports, and a loss of business cohesiveness vis-à-vis government that would result from business-sponsored, industry-wide work in the field of technology. There are also removable barriers to the rapid expansion of output in the form of unsound policies respecting agriculture and land use. As a result, agricultural production remains well below levels that are attainable without sizable drafts on capital, with undesirable consequences for the most backward half of the population in a majority of the countries. In the fifth place, tax policy and administration leave much to be desired. Unlike most observers, I am not disturbed by the relatively regressive character of the Latin American tax systems, since I am mindful of two facts: first, that more progressive systems would have an adverse impact on capital formation and, second, that luxury imports are already fairly heavily taxed in most cases. Incidentally, conventional views on taxation need to be reconsidered before being applied to cases of rapid growth of per capita income. In my view, much of our thinking about tax incidence has been colored by the artificialities of static and distribution-oriented analysis, so that our preconceptions yield a distorted picture when the focus is the growth of an underdeveloped economy in which nearly every income

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group is able to effect some improvement of its absolute economic position and many of the less fortunate obtain not unimportant satisfactions from the numerous evidences of physical growth all around them and the connections they see between such growth and unfolding economic opportunities. Sixthly, educational levels are too low and an excessive number of children are still without formal schooling. It is the investment service quality of education that is most in need of emphasis, mainly to expedite the growth of agricultural output and to prepare increasing numbers of rural people for industrial or mining activity. An illustration of what is meant, for instance, is that experience everywhere has shown that labor venturing from the countryside into industry or mining operates at a far lower level of productivity than labor already accustomed to industrial life. T h e handling of social security and the content of labor legislation are additional weaknesses from the development point of view. In fact, it may be argued that the value of such policies viewed from the development angle varies rather inversely with their humanitarian appeal. I am not arguing against social protection with respect to minimum needs of people struck by misfortune. What I have in mind are systems of dismissal pay on a lump-sum basis in which a premium is placed upon loyal employees turning disloyal because of the monetary gains involved;, or the rules of the game under which employees are theoretically non-dismissable after X years only to find that dismissal occurs regularly on the eve of the Xth year in order that employers may avoid saddling themselves with non-dismissable workers. I also refer to the excesses of the Christmas bonus system, outlays under which are an-

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other on the long list of factors that expand consumption at the expense of developmental investment. Shaky currencies—and associated laxity in fiscal policy —coupled with abuses of related exchange control systems, are additional weaknesses of a serious sort. It is about time that production-minded people recognize that unstable currencies work powerfully to restrict savings, distort the structure of production, expand the sphere of government intervention, and overencourage man's speculative instincts of an economically subversive kind. Finally, something needs to be said about the insufficient security of property. This is partly a by-product of underdevelopment itself, in the sense that propertyless masses cannot be expected to have much respect for the possessions of a small minority of relatively unenterprising people. It is also a by-product of long experience with slow economic growth, in the sense that most people do not see a connection between property and growth of physical resources when secular expansion proceeds at a snail's pace. Once the developmental ice is really broken on an enterprise basis, however, support is likely to be forthcoming from quite unexpected sources. To say this is not to argue that communists and crypto-communists in the Hemisphere are going to see the ideological "attractions" of their faith suddenly melt before the fires of economic development. The condition of the security of property is also the result in part of the lax administration of the law, to which reference has already been made. Finally, it is to an important degree the consequence of relatively unstable political systems and the arbitrariness that is frequently associated with changes in regimes. I have dwelt at greater length upon the weaknesses

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than upon the strengths of the Latin American economies for two reasons. The strengths are more generally known, and they also involve some matters that are found to exist in other regions of the world. More importantly, I have said more about the weaknesses because I wish to establish a basis for constructive comment. In this connection, you will note that most of the shortcomings on my list are of an institutional character, but of the kind in which Oriental traditionalism does not bulk large. This is of course a very favorable situation. It is worth emphasizing, since so much that is written on the subject of development has reference to the rather different conditions found in much of continental Asia, where so many ominous concessions are being made to communist pressures.

Ill I now turn to a discussion of some specifics in the field of governmental reform. The sphere of public administration ranks high. A pressing need is for a concerted effort, preferably under pressure from business interests, to effect rapid improvement in the quality and integrity of the public service. Modernization of physical facilities, appointment of superior personnel to ministerial posts and increased tenure of office by such people, upward revision of salary scales, promotion based solely on merit, ruthless opposition to graft, and the indoctrination of public-spiritedness are the means by which a satisfactory situation may be realized in a relatively short span of time if the proper sort of drive is employed with all the weapons at the disposal of the modern state.

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SJ

It is of course easy to assume an ivory-tower pose about the whole business. There has already been too much of that. What is needed is a program that meets the issues realistically and that wins converts on a wide scale. In such an effort the strategy and tactics are sure to challenge the intelligence and courage of the best men in public life today. In fact, I doubt that there will be the remotest chance of success unless the campaign is part and parcel of a broad-gauged development effort with dramatic appeal. I can only offer a few general suggestions to indicate roughly what I have in mind, since the separate national economic "revolutions" will have to be tailored to the peculiarities of each country. Carefully pre-arranged measures should cover every major area of the economy, but the attack should only proceed marginally and gradually rather than frontally. The currency, taxation, social security, land reform, a great variety of promotional measures in agriculture, reassessment of tariffs with a view to eliminating impediments to efficiency that are inherent in some duties, interest rate policy in the field of mortgage credit, investment incentives, the whole galaxy of regulatory measures affecting business, operations of official development institutions, and the like, should be dealt with as a unified whole, in a manner that bends over backwards to be pro-capital. Each of the specific features should meet the requirements of internal consistency, of course. It is also worth the emphasis of repetition to remark that they must be mutually re-enforcing both as to the unmistakable character of implications for near- and longterm growth and the real security afforded new and old investments. The program might best focus on a short-term saving target that is, say, twenty-five to thirty per cent above a

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LATIN AMERICA

recent average. T h e promotion of savings should be tied as much as possible to the other specific features of the program, though there should also be a place for a persuasive special campaign in which use might profitably be made, among other things, of relatively short-term projections of per capita national product to dramatize the program's expected outcome in terms that the average individual is likely to find both interesting and comprehensible. Illustrations that are correlated with national product figures might consist of typical savingsfinanced investments and the goods-and-services benefits that would flow therefrom. Simple cases of the type referred to could include small investments in highyield seed by the farmer; modest investments in better tools by the representative artisan; and savings-financed small expansion of plant and equipment by the pintsized manufacturer. Such self-financed expansions would, of course, be in addition to bank-financing or official lending that would be going on. As implied in what has just been said, the higher income groups, who comprise the main savers and who are generally well informed, would not be impressed by a savings campaign as such as much as by estimates of the total effects of the over-all program. I shall return in a moment to the position of this group. At this point one can visualize the usual objections to the impact of the program on consumption levels. Sympathies will pour out from the only partly informed "humanitarians" regarding the burden that is expected of people who are at or near so-called subsistence levels. T o this I reply that the efforts will be voluntary and that we should not too readily accept stories based on the comparability of national income statistics. Complaints are also likely to point to the deflationary effects

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25

that may be expected in the consumer goods industries. T o this I need only remark that I am not proceeding k la model building upon restricted ceteris paribus assumptions. High marginal saving during an upsurge need not involve more than spotty and short-lived declines in the domestic consumer goods sector. Moreover, the larger declines in consumption will probably take the form of a drop in purchases of foreign origin, which should be a welcome change at such a time. The major appeal, clearly, will have to be to the investing and entrepreneurial groups. They are the economically and politically sophisticated citizenry. T o them, the over-all picture and prospects are the things that count. An appeal to such people should be in terms of a drive for economic expansion primarily and overwhelmingly on a private basis. These people have been operating within a relatively restrictive institutional web, with the result that they are reasonably certain to respond well to a national drive to expand enterprise and output as well as their own absolute position in the society. T o them the prospects for a noticeable growth of micro-capitalists outside agriculture are all to the good, since such newcomers provide needed breadth to the confidence base. They will also appreciate the growth of enterprise in the traditionally more slowly moving field of agriculture, of course. But they will be most interested in the other features of a positive and unprecedented program. In particular, I feel that they are likely to be truly fired by the prospects of thoroughgoing reforms in the areas of government that touch the economy. These reforms include matters over and above those already discussed. A general statement about planned currency reform is called for, except of course in those

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LATIN AMERICA

cases in which currency stability is a well-established fact. Fortunately, there are a number of Latin American countries in which strong currencies exist. T h e statement to which I refer need only be general in character, mainly to insure against deflationary expectations that might result from an overplaying of the currency aspects of the over-all program. Specifically, the statement on currency policy might be limited at first to strong declarations on the goal of internal financial stability and general hints as to how stability might be achieved. In the field of social security, a sensitive area politically, policy declarations could stress the combination of the eradication of abuses and the strengthening of the truly protective features of the system. T a x policy might emphasize the determination to effect full enforcement at an early date coupled with the use of promotional measures, transitionally, for the purpose of helping to increase saving and augment investment. T h e enforcement measures would be of the kind which some finance ministers have already put into effect, with excellent results. T h e promotional feature might consist of a system of credits against income tax based on the percentage of income that is devoted to investment of specified types; thus, there might be a tax credit of, say, one-half to one per cent for each five per cent by which non-inventory investment exceeds ten per cent of income. A question immediately arises as to what this will do to the yield of the tax. T h e yield at unchanged rates need not decline and could well increase in view of the enforcement aspects of the program; in addition, of course, the result after a short lag should be an expansion of the tax base, provided that government investment is of the right kind (as will be

ENTERPRISE A N D D E V E L O P M E N T

indicated below). It must also be remembered in this connection that income taxation in Latin America does not dominate the revenue picture. My tax suggestions, if implemented, are not likely to have a sharp short-term impact on the supply of private investible resources. As has already been hinted, however, the countries could simultaneously effect a downward adjustment in rates, in which case the system of tax credits could serve to expand investment rather considerably in relation to consumption. Even with such a change, concentration on the purely short-term effects in the narrow tax field could easily give a distorted picture of the probable eventual benefits over a wider area. Specifically, tax reform has long been overdue on social grounds—incidentally, in France no less than in Latin America. There has been little reform of a striking character, partly because of the obvious resistance to change on a piecemeal basis, but basically because of an unimaginative and largely negative view of the problem. A system of promotional tax credits within the indicated framework could well break the ice in a wholly desirable way, producing some expansion in investment over the short-run and creating valuable long-term investment benefits while simultaneously reassuring the ordinary citizen on the administration of income taxation. Another part of the over-all program could consist of a thoroughgoing re-examination of the tariff structure, an action that ought to be taken periodically anyway. It would be possible to reduce duties to modest proportions wherever the evidence showed that existing margins of protection encouraged laxity and unduly burdened consumers. Several countries have already done this with fairly good results. The action could very well spur modernization, increases in productivity, and the expan-

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sion of the domestic market. T h e last mentioned development would of course redound to the benefit of firms awaiting the growth of demand justifying investment in plants providing tolerable economies of scale. T h e same general re-examination should also concern itself with the import licensing system, especially in connection with the potentials of currency reform, so as to increase the scope for enterprise in the whole arena of foreign trade. T h e field of interest policy also awaits a considerable overhaul in many countries, perhaps as part of the broad approach to internal financial stability. I refer in particular to controlled and unduly low rates in the mortgage market. Many of such rates have actually been negative in real terms. Under such policies it is inevitable that government rationing, and the bickering that generally attends the use of this arrangement, is forced to act as a substitute for the free market. The result is yet another discouragement of saving, and partly in consequence of this the tendency is strong to perpetuate centralized and demonstrably ineffective control over the use of economic resources. Land reform urgently calls for action, but by no means in all of the countries. This is not necessarily a problem of size, since many of the larger farm operations are modern in every sense and in the vanguard of agricultural efficiency. Land that is either not being worked or that is in a demonstrably low-order use by virtue of inattention on the part of the owner or his agent presents the real problem. T a x reform may help in this department. Or this approach coupled with workable and equitable compensation arrangements must come to grips with objectionable phases of land tenure. Action in this field may also become surprisingly feasible within the framework of our suggested over-all program. Im-

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*g

provements could well result in respectable additions to national savings without commensurate drafts on supplies of goods available for consumption. Next, a word about the great variety of promotional measures that should be taken or extended in order to raise agricultural output. This is the arena in which government has much to contribute to the growth of private enterprise and national product, and on the basis of very attractive returns per unit of resources employed. For example, as Lewis points out, many countries can expect an annual return of fifty per cent on their investment in efforts to increase agricultural productivity. This result will be achieved if agriculture produces half the national product and if the annual expenditure of one per cent of the national income increases agricultural productivity, as is not improbable, by one per cent per year. The means to this end are all well known, and they have been tested in the field. I refer to agricultural extension, supervised credit, improved methods of irrigation, improved work in agricultural experimentation, soil surveys, systems of market news, the use of systems of standards especially in marketing farm output, and the spread of knowledge regarding everything from the use of fertilizers to methods of on-farm storage. The operation of official development institutions should also be re-examined in the light of our suggested program. Some of them operate conservatively, in the sense of avoiding much above ordinary bank risks; others attempt to move into areas of production which are more efficiently operated by private business; in still other cases informed observers have revealed that the lack of sufficient disinterestedness on the part of officials has thwarted many soundly based private ventures and in

LATIN A M E R I C A

the pfocess contributed to increasing the attractions of consumption in relation to investment. T h e several fields of government investment and policies related thereto are of vital importance. I doubt whether there is an underdeveloped country in the Americas that could not for some time effectively use all available revenues that are earmarked for development to make investments in social overhead capital or basic services. T h e technical and other problems connected with such investment are bound to challenge the whole governmental hierarchy, so that there should be no limit to excitement and fascination for the individuals involved. In fact, I know of nothing government could do that would be more reassuring to private capital and more stimulating to the spirit of enterprise than a persuasive policy declaration of the indicated kind, backed by a will to implement it effectively. It would inject a constructive philosophy of partnership in development that could unleash impressive forces of growth. Incidentally, now is the time to take this sort of thing seriously, given the early commencement of operations by the International Finance Corporation. Finally, let me say a word about the whole array of regulatory measures affecting business. If these too are re-examined by disinterested parties of stature, within the framework of a dynamic program to expand national output by fostering a maximum of private initiative and enterprise, I venture to predict that all manner of streamlining operations will be shown to be feasible and very beneficial to the nation's productive labor. A revival of the pre-classical distinction between productive and unproductive labor might even be called for, at least for purposes of dramatizing aspects of the over-all program. But this is in the realm of the public relations

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31

specialists. Theirs is the job of devising means of "selling" the program, first to outstanding citizens and then to the whole national audience. Help from an important outside source can reasonably be expected: any such program that gets off the ground will assuredly attract additional private and public foreign capital as well as increased technical assistance. With the resulting teamwork, the battle for production is sure to be won—and sooner than most people think.

Establishing Operations in Latin America: A Case History by

RICHARD L . DAVIES

President, Pennsalt International

Corporation

OPERATION

As used here, an operation is a business organism for creating good things for people. It is the living miracle by which the confidence and desire to serve, of various components, are put together for the multiplication of benefits for those components and for others. In the classical operation of the feeding of the five thousand people by the Sea of Galilee, five loaves of bread and two fishes were the seven components. In the business operation of today, which is generating benefits for so many, it is interesting to consider the necessary ingredients as likewise being seven, with five of one type and two of another: manager, customer, supplier, employe, investor, science, government. T h e establishment of an operation is the selecting of these components and the putting of them together into a common undertaking. OPERATION

ABROAD

When an operation of these seven components, all from a single country, proves particularly successful in 38

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33

generating benefits, it is natural that one or more proposes an operation in another country. Although the purpose would always be to generate benefits for all concerned, each component would have a special motivation for establishing the new operation abroad: 1. Manager

The manager wants to establish the new operation because he has learned how to conduct an operation successfully in his own country and sees an opportunity to convert this proficiency into the generation of more benefits in a particular area outside his own country. 2. Customer

The customer is especially interested in an operation abroad because he feels that such an operation will generate benefits for him by supplying his needs more favorably, while at the same time generating sufficient benefits for the other components of the new operation to justify its healthy existence. 3. Supplier

The supplier is interested in the establishment of a new operation abroad because it will generate benefits for him in the form of an advantageous foreign market for his goods, while at the same time generating adequate benefits for the other components of the new operation. 4. Employe

The employe welcomes a new operation in an area where his skills are especially needed and therefore where the new operation can afford to deliver increasing benefits to the employe while at the same time generating benefits for the other components.

LATIN AMERICA

34 5. Investor

T h e investor is interested in the establishment of a specific operation outside his own country when he feels that the new operation can deliver more benefits in the form of safe net earnings on investment while still delivering adequate benefits to the other components of the new operation. 6. Science T h e science component will urge the new operation abroad in the area where its contribution of technology can bring the greatest benefits for itself as well as for the other components. 7.

Government With regard to the government component, the government concerned will encourage a new operation when it feels it will be of greatest benefit to the entire people over which the government presides, as well as to the specific components making up the operation. T h e benefit to the people over which the government presides may be in the form of increased tax revenue because of the new operation, or simply by the generation of general benefits to the economy.

OPERATION IN BRAZIL, VENEZUELA, PERU, AND MEXICO In 1950, after a century of operations first in Pennsylvania, then on the Eastern Seaboard, then in the East and Middle West, and finally in the entire United States, our company felt it was desirable to establish operations abroad. This required, for any such operation, the selecting of the seven necessary components and putting them together in a common undertaking. Naturally in

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35

this process of selection there were some countries which seemed to have many more ideal components than others. After exploration of conditions and opportunities in many parts of the world, we found four countries in which we felt we could best, at this time, establish operations similar to those which we had been carrying on in the United States. It developed that these countries are all in Latin America—that is, Brazil, Venezuela, Peru, and Mexico. The reasons for selecting these countries, from the point of view of the seven components of the operation, are the following: 1.

Manager

From our point of view as a manager, we felt that the operational experience which we had developed in the United States, together with the knowledge which we had acquired of countries outside the United States, best fitted us to take responsibility for operations in these four countries. 2.

Customer

From our point of view as a customer, there were great potentialities for operations in these countries to supply us with minerals for our manufacturing and selling activities in the United States. 3.

Supplier

From our point of view as a supplier, we had found a growing market in these four countries for products of the type which we manufacture in our United States operations. 4.

Employe

With regard to employes in these four countries, we found that there were many people who wanted

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to work in such new operations and who, with training by us, could be productive employes. 5. Investor From our point of view as investor, we found in these four countries that the expected return on investment was high enough and the effective tax rates were moderate enough so that not only could we advantageously invest our own funds in the proposed operation, but other investors from those countries as well as from the United States were desirous of participating. 6. Science With regard to the scientific contribution, we found that these four countries were at a stage of economic and technical development where the fruits of our own scientific endeavors in the United States would be most helpful. 7.

Government It appears to us that the ideal government for an operation is one which provides a balance between assurance of stability on the one hand and encouragement of free operation on the other hand. This eliminated certain areas of the world where there is plenty of stability, even to the extent of rigidity, but with insufficient encouragement for free operation. It also eliminated areas where there is freedom of operation even to the extent of disorder, but with inadequate assurance of stability. We recognize that the governments of none of the four selected countries provide the same assurance of stability for an operation as the United States. Ex-

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37

amples of this have been rapid changes in the values of the currencies of some of these countries. However, we found in all four countries somewhat greater encouragement for free operation than in the United States. One way in which the governments of these four countries extend encouragement is by lower tax rates on the operations than would prevail in the United States. O P E R A T I O N S IN MEXICO We have established operations in Brazil, Venezuela, Peru, and Mexico, and have selected the Mexican operations as examples in this discussion. In that country we have established operations called Pennsalt de México, S.A.j Minerales y Metales Industrials, S.A. de C.V., and we are in process of establishing a basic chemical manufacturing unit. P E N N S A L T DE MÉXICO, S.A. When we study the history of the growth of our affiliate, Pennsalt de México, we clearly recognize three stages of development, the first stage of which proceeded as follows: 1. Manager Beginning with the formation of Pennsalt de México and during the first stage, although we held the control through fifty-one per cent ownership of the stock, we arranged to have the Mexican stockholders act as managers of the company. During this stage, we found that the Mexican management was somewhat lacking in some of the fundamentals of business management as we know them in the United States. In addition, we discerned the absence of what we con-

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38

sidered the proper zeal in looking after the interests of the operation itself. T h e managers tended more to follow the patrón or proprietor concept of management rather than the trusteeship type which we have found in the United States so essential to the success of an operation. 2. Customer From the very beginning, the customers of this enterprise were Mexican citizens, Mexican farmers, Mexican industries, as well as various divisions of the Mexican government. In general, the relationship between the company and the customer was cemented by mutual confidence in the integrity and honesty of each other. T h e customer put his confidence in Pennsalt de México to deliver products of high quality which would perform satisfactorily, and the company extended to the customer long term credits for the payment of the goods delivered. 3. Supplier During this first stage, suppliers were mainly American companies, including our own organization, as well as some foreign concerns. T h e equipment and parts necessary for production and maintenance were supplied from outside of Mexico. Wherever possible, raw materials produced in Mexico were used. 4. Employe T h e employes of this company from the outset were almost entirely citizens of Mexico. A few employes were citizens of countries other than the United States and Mexico, residing in Mexico. T h e employes were from many diverse social groups of the country. During this period we were able to train Mexican

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39

citizens to occupy managerial and sub-managerial positions in the company. This is in conformity with basic policy of our company. American experts were dispatched to Mexico for the specific purpose of training Mexican nationals in technical as well as managerial techniques. 5. Investor The major part of the financial investment was undertaken by us, including long term credit necessary for the purchase of raw materials to make this production possible, as well as the financing of re* ceivables for customers. 6. Science The scientific knowledge gained over long years of experience in this country was put to the most fruitful use in Mexico to create benefits for all the components involved. No act was left undone to introduce all the applicable experience of our company in the manufacture of the products of Pennsalt de México, as well as in the most beneficial method of use and application of these chemicals. 7.

Government The government of Mexico was most sympathetic to our operation and allowed us adequate freedom of operation; however, it was not possible always to enjoy assurance of economic stability to an equal degree. In the second stage the following changes were made:

1. Manager During the second stage of development oiPennsatt de México, we found that it became necessary for us

LATIN AMERICA

4o

to supplement the Mexican shareholder management provided during the first stage by management people from our own organization in the United States. Steps were taken to train Mexican citizens as managers, as well as to give added responsibility to the Mexican technical members of the operation. We found them eager to assume this added responsibility. 2.

Customer T h e customer component of the operation remained of the same type but grew substantially as our operation increased in strength. Due to the nature of the operation, considerable managerial judgment was required in the selection of customers whose integrity and honesty could be depended upon.

3.

Supplier T h e sources of supply began to undergo a significant change so that our operation was progressively less dependent upon our United States company and other American suppliers. T h e Mexican sources of supply became stronger, and other foreign sources also began to play a larger part in supplying our operation in Mexico.

4.

Employe Additional employes required in the growth of the operation were all obtained from Mexico, and many of them were advanced to sub-managerial positions. It became less and less necessary to send experts from the United States to give them training.

5. Investor Our portion of the investment increased somewhat due to the necessity of establishing more managerial

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41

control by the members of our own oragnization who had been delegated to take over the task of management. 6. Science The technological advances made by scientific research in the United States company and through our continuing gains in the better application of chemicals came to be felt more and more during this second stage, and improved methods of production and application were substituted for old, with beneficial results. New chemical processes were considered and adapted. 7.

Government The Mexican government continued to maintain its policy of encouraging industries, including Pennsalt de México, as a way to increase the country's wealth. However, the assurance of economic stability faltered and we, along with the other business operations in Mexico, went through the earthquake of the devaluation of the currency. Close examination of this operation, together with our operations in the other countries at this time, brought home to us even more vividly the great importance of economic stability in our foreign operations.

The third and present stage finds the situation as follows: 1. Manager During the third and present stage of our operation, we found it even more beneficial to substitute completely the previous management with members of the staff of our own United States organization.

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However, the training of Mexican nationals continues, and Mexican nationals whom we have trained are at present members of the management group of Pennsalt de México. Furthermore, one of the Mexican nationals trained during the first and second stages of the operation has been advanced to the top managerial position of one of our foreign operations in another country. 2. Customer With the improved efficiency of managerial control, the customer component has been enlarged. T h e customers we serve through this operation remain Mexican, although there are plans to include customers in neighboring countries. 3. Supplier A significant change has come about in our sources of supply. There has been an increasing emphasis on the Mexican sources, as well as on the European, while we in the United States are playing a continually diminishing role as a supplier. 4. Employe The employes remain Mexican also, and are assuming the shape of an enthusiastic and effective labor force not much different than found in our operations in the United States. 5. Investor The share of our investment remains about the same as during the second stage of development of Pennsalt de México.

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43

6. Science Our Mexican operation is considered equal to our operations in the United States as a place to transplant the fruits of the endeavors of our research activities. 7.

Government The Mexican government continues to share our enthusiasm, providing adequate freedom of operation and increasing assurance of economic stability. MINERALES Y METALES INDUSTRIALES, S.A. DE C.V.

Minerales y Metales Industriales was founded within the past year and the experience gained throughout the growth of Pennsalt de México from its inception to the present, has been advantageously applied to this mining operation. Looking back on the rapid growth of this operation, we find that we pass through two clear and significant stages. In the first stage this was our situation: 1. Manager During the first stage the managerial responsibility was entrusted to the hands of Mexican nationals who had had no experience with our own organization, but who had been active in the mining field in Mexico for a number of years. At that time we assumed that this mining experience in Mexico would be of advantage to us. 2.

Customer The entire production of our mining operation was channelled to the United States with Pennsalt acting as the sole customer of Minerales y Metales Industriales.

LATIN AMERICA

44 3. Supplier

Due to the nature of the mining operation the supplies were strictly Mexican. 4. Employe Since as a matter of basic policy our company uses nationals of the country in which an operation is undertaken, here all the more we employed Mexicans because of the type of the operation. 5. Investor All the capital required for the rights to operate and the working capital necessary were supplied by us from the United States. 6. Science Our experience in the mining, beneficiation, and application of minerals to industry found Minerales y Metales a natural development for the generation of wealth and benefits in that area. 7.

Government T h e Mexican government welcomed our developing the country's resources, recognizing the beneficial effects to all components involved, and it offered us a freedom of operation equal to that in any other country. In the present stage we find these changes:

1.

Management In the present stage of Minerales y Metales Industriales' operation, we have substituted the Mexican managers with a manager from our staff in the United States. Our experience showed that the Mexican techniques of mining operations were so different from

ESTABLISHING OPERATIONS IN LATIN AMERICA

45

our own that consumer demand in the United States outstripped the rate of production as carried out by those older techniques. The regularity and increase in production since we took over the top management responsibility have been so marked that they reinforce our belief that our operations should be carried on according to American business methods to the greatest extent possible. 2. Customer Our company still remains the customer of the operation, and from our point of view as a customer we have been gratified by the increased production brought about by the managerial change. It may not be out of place to add that, from a customer's point of view, the eventual reduction in cost brought about by good management is of great interest. 3. Supplier The sources of supplies in mining operations are by nature Mexican. 4. Employe The employe component has been enlarged in keeping with the enlarged production, and under the new management and technical training the productivity of each employe is approaching an efficiency comparable to that in the United States. The training of Mexicans for managerial posts under the direction of the general manager from our own organization goes on continuously and already we have several positions of sub-managerial nature that are filled by Mexican nationals.

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5. Investor O u r share of investment continues to be the same as at the beginning, and the principal share of investment continues to be from us. 6. Science T h e sources of supplies in mining operations are by nature Mexican. However, much scientific knowledge and experience of the United States has been introduced in the form of modern mining equipment and technical personnel so that the practices of American mining industry may be beneficial to all the components concerned. 7.

Government T h e Mexican government has been so encouraged by the rate of increase of wealth of the nation brought about by the close working of all these components, which are provided by United States firms and nationals, that they are more than ever welcoming such undertakings there. BASIC C H E M I C A L U N I T F O R

MEXICO

W e are at present in the midst of a program for establishing in Mexico a relatively large basic chemical unit of a type which we have operated successfully for many years in the United States. 1. Manager T h i s particular enterprise, by nature, requires more specialized management proficiency than any of the other operations we have until now established abroad. One of the reasons we are doing this now is that we have available not only the management experience in this type of operation

ESTABLISHING OPERATIONS IN LATIN AMERICA

47

in the United States, but, through the other two operations in Mexico, we have a knowledge of the circumstances under which the management will have to operate there. 2. Customer This unit will supply basic chemicals of great importance to the industries of Mexico, and if things go as planned, should open the way for a substantial expansion of related industries in that country. 3. Supplier The raw materials for the chemicals to be produced in this unit will come almost entirely from Mexico. 4. Employe The employes will be mostly Mexicans trained by us, both in our plants here and by on-the-spot training by technicians from the United States. 5. Investor With regard to the investment, our company is prepared to put in all the necessary funds. However, it may be desirable for us to allow various Mexicans who are interested in good return on their investment and who are interested in the establishment of this industry to participate. The individuals who are expected to be managers and employes have also indicated a desire to participate in the investment. 6. Science In this particular case we are fortunate in being able to bring to the operation the most-up-to-date,

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efficient, and scientific methods developed so far in the world. 7.

Government T h e Mexican government is encouraging the establishment of this operation by the moderation of tax rates in accord with its usual practice for encouraging new industries, but is urging that there be opportunity for substantial investment by Mexican citizens.

CONCLUSION In our examination of these seven components of an operation we should not lose sight of the basic requirement that each must bring to the operation the qualities of confidence and the desire to serve in order that the desired miracle of multiplication of good things may occur and continue. This is equally true for the manager, customer, supplier, employe, investor, science, and government. T h e more carefully this type of operation is studied, the more evident is the analogy with the classical operation in the first days of Christendom whereby the five loaves and the two fishes were multiplied to feed the five thousand people. In fact, this type of operation is not found in the history of civilization before the advent of Christendom. One of the most exciting adventures before us today is the establishment of this living miracle in Latin America in these present times.

Problems of United States Investments in Latin America by

H. W.

BALGOOYEN

Vice-president, The American & Foreign Power

Company.

Anyone who has spent twenty years in the public utility business in Latin America, as I have, will recognize that the fundamentals of foreign investment remain very much the same; the problems have changed very little in the past generation; and, unfortunately, the popular misconceptions as to the nature, the purpose, and the results of foreign investment still persist. The last time I discussed the subject of foreign investment, I referred to it as "one of the most studied and least understood economic topics of our time"—one that had been worn threadbare by the probing minds of a score of official committees and a great multitude of amateurs and "experts." I am not posing as an "expert." I have discovered no magical solutions. I believe a good point of departure in any discussion of Latin American investment problems is to try to develop a clear understanding of the reasons for our interest in Latin American investment from a national as well as from an individual viewpoint. As a spokesman for private investment interests, much of what I shall have to say will be from the private investor's 49

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viewpoint—a viewpoint which must be understood both here and in Latin America if any real progress is to be made; but behind the problems of the individual investor there is a broad public interest which all Americans, both North and South, cannot afEord to ignore. Let us examine, first, the reasons that we, as United States citizens, should feel an interest in the industrial and general economic development of Latin America and in the related investment problems. Here, we are dealing with the future of twenty friendly nations on the American continent and the islands along its shores; countries with a combined population greater than our own and the world's most rapid rate of population growth. These are nations and peoples with whom we have much in common. Differ though they may in racial origin and cultural background, they share our love of peace and freedom, our resistance to alien subversion and aggression, and our respect for the dignity and worth of the individual. Burdened by a long history of colonialism, followed by extended periods of political and economic instability, they have had difficulty in adapting their traditional social and economic patterns to the requirements of our modern industrial age. But they are determined to make up for lost ground—and quickly—and they have no patience with those who counsel caution and moderation in driving toward their economic goals. With a per capita income which averages only oneeighth of ours, they still consume one-fifth of all our exports, and these exports are heavily weighted with capital goods to supply industries established by United States investors. T h e nations of Latin America represent one of the world's greatest storehouses of

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natural resources and one of the most accessible. Roughly one-third of our imports come from Latin America and thirty per cent of all the exports of these countries result from the investments of United States citizens. In time of peace, the farms and mines of Latin America supply us with minerals and foodstuffs essential to the smooth functioning of our industrial machine and the maintenance of our standard of living; and in time of war, the availability of this production is indispensable to our national survival. Here is a three and one-half billion dollar market for our goods—a market at the very beginning of its growth and development and expanding in terms of purchasing power at a rate much faster than our own. It is entirely in our national interest and to our individual advantage that this growth and progress should continue—that resources should be further developed, that industry should expand and flourish, and that a more prosperous and satisfying way of life should be achieved. Every individual whose productivity can be raised above the subsistence level is a potential customer; and every person with a peso in his pocket after providing for minimum living needs can, with others of his kind, broaden the markets for American goods, increase the opportunities for American workmen, and make for closer commercial and cultural ties among all the American nations. Our private investments in Latin America are playing an important role in facilitating this progress. Latin America abounds with practical examples of the increased productivity, the enhanced earning power, the higher living standards and, in some areas, the improvements in health, sanitation, and education that have resulted where a fair opportunity has been pro-

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vided for the productive investment of private United States capital with the experienced management and advanced techniques that accompany it. T h e nations of Latin America must be able to count on this type of assistance on an increasing scale if they are to maintain their recent rate of progress. Even now, there are indications that the pace of economic growth is beginning to slacken. T h e remarkable expansion in economic activity since the war has outrun the capacities of the Latin American countries to finance their capital requirements. Efforts of government to maintain the rapid pace of industrialization, to determine its direction, and to finance more and more of the cost have contributed to an unbalanced economic development in some countries, to a serious inflationary situation, and to the persistence of foreign exchange problems long after the original reasons for their existence ceased to be important factors. Regardless of the reasons for their difficulties, these countries need our help, both in capital investment and in the technical assistance to assure its most productive application; capital in the form of agricultural implements, industrial machines and transportation equipment; and capital in the form of electric power facilities to turn the wheels of industry and multiply the productivity of the individual workman; for it is only by such means that these nations can realize their economic aspirations. Our country has had much recent experience in helping other nations and other peoples. In acquiring this experience, we have made many mistakes which might have been avoided had the emergency needs been less urgent, and had time permitted us the luxury of sober reflection. Yet, I believe we have

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learned some valuable lessons. One is that friends are not bought with gifts or money; another is that the most valued assistance is that which enables the recipients to help themselves; but perhaps the most important is that there is no substitute for the drive and creative force which the system of free, private, competitive enterprise, with its incentives for effort and its rewards for accomplishment, can impart to the productive process. It can be said to their credit that our Latin American friends are not looking for charity. They are eager to help themselves and, despite some unfortunate socialistic experimentation, their chief reliance still is placed on private enterprise. It is in their own self-interest as well as ours that our help should be extended in the most practical way—by increasing the flow of private investment capital, with the technical assistance that comes with it—to those nations that seek it intelligently and are willing to give it encouragement and protection. I am sure that United States private investors have done more in the field of technical training and assistance in both industrial and agricultural pursuits than have all the official technical assistance agencies together. And they have done this not out of charity but because they believed it was in their own interest. This is not intended as a criticism of the very fine work that governmental and inter-governmental agencies have accomplished in fields where they have demonstrated their competence. The Joint Technical Assistance Programs of our government, working in cooperation with the governments of Latin America, have many constructive accomplishments to their credit in such fields as health, sanitation, education, public

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administration, and improved agricultural methods. Although some errors have been made, the balance is sufficiently favorable to justify the continuance of these efforts. I believe that the case is equally strong for continuance of the fine work which our government is doing, directly through the Export-Import Bank, and indirectly through its contribution to the capital of the International Bank, in assisting to finance the construction of basic services in Latin America. I am sure that officials of these banks are sincere when they say that their aim is to assist private investors rather than to increase their problems. Both institutions however, are under constant pressure to lower their lending standards, and to enter questionable fields of activity. It isn't right for private enterprise to look to government or to government-supported agencies for protection against the consequences of its own poor business judgment, ill-considered investments, or over-zealous sales efforts. It is our responsibility, as citizens and taxpayers, to keep ourselves informed and vigilant so that we may help the conscientious officials of these institutions to resist the pressures of politically influential groups who would break down the standards that have been set and divert these agencies from their proper functions. We must also be vigilant in combatting the constant propaganda for new financing agencies such as the proposed SUN FED, whose proponents hope to use the taxpayers' money to set up a world-wide giveaway agency to promote dubious ventures of such questionable merit that they cannot attract private capital or meet the lending standards of existing governmental institutions. It cannot be urged too strongly nor repeated too

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often that, if the economic development of Latin America is to proceed along sound, practical lines, the major role must be preserved for private enterprise— not government. Above all, it must be made clear that neither the United States government nor the financial institutions it supports will provide funds, now or at any other time, to finance exports to countries whose shortage of capital is due to their unwillingness to provide an economic environment conducive to domestic capital formation and the attraction of foreign investment. Since it is generally conceded by practical people that the major financial burden of the economic development of Latin America must be borne by private investors—domestic and foreign—let us consider, for a moment, some of the motives which might induce a private investor to take all or part of his capital out of the relatively safe and profitable environment of the United States, to undergo the foreign exchange risks and other economic and political hazards incident to Latin American investment. In special cases, the motive may be a desire to protect an existing investment, to maintain a market position by getting behind tariff walls, or to assure a source of essential raw materials. But the overriding motive, and the only one which will bring about a broad flow of new capital into the mainstreams of Latin American industry and commerce, is the profit motive. Private enterprise in the United States has always been known for its initiative and its willingness to venture. The urge to pioneer, to accomplish, and to build is part of our American heritage; but the driving force behind it all is the desire to produce something of recognized value for which adequate compensation will be received in the way of earn-

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ings or profits, and the greater the risks, the greater should be the opportunities for profit. There really is nothing complicated or obscure about the reasoning of an investor when he lists the plus and minus factors of a contemplated venture in a foreign country. It must all add u p to a reasonable opportunity to operate his business with a minimum of government interference and, with good management, earn a profit commensurate with the risk and with the value of the service rendered. T h e infinitely complicating and confusing element too often is the irrational and unpredictable behavior of the governments with which investors must deal: governments of capitalhungry nations who profess their eagerness to receive private investments, while promoting state-owned enterprises which encroach upon and narrow the field for private endeavor, and while making no effort to remove obstacles which make it impossible for existing enterprises to flourish; and governments of capitalexporting countries, who sometimes urge their citizens to invest abroad while their policies, in the fields of taxation, foreign trade, and diplomacy have the effect of inducing investors to keep their money at home. As a private investor, I would not be moved to action by any talk about our collective responsibility to invest abroad. Nor would I concede that American investors are, in any way, derelict in their duty or unduly timid in failing to measure u p to the expectations of theorists who calculate how many billions should be invested each year, in this industry or in that country, to raise productivity or living standards to a level they consider appropriate, or to rectify an imbalance in our international payments. Individual investors will not be stampeded into unwise ventures.

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into uninviting places, by arguments that a disproportionate amount of total private investment is going into this industry or that country; or that, in certain areas, the inflow of new investment funds is failing to keep up with earnings remittances on existing investments. As to the first of these arguments, I would say that there are excellent reasons, from the viewpoint of both the investor and the recipient, for the large petroleum and iron ore investments that have been going into Venezuela, for the expansion that is taking place in North American utility properties in Cuba and Brazil, and for the great increase in our investment stake in the friendly environments of Peru and our immediate neighbors, Canada and Mexico. (This is by no means a complete list of Latin American countries which are providing, or making an effort to provide, a favorable environment for foreign investments.) I would like to consider the second argument, that the inflow of investment funds should exceed the outflow of earnings, in some detail, since it is cited, in some Latin American countries, as a reason for restricting earnings remittances of present foreign investors, and because it has been given new life and a certain pseudorespectability by two recent studies originating in United Nations agencies. To appreciate the full impact on the Latin American investment picture of these two United Nations studies —International Cooperation in a Latin American Development Policy, and prepared by the Economic Commission for Latin America, known as ECLA, for the use of delegates to the recent Rio de Janeiro Economic Conference; and Foreign Capital in Latin America, prepared for ECLA by the United Nations Department

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of Economic and Social Affairs—it is necessary to understand the enormous prestige enjoyed in Latin America by ECLA and by its Director, Raul Prebisch. The studies, reports, and pronouncements of ECLA are accepted, without question, as the final word in matters of economic theory and policy. The ECLA study, which gave the United States Delegation so many headaches in Rio, made these interesting suggestions: that an investment target of a billion dollars a year should be set up for Latin America, of which about one-third should be supplied by private foreign investment, and two-thirds by the International Bank and the Export-Import Bank; that there should be created an Inter-American Fund for Economic Development, with half the capital furnished by the United States out of taxes levied against the income of United States investors in Latin America; that a larger proportion of the new investment in Latin America should come from "public sources" rather than "costly" private investment; and that, in developing countries, new investment should exceed earnings remittances on existing investments. The study on Foreign Capital in Latin America followed up the last-mentioned suggestion by pointing out that, over a period of some twenty-five years, our private investors had taken out more than they had put into Latin America. This was hailed by a large segment of the press as a startling discovery—and a "little-known situation." As I pointed out in an article in the New York Journal of Commerce: "If this is truly a 'little-known situation' and, of itself, is considered to be cause for alarm, it is only too evident that we have not progressed very far in our understanding of foreign investment fundamentals." If in-

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vestments are made for profit, and if profits, to be useful to a company's shareholders must, eventually, be translated into cash income in a currency investors can use, why should a private United States company be expected to put into foreign investment over a period of years more than it takes out? And, if not one private company, why should the sum total of all private companies? The real question, of course, is not whether, during a specific year, or over a period of years, the inflow of private United States capital to Latin America has exceeded the outflow of profit remittances. Neither is it merely a question of balancing foreign exchange income and outgo, although it can easily be demonstrated—as did Assistant Secretary of State Henry Holland, in a recent address—that United States private investments in Latin American countries, by earning them a billion dollars a year on export account, by saving them a billion and a half dollars annually on import account, and by paying them taxes estimated at one billion dollars annually do produce an annual net gain in dollar exchange of very sizable proportions. The significant question is whether, all things considered, these investments have been beneficial to the countries which have received them. It is only fair to say that the U. N. study on Foreign Capital in Latin America did concede that "comparison of particular items in the balance of payments are of limited significance. . . . The basic questions are how a given amount and composition of foreign investments affect the country's output and international payments position." But this was almost completely ignored in the sensational press reports which heralded the study. It is extremely important that the various

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U. N. releases, economic reports and studies, with their tremendous influence on economic thinking throughout the world, should be studied carefully, examined critically, and interpreted correctly by the American press. Superficial analyses or uninformed reporting of the many and complex problems involved in United States direct investments in Latin America can only result in a great disservice, not only to the United States investors immediately concerned, but to the friendly countries of Latin America which are so in need of help to finance the economic progress to which they aspire. I would now like to turn from consideration of the general background and problems of Latin American investment to the more specific problems of an actual, long-term investor in a key industry in that area and tell you, from personal knowledge, some of the problems my own company, the American & Foreign Power Company, has had to face during more than thirty years in the Latin American investment field. And I want to talk not only of problems but also of opportunities and accomplishments. T h e Foreign Power System has investments of over a billion dollars in the public utility industry in eleven Latin American countries. Over the years, we have met with more than our share of obstacles and frustrations; and our earnings have been considerably less than they would have been on the same amount of capital invested in the United States. This has been partly due to economic conditions beyond the control of the countries where we have invested, but, too often, it has been due to the failure of responsible government authorities to come to grips with some of their most serious economic problems—to their tendency to

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do that which is politically expedient, rather than financially sound. T h e Foreign Power System was faced, early in its history, with a variety of economic problems that could scarcely have been anticipated by its founders. Our Latin American investments were made in the 1920's when currencies were stable, exchange was convertible, governments paid their bills and tried to keep out of debt, and individuals, rather than governments, complained of a dollar shortage. We had just completed the acquisition of our properties when the 1930 collapse of commodity prices hit Latin America and ourselves with the full impact of the world depression. As commodity prices fell and demand for foreign currencies exceeded the supply, the foreign exchange reserves of the countries we served diminished rapidly and the international values of their currencies dropped precipitously. For example, the value of the Argentine peso, which had been forty-two cents in 1929, dropped to twenty-six cents in 1935, and is now quoted at about three cents in the free market; and the Chilean peso declined from twelve cents to four cents during the same six-year period and is now quoted at around 700 to the dollar. Only a few currencies were able to buck the trend, the outstanding example being the Venezuelan bolivar, which, supported by an enlightened government policy toward petroleum development, actually rose in value against the dollar. Not only did the decline in exchange rates drastically reduce the dollar value of our earnings, but country after country imposed strict exchange controls which severely restricted their remittance to the United States. In some cases, dollars were not available even to pay for essential materials and equipment. Although the

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first shock of these developments was the hardest, this was only the beginning of a long and difficult period of declining currency values and exchange restrictions which still are a factor to be reckoned with in some of the countries where we operate. Next to these currency difficulties, our most serious economic problem has been the inflationary trend which got under way in earnest during the early years of World War II, rapidly picked up momentum, and today, in some countries, seems to be out of control. I do not say that our experience has been typical, although ours is one of the two largest private United States investments in Latin America. There is no doubt that public utilities, especially foreign-owned utilities, are in a particularly vulnerable position in times of currency weakness and rampant inflation, when prices and costs of operation are rising, and the price of the product they sell is subject to government regulation. Yet, the problems of the utilities in Latin America are not insoluble, provided that the regulatory authorities have the courage to face up to their responsibilities. Electric power and transportation are the keys to an expanding economy and a rising standard of living and there is no logical reason for the rate of return on investments in these industries to be among the lowest in Latin America, and lower than they are in the United States. Interest rates in Latin America are extremely high. In some countries, they run up to twelve per cent or more, while returns on equity investments outside the public utility field may reach thirty, forty, or fifty per cent annually on invested capital. In such an economic environment, the nominal yields on investments in electric power and transportation are a curi-

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ous anomaly, and one which must be remedied if the economic development of Latin America is to go forward. Since the governments concerned fully realize the urgent need for additional investment in electric power, the reluctance of some of them to authorize remunerative service rates would make no sense at all if they did not believe they have an easy alternative, and one that possesses much political appeal. It is the entry of government into the electric power business, financed with money raised through the taxing power or by longterm borrowings at low interest rates. Several Latin American countries have created government power agencies to construct costly power plants, financing their cost with funds obtained through taxes, government borrowings, and outright inflation of the currency; but still the power shortage continues and the countries which have gone farthest down the public power r o a d even in one instance to the point of confiscating foreign-owned utilities—are among the chief sufferers. Despite the recent emphasis on public power programs, the provision of electric power in Latin America is still largely in private hands, and most of the governments continue to emphasize their desire for additional private foreign investment in the industry. Naturally, those countries that have been realistic and fair in their treatment of the foreign-owned utilities are the ones that are receiving the bulk of the new investment The Foreign Power System, alone, has spent $400 million since the war on new construction in Latin America and, if present trends continue, this amount should double in the next ten years. We are sometimes asked why we continue to spend so much money on new construction in Latin America.

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The first reason is the obvious one: we are in the power business, and the first responsibility of any electric power company is to make all reasonable efforts to meet demand. However, we do not consider that this responsibility extends to countries where we have had a history of unfair treatment or where there is no reliable promise of fair treatment for the future. Sometimes a commitment to expand our facilities does result in more favorable consideration by government of our essential requirements in the way of service rates, foreign exchange authorizations, and local financing, and there are, of course, important savings in operating expenses to be gained by replacing obsolete and inefficient equipment with facilities of modern design and efficient operation. While we must be realistic about our problems, we cannot allow them so to preoccupy us that we lose sight of our opportunities; and however difficult the financing problem it creates, we must look upon the dynamic growth of local industry and the soaring demand for power as an opportunity and a challenge, rather than as an obligation. It is quite an understatement to say that it has not been easy to find the money to carry out our post-war construction program. The disastrous collapse of currency values during the depression left us with an unwieldy capital structure and an overpowering burden of fixed charges and dividend obligations on senior securities. A complete and thorough-going corporate reorganization was necessary, and it required some seven years of continuous negotiations and hearings before our reorganization became effective in 1952. Here was a company in the throes of a long and costly corporate reorganization, under the necessity of coping with a serious power shortage, requiring substantial new

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investment in countries with long records of currency problems and foreign exchange difficulties—countries with undeveloped capital markets and unsolved inflationary problems which exerted a continuous upward pressure on operating expenses and construction costs. Yet, there was no alternative, as we saw it, but to go ahead. Foreign Power's own resources were exhausted before the program was well under way and the development of new financing mechanisms soon became a matter of urgent necessity. Our situation in those days reminds me of a scene in an old Bob Hope movie, where Bob was seated in the front seat of a jeep going rapidly down hill on three wheels, frantically holding up the wheel-less end of the front axle by means of a pair of suspenders thrown over his shoulder and shouting, "Do something, quickl Can't you see that this is impossible?" Well, we did something quickly—several things, in fact. We pioneered and met with some success in developing local capital markets in the interior of Brazil, in Cuba, in Costa Rica, Panama, and other countries. We raised some twenty million dollars by means of common stock sales in Brazil alone, not on the basis of the yield, which was relatively low, but by emphasis on the safety factor and on the absolute necessity of local participation in the financing of badly needed additions to power supply. We also sought the assistance of the Export-Import Bank, which responded by extending credits totalling over seventy million dollars. We secured a loan of ten million dollars from a group of private banks in the United States. We sought, and obtained, the assistance of government sponsored development banks and financing institutions, both in Cuba and Brazil. We sold securities of our Cuban subsidiary

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to the union representing its employes and to the Cuban public and, when necessary, we borrowed from local banks at high rates of interest. Still, it was necessary to finance more than fifty per cent of our post-war construction program from retained earnings. This percentage, of course, is much higher than it should be, and we are making every effort to cut it down by raising a larger portion of our construction requirements in the areas which directly benefit. Within the past two years, we have been successful in obtaining loans totalling eighteen million pesos for our Cuban subsidiary from Financiera Nacional, a subsidiary of the Cuban Central Bank; and our Brazilian subsidiaries have obtained a quarter of a billion cruzeiros from the National Development Bank in that country. Additional loans are under negotiation from financing institutions in Mexico and Brazil. In this way, we are developing an effective partnership between private investors and government institutions in Latin America and the United States to share the task of building and expanding modern, efficient electric power facilities, under private management and control. The gradual development of local capital markets, and the growing acceptance by government of the proposition that the private companies should be given every encouragement to expand their facilities—despite the noise of the nationalistic element and the clamor of the advocates of public power—is providing Foreign Power and other foreign owned utilities in Latin America with one of their greatest opportunities; and we are determined to make the most of it. I am citing some of our experiences in Foreign Power because I believe that the very fact that a privately owned utility company, operating entirely in Latin America, and faced since its inception with the hazards

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of currency depreciation, exchange controls, inflation, economic and political instability, and the rising tide of nationalism, can somehow manage to survive and grow and render real service to its customers is indicative of the results that can be achieved by investors in basic industries as these hazards are mitigated and the obstacles are overcome. I am not going to attempt to outline the various steps that should be taken by the Latin American governments to solve these economic and political problems, whose existence acts as a deterrent to both domestic and foreign investment. So far as the public utility industry is concerned, I believe that there is a great deal that can be done by alert and capable management to mitigate the effects of these economic conditions on their business. It is obvious that the solution of the problem of rising costs of operation, which derive largely from inflation, must be found in more efficient operations, in higher service rates, or in a combination of both. If foreign exchange restrictions threaten to block the remittance of dollars, the authorities must be shown that the requirements of such key industries as electric power, upon which the industrial life of the country depends, should be a first charge against their foreign exchange resources. The solution to the problem posed by the drying up of the traditional sources of capital investment in Latin American utilities must be found in the development of new sources of both debt and equity capital, and if conditions in the industry are such as to render a direct appeal to the profit motive ineffective, another type of appeal must be devised to interest the equity investor until conditions improve. I have told you of the results of some of our efforts in this direction.

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None of these results can be achieved without a great deal of educational work and constant attention by utility management to its public and government relations, and wherever a good job is being done, management is spending a major part of its time and effort on this type of activity. It is not easy to operate a pricefixed industry profitably in an inflationary economy. Problems related to the necessary revision of rates require constant attention. Their solution requires the understanding cooperation of the highest authorities in government and a high degree of economic statesmanship and courage on their part. And this is equally true whether electric service is provided by private utilities or government agencies. No one likes to pay higher rates for electricity. Yet, the provision of remunerative rates is the only answer to the problem of assuring adequate power supplies to the power-hungry economies of Latin America while maintaining the solvency and financial responsibility of their governments. I would like to close, now, with a few words about the new horizons of opportunity which are opening to our industry with the advent of the atomic age. The announcement of President Eisenhower's "Atoms for Peace" program excited the imagination of the world and aroused intense interest in Latin America. Every country is eager to learn and apply whatever these new developments have to offer. Perhaps some are too optimistic as to the immediate contribution of atomic energy, but who is to say that the opportunities and benefits they envision may not ultimately be realized. At any rate, these young and vigorous countries do not intend to be left behind in the procession and neither do we in Foreign Power. You may have seen the announcement that appeared recently concerning our decision to order three 10,000 kilowatt atomic power

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reactors, each of a different type, for installation in selected Latin American countries. The reasons for our decision can be stated very simply: First, we want to get all the knowledge and experience we can in this new field as quickly as we can get it; second, we believe we have an obligation to provide similar opportunities for the people of the countries we serve, so far as it is within our capacity; third, we want the utilization of atomic power in Latin America to develop as a private enterprise program rather than as a government monopoly; and, fourth, we regard this as a splendid opportunity to demonstrate that the private utility industry, as exemplified by Foreign Power, has no intention of abandoning its hard-won position in Latin America to government agencies—that private capital has not lost its readiness to venture and its eagerness to pioneer new fields. We are under no illusions as to the immediate economy of installing atomic power plants as compared with conventional thermal plants. While we do believe that atomic power may become economic and competitive earlier in some areas we serve, where neither domestic fuels nor cheap hydro power are available, than it will elsewhere, we realize that there can be no definitive answer to the question of relative economy until more experience is gained and a number of unresolved questions are answered—including the financial arrangements the United States government will make for the the use of the necessary atomic fuel. Nevertheless, a start must be made at some point, and we are confident that the initiative we are taking will serve to expedite the necessary official decisions and preliminary work. We trust that this venture of ours into the atomic power field will be recognized as one more evidence of

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our continuing confidence in Latin America. After more than thirty years in that area, we are more impressed than ever with its tremendous potentialities. Its vast natural resources have scarcely been touched; its industry, though rapidly growing, is still in its infancy; wider education, social progress, and improvements in transportation and communications are creating a better comprehension of investment problems; and, as I have indicated, the field for electric power development is limitless. I have tried to give you a broad picture of the need, the desire, and the reasons for private foreign investment in Latin America. I have made no attempt to gloss over any of the problems and uncertainties that continue to face the private investor in this largely undeveloped area, with its enormous potential for growth and progress; and, finally, I have told you something of what is being done by one of the largest North American investors, despite obstacles, to preserve and expand the opportunities for private enterprise in Latin America. Given the opportunities which these nations hold for foreign capital, and given their recognition of their need for foreign capital, it is unthinkable that mutual self-interest will not result in removal of the obstacles which impede its flow. Foreign Power is only one of many United States investors who have the courage to face the problems, the determination to work for their resolution, and the faith to believe in the opportunities. We, in Foreign Power, look upon our system of electric properties as an integral and essential part of Latin America's vigorously expanding economy and despite the problems, we continue to have faith in Latin America's future, for, in a very real sense, it is also our future.