IMPLICATIONS OF ECONOMIC NATIONALISM IN THE POOR COUNTRIES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79R00967A000300030002-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 34
• Document Creation Date: December 20, 2016
• Document Release Date: August 16, 2006
• Sequence Number: 2
• Publication Date: June 29, 1971
• Content Type: MEMO

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Confidential
MEMORANDUM
OFFICE OF
NATIONAL ESTIMATES
Implications of Economic Nationalism in the Poor Countries
Confidential
Copy No. ,19
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CENTRAL INTELLIGENCE AGENCY
OFFICE OF NATIONAL ESTIMATES
MEMORANDUM
SUBJECT: Implications of Economic Nationalism in the
Poor Countries*
Economic nationalism in the less developed countries has led
to a spate of nationalizations of private foreign firms in the
past few years, and to a series of other measures designed to as-
sert more control over such investors. This memorandum examines
some of the reasons for economic nationalism, and its domestic
political and economic effects, particularly when it takes the
form of nationalization. The memorandum then assesses the impact
this trend towards nationalism can have on future interest in in-
vesting in less developed countries, the potential effects on
our balance of payments, and on relations between rich and poor
countries in general.
This memorandum has been prepared by the Office of National
Estimates and coordinated within the CIA.
CONFIDENTIAL l
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"In retrospect, the history of our time is likely
to be recorded as the conflict between ethnocentric
nationalism and geocentric technology."
(Rolfe & Damm, The Multinational Corporation in the
World Economy, p. 32)
I. THE TREND TOWARD ECONOMIC NATIONALISM
1. Nationalism is on the rise among the less developed
countries (LDCs) and, to an increasing extent, is being trans-
lated into economic terms: nationalization of foreign-owned
enterprises, reservation of key economic sectors for govern-
ment or local control, demands for employment of indigenous
personnel in foreign-owned firms, increasing controls over new
foreign investment, restrictions on profit remittances, rising
tax rates, demands for reinvestment of a rising share of profits,
and so on. This economic nationalism poses some difficult prob-
lems for foreign private investors, most of whom are from the
developed countries, and for their governments. It will also
have longer range effects on trade and investment patterns in
the free world and on relations between the LDCs and the rich
countries.
2. Such nationalism is by no means a new phenomenon among
the LDCs, nor is it confined to them. It exists practically
everywhere, and historically has ebbed and flowed -- remaining
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latent for a period and then becoming active. Overt manifesta-
tions have spread and intensified over the past few years, how-
ever, particularly in Latin America and Africa. Recent examples
of countries which have nationalized or asserted more controls
over foreign-owned assets include Peru, Bolivia, Chile, Venezuela,
Guyana, both Congos, Zambia, Tanzania, Sierra Leone, Sudan,
Somalia, Uganda, Libya, Algeria, and India, and the list grows
longer by the month.
3. These actions stem primarily from a desire to assert
national independence and sovereignty over decisions that can
affect the country. Resentment over foreign control and the fear
of foreign manipulation are everywhere deep. The economically
weak, particularly, fear exploitation by stronger foreign inter-
ests. Servan-Schreiber's book The American ChaZZenge, for example,
has been widely interpreted in Latin America as a treatise on the
power of American firms to dominate even relatively strong coun-
tries like France. And many Latins feel their countries must, in
effect, fight against economic enslavement. Such fears of foreign
economic control are equally strong in many African countries,
though more often stated in terms of the battle against neo-colonial-
ism and racism. The vision of economic independence and the felt
need to control major decisions affecting the local economy are much
the same.
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4. Such feelings seem somewhat weaker in much of Asia today,
or at least they are less frequently directed against Western
interests. This may be due in part to the fact that attitudes in
a number of these countries have been conditioned by their depen-
dence on the West for protection. Perhaps, too, their elites are
more sophisticated and their older more established cultures induce
greater self-confidence vis-a-vis the foreign economic presence.
Moreover, many East Asian countries, such as Taiwan and South Korea,
have made rapid economic progress with the help of foreign private
investment. Others, such as Indonesia and Burma, nationalized most
foreign holdings in the early post independence period and thus
have fewer targets; India and Pakistan had relatively little foreign
investment to begin with. Finally, in most of the area, the econom-
ic villains are usually the overseas Chinese, omnipresent in commerce,
whose success is bitterly resented. As the Japanese presence expands,
they too are likely to experience difficulties arising from economic
nationalism directed against them.
5. In many LDCs, the economic benefits of foreign invest-
ment are not very visible to the inhabitants, and seem far out-
weighed by the political costs. Attacks on foreign interests are
generally popular and politically gratifying and the greater the role
of foreign enterprises in a given country, the more tempting a
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target they are likely to be. Latin American nationalizations
have often occurred in periods of domestic political tension.*
This has also been the case in other areas, e.g., Iran's
nationalization of the oil companies, Zambia's sudden move against
the copper companies and the Sudan's expropriation of practically
all foreign-owned interests in the past year or so. These moves
were primarily responses to internal political pressures.
6. Economic nationalism, particularly when it takes the
form of nationalization or severe restrictions on foreign enter-
prises, is rarely based on dispassionate economic calculations
but consideration is sometimes given to potential gains or losses.
Latin Americans, for example, complain that US investors annually
repatriate over a billion dollars in profits and invest very
little either from earnings or fresh capital. They say they can
eventually pay off long-term loans but that foreign equity invest-
ments are, in effect, a continuous drain on foreign exchange.
Loans, rather than direct investment, have greater appeal for LDCs
during times of fairly rapid growth because they are easier to pay
off and cost less than allowing foreign owners to repatriate their
rising profits.
* Bolivia in 1938:, 1952, and 1969; Mexico during the revolution
and in 1938, Peru in 1968, and Chile in 1970 and 1971.
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7. Moreover, it is widely believed in the LDCs that
precious natural resources, especially minerals, have been ex-
ploited for the benefit of the rich countries and not for the
local economies. Indeed, it is sometimes asserted that the whole
wealth and achievement of the developed countries is based on ex-
ploitation of the natural and human resources of the poor countries.
Many in the LDCs think that the profits earned by foreign investors
have been unconscionably high, and even that markets and terms of
trade are rigged by the rich countries to the detriment of the
poor.' As this theme is reiterated by propagandists in the LDCs,
the emotional content of economic nationalism grows apace.
8. Moreover, there appears to be a fairly general disillu-
sion with, and loss of respect for, the advice and formulas for
economic development offered by the developed countries. This
probably stems from growing LDC desires for self-reliance, for
working out their own formulas and policies, and perhaps from the
In May 1971 for example, Venezuelan President CaZdera at a press
conference with US journalists defended his country's recent oil-
price hike saying "Venezuela has as much right to influence the
price of its oil as a manufacturer in the United states has to
set prices for his products." It is the buyer who sets the price
of raw materials, he argued, but the seller who sets the price
of manufactured goods. He. further stated that the price of oil
had not risen in a decade while the cost of imported manufactures
had increased sharply.
(Reported in the Christian Science Monitor, May 14, 1971, Unc.)
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loss of earlier illusions about the possibility for easy and rapid
development. There are exceptions, of course, especially among the
more successful of the LDCs like Iran, the Ivory Coast and South
Korea. But, in general, when net bilateral aid and foreign private
investment level off, arguments advanced by the developed countries
in support of the benefits to be derived from foreign investment
become less persuasive to the LDCs. Then their tendency to assert
their "independence" and sovereignty by nationalizing foreign
interests or otherwise restricting their role is likely to grow.
9. Thus, assuming that net aid and private investment from
the developed countries continue to stagnate or decline* and that
rapid population growth and urbanization contribute. heavily to
social and economic problems among the LDCs, it seems likely that
only certain strong governments, perhaps only highly authoritarian
governments, will be inclined to welcome and protect the private
In recent years, the flow of funds from the developed non-
communist countries has risen. In 1966 it totalled about
$10.3 billion; by 1969 it amounted to nearly $13.6 billion.
But contributions to multilateral agencies like the UN and
IBRD and export credits (both government and private) account
for much of this increase. Net bilateral aid and net private
investment rose more slowly: bilateral aid from about $6.1
billion to about $6.3 billion and direct private investment
(net) from about $2.2 billion to nearly $2.6 billion between
1966 and 1969.
(OECD, Development Assistance Committee, 1970 Annual Aid Review, Jan
1971, Unc.)
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foreign investor over the next decade. Even they will probably
have to repress popular manifestations of economic nationalism.
Other strong governments will undertake nationalistic measures
against foreign concerns primarily to promote or protect
national interests, only secondarily because such moves are
popular. The weaker governments are also likely sooner or later
to succumb to the political pull of nationalization or to exert
increasingly onerous controls over foreign investors.
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II. IMPACT OF ECONOMIC NATIONALISM ON THE LESS DEVELOPED
COUNTRIES
10. Private venture capital from Western countries and the
management, technical and marketing skills that accompany it have
contributed greatly to the output and exports of the LDCs. For
example, few of the oil producing countries would have been any-
where near their present levels of production without the capital
and technology provided by the privately owned major oil companies.
Almost all the major mines in the poor countries were opened up
by foreign firms. And many of the cash crops upon which a number
of LDCs depend, e.g., cocoa, rubber, coffee and tea, were estab-
lished and promoted by private foreign capital. Foreign-owned
enterprises also built roads, railroads, schools, and ports in many
countries. More recently they have trained locals for an increas-
ing number of skilled positions and, in a number of countries, are
expanding into manufacturing and service industries. Such activities
have helped develop many of the poor countries, and have made major
contributions to government revenues as a by-product of the foreign
investors' efforts to earn profits for themselves.
11. What, then, is the internal impact of economic national-
ism when it takes the form of nationalization or otherwise severely
reduces foreign enterprises' freedom of action? Most important
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politically, perhaps, is the psychic satisfaction derived from
the assertion of sovereignty that such acts demonstrate. They
have almost always increased the government's popularity with
the people and contributed to domestic political unity, at least
for a time. They have served, often, to distract attention from
domestic problems as in Chile, Zambia, Peru, Congo (Kinshasa),
and Bolivia. In this sense, such nationalistic decisions have
been a political plus for many rulers in the LDCs, regardless of
the economic impact. Perhaps few, if any, of the poor countries
are so imbued with a drive toward economic development as we, of
the developed world, often think they are. Pride and the need to
establish national identity and sovereignty mean more to many of
them than the prospect of economic achievement, particularly if
this seems to require adopting new values.
12. The longer-term political effects of nationalization
and/or restriction of the foreign role in the LDCs are unclear.
Reducing the visible foreign role in the local economy is highly
popular in most LDCs. But when such scapegoats have been thrown
out, popular grievances are more likely to focus on the govern-
ment in power. Labor unrest, for example, may be much more dif-
ficult to handle if the employer is the local government. It is
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probably too soon to tell whether the positive political gains --
in self-confidence and cohesion -- will outweigh these potentially
negative effects.
13. In recent years a policy of nationalization or other
attacks on foreign-owned commerce has usually been accompanied by
other policy changes tending toward a greater government role in
the economy as a whole. The Indonesian experience under Sukarno,
Egypt under Nasser, Algeria, Zambia, Peru and Chile are good exam-
ples of this. It is impossible to sort out the economic impact
of nationalizations or other manifestations of economic nationalism
from the more general effects of such policy changes.
14. Nationalization itself can produce economic benefits.
For some countries, nationalization of foreign enterprises, even
when compensation is paid, can provide a positive effect on the
balance of payments. Egypt's foreign currency earnings from the
Suez Canal are a prime example: before it was closed in 1967,
Canal earnings were over $200 million a year; nearly 10 times the
pre-nationalization level.* This is particularly true for enter-
prises or industries that are profitable, essentially complete,
The increase was not due solely to nationalization, Canal
traffic also soared during this period.
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enjoy an assured market after nationalization, and where no
significant new investment would normally be expected for a
number of years. Guyana apparently decided to move against
the Aluminium Company of Canada's (ALCAN) subsidiary DEMBA
after it became clear that ALCAN could not be persuaded to
build more plants to process bauxite in Guyana; it is for-
tunate for Chile that it is taking over the copper mines
after a major round of investment had been made by the companies.
15. Moreover, in some countries, hopes for significant
new private foreign investment are dim in any event. In these
cases, profit remittances and capital repatriation sometimes
represent a real burden to the balance of payments. Thus na-
tionalization might produce a net foreign exchange gain for the
economy -- especially if any compensation were small or stretched
out. Although difficult to prove, this is probably the case for
Uganda and Somalia. But nationalizations 'in such comparative back-
waters cause fewer ripples in any case, primarily because they
never attracted much investment.
16. The impact of nationalization on output and profits of
the enterprises involved generally depends on the attitude the
government takes. Usually, the move itself causes at least a
short-term disruption, but if the government wants its acquisition
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run in a "businesslike" fashion, with emphasis on profit-
ability, and can hire the necessary technical and management
skills, then nationalization has little effect. This appears
to be the case for the copper industry in Zambia and Congo
(Kinshasa), where the former owners continue to manage these
enterprises for a fee. In Zambia, for example, the chronic
labor unrest has been damped down, and the mines are still
efficiently run. In Congo (Kinshasa) the terms of the manage-
ment contract are so attractive to the foreign ex-owners, that
the copper operation has proceeded smoothly, to the benefit of
both the government and the management.
17. On the other hand, if a nationalizing government is
more interested in creating jobs for its nationals regardless
of qualifications or in enhancing welfare, then the enterprises
it takes over are likely to show less profit and production may
decline. The Bolivian tin mines are an outstanding illustration.
Employment rose rapidly after nationalization.' Where there had
been equal numbers of above and below ground workers before, there
came to be twice as many working above ground as below. Costs
rose, output declined, and the mines incurred large losses.
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18. Can the LDCs pay "fair value"* for nationalized
assets? It will depend on a variety of factors including the
terms agreed to, the amount of foreign exchange available, and
the strength of competing domestic resource requirements. For
example, if demand for petroleum remains high, oil assets could
be paid for relatively easily by such countries as Libya or Kuwait
whose revenues from the industry are enormous relative to their
populations, total output, and foreign exchange requirements; less
easily by such countries as Nigeria or Algeria where oil is a less
significant factor in relation to total output and foreign expen-
ditures; and only with difficulty and over a longer time by such
countries as Bolivia. Where profits were low or negligible before
nationalization, or where the nationalizing government is already
deep in debt and relatively poor, reasonable compensation is prob-
ably out of the question, as in Uganda or Guyana for example.
19. Will the LDCs pay reasonable compensation when it is
economically possible? Here too, the answer will depend on a
Defined in US statutes as the value and terms that would be
agreed to by a willing seller and a willing buyer acting
independently. Even in theory, this is a difficult figure
to arrive at since, once the nationalization is imminent,
there is no "willing buyer". The problem of discounting
future profits is also thorny.
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variety of factors: their fear of sanctions or other forms of
reprisal; their assessment of their need for foreign loans or
investment in new fields; and on the plausibility of counter-
claims they might make for back taxes or fines. Most importantly,
the decision to pay compensation will probably depend heavily on
the domestic political situation at the time.
20. The LDCs seem increasingly less afraid of economic
sanctions. Many are aware, however, that the World Bank and
other international lending institutions will probably not extend
new loans so long as there is a major outstanding dispute over
compensation. This appears to apply pressure towards working out
an agreement with the former owners but seems to have little effect
on the decision to nationalize. Moreover, many LDCs apparently
think that there are a multitude of would-be investors anxious to
explore their highly attractive opportunities. Thus they are
often not afraid of scaring off prospective investors by applying
nationalistic measures to existing foreign firms.
21. In general, the outlook for actual payment of fair and
prompt compensation is poor. Thus far, practically all the countries
that have nationalized foreign assets have acknowledged that some
compensation is appropriate. In most cases, however, depreciated
book value,typically considerably below "fair value", is the most
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that the former owners can hope for. Nationalizing governments
have begun to set the price unilaterally, often at book value
less retroactively applied taxes or other charges. In addition,
payments are being stretched out over a long term with in-
adequate interest allowances. While the former owners are
likely to complain loudly, and to press their claims through
their own governments or against government guarantees, many
if not most foreign investors appear resigned to something well
under market value. Indeed, many are probably prepared to settle
for whatever they can get because, having included this risk in
their original calculations, they have already recovered their
investment.
22. The major short-term economic drawback of nationalistic
policies, especially nationalization or measures which abruptly
restrict foreign investors' freedom of action, is its effect on
the investment climate. Credit, even bank loans and trade advances,
may dry up as it did for Peru and is doing for Chile, as potential
lenders back off or delay pending an assessment of their prospects.
Even less stringent measures have a similar effect. Millions of
dollars of planned new foreign investment in Argentina, for
example, have been suspended in recent months as that country has
manifested increasing economic nationalism and political uncertainty.
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In this instance the investors' hesitancy was caused more by
the vacillation and uncertainty of the Argentine government
than by any specific act against foreign business. Probably
the greatest long-term adverse effect of nationalization and
other manifestations of economic nationalism is that future
economic development may be hurt by the lack of foreign funds
and the scarcity or absence of entrepreneurs willing to take
risks.
23. Nationalistic measures that restrict the freedom or
the profits enjoyed by foreign investors will not necessarily
destroy the climate for foreign investment, so long as the new
rules are moderate and consistently applied, and uncertainty
is minimized. Where existing profit margins are higher than
the minimum required to attract or keep investrient, host coun-
tries can demand and get a greater share, and still leave in-
vestors relatively content to do business.* In other cases,
former owners of nationalized enterprises have been satisfied
with lucrative management or service contracts, as part of com-
pensation agreements, and the general investment climate was
not too greatly impaired.
If, for example, the market outlook is such that a potential
investor must foresee a net return of 20 percent a year before
he will commit himself, measures which reduce his potential
take from 30 percent to 25 percent will not necessarily inhibit
him.
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24. In the more advanced and self-confident of the LDCs,
the Japanese-type of investment is likely to be attractive to
both investor and host country, so long as world markets continue
to expand. Here, the investor loans money, often to pay for
machinery and equipment which the investor supplies, takes little
or no equity, may or may not supply managerial skills on a contract
basis, but contracts to buy the enterprise's output for a long term
during which the loan is paid off. The Japanese have used this
sort of arrangement in Indonesia, Thailand, South Korea, Australia,
Chile, Brazil, and Zambia. In Taiwan, they not only have supplied
machinery and raw materials but have made arrangements to sell
approximately half of that country's exports to third countries.
25. Some poor countries, however, are likely to go so far
in their search for economic independence that their nationalism
will frighten away all foreign funds. If they are forced to rely
solely on their own resources, economic growth will be even slower
than would otherwise be the case. These will be the "losers" in
the growth game. Possible candidates are numerous: Bolivia and
Tanzania may be examples.
26. At the other extreme, a few strong governments will see
an advantage in continuing to welcome foreign investors -- although
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their terms and conditions may be less attractive than at present
-- and will obtain capital and use it to further development.
The successful ones are more likely to be conservative or export-
oriented economies like Taiwan, South Korea, Gabon, Ivory Coast,
and possibly Mexico and Brazil. None of these "potential winners"
is currently suffering from rampant economic nationalism, though
even they are not immune, and all have relatively strong and
authoritarian governments whose policies towards foreign investors
are relatively clear and consistent.
27. The majority of the LDCs will probably fall somewhere
in between. Their ability to attract risk capital for development
will depend on their assets, the relative stability of their regimes,
and how well they and potential foreign investors can work out
acceptable arrangements.
28. Thus the long-term impact of growing economic nationalism
in the LDCs which possess resources that might attract investment
will depend heavily on what happens to the investment climate:
whether they establish clear and workable rules for foreign in-
vestors, and whether they apply them consistently. Mexico is the
outstanding example of success in these terms. Foreign investment
is welcomed on Mexican terms, the rules of the game are well known
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and consistently applied, and investors continue to find attrac-
tive opportunities there. If, on the other hand, foreign investors
are discouraged, government aid and domestic capital will become
even more important to economic development. Few of the LDCs ap-
pear capable of rapid growth without foreign aid.or investment.
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III. IMPACT ON THE DEVELOPED COUNTRIES
29. Compensation payments for nationalized properties
are rarely going to be as high as the former owner's profits,
although compensation is likely to be offered in some form.
It will usually be paid out over fairly long periods. Moreover,
as the LDCs assert more controls over the foreign-owned enter-
prises, taxes will probably be raised or the foreigners' share
of profits lowered through dilution of ownership. Profits may
also be decreased by restraints which lower efficiency. Thus
the net effect of economic nationalism on the developed countries'
balance of payments with the nationalistic LDCs will tend to be
negative.
30. The petroleum and mining and smelting industries account
for nearly half of developed country investments in the LDCs,'
DAC estimates of the direct foreign investments (book value)
of the major developed countries in 1966 were as follows in
billions of dollars.
World LDCs
Total
LDCs as a % of
LDCs as a Total US Foreign
% of Total Investment
Petroleum 25.9 11.9
46 42
Mining & Smelting 5.9 2.8
47 44
Manufacturing 36.2 8.0
22 19
Other 21.5 7.2
33 32
Total# 89.6 30.0
33 31
# May not add because of rounding.
Source: Rolfe & Damm, "The Multinational Corporation in the
World Economy", Praeger, 1970, p. 7. (Unc.)
21
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and these extractive industries are usually among the first to
feel the impact of nationalistic sentiment among the LDCs. Many
of the large mines have already been taken over and the oil pro-
ducing countries have recently increased their share of profits
from petroleum. Because of their size and relative importance,
these industries are likely to continue to be major targets
either for complete nationalization or of demands for greater
shares of profit, and greater local control over key management
decisions including reinvestment, prices, and employment. In any
case, the share or profits remitted to the foreign owners is
almost certain to decline.
31. In round terms, US direct investment in less developed
countries' is valued at about $20 billion (book value) and income
remitted from it totalled almost $3.3 billion in 1969. The
petroleum industry accounted for about $7.8 billion or just over
a third of total value, but about $2.3 billion in income, or over
two-thirds of total income.
32. In terms of income from investments in the LDCs, the
fate of the oil industry is thus of major importance to the US.
It is also, in all likelihood, a special case because of the LDCs
Excluding international, unallocated investment.
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enjoy a sellers' market for their product. The oil producing
states are already exerting demands for greater revenues and
greater control over production as evidenced by the recent
rounds of negotiation which raised their take substantially.
Algeria, Venezuela, and Libya have been most assertive, but
Nigeria and the others are not likely to be far behind. Pro-
ducer governments will almost certainly insist on a share of
all new concessions granted and parts of existing industries,
are likely to be nationalized. Within the next decade, a large
share (perhaps the bulk) of LDC oil production is likely to
come under still greater government control. The role of the
major oil companies will shift more towards service contracts
or joint ventures in which they provide the expertise and some
of the development capital in return for a share of the oil
and/or a negotiated fee. This, in turn, is almost certain to
reduce US (and other developed countries) share of profits from
oil, and to shift the terms of trade for oil further in favor
of producer countries.
33. There are few, if any, other industries in which such a
drastic change in ownership and terms of trade seems possible.
Most mining and many if not most financial, transportation, and
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communication enterprises in the LDCs are likely to be under local
ownership (either through nationalization or other mechanisms) by
the end of the 1970s. But it is unlikely that the LDCs will be
able to take successful concerted action to raise the prices the
developed countries must pay for their products. This applies
even to the copper industry where four LDCs (Chile, Zambia, Peru
and Congo Kinshasa) produce a large share of internationally
marketed copper. The LDC producers have grown accustomed to high
and rising revenues from copper and their continuing need for
these revenues is so great that they will probably make some at-
tempt to cooperate in restricting output or holding it off the
market long enough to affect the world price materially. However,
because of the diverse policies and problems of these four nations
and the fluctuating market demand for copper, it is unlikely that
they will be successful. Moreover, as time passes their leverage
over the market is likely to decrease, since their increasingly
nationalistic policies have slowed expansion of their mines and
will cause investors to turn more towards comparatively safe
countries -- Canada and Australia for example.
34. The overall impact of rising economic nationalism on
the US balance of payments is, of course, impossible to predict.
Much will depend on the forms this trend takes -- nationalization
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with little or no compensation or less dramatic measures that re-
duce the foreign owners' share of profits and ability to control
management decisions -- and on the speed at which LDCs move. Much
will also depend on how well the US-owned companies can adapt to
the changing atmosphere in the LDCs and find mutually acceptable
forms of new investment. But the Table below gives an indication
of the general magnitude of investment and income flows potentially
at stake.
DATA PERTAINING TO DIRECT US INVESTMENT ABROAD
(In Million US Dollars)
1960
1966
In Less Developed Countries*
Book Value, Year End
12,546
18,138
19,421
21,484
23,060
Net Capital Outflow
220
474
874
1,334
1,076
Income
1,511
2,379
2,695
2,995
3,571
Difference Between
Outflow & Income
+1,290
+1 , 905
+1,821
+1,661
+2,495
In Developed Countries
Book Value, Year End 19,319
36,661
40,070
43,499
47,703
Net Capital Outflow
1,454
3,186
2,264
1,875
1,993
Income
844
1 , 666
1,823
1,977
2,067
Difference Between
Outflow & Income
- 610
-1 ,520
Source: US Department of. Commerce, Survey of Current Business,
October 1970, (Unc.)
Includes international investments, unallocated by country --
much of which is accounted for by international petroleum
affiliates and foreign registered shipping.
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35. Even if many LDCs nationalize the bulk of existing
foreign-owned enterprises and apply increasingly restrictive
measures to new investment, as seems likely over the next decade,
the overall effect on the investor countries probably will not
be very great. Management contracts, joint-ventures, and similar
arrangements between investors and recipient countries are likely
to replace the older forms of investment in many cases, and will
continue to produce income for the developed countries.* But
investors will pay more attention to relatively welcoming areas,
especially Australia, Canada, and other developed countries.
Since the bulk of foreign investment already flows between devel-
oped countries, this will not represent a major shift in emphasis.
IV. RELATIONS BETWEEN DEVELOPED AND LESS DEVELOPED COUNTRIES
36. Over the next decade or two, rising economic nationalism
in the LDCs will certainly result in greater friction between them
and the developed countries of the free world. The US, as the
largest single investor, is in for some difficult times especially
in Latin America. But it will not be alone in this. Disputes
Although the developed countries' share of profits will be
reduced, the absolute level of their earnings from LDCs is
unpredictable.
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over compensation for nationalized properties will be almost un-
avoidable. The outcry raised by important firms whose properties
are taken over will tend to lessen existing enthusiasm for aid to
underdeveloped countries on the part of the major donors. This
may also diminish their willingness to offer better trade conces-
sions to the exports of the LDCs. And friction is likely to rub
off on other matters under discussion between rich and poor. Dif-
ferences over the law of the sea, for example, can only be height-
ened if the major maritime nations appear to be pushing their
claims of narrow territorial waters and fishing rights while
simultaneously reducing their aid to poor maritime countries and
demanding "full" compensation for nationalized properties.
37. This friction will probably offer the communist powers
increasing opportunities to improve their position in a number
of LDCs. They are not likely to rush into many breaches, however,
because in addition to their own political and economic constraints
they too are leery of fluctuating policies among the LDCs. For
some LDCs, loans and technical assistance from communist powers
may take the place of private foreign investment, as has already
happened, to a large extent, in Egypt. Romania has offered Nigeria
help in establishing a national oil company. There may be many
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more such instances. Trade between LDCs and the developed free
world countries, however, is unlikely to be greatly affected by
such developments. Within the next few years, the communist
countries are not likely to absorb much of the LDC products that
are now sold in the free world, nor are the LDCs likely to shift
to the communist countries for the bulk of their import require-
ments.
38. In the longer run, perhaps a much longer run, some
aspects of the relations between the rich and the poor countries
are likely to improve. The bitterness of seizures, punitive laws,
and protracted negotiations will fade in time and there will be
fewer causes of friction when the role of the foreigner in the
LDCs is reduced. A hired expert who can be fired if he does not
please the government, for example, is much less an offense to
nationalistic sensibilities than is an owner-manager of an inde-
pendent company. Moreover, if employment and investment decisions
are made locally, the fear of foreign manipulation is greatly
lessened, though not eliminated so long as the relatively weak
must deal with the economically powerful.
39. Other sources of friction between rich countries and
poor will remain, however, and some are likely to worsen. Trade
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arrangements -- tariffs, quotas, and prices in particular --
will be salient points of disagreement. Population pressures
and their ramifications will also cause great problems in many
of the poor countries, hindering advancement in numerous ways.
The gap in levels of living between rich and poor is certain
to widen, whether or not the poor countries act to reduce the
inflow of foreign funds. Growing awareness of this gap among
inhabitants of the LDCs will add to these frictions between
developed and less developed countries.
40. As economic nationalism grows in the LDCs and the
foreign presence is reduced, the relative importance of the
developed countries' relations with the LDCs is likely to con-
tinue to decline. Trade will continue to expand, but the rich
will come to focus increasingly on economic relations among
themselves. The bulk of their trade and investment is already
with others in the developed world.* Economic and political
The share of the less developed countries in US trade, for
example, has declined steadily over the past few years. About
34 percent of our exports went to these countries in 1964;
only 30 percent in 1970. Imports from LDCs dropped from 36
percent of total US imports in 1964 to 26 percent in 1970. The
same trend appears in direct investment by US companies. Nearly
35 percent of the book value of US direct investment was in
less developed countries in 1960; by 1969 it had dropped to
about 28 percent of a much larger total. The value of US
investment abroad rose from nearly $32 billion in 1960 to
nearly $71 billion in 1969. (US Department of Commerce,
Survey of Current Business, and Overseas Business Reports,
1970 and .1971. Unc.)
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ties can only increase as the multinational companies extend
their activities across national boundaries.
41. Thus, the economic nationalism of the LDCs is likely
to achieve its primary aim -- reduction of the role of foreigners
in their economies -- but often at the expense of economic growth
and technological linkages with the advanced countries. In the
eyes of many LDCs, the gains in self-confidence and national
pride will outweigh the cost.
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MEMORANDUM FOR: The Director
Expropriation".
This paper treats an issue which is likely to be of
grow?:ng importance. We have given it fairly broad
t, distribution, includin in particular people who are
involved in I I'US Policy in Cases of
Attachment :
Memorandum, dtd 29 Jun 71
"Implications of Economic Nationalism in the
Poor Countries"
29 June 1971
(DATE)
FORM NO. IO1 RELACES
I AUG 54
P1,~1~?p I3.;rezse
3 ' ~~ =ASu~ stan~ Secretary"i'ox
a attached stuy ua be of 3 merest to
YOU; car zcc ion w th NSM ,` ;'TUS Po icy in
Cases of :EXpropri.ation.
Deputy" Drecto ;
`Office A Tat ona ,:Est mates
Countries
ATTACH:. Implications ofEd0ftom :c
Nationalism i the 1'oex~
FORM rNO. IQI REPLACESv FORM 10-101',
I All
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O _ "fine 1971