Problems of External Aid

Many of the underdeveloped countries will promote the growth of their economies in one way or another no matter whether they receive substantial outside aid in the process or not. The character of that development, however, is likely to be strongly influenced by the types and amounts of aid available. The outcome is much more likely to be favourable, from the standpoint of the objectives for successful development set up previously, if there is substantial international aid than if there is not.

By substantial aid I mean not only large amounts of technical assistance but also of capital. Initially, the capacity of an underdeveloped country to use capital productively may be surprisingly small - limited by lack of organisation, trained personnel, and all the social obstacles we have stressed. At this stage technical assistance is its main need from outside, with comparatively small amounts of capital, much of which may have to be in the form of grants for non-self-liquidating projects in education, health, access roads to rural areas, and the like. If these efforts succeed and development begins to roll, the capacity to organise and manage improves, more and more personnel with basic training for modern production appears, the market begins to broaden, and in consequence the capacity to use capital in productive projects may go rapidly upward. At this stage the limits on the speed of internal capital formation in a country still close to the subsistence level are likely to become a real limiting factor on the speed with which production can increase. India, for example, seems to have reached this stage.

If, at this stage, substantial capital is available from outside to supplement what can be formed internally (and to stimulate internal capital formation, for it does that too) the rate of economic growth can be considerably increased, and the strains and frustrations and political risks of the development process are likely to be considerably less. It is possible for underdeveloped economies to modernize themselves with very little capital from outside. Japan's imports of capital were small, though some of it came at crucial times. The .v.

contribution of foreign direct investments to the advancement of technical know-how, also, was greater than would be indicated merely by the size of the investment. The Soviet Union industrialised its economy with practically no aid from foreign investment capital except for the foreign-owned installations confiscated after the revolution, though it imported machinery in the early days on short-term or intermediate-term credits and hired services of foreign experts.

That it is possible for development to go forward with a minimum of outside capital does not, however, lead to the conclusion that this is the most desirable way. We are interested in the results of economic development, including the political results, and not merely in economic development at any political and social cost, toward whatever goal.

Both Japan and Russia achieved their development in an authoritarian political and social framework. The outcome in both cases, from the standpoint of the peace of the world and democratic ideals, was highly unfavourable. Perhaps it takes authoritarian methods to carry through rapid development without external financial aid in countries that start from a low level and have no windfall income from readily exportable resources. If so, and in view of the universal pressure for rapid development, the free world has a tremendous stake in seeing to it that international capital aid as well as technical aid is available in really substantial amounts to countries that would like to follow a democratic path.

A country starting from the extreme poverty level of, say, India is bound to have along, hard pull at best to educate and train personnel, accumulate capital, and install and operate productive facilities on a scale which will bring marked improvement in living conditions. In the absence of outside aid, the only way to accumulate capital is to increase production without taking much of the benefit in more consumption, or even while pushing consumption standards down. Where the people are already near the subsistence level this may mean extreme hardship. Somehow the people must be motivated to change their accustomed ways quickly, to work hard, and to forego present consumption so that capital investments can be made. The totalitarian methods of motivating people include a monopoly of information and propaganda and the terrors of the police state, so applied as to whip up an artificial enthusiasm for the projects of the state planners, to break opposition, and to enforce cooperation or at any rate conformity. Anti-foreign propaganda and fear and hate campaigns are standard techniques. If motivations more compatible with democratic and peaceful objectives are to be used successfully, the voluntary enthusiasm, cooperation, and initiative of the people have to be aroused. It seems likely that the motivations of democracy require for their sustenance more in the way of tangible benefits now, or soon, than a totalitarian regime needs to provide.

Outside help through grants, loans, and investments which assist in providing technical services, equipment, and supplies can greatly lessen, though they can never remove, the strains and hardships of the crucial early years of development. Aid at key spots in the programme, correctly timed and in adequate amounts, may make it possible for tangible results benefiting ordinary people to appear more quickly. The need to hold down the level of consumption in order to accumulate capital for further development would then be somewhat less urgent. People could begin to enjoy more to eat and wear, and to afford better education and health services, earlier than if the rigorous necessity of going it alone forced their government to skim off nearly all the increased output for the support of further development or even to depress an already narrow margin of subsistence. Under the psychological and economic conditions of a 'go-it-alone' situation, the chances of successful development as we have defined it would appear to be slight in some of the very countries whose course will be most important in shaping the kind of world we and our children will live in.

The issue has been stated clearly and fairly with respect to India by one of that country's leading economists, V. K. R. V. Rao. In analysing the first Five-Year Development Plan of the Indian Planning Commission he pointed to the modest aims of the plan. Under the circumstances facing India, little more could be attempted than to construct the base for subsequent development. Because the programme does not hold out large hopes, there is danger that it may not supply the psychological lift so essential for the success of a great and dynamic social experiment. India, says Dr. Rao, is trying to pursue its planned development while retaining Western liberal values. The fate of this 'great and perhaps unique experiment' may turn on the results accomplished during the next five years. If this first Plan succeeds, it 'may well pave the way for social transformation free from class violence. If anyone person can make it succeed, it is Prime Minister Nehru; and if anyone thing can, under the limitations imposed by the existing political and social situation in India, concretely and effectively aid him in achieving its success, it is vision, imagination and understanding on the part of those economically developed nations of the world that are in a position to give assistance in finance, technique and equipment. If the most powerful nations of the world will only realise that economic development of the under-developed areas constitutes at least as effective insurance against war as armaments do, not only will world peace be much nearer attainment but also India's first Five-Year Plan will be much more certain of achievement, and possibly also of expansion and enlargement. Whether such wisdom will dawn on these nations, and in time, is a question to which no wise man would venture an answer.' 

(E. Staley: The Future of Underdeveloped Countries, Harper and Row)