The Capitalist Challenge: PATHS OF PROGRESS

BUSINESSMEN in the U.S. are traditionally leery of government interference in the economy. Nations that have shed colonial rule tend to be equally suspicious of capitalism. Thus, a prime problem of the San Francisco conference was: Where should governments leave off and private enterprise take over in developing backward economies?

World Bank President Eugene Black spoke for most U.S. businessmen when he criticized governments for “stifling” private enterprise through state ownership of productive industries. Several Asians contended that government financing was essential for key industries that do not readily attract private investment. But neither Black nor any other speaker at the conference argued that an agricultural nation could hope to struggle up from poverty until its government has developed the basic facilities of an industrial economy: roads, harbors, railways, communications, schools, reservoirs, power plants. In fact, since private capital is seldom available for such projects, the government must foot the bill. Yet, when these industrial foundations have been laid, the backward nations with sound plans to develop their industries can then mobilize foreign and domestic investment and eventually achieve a free enterprise economy.

Among the nations whose development programs successfully combine varying degrees of government and private investment:

PUERTO Rico, whose strikingly successful Operation Bootstrap has sparked a productive industrial economy that in ten years has brought in 500 new industries, created 80,000 jobs, boosted per capita income from $264 to $369. Puerto Rico’s Economic Development Administrator Teodoro Moscoso emphasized that the “key” to his country’s swift rise was the original decision to use government funds only to create an environment in which private industry could flourish. Said he: “What is transforming Puerto Rico is not the money but the dynamic productive forces of the U.S. industrial concerns which made the investment decisions and are operating the new factories. Comparable amounts made as loans or grants would have had nowhere near so great an impact.”

By offering generous tax exemptions to new investors, Operation Bootstrap attracted 169 new plants in the first five years (v. 19 in the previous five years), is now bringing in ten a month. To arguments that Puerto Rico owes its success to its position as a low-wage part of the U.S. customs area and to the free movement of goods between the island and the U.S., Moscoso replied: “Puerto Rico had this same kind of economic relationship with the U.S. from 1917 to 1940−and yet nothing much happened.”

IRAQ, where U.S. technicians hired by the government to plan and supervise basic development projects have been highly effective ambassadors for free enterprise. The bustling nation is spending 70% of its oil revenues (six-year total: $1.4 billion) on a development program unparalleled in the Middle East (TIME, April 8), has retained Cambridge, Mass.’s Arthur D. Little, Inc. to plan the nation-shaking transformation. Iraq may also seek outside investors to join with Iraqis said its Minister of Development Dhia Jafar. He added: “Through such projects and through the wonderful technical work of outside people such as the Little organization, the West will allay old fears and prove that private foreign capital can work for the public good.”

INDIA, one of the biggest potential areas for private investment, with a population of 382 million representing one-seventh of the world’s population. In a first Five-Year Plan that was as “important as the French, Russian or Chinese Revolutions,” said the Reserve Bank of India’s Governor Haravu Varada Raj Iengar, the government’s “main task” was to give the peasant “both the feeling that he could improve his standard of living, and the resources with which he could attempt to do so.”

India not only boosted agricultural production, but succeeded in stimulating demand for a wide variety of consumer goods, many of which are now turned out by hundreds of small manufacturers throughout the subcontinent. Unfortunately, said Iengar, the second Five-Year Plan has run into trouble (see Worldwide Inflation), caused a grave shortage of capital.

For this reason, and despite Prime Minister Nehru’s longtime hostility to foreign investors, Banker Iengar came to the conference to plead for private capital. He outlined a “sound, severely practical, commonsense” policy in which the government’s role in the economy will be limited strictly to investment in basic industry for which private capital is not available. Banker Iengar pointed out that the state-owned industry represents only 3¾% of the total investment in Indian industry, and that “for as long as we can foresee,” this proportion would not exceed 15% to 20%. Said Iengar: “The private sector is playing a dominant role in the Indian economy today and is bound to play a dominant role in the future. We are in financial difficulty. It is to the private sources that we must look for making all the machinery we require, for taking the steps to see that ten years from now we do not have to spend precious foreign exchange for technical know-how.”

IRAN, whose two-year-old development program looks ultimately to a wholly free economy. Abol Hassan Ebtehaj, director of Iran’s Seven-Year Plan Organization, said that his country will spend $1.1 billion in oil revenues to build “basic ‘facilities which will create the climate necessary to stimulate private enterprise. Our philosophy is to develop and operate industry only when private capital is unable or unwilling to do so.” While emphasizing that foreign capital is essential to the.program, Ebtehaj said that the country’s greatest present need is for consultants, industrial managers, technicians. “Our need is for foreign firms,” said he, “who can identify themselves with us in our objectives and our struggles.”

The need for dedicated advisers and investors was a constant theme with Asian and African delegates, resentful of colonial exploitation. But Iran’s Ebtehaj pointed up another evil heritage: the bitter memory of exploitation of the people of underdeveloped countries by their own kind. Free enterprise still suffers in Iran, Ebtehaj said, from a “disastrous” experiment before World War II. Locally owned textile mills were established. Many small investors bought stock. The big stockholders, who exercised control, robbed the mills by overcharging for raw cotton they sold to the mills and underpaying for finished textiles they bought back from the mills. Not only that, said Ebtehaj, but the conditions of labor recalled the early phase of the Industrial Revolution. “There was child labor working twelve to 14 hours a day for 15¢ and nonpayment of workers’ health-insurance premiums−or any taxes, for that matter.” Though the Iranian government has since moved to prevent the recurrence of such abuses, Ebtehaj conceded wistfully that underdeveloped lands need not only capital and technical know-how but the fair play traditions embodied in “your Common Law.”

“Is there time?” asked Ebtehaj, echoing a major theme of the conference. “Is there time in which to effect these physical improvements in the standard of living, and yet to maintain the basic freedoms in which all of us here believe? We believe there is time−provided that our program in Iran responds to the spur of urgency. To such a spirit of urgency and decisiveness we are fully committed.”