NEED FOR CAPITAL

of capital. Development will by its own momentum ultimately bring about a solution, for as productive power and national income rise, so the proportion of the national income which can be saved will grow ; the amount of savings available therefore rises cumulatively until at a high stage of development the country can finance a high level of development expenditure. As this process proceeds, it may be expected that the financial institutions through which saving is stimulated will establish themselves. It would, indeed, be the duty of Governments to foster their growth. In the early stages, however, they exist only in a limited form, and it is no solution to the problem of the lack of savings merely to create new institutions faster than the cumulative process will allow. 3. The traditional means by which the vicious circle of lack of savings and lack of development has been broken is by injections of foreign investment. Without the use of external resources, the Government must either restrict its development programme or divert internal resources to development work by cutting down the standard of living. The latter process could be achieved by a ruthless mobilisation of the economy including direct action to cut consumption. Alternatively, it could be accomplished by inflation. This would be a slower and less obvious process, but it would just as inevitably involve a reduction in living standards ; indeed, it might also have other serious consequences, for it would tend to discourage savings still further, and might adversely affect production. 4. For Governments in South and South-East Asia none of these courses is practicable. Curtailment of the development programmes, while populations are increasing, would condemn the people of the area to continuing poverty ; direct reduction of living standards could not be achieved without authoritarian government; the political, social and economic consequences of inflation are unpredictable, but the social fabric could hardly be expected to withstand the strain which it would impose. 5. In the absence of any effective means of making further progress with their economic development by their own unaided effort, these countries need a large initial stimulus in the form of foreign investment They need more goods to enable them to carry out their development programme —not only capital goods, but also consumer goods for the workers engaged on the projects. The foreign investment provides these goods. In other words, it enables the country to have a larger balance of payments deficit than would otherwise be possible (or a deficit instead of a surplus). This is the primary function of the foreign investment. Without it, the country would not be able to afford to buy from abroad sufficient capital or consumer goods, and the development programme could not be carried out. 6. At the same time foreign investment can incidentally help to provide the internal finance which the Government need to pay the workers and the contractors for the development programme. The precise technique by which the flow of capital from abroad is transmuted into finance for the Government will vary from time to time and from country to country. But in one way or another, the foreign investment can serve a double purpose, providing both external finance to meet the balance of payments deficit and internal finance for the Government. Balance of Payments 7. The balance of payments of the four territories whose development programmes have been described in the previous chapters, is summarised in the following table. This gives estimates of their receipts and payments on

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