Exporting Capitalism

Private Enterprise and US Foreign Policy

Ethan B. Kapstein

• Editorial: Harvard University Press
• Año: 2022
• ISBN:
  9780674276277
• Categoría: Politics & International Relations
• Categoría: Globalisation

The first comprehensive history of America's attempts to promote international development by exporting private enterprise, a story marked by frequent failure and occasional success. Foreign aid is a primary tool of US foreign policy, but direct financial support and ventures like the Peace Corps constitute just a sliver of the American global development pie. Since the 1940s, the United States has relied on the private sector to carry out its ambitions in the developing world. This is the first full account of what has worked and, more often, what has failed in efforts to export American-style capitalism.Ethan Kapstein draws on archival sources and his wide-ranging experience in international development to provide penetrating case studies from Latin America and East Asia to the former Soviet Union, Afghanistan, and Iraq. After WWII the Truman and Eisenhower administrations urged US companies to expand across the developing world. But corporations preferred advanced countries, and many developing nations, including Taiwan and South Korea, were cool to foreign investment. The Cold War made exporting capitalism more important than ever, even if that meant overthrowing foreign governments. The fall of the Soviet Union brought new opportunities as the United States promoted privatization and the bankrolling of local oligarchs. Following the invasions of Afghanistan and Iraq, the United States believed it had blank slates for building these economies, but ongoing conflict eroded such hopes.Kapstein's sobering history shows that private enterprise is no substitute for foreign aid. Investors are often unwilling to put capital at risk in unstable countries. Only in settings with stable governments and diverse economic elites can private enterprise take root. These lessons are crucial as the United States challenges China for global influence.

1

Private Enterprise, International Development, and the Cold War

An increased flow of United States private investment funds abroad … would do much to offset the false but alluring promises of the Communists.

—PRESIDENT DWIGHT D. EISENHOWER, MESSAGE TO CONGRESS, 1955

FRESH OFF HIS STUNNING UPSET over Thomas Dewey in the election of 1948, President Harry S. Truman was searching for a big idea to animate his inaugural address. That idea eventually emerged from a relatively lowly State Department official named Benjamin Hardy, who had to circumvent several layers of bureaucracy to get his contribution up to the White House. Hardy thought that Truman should emphasize a positive program that would harness the energies of American corporations and charitable organizations on behalf of the world’s developing nations, building on some modest efforts along these lines that the United States was funding in Latin America. This appealed to a president who sought to cast his own vision on the international system, allowing him to step out from the shadow of his predecessor, Franklin D. Roosevelt.¹

Truman recognized that the US government had economic, moral, and geopolitical interests in promoting the growth of the world’s developing nations, including those grappling with postcolonial independence, and the famous “Point Four” of his 1949 inaugural address pledged American assistance to this great task. In particular, Truman thought that the United States should mobilize the nation’s science, technology, and capital in an effort to transform developing world economies. In Truman’s words, “I believe that we should make available to peace-loving peoples the benefits of our store of technical knowledge in order to help them realize their aspirations for a better life. And, in cooperation with other nations, we should foster capital investment in areas needing development.”

At the same time, Truman wanted to reassure the developing world about his intentions: “The old imperialism—exploitation for foreign profit—has no place in our plans. What we envisage is a program of development based on the concepts of democratic fair-dealing.”² The United States had no intention of replacing the European powers as these countries began the often arduous process of decolonization, but instead would act to support their growth.

The Point Four announcement caught some members of Truman’s administration off guard. They did not anticipate that the President would seek to take on new international initiatives, particularly in regions that seemed distant to many Americans. But beyond American participation in European reconstruction through the Marshall Plan (and note that some developing nations, including Taiwan, received Marshall Plan aid), Truman was aware of the potential strategic challenges posed by a growing number of newly independent nations. In 1945, the United Nations had 51 members; that number increased to 76 by 1955, and by 1961 it would grow to 104. These new states would certainly become targets for communist influence.

Driving US policy toward the developing world was postwar decolonization—which, in fact, had been one of Roosevelt’s wartime objectives—alongside the emerging Cold War with the Soviet Union and the threat posed by communist China following Mao Tse-tung’s victorious peasant revolution in 1949.³ The advent of the Korean War in 1950, in which Beijing of course actively participated by sending troops, would further stimulate US concerns with the stability and security of developing countries, particularly those in East Asia and other suppliers of “critical” raw materials to the American economy and its defense industries. A “Soviet economic offensive” in the developing world, beginning in the mid-1950s, would add more fuel to American efforts to promote international economic growth.⁴

The Cold War also brought into sharp relief the ideological frames that shaped US development policy, which revolved around the fundamental concepts of “self-help” and private enterprise.⁵ After all, the conflict with communism was also a war of ideas, as emphasized in one of the founding documents of the period, National Security Council report 68 (NSC-68).⁶ The Cold War provided Washington with an opportunity to extoll the many virtues of its free-market approach to economic organization, contrasting it with the communist world’s “command and control” model. To once again cite David Baldwin, the United States never tired “of citing the advantages—real and imagined—of an economic system based on private enterprise.”⁷

Yet US policy was also powerfully shaped and constrained by postwar fiscal concerns, which placed added pressure on officials to emphasize private enterprise and foreign direct investment (FDI) as drivers of development. With Congress unwilling to fund a massive foreign aid program beyond the Marshall Plan, the Truman administration had no choice but to encourage American investors to go overseas, and it elaborated a number of policies and subsidies designed to motivate them to do so. Still, the failure of American business to respond to these incentives at the levels necessary to meet developing world investment needs would lead Washington to reconsider its reluctance to providing foreign aid, and eventually to the creation of a “permanent” foreign assistance bureaucracy, the United States Agency for International Development (USAID), in 1961.

This chapter describes and analyzes the broad contours of US development policy during the first two decades of the Cold War, emphasizing why the center of that effort shifted from private enterprise toward government-to-government official development assistance (ODA) as the decade rolled on. In sketching this history, we will see the limits placed on the American state’s policies by both business leaders and developing world governments. That is one theme that re-emerges time and again throughout this book.

The first section of the chapter examines the instruments that Washington devised in order to propel overseas investment. In the second, I turn to the Eisenhower administration’s tortured path toward founding the International Finance Corporation (IFC) in 1956. While the idea of launching an IFC had been around since the Truman presidency, it had languished in Washington for lack of support. I explore how and why attitudes toward the IFC changed during the 1950s.

The chapter thus provides both the historical background for the country case chapters that follow, along with an outline of some of the enduring issues that US policy makers have faced. One of the main lessons of this history is straightforward: US policies to promote private enterprise around the world, as with the new Development Finance Corporation (DFC), have deep roots, going back at least to the earliest days of the Cold War. Studying that history could prove useful to all those charged with advancing American interests in the global economy, and help them to recognize that many of the issues being debated today are hardly novel.

Catalyzing Private Investment

At the end of World War II, the world economy lay in ruins. Much of Western Europe and East Asia had been shattered by the fighting, and Washington’s initial belief in a quick recovery was soon shaken.⁸ The hopes pinned on the United Nations to serve as the cornerstone of a new era of global peace and prosperity were also quickly squashed by the emerging Cold War with the Soviet Union. While these troubles would eventually lead to the June 1947 announcement of the Marshall Plan for European recovery, Washington had no intention of doing anything on a comparable scale for developing countries. The Marshall Plan bestowed limited funding to select Asian economies, including China and South Korea; officials seemed to believe that the rest of the developing world, which continued to include many colonies, would indirectly benefit from assistance to the European metropole.⁹

This is not to say that the United States was indifferent to their plight. Washington sought to promote international development for a host of humanitarian, economic, and security reasons; in fact, these were inextricably linked for American officials, given a deeply rooted belief that economic grievances were the primary reason for political instability. As President Truman put it in 1950, “poverty, misery and insecurity are the conditions on which communism thrives.”¹⁰

Planning for the postwar economy had begun during the war itself, and the fruits of these efforts were made manifest at the Bretton Woods negotiations of 1944. There, the international community agreed to create an International Monetary Fund (IMF) in the interest of ensuring financial stability, and an International Bank for Reconstruction and Development (IBRD, or World Bank) to provide loans for recovery. For our purposes, it is critical to point out that one objective of the World Bank, as set forth in its articles of agreement, was to “promote foreign direct investment.” Specifically, it was expected to carry out that task “by means of guarantees or participations in loans and other instruments made by private investors.”¹¹ The reasons for the inclusion of this article were straightforward: developing countries had to mobilize foreign savings in order to meet their investment needs, and if official development assistance was not forthcoming or sufficient, then governments had little choice but to attract private funds from abroad.¹²

Fortunately, over the course of the war, a “surplus” pool of capital in the United States had emerged and was waiting to be deployed overseas. As a 1945 report by a US House special committee put it, “After the war, extensive foreign investments by the United States will have important benefits … to the rest of the world. The scarcity of capital in underdeveloped countries … will provide a large opportunity for American investments.”¹³ Assistant Secretary of State William Clayton made a similar point in a 1946 speech, saying that “It is essential that American capital … make a major contribution over a long time to the increase of production and wealth in many countries.… We cannot long continue to enjoy great wealth and prosperity, with most of the world lying prostrate from the war.”¹⁴

Yet there were many impediments to moving American capital overseas, especially to the world’s poorest nations. First, drawing on the British colonial experience, the State Department was concerned American investors might “exploit” developing nations, causing political problems between Washington and host governments and creating an opening for communist penetration. In order to create a buffer between the US government and foreign investors, the State Department began to give serious thought to calling for the creation of a United Nations Investment Board that would serve as a mediator between investors and host governments, ensuring that foreign investments were being made “for desirable purposes.”¹⁵

Second, and perhaps more intractable, were the host of risks associated with FDI, including the lack of convertible currencies and exchange controls; the fear of expropriation without adequate compensation; double taxation; and the presence of high tariffs in industrial countries that discouraged developing world exports. Even during the 1944 Bretton Woods talks, the US Treasury advisor Harry Dexter White warned that private investors “had suffered too many losses” in the developing world in the past to justify any hope that large sums could again be mobilized.¹⁶

In order to address these problems, in 1945 the US government created an interagency Foreign Investment Policy Committee with the express purpose of elaborating a set of proposals that would assuage the investment community on the one hand and potential developing world recipients on the other. Working in consultation with the American business community, these proposals would soon come to reflect the concerns of investors more than those of recipient nations. Thus, references to “desirable investments” would soon become increasingly muted in official policy discourse.

Fundamentally, American firms wanted the following ...