High Cost of Low Interest

Wriston, Walter B.


Every age develops a vocabulary that has the appearance of precision. Its purpose is allegedly to permit us to communicate more easily the various ideas and concepts that we use in our daily work. You will all recall that not so long ago n this country everybody had to make a "judgment" about something. At this point in time, everyone has to talk about "escalation" and "poverty" and "hawks" and "doves." It has gotten so bad in the academic community that a scholar recently referred to a good old-fashioned bull session as an unstructured conference.

One of the many phrases that make the rounds today is "Investment climate." This particular term is an all inclusive combination of words used to describe what one company or another believes to be the factors that influence it to build a plant or start a business in some country or area. Various planning directors of corporations and banks have scientifically compiled check lists of the factors that go into making up an investment climate. They have also devised arithmetic ways of weighing these factors to determine whether or not your corporation or my bank will make a foreign investment.

Since we all have this problem, it occurs to me that it might be useful to review some of the factors that form an investment climate, by taking an actual case of a region where Citibank has invested an enormous amount of money in relationship to our total resources.

One of the first things we all look for is political stability.

This particular region had suffered the same political leadership for over eleven years, and the opposition was so disorganized that there had been no real challenge to the entrenched, working regime. But political stability, so-called, had not necessarily created the dynamic economic climate that you might expect.

As a matter of fact, more than 80,000 jobs in manufacturing plants have been lost during the last five-year period because companies have moved out of the area to more favorable environments. Our studies indicated that the disappearance of these jobs had not been offset by the creation of any new industries. They were a dead loss to the community.

Moreover, the economic decline of the area was reflected by the fact that the third largest item in the budget was for the payment of a form of unemployment insurance, and the rolls of people receiving this aid grew at the staggering rate of 5,000 people a month. This grim statistic was further compounded by the fact that poverty is listed as the third highest cause of death.

So far the portrait I paint indicates that economic dynamism is dying in this area. This region also happens to include a port. But once again, such figures as are available indicate to our planners that shipping tonnage figures have dropped off sharply over the last three years. Part of this decline can be attributable to widespread strikes and slowdowns that cause shippers to seek other ports to unload their merchandise. Last year, for example, 75,000 people were involved in 232 separate strikes in the area which, so far as we can tell from the figures, added up to more than 14 years of workdays lost in strikes or slowdowns.

Another factor in considering investment climate is generally the stability of the population and the control of crime, so that you can be somewhat comforted by the physical protection of both your plant and the personnel who work there.

Here too, the area that we are studying did not appear to offer reassurance. One riot a few years ago lasted for six days, produced many casualties among the police force, and the best estimate seems to be that 112 stores were looted. Disturbances were strong enough to elicit statements from the political leader of the country in which this region is located, and stirred up an enormous amount of talk about the fact that every six hours a policeman is injured in the line of duty. And some local statistician even came up with the fact that a major crime is committed every twenty seconds.

Another facet of the investment climate is the administrative efficiency of Government. Our studies on this showed that a steadily growing number of civil servants operated in an expanding area of the private sector. The local bureaucracy numbered more than 16 percent of the whole country's local civic employees, while the region accounted for less than five percent of the country's population. Permits, licenses, clearances and similar governmental restrictions appear to be proliferating daily.

Taxes, as in most areas of the world, are headed steadily upward, but the expenditures of the regional government appear to climb faster than the tax rate. In fact, over the past 15 years, its per capita debt has just about doubled while the nation's per capita debt has actually declined somewhat. And the financial situation is complicated by the exodus of middle-income wage-earners, which has totaled 1 1/2million persons during the past 15 years.

Bulking equally large in the investment climate would, of course, be the attitudes of the national and the local governments toward private enterprise. Here at last is a plus. The climate nationally is as favorable as we have anywhere in the world. It is true that the restrictions on what a private company can do grow daily more voluminous but, on balance, there are fewer than you find elsewhere. The market is obviously difficult because there were thousands of bankruptcies of firms in the country last year. These, however, were brought about by management errors and market difficulties and not by government regulations.

Our review of all these facets of the investment climate did not draw too promising a picture. By any measure, the odds would probably be against making a large investment in this region. But, the First National City Bank decided that, on balance, this was an excellent area with an enormous potential, and our largest investment was made in this area and will undoubtedly continue to expand. In addition, private business from all over the world generally has invested some $10 billion in this region in the past ten years, despite a crippling, illegal strike that tied up all transit facilities and a total power blackout that lasted 12 hours.

Perhaps you've already guessed that the region I have sketched is New York City.

The point I am making is that the controlling factor in assessing an investment climate is total familiarity with all the conditions. If a foreign city had the kind of climate which I described from official statistics, many of you might hesitate to make an investment. But because we live and work in New York we become as the song goes, "accustomed to its face. " The longer we live here, the more accustomed we become.

Admittedly, New York has become a whipping boy. But you can draw the same kind of profile for just about every one of the world's major cities. Tokyo, the world's biggest city for example, is strangling in people. Her population is now over 11 million and is expected to reach 18 to 20 million in the next ten years. Her transportation system is so limited that recently, the city hired 2,500 students as part-time "pushers" to cram four million daily commuters into the trains.

And so on around the world. London, Paris, Rome, even Moscow. Every one of these cities would show up quite badly in an investment climate survey. So would India, where a consortium of three leading U.S. firms and three prominent British firms will build a steel mill. So would South America, where the communists themselves recently admitted they have lost what they like to call "the revolution." Yet, around the world, including areas that surveys indicate are poor investment climates, tens of billions have been invested successfully.

In drawing this picture, I do not mean to imply that successful investment overseas depends on getting used to the hazards and handicaps of what appears to be a poor climate. This perhaps is what is wrong with New York and most of the cities of the world. We have allowed ourselves to become accustomed to chaos and we have made a joke of our misfortunes, and even written musical comedies about them. You could even say that familiarity breeds tranquility, and tranquility is certainly not the stuff of which profits are made.

What I am suggesting instead is that, to paraphrase Emerson, where there is no vision, business perishes. For vision, after all, has been the principle ingredient in the development of the western economies. And vision has also been the foundation of progress where it exists in the developed and developing countries. Vision, of course, is not an automatic ingredient. It requires intensive continuing interest, the kind of interest that would allow you to see through the negative factors in an investment climate like New York's. Let that interest slacken and you're going to let the big ones get away. We can pay a high cost in lost earnings for not taking the time necessary to capitalize on investment opportunities.

For example, without denigrating the part played by our own government, the incredible success of the Marshall Plan can be traced fundamentally to entrepreneurs with vision. These are the managers who stood up to their waists in rubble and yet had the foresight to bet on the future.

And today, visionary developments are talking place all around the world. Some of them are starting in this country and will undoubtedly fan out around the globe. Others are underway abroad. One of these domestic developments is one corporation's recently announced plan to begin building the first of several spanking new cities. It is already looking for land around a metropolitan area to create the first of these cities of 100,000 population. It is expected ultimately to cost up to $1 billion and take 15 to 20 years to complete. Here, clearly, is the start of an emerging pattern that could work miracles in the crowded Middle and Far East.

For another domestic example, the atomic energy revolution is here. Sixty percent of all new planned generating capacity in this country will be fueled by atomic power. You can, of course, say that the widespread use of atomic power was inevitable. But as the historian Tawney once suggested, "all revolutions are declared to be natural and inevitable, once they are successful."

The truth in this situation is that it was imagination that kept American companies in business in the face of all the talk of the prohibitive costs of atomic power generation. And the fallout from that persistence has been a sizeable business in contracts for overseas installations, often in areas you and I might easily call poor investment climates.

All of the new economics has not changed the ancient rule that risk runs with return. In many areas of the world where the investment climate, measured by the usual criteria, seems to be the most favorable, the profit and loss account is the most anemic. To survive on the frontier of economic development requires that we all learn as much about the area as we know about our home town and attempt to evaluate the risks in the same way.

It used to be that the rules of the game were fairly well known and that the stability of such rules was one of the most important ingredients of investment climate. The demise of colonialism and the resultant birth of new nations is changing the rules all over the world. Those of you who have followed with care the rulings of the Supreme Court in the United States over the last decade cannot but fail to know that the rules of the game in the United States are changing almost daily, and that we can no longer look upon the changes abroad as being as difficult a condition to live with as we once could. Change, after all, is the only unchanging aspect of life.

What I have been calling vision or imagination, however, is surely no investment-climate panacea. It will have little effect on oppressive political arrangements and bureaucratic controls. It will not compensate for a lack of native abilities. Nor will it shorten the pipelines of distribution. But vision can act as a bridge between risk and technology, and perhaps here lies its greatest contribution. As Barbara Ward suggests, "technology is creating a common experience, common dilemmas, common mistakes, and more hopefully, common opportunities."

Note that Miss Ward does not rule out the dilemmas and the mistakes. You can evaluate all of the elements in an investment climate appraisal. You can assign them probabilities, and incorporate them in a series of equations and build a mathematical model. And after you have thrown the whole mess into a computer, the answer you are likely to get, is that the chances are, say, three to two against successful development. This is Miss Ward's dilemma and your risk. For risk, after all, is what you and I are concerned with daily; it is what business and banking have been involved with since the beginnings of commercial enterprise. It has concerned every economist since Adam Smith. Today, science and technology have given us the tools to evaluate risk more precisely. But it requires imagination to see the future and adjust your evaluation of risk.

Karl Marx was wrong because he underestimated the velocity of change in the world. He was defining and shooting at a static target in a world that moves on. Communism has been an economic failure and we begin to see the first faint shadows of the profit motive falling across the Russian continent.

The investment climate is partly what you and I and thousands like us make it. Perhaps we will not live to see on a world-wide basis what Adam Smith called "a great commercial republic," but neither will the world go to hell on an inevitable statistical curve which has been so freely predicted over the years. The enormous success of our joint policy with the Organization of American States in saving the Dominican Republic has stilled the critics and made an incalculable contribution to stability in Latin America. A courageous stand in Vietnam can give courage to those who saved Indonesia from a Communist take-over in the same manner that similar courage saved Greece and Turkey not so long ago. The manner in which we all conduct our own business abroad, by demonstrating daily that we are making a positive contribution to the host country, can help to shape the investment climate in which we operate. Investment climates at home and abroad can be improved, not by bemoaning the good old days which never really existed, but by working to improve tomorrow.

  • The document was created from the speech, "High Cost of Low Interest," written by Walter B. Wriston for the Citibank Insurance Forum on 3 November 1966. The original speech is located in MS134.001.001.00028.
This object is in collection Subject Temporal Permanent URL
Component ID:
To Cite:
DCA Citation Guide    EndNote
Detailed Rights