Price Vs. Policy: A Tale of Two Markets

Wriston, Walter B.


Financing LDCs from Columbus to OPEC


There is nothing wrong or even unusual about that situation. Countries import capital to speed their economic development. The capital inflow permits a higher level of domestic investment and more economic growth than would have occurred without it. It adds to the countries' capacity to repay at the same time that it increases their external debt. It is the normal situation of a successful private firm--and of a successful developing country. It is an accurate description of the United States of America from colonial days up to about 1915. It is hallmark of progress.

The caveat is that the imported capital must be used to create new domestic economic activity sufficient to at least cover the carrying charge on the debt. What worried many analysts after the first oil shock was that even the most successful countries would now use so much of their borrowed money to pay for oil that they would not generate the economic growth needed to service the debt.

There was a period of two years- 1974 and 1975 -when these fears might have appeared justified. The current-account deficit of the major LDCs increased nearly $18 billion. The oil price rise accounted for about a third of the deterioration; the other two thirds were due mainly to the prolonged recession in the United States, Europe and Japan that cut prices and held down the volume of LDC exports.

But from 1917 onward, it should have been apparent to any objective observer that these fears were, if not unwarranted, at least greatly exaggerated.