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Yet, as economies grow more industrialized, the productivity of their capital can decline—as the Soviets have lately discovered. To raise gross national product by a value of 1,000,000 rubles a year, for example, the Soviets during the 1950s had to make capital investment of 2,000,000 rubles; to achieve the same G.N.P. gains more recently, they have had to invest 3,300,000 rubles. The Communists have been used to raising capital by coercion, holding down wages, deferring consumption, and plowing back the produce of today's labor into plants and machines for tomorrow. But now they are also finding it politically necessary to divert more and more into consumption to quiet their clamoring people. One consequence is that Poland, Rumania, Hungary, Czechoslovakia and Yugoslavia have begun in a modest way to import capital from the West, permit Western businessmen to invest in some ventures.
Lately, the long-term trend to capital tightness has been aggravated in the U.S. by the Government's large-scale bor rowings to finance its budget deficit. Through issues of securities and loans, the market generates about $70 billion in credit yearly. The Federal Government expects to borrow a phenomenal amount of that—about $22 billion in the fiscal year ending this June. Unless taxes are increased fairly soon and sharply, the Government will pull $17 billion more out of the capital market in the first six months of 1968 than in the first half of 1967. In consequence, capital is likely to become still costlier and scarcer; money tightness has already begun to crimp construction.
There is also a worldwide clamp on capital flow acrosrnational borders. This trend is doubly disturbing because foreign capital is usually targeted on strategic investment projects and provides a particular fillip. The $7.2 billion that Europeans invested in the U.S. up to 1914 financed most of the nation's railroads and canals, and many of its oilfields and mines; the $12.8 billion that the U.S. sent in Marshall Plan aid rebuilt much of postwar Europe. Now, to fight the battle of the balance of payments, the world's two major exporters of capital—the U.S. and Britain—have lurched toward controls. Under newly tightened restrictions on foreign loans and investments, Washington hopes to cut the capital outflow by $2 billion this year. Eu rope stands to lose about $1.5 billion in American capital, Japan and Australia about $300 million between them.
At the same time, a growing disenchantment with foreign aid has led to a leveling-off in grants and other assistance. Although the gross national products of industrialized North America, Europe and Japan have increased more than $300 billion since 1961, the net outflow of aid from their governments is just about the same as it was then—$6 billion. U.S. foreign aid accounts for half the total; but the U.S. gives only six-tenths of 1% of its G.N.P. in aid—a much lower ratio than France, Italy, Belgium and The Netherlands, all of which give 1% or more.