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As for private U.S. investment in the developing countries, most of it concentrates in a few that produce marketable minerals—Middle Eastern oil, Latin-American metals. The developing countries are in a squeeze because they depend on the U.S. and other rich nations for 20% of their capital, need hard currencies to buy machines and other capital to build schools, low-cost housing, telephone systems, roads and other all-important "infrastructures" that are slow to show profits. The dilemma: countries often need infrastructure to attract capital, but cannot develop it without large amounts of capital.
Since capital is the product of deferred consumption, the way to make more of it is to increase savings. The U.S. by far leads the world in total savings and capital formation. Economist John W. Kendrick of George Washington University has calculated that Americans have accumulated financial assets of $2.4 trillion, mostly in bonds, stocks, savings accounts, pension funds and life insurance. Last year the U.S. added $129 billion to its stock of capital in the private sector of the economy. The greatest source was not people but businesses, which added $90 billion, primarily through reinvested earnings and depreciation allowances.
Finding New Sources
Government is a fast-growing source of capital formation. Though the Government spends prodigiously on services, salaries, subsidies and defense, which add little directly to capital formation, it does make quite a contribution to the nation's capital resources by building dams and roads, making loans, and investing in education, manpower training, health programs, research and development. The Budget Bureau estimates that these federal investments will rise from $27.3 billion in fiscal 1967 to $31.9 billion in 1968.
Americans are generally becoming much thriftier—personal savings have jumped from 4.9% of after-tax income in 1963 to 7.5% now—but they tend to save less of their pay than do the Europeans. The highest savers of all are the Japanese, whose people, companies and government together save and reinvest 36% of the gross national product-compared with 18% in the U.S. Emphasizing tomorrow's growth at the expense of today's income, Japan this year will rank third in the world in G.N.P., after the U.S. and the U.S.S.R., but 20th in per-capita income. One of the secrets of Japan's 11.4% average annual growth rate, compared with the U.S.'s 4.3% during the 1960s, is that Japan permits its businessmen to deduct from their taxes nearly twice as much depreciation as does the U.S.
The obvious keys to attracting capital are economic good sense and political sanity. Without those, foreign capital will not flow in and domestic capital will flow out. When governments begin to welsh, devaluate and expropriate, capital flees. Such was the case with Indonesia under Sukarno and Brazil under Goulart. And merely printing money cannot create capital. All that that usually does is bring on inflation. When prices soar and money values decline, people usually put their money into goods instead of savings.