New Program for More Help & Less Aid

FOREIGN INVESTMENT

ABROAD new U.S. foreign-investment program is taking form in Washington. Even as fresh opposition to the foreign aid and reciprocal trade programs showed itself in Congress (see NATIONAL AFFAIRS), the State Department was busy last week on a program that every businessman and Congressman could support. The aims: 1) get other countries to shoulder more of the development burden now borne by U.S. foreign aid; 2) shift from giveaway aid programs to revolving loans; 3) encourage private investment and sound fiscal and monetary policies in countries that now dissipate U.S. help by bad housekeeping.

The program's chief architect is C. Douglas Dillon, 48, onetime chairman of Dillon, Read & Co., investment bankers, who was promoted fortnight ago to the rank of U.S. Under Secretary of State for Economic Affairs. Dillon's first objective: an increase in the reserves of the International Monetary Fund, which have not been raised generally since the fund was created in 1944, although inflation and rising world trade have cut in half the fund's effectiveness in keeping world currencies in balance. Although the fund squeaked through the currency crisis at the time of Suez, many fear that it is now facing a major new threat. So many underdeveloped countries are running out of foreign exchange, because of the drop in sales of raw materials, that economists fear world trade will be drastically curtailed, and many a nation plunged into depression. Britain is also strong for a bigger fund.

If the U.S. increases its commitment (now $2.8 billion) to the fund, other nations with strong economic positions, such as Canada and West Germany, will also have to follow suit. West Germany still has the original fund quota of $330 million, which was fixed before the country's astonishing industrial recovery. With $5.5 billion in accumulated foreign exchange and gold reserves, Bonn could well afford to double its quota in the fund. Since the German mark is as sound as the dollar, an increase in the German quota would greatly reduce pressure on the fund's U.S. dollars. The U.S. also wants a stronger fund, able to swing a bigger stick to force its members to keep their fiscal houses in order. This would take much of the heat off the U.S. which often has to perform this disagreeable job when considering foreign loans.

Brazil is a case in point. Brazil got into a fiscal mess with inflationary policies, and did little to reform because officials thought they could always count on the U.S. Export-Import Bank for loans. Eventually, after 63 authorized loans totaling $656 million, Brazil had to go to the Monetary Fund. There a coolly competent professional international staff delivered a stern lecture, exacted a promise of reform, gave a small drawing account of $37.5 million in the hope that Brazil would go and sin no more. If Brazil had had to take this lecture from the U.S., the howl in Rio would have carried all the way to Washington. Said a foreign diplomat in Washington: "From the U.S. standpoint, it is a good thing to have the lightning go down somebody else's pole for a change."

Under Secretary Dillon is well aware that currency reform is only part of the answer to the need of foreign countries for capital. Yet he sternly insists that the people of even the most backward areas are "fully prepared to bear the major burden of their own economic development," if the means to finance it is available. One way would be to increase the lending power of the World Bank by raising subscriptions. Dillon believes that the U.S. could afford to underwrite more of the bank's "hard" loans to foreign governments, if other countries also boost their bank quotas. Dillon would also like to boost the capital of the Development Loan Fund (TIME, Sept. 30), which Congress created last year in a move away from outright giveaways.

While the DLF has an important role to play in encouraging private investment, many businessmen think that the U.S. could do much more to encourage private investment by granting tax relief for U.S. corporations operating abroad. The U.S. levies the same taxes on business income earned abroad as it does on domestic earnings, with the exception of Western Hemisphere trading corporations, which get a 14 percentage-point tax reduction. While the Administration has long given some support to extending this reduction worldwide, the plain fact is that any U.S. taxation on foreign business activity is self-defeating. It simply encourages nations to boost their taxes to U.S. levels to collect as much as possible of the corporate profit.

It would cost the U.S. comparatively little to drop all taxes on foreign profits, thus give private business a big incentive to invest abroad, reduce the need for government aid. The Treasury's loss would be only $200 million a year, only about seven weeks' cost of the interest that the U.S. now pays on the portion of the federal debt attributable to postwar foreign aid.

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