CONTROLLING INVESTMENT OVERSEAS
By NICHOLAS DAVENPORT Pr is pathetic to think that the wait- ing and preparing for the convertible debenture issue of the British Petroleum Company brought instil
tutional business on the Stock Exchange almost to a standstill. As oil issues go it was not stupendous—the major oil companies are spend- ing over £1,500 million a year on capital account —and as part of the national investment in over- seas oil undertakings it was clearly 'top priority.' The trouble is that outside the nationalised industries, which are financed directly by the Treasury, there is no proper financial control or planning of the national investment programme. The Capital Issues Committee does not direct the financial traffic; it merely acts as a robot traffic light—with a Treasury policeman pressing the buttons—and like most traffic lights in busy centres it is occasionally responsible for gigantic jams. The British Petroleum issue is essentially part of our overseas investment. Mr. Alan Day, to whose Third Programme talk on sterling I referred last week, expressed the view that as we are so short of capital at home, and as the basic needs of our economy have been so starved for so long, we ought to ,reduce the amount of lending we do overseas rather than increase it. This, he added, would involve imposing exchange control over capital movements to sterling area countries. I was interested to see that Mr. Robert Neild, writing in the District Bank Review, was even more emphatic than Mr. Day. In view of our large foreign debts and our small reserves, he said, steps will have to be-taken—at least for the next few years—to check the capital outflow and devote a larger part of our current surplus to reducing the sterling balances and raising the reserves. The only effective way, he said, to achieve this would be to tighten the control on capital movements to non-sterling countries and introduce a new control on capital movements to the sterling area. Mr. Neild, a Cambridge economist, spent some years recently at the Treasury and must know what he is talking about on these balance of payments issues.
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As a Conservative Government does not be- lieve in planning investment at home (outside the public sector) it cannot be expected to welcome any planning of our investment abroad, but I have always wondered why it goes on setting itself a precise target of £300 to £350 million a year for the surplus on our international account if it has no definite ideas what to do with it. Since 1952, if we omit the bad year 1955 when we had a deficit, we have been averaging a surplus of about £230 million on our annual balance of payments (including defence aid and grants), and unless' there is another Korean war it does not seem likely that we can do much better. Since the begin- ning of 1952 to the middle of 1957 the cumulative surplus amounted to £957 million. Yet at the end of this period the improvement in our posi- tion as international banker (taking the difference between the sterling balances and the gold and dollar reserves as the net banking liability) was only £56 million. According to Mr. Neild this was due to the fact that long-term investment abroad and repayment of debt, etc., absorbed £901 million. If the Chancellor really needed the surplus, as he told the House of Commons on April 9, 'not only for our own security as a trading nation but also to honour our commitments as a world banker,' it was just plain silly to have allowed so much investment abroad.
The Treasury has stated in its Bulletins that the net annual outflow of long-term capital in the past three years has averaged a little over £190 million. Out of this sum repayment of the Ameri- can and Canadian loans has accounted for about £30 million a year. The rest has been absorbed by direct sterling area borrowings on the London market and by investing retained profits of UK- controlled oil, mining, manufacturing and property companies operating overseas. The actual gross investment abroad is considerably larger than these net figures suggest, for allowance is made for long-term investment in Britain by foreign companies and individuals and for sales of long-term British assets abroad (such as the Trinidad Oil Company). We must also add the 'leaks,' that is, the flow of funds out of sterling area countries into dollars through gaps in the present exchange controls, which can only be deduced from movements in the gold and dollar reserves. Mr. Day estimated the Kuwait 'leak' at about £45 million a year in the past two years, rising to £70 million in the first half of 1957 before the 'leak' was stopped. Other 'leaks' arc now reported to be active in Hong Kong and Tangie * * * It is deplorable that when confronted with flight from sterling and a threat to our solver% as international banker, the Chancellor shoal have resorted to a 7 per cent. Bank rate as h main defence, knowing that this reduces the so plus on our meagre balance of payments. ii creases our domestic costs, worsens the positio of our commodity-producing customers oversew desirable productive investment at hornand undermines confidence in business ever! where. A better policy, as these two economists convincingly argue, would have been to withdraw from our over-extended investment commitmen overseas, tighten up our exchange controls arid impose a new one over capital movements in Ile sterling area, and, as Mr. Day suggests, try 1° negotiate a funding of some of the sterlirg balances held by large holders, such as Malaya and Ghana, which have sterling far in excess of their immediate needs. The present ludicrous policy of using, or misusing, an annual surplus of £200 million in indiscriminate investment ove seas and in indiscriminate repayment of sterlir balances should not be tolerated a moment longe
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