Economic Adjustments from the Standpoint of External Balances

Abstract

Present discussions of economic development often speculate whether the backward economies can utilize foreign capital so as to alter perceptibly and permanently their comparative cost advantages; and, if so, how intensive must be the impact of foreign capital for this to occur. Historical precedents indicate that foreign capital can be directly applied to expand certain types of exports. In addition to the past and present colonially dependent areas, the United States and Canada are often cited as outstanding examples. In these two countries, however, foreign capital contributed mainly to the expansion of exports of raw materials and agricultural products, while the elimination of the comparative disadvantage in manufactured goods was a long and complex process in which the availability of foreign capital was just one of many favorable factors. The circumstances surrounding economic development today are essentially different. The East European experience might help us to gain a better perspective on the timing and magnitude of capital imports necessary for a permanent modification of a country’s comparative costs. It would be especially enlightening to understand better what is required to expand the share of exports whose value depends mainly on special skills and round-about productive processes, rather than on crude labor and raw materials.