IMPLICATIONS OF ECONOMIC NATIONALISM IN THE POOR COUNTRIES*

Created: 6/29/1971

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MEMORANDUM

Implications of Economic Nationalism in the Poor Countries

J^/T

Copy No.

CENTRAL

AGENCY

OF VTIONAL ESTIMATES

1

MfMOPSNSUM

SUBJECT: Implications of Economic Nationalism in the Poor Countries'

not?:

Economic nationalism in the less developed countries his ledpate of nationalizations of private foreign firms in the past few years, anderies of other measures designed to as-

sert more control over such investors. This memorandum examines some of the reasons for economic nationalism, and its domestic political and economic effects, particularly when it takes the form of nationalization. The memorandum then assesses the impact this trend towards nationalism can nave on future interest Inin less developed countries, the potential effects on our balance of payments, and on relations between rich and poor countries in general.

* Thia nemorwidw* haa btan praparod by the Office of national Sttimta* end coordinated within the CIA.

"In retrospect, the history of our tine is likely to be recorded as the conflict between ethnocentric nationalism and geocentricamm, The Multinational Corporation in ths World Eoonomy,

I. THE TREND TOWARD ECO'IChIC NATIONALISM

Nationalism is on the rise among the less developed countries (LDCs) and. to an increasing extent, is beinginto economic terms: nationalization of foreign-owned enterprises, reservation of key economic sectors foror local control, demands for employment of indigenous personnel in foreign-owned firms, increasing controls over new foreign investment, restrictions on profit remittances, rising tax rates, demands for reinvestmentising share of profits, and so on. This economic nationalism poses some difficultfor foreign private investors, most of whom are from the developed countries, and for their governments. It will also have longer range effects on trade and Investment patterns In the free world and on relations between the lOCs and the rich countries.

Such nationalism is by noew phenomenon among the LDCs, nor is it confined to them. It exists practically everywhere, and historically has ebbed and flowed remaining

latenteriod and then becoming active. Overthave spread and intensified over the past few years,particularly in Latin America and Africa. Recent examples of countries which have nationalized or asserted more controls over foreign-owned assets include Peru, Bolivia, Chile, Venezuela, Guyana, both Congos, Zambia, Tanzania, Sierra Leone, Sudan, Somalia, Uganda, Libya, Algeria, and India, and the list grows longer by the month.

3. These actions stem primarilyesire to assert national independence and sovereignty over decisions that can affect the country. Resentment over foreign control and the fear of foreign manipulation are everywhere deep. The economically weak, particularly, fear exploitation by stronger foreign Servan-Schreiber's book; The Ammrioan challenge, for example, has been widely interpretedatin Americareatise on the power of American firms to dominate even relatively stronglike France. And many Latins feel their countries must, in effect, fight against economic enslavement. Such fears of foreign economic control are equally strong in many African countries, though more often stated in terms of the battle against neo-colonial-ism and racism. The vision of economic Independence and the felt need to control major decisions affecting the local economy are much the same.

4. Such feelings seem somewhat weaker in much of Asia today, or at least they are less frequently directed against Western interests. This may be due in part to the fact that attitudesumber of these countries have been conditioned by theiron the West for protection. Perhaps, too, their elites are more sophisticated and their older more established cultures induce greater self-confidenceis the foreign economic presence. Moreover, many East Asian countries, such as Taiwan and South Korea, have made rapid economic progress with the help of foreign private investment. Others, such as Indonesia and Burma, nationalized most foreign holdings in the early post independence period and thus have fewer targets; India and Pakistan had relatively little foreign investment to begin with. Finally, in most of the area, thevillains are usually the overseas Chinese, omnipresent in commerce whose success is bitterly resented. As the Japanese presence expands they too are likely to experfence difficulties arising from economic nationalism directed against them.

In many LOCs, the economic benefits of foreign invest-

ment are not very visible to the inhabitants, and seem farby the political costs. Attacks cn foreign interests are generally popular and politically gratifying and the greater the role cf foreign enterprisesiven country, the more tempting a

target they are likely to be. Latin American nationalizations have often occurred in periods of domestic politicalhis has also been the case in otherran's nationalization of the oil companies, Zambia's sudden move against the copper companies and the Sudan's expropriation of practically all foreign-owned interests in the past year or so. These moves were primarily responses to internal political pressures.

6. Economic nationalism, particularly when it takes the form of nationalization or severe restrictions on foreignis rarely based on dispassionate economic calculations but consideration is sometimes given to potential gains or losses. Latin Americans, for example, complain that US investors annually repatriateillion dollars in profits and invest very little either from earnings or fresh capital. They say they can eventually pay off long-term loans but that foreign equityare, inontinuous drain On foreign exchange. Loans, rather than direct investment, have greater appeal for LDCs during times of fairly rapid growth because they are easier to pay off and cost less than allowing foreign owners to repatriate their rising profits.

3oliviaexico duping the revolution anden,nd Chile0

CON QmWfE NT IA L

Moreover, it is widely believed in the LDCs that precious natural resources, especially minerals, have beenfor the benefit of the rich countries and not for the local economies. Indeed, it is sometimes asserted that the whole wealth and achievement of the developed countries is based onof the natural and human resources of the poor countries. Many in the LDCs think that the profits earned by foreign investors have been unconscionably high, and even that rcarkets and terms of trade are rigged by the rich countries to the detriment of thes this theme is reiterated by propagandists in the LDCs, the emotional content of economic nationalism grows apace.

Moreover, there appears toairly generalwith, and loss of respect for, the advice and formulas for economic development offered by the developed countries. This probably stems from growing LDC desires for self-reliance, for working out their own formulas and policies, and perhaps from the

* In1 for ezxcrple, Venezuelan President Calderaress conference with. US journalist* defended his country's recent oil-price hike saying "Venezuela has as much right to influence the price of itc oilanufacturer in the United States has ta set prices for his products." It is ths buyer vho sete the price of raw materials, he argued, but the seller who sets the pricenufactured goods. Re further 3tattd that the price of oil had not risenecade vhile the cost of imported manufactures had increased sharply.

(Reported in the Christian Science Monitor,na.)

CON : aT

loss of earlier illusions about the possibility for easy and rapid development. There are exceptions, of course, especially among the more successful of the LDCs like Iran, the Ivory Coast and South Korea. But, in general, -hen net bilateral aid and foreign private investTent level off, arguments advanced by the developed countries in support of the benefits to be derived from foreign investment become less persuasive to the LOCs. Then their tendency to assert their "independence" and sovereignty by nationalizing foreign interests or otherwise restricting their role is likely to grow.

In recent years, the flov of funds from the developed non-ccrmtnist countries has risen. In ISSS it totalledillion;9 it amounted toillion, out contributions to multilateral agenoies like the UN and IBRD and exportboth government and private) account for much of this increase. Net bilateral aid and net private investment rose nore slculy: bilateral aid from aboutillion to3 billion and direct private investment (net)2 billion to6 billion5

(OFCD, Development Assistance0 Annual Aid Peviev, Jan

na,}

9. Thus, assuming that net aid and private investment from the developed countries continue to stagnate ornd that rapid population growth and urbanization contribute heavily to social and economic problems among the LOCs, it seems likely that only certain strong governments, perhaps only highly authoritarian governments, will be inclined to welcome and protect the private

foreign investor over the next decade. Even they will probably have to repress popular manifestations of economic nationalism. Other strong governments will undertake nationalistic measures against foreign concerns primarily to promote or protect national interests, only secondarily because such moves are popular. The weaker governments are also likely sooner or later to succumb to the political pull of nationalization or to exert increasingly onerous controls over foreign investors.

II. IMPACT Of" ECONOMIC NATIONALISM ON THE LESS 0EVELODED COUNTRIES

venture capital from Western countries andtechnical and marketing skills that accompany itgreatly to the output and exports of the LOCs. few of the oil producing countries would have beennear their present levels of production without thetechnology provided by the privately owned major oilall the major mines in the poor countries were opened up

by foreign firms. And many of the cash crops uponumber of LDCsocoa, rubber, coffee and tea, wereand promoted by private foreign capital. Foreign-owned enterprises also built roads, railroads, schools, and ports in many countries. More recently they have trained locals for annumber of skilled positions and,umber of countries, are expanding Into manufacturing and service industries. Such activities have helped develop many of the poor countries, and have made major contributions to government revenuesy-product of the foreign investors' efforts to earn profits for themselves.

then, is the internal impact of economicwhen it takes the form of nationalization or otherwiseforeign enterprises' freedom of action? Host important

politically, perhaps, is the psychic satisfaction derived from the assertion of sovereignty that such acts demonstrate. They have almost always increased the government's popularity with the people and contributed to domestic political unity, at leastime. They have served, often, to distract attention from domestic problems as in Chile, Zambia, Peru, Congond Bolivia. In this sense, such nationalistic decisions haveolitical plus for many rulers in the LDCs, regardless of the economic impact. Perhaps few, if any, of the poor countries are so imbuedrive toward economic development as we, of the developed world, often think they are. Pride and the need to establish national identity and sovereignty mean more to many of them than the prospect of economic achievement, particularly If this seems to require adopting new values.

he longer-term political effects of nationalization and/or restriction of the foreign role in the LDCs are unclear. Reducing the visible foreign role in the local economy is highly popular in most LDCs. But when such scapegoats have been thrown out, popular grievances are more likely to focus on thein power. Labor unrest, for example, may be much moreto handle If the employer is the local government. It is

probably too soon to tell whether the positive politicaln self-confidence and cohesionwill outweigh these potentially negative effects.

recentolicy of nationalization oron foreign-owned commerce has usually been accompaniedpolicy changes tendingreater government roleeconomyhole. The Indonesian experience underunder Nasser, Algeria, Zambia, Peru and Chile are goodof this. It Is impossible to sort out the economic Impact

of nationalizations or other manifestations of economic nationalism from the more general effects of such policy changes.

itself can produce economicsone countries, nationalization of foreign enterprises,compensationaid, canositive effect onof payments. Egypt's foreign currency earnings fromCanalrime example: before it was closed inearnings were0ear; nearlyimeslevel." This is particularly true foror Industries that are profitable, essentially complete,

' Thevas not due solely to nationalization. Canal traffic alec soared during this period.

enjoy an assured market after nationalization, and where no significant new investment would normally be expectedumber of years. Guyana apparently decided to move against the Aluminium Company of Canada's (ALCAN) subsidiary DEMBA after it became clear that ALCAN could not be persuaded to build more plants to process bauxite in Guyana; it isfor Chile that it is taking over the copper minesajor round of investment had been made by the companies.

Moreover,"in some countries, hopes forew private foreign investment are dim in any event. In these cases, profit remittances and capital repatriation sometimeseal burden to the balance of payments. Thusmightet foreign exchange gain for the economyspecially if any compensation were small or stretched out. Although difficult to prove, this is probably the case for Uganda and Somalia. But nationalizations in such comparativecause fewer ripples in any case, primarily because they never attracted much investment.

The impact of nationalization on output and profits of the enterprises involved generally depends on the attitude the government takes. Usually, the move itself causes athort-term disruption, but if the government wants its acquisition

runbusinesslike" fashion, with emphasis onand can hire the necessary technical and management skills, then nationalization has little effect. This appears to be the case for the copper industry in Zambia and Congohere the former owners continue to manage these enterprisesee. In Zambia, for example, the chronic Tabor unrest has been damped down, and the mines are still efficiently run. In Congo (Kinshasa) the terms of thecontract are so attractive to the foreign ex-owners, that the copper operation has proceeded smoothly, to the benefit of both the government and the management.

17. On the other hand,ationalizing government is more interestedreating jobs for its nationals regardless of qualifications or in enhancing welfare, then the enterprises it takes over are likely to show less profit and production may decline. The Bolivian tin mines are an outstanding illustration Employment rose rapidly after nationalization. Where there had been equal numbers of above and below ground workers before, the came to be twice as many working above ground as below. Costs rose, output declined, and the mines Incurred large losses.

the LDCs pay "fairor It will dependariety of factors includingagreed to, the amount of foreign exchange available,strength of competing domestic resource requirements. if demand for petroleum renains high, oil assets could

be paid for relatively easily by such countries as Libya or Kuwait whose revenues from the industry are enormous relative to their populations, total output, and foreign exchange requirements; less easily by such countries as Nigeria or Algeria where oiless significant factor in relation to total output and foreignand only with difficulty andonger time by such countries as Bolivia. Where profits were low or negligible before nationalization, or where tht nationalizing government is already deep in debt and relatively poor, reasonable compensation isout of the question, as in Uganda or Guyana for example.

the LDCs pay reasonable compensation when Itpossible? Here too, the answer will depend on a

* Defined in US statutes as the value and certs that -jould be agreed toillingilling buyer acting independently. Even in theory, thiaifficult figure to arrive at since, once the nationalisation ie imminent, there is nobuyer". The problem of discounting future profits is also thorny.

variety of factors: their fear of sanctions or other forms of reprisal; their assessment of their need for foreign loans or investmentew fields; and on the plausibility ofthey might make for back taxes or fines. Most importantly, the decision to pay compensation will probably depend heavily on the domestic political situation at the time.

The LDCs seem increasingly less afraid of economic sanctions. Mary are aware, however, that the World Bank and other international lending institutions will probably not extend new loans so long as thereajor outstanding dispute over compensation. This appears to apply pressure towards working out an agreement with the former owners but seems to have little effect on the decision to nationalize. Moreover, many LDCs apparently think that thereultitude cf would-be investors anxious to explore their highly attractive opportunities. Thus they are often not afraid of scaring off prospective investors by applying nationalistic measures to existing foreign firms.

In general, the outlook for actual payment of fair and prompt compensation is poor. Thus far, practically all the countries that have nationalized foreign assets have acknowledged that some compensation is appropriate. In most cases, however, depreciated book value,typically considerably below "fairs the most

that the former owners can hope for. Nationalizing governments have begun to set the price unilaterally, often at book value less retroactively applied taxes or other charges. In addition, payments are being stretched outong term withinterest allowances. While the former owners are likely to complain loudly, and to press their claims through their own governments or against government guarantees, many if not most foreign investors appear resigned to sorrething well under market value.. Indeed, many are probably prepared to settle for whatever they can get because, having included this risk in their original calculations, they have already recovered their Investment.

22. The major short-term economic drawback of nationalistic policies, especially nationalization or measures which abruptly restrict foreign investors' freedom of action, is its effect on the investment climate. Credit, even bank loans and trade advances, may dry up as it did for Peru and is doing for Chile, as potential lenders back off or delay pending an assessment of their prospects. Even less stringent measuresimilar effect. Millions of dollars of planned new foreign investment in Argentina, for example, have been suspended In recent months as that country has manifested increasing economic nationalism and political uncertainty.

In this instance the investors' hesitancy was caused more by the vacillation and uncertainty of the Argentine government than by any specific act against foreign business. Probably the greatest long-term adverse effect of nationalization and other manifestations of economic nationalism is that future economic development may be hurt by the lack of foreign funds and the scarcity or absence of entrepreneurs willing to take risks.

23. Nationalistic measures that restrict the freedom or the profits enjoyed by foreign investors will not necessarily destroy the climate for foreign investment, so long as the new rules are moderate and consistently applied, and uncertainty is minimized. Where existing profit margins are higher than the minimum required to attract or keep investment, hostcan demand andreater share, and still leaverelatively content to do business." In other cases, former owners of nationalized enterprises have been satisfied with lucrative nynageirent or service contracts, as part ofagreements, and the general Investment climate was not too greatly impaired.

If* fa* ezarrple, the market outlook ie tuckotential investor muetet return ofear before he will comit himself, measures which reduce his potential take fromercent toercent will not necessarily inhibit kin.

-CONFIDENTIAL

In the more advanced and self-confident of the LOCs, the Japanese-type of investment is likely to be attractive to both investor and host country, so long as world markets continue to expand. Here, the investor loans money, often to pay for machinery and equipment which the investor supplies, takes little or no equity, may or may not supply managerial skillsontract basis, but contracts to buy the enterprise's outputong term during which the loan is paid off. The Japanese have used this sort of arrangement in Indonesia, Thailand, South Korea, Australia, Chile, Brazil, and Zambia. In Taiwan, they not only have supplied machinery and raw materials but have made arrangements to sell approximately half of that country's exports to third countries.

Some poor countries, however, are likely to go so far in their search for economic Independence that their nationalism will frighten away all foreign funds. If they are forced to rely solely on their own resources, economic growth will be even slower than would otherwise be the case. These will be the "losers" in the growth game. Possible candidates are numerous: Solivia and Tanzania may be examples.

At the otherew strong governments will see an advantage in continuing to welcome foreign investorslthough

their terms and conditions may be less attractive than at presentand will obtain capital and use it to further development. The successful ones are more likely to be conservative or export-oriented economies like Taiwan, South Korea, Gabon, Ivory Coast, and possibly Mexico and Brazil. None of these "potential winners" is currently suffering from ran-pant economic nationalism, though even they are not fiiwune, and all have relatively strong and authoritarian governments whose policies towards foreign investors are relatively clear and consistent.

majority of the LDCs will probably fall scnewhere

in between. Their ability to attract risk casital for development will depend on their assets, the relative stability of their regimes, and how well they and potential foreign investors can work out acceptable arrangements.

the long-term impact of growing economicthe LDCs which possess resources that might attractdepend heavily on what happens to the investmentthey establish clear and workable rules for foreignand whether they apply them consistently. Mexico isexample of success in these terms. Foreignwelcomed on Mexican terms, the rules of the game are well known

>

consistently applied, and investors continue to findopportunities there. If, on the other hand, foreign investors are discouraged, government aid and domestic capital will become even more important to economic development. Few of the LDCscapable of rapid growth without foreign aid or investment.

III. IMPACT ON THE OEVELOPEO COUNTRIES

payments for nationalizedrarely going to be as high as the former owner'scompensation is likely to be offered in some form.

It will usually be paid out over fairly long periods. Moreover, as the LOCs assert more controls over the foreign-ownedtaxes will probably be raised or the foreigners' share of profits lowered through dilution of ownership. Profits may also be decreased "by restraints which lower efficiency. Thus the net effect of economic nationalism on the developed countries' balance of payments with the nationalistic LOCs will tend to be negative.

* CAC estimates of the direct foreign investments (book value) of the major developed countries6 were as follows in billions of dollars.

LDCsf

asUS Foreign

of

Petroleum 46 42

MiningSmelting 47 44

Manufacturing 22 19

Other 33 32

TotaU 33 31

petroleum and raining and smelting industriesnearly half of developed country investments in the LDCs,*

and these extractive industries are usually among the first to feel the impact of nationalistic sentiment among the LOCs. Many of the large mines have already been taken over and the oilcountries have recently increased their share of profits from petroleum. Because of their size and relative importance, these industries are likely to continue to be major targets either for complete nationalization or of demands for greater shares of profit, and greater local control over key management decisions including reinvestment, prices, and employment. In any case, the share or profits remitted to the foreign owners is almost certain to decline.

Excluding international, unallocated investment.

In round terms, US direct investment in less developed countries* is valued atillion (book value) and income remitted from it totalled3 billion The petroleum industry accounted for8 billion or justhird of total value, but3 billion in Income, or over two-thirds of total income.

In terms of income from investments in the LOCs, the fate of the oil industry is thus of major importance to the US. Itlso, in allpecial case because of the LDCs

ellers' market for their product- The oil producing states are already exerting demands for greater revenues and greater control over production as evidenced by the recent rounds of negotiation which raised their take substantially. Algeria, Venezuela, and Libya have been most assertive, but Nigeria and the others are not likely to be far behind. governments will almost certainly Insisthare of all new concessions granted and parts of existing industries, are likely to be nationalized. Within the nextarge share (perhaps the bulk) of IOC oil productionikely to come under still greater government control. The role of the major oil companies will shift more towards service contracts or joint ventures in which they provide the expertise and some of the development capital in returnhare of the oilegotiated fee. This, in turn, is almost certain to reduce US (and other developed countries) share of profits from oil, and to shift the terms of trade for oil further in favor of producer countries.

33. There are few, if any, other industries in whichrastic change in ownership and terms of trade seems possible. Most mining and many If not most financial, transportation, and

communication enterprises in the LOCs are likely to be under local ownership (either through nationalization or other mechanisms) by the end of. But it is unlikely that the LDCs will be able to take successful concerted action tohe prices the developed countries must pay for their products. This applies even to the copper industry where four LDCs (Chile, Zambia, Peru and Congo Kinshasa)arge share of internationally marketed copper. The LOC producers have grown accustomed to high and rising revenues from copper and their continuing need for these revenues is so great that they will probably make someto cooperate in restricting output or holding it off the market long enough to affect the world price materially. However, because of the diverse policies and problems of these four nations and the fluctuating market demand for copper, it is unlikely that they will be successful. Moreover, as time passes their leverage over the market is likely to decrease, since their increasingly nationalistic policies have slowed expansion of their mines and will cause investors to turn more towards comparatively safe countriesCanada and Australia for example.

34. The overall impact of rising economic nationalism on the US balance of payments is, of course, impossible to predict. Much will depend on the forms this trend takesnationalization

with little or no compensation or less dramatic measures thatthe foreign owners' share of profits and ability to control management decisions and on the speed at which LDCs move. Much will also depend on how well the US-owned companies can adapt to the changing atmosphere in the LDCs and find mutually acceptable forms of new investment. But the Table below gives an indication of the general magnitude of investment and income flows potentially at stake.

DATA PERTAINING TO DIRECT US0 (In Million US Dollars)

9

In Less Developed Countries*

Book Value, Year End

Net Capital Outflow

IncomeBetween

ncome

In Developed Countries

Book Value, Year

Net Capital

Between

Outflow & 74

Source: Department of Commerce, Survey of Current Business,Unc.)

* Includes international investments, unallocated by countrymuch of uhich is accounted for by international petroleum affiliates and foreign registered shipping.

AL

if many LDCs nationalize the bulk ofenterprises and apply increasinglyto new investment, as seems likely over the nextoverall effect on the investor countries probably willvery great. Management contracts, joint-ventures, andbetween investors and recipient countries arereplace the older forms of investment in many cases, andto produce income for the developed countries.* will pay more attention to relatively welcomingAustralia, Canada, and other developedthe bulk of foreign investment already flows betweencountries, this will notajor shift in emphasis.

IV. RELATIONS BETWEEN DEVELOPED AND LESS DEVELOPEO COUNTRIES

the next decade or two, rising economicthe LDCs will certainly result in greater friction betweenthe developed countries of the free world. The US, assingle investor, is in for some difficult timesLatin America. But It will not be alone in this. Olsputes

' Although the developed countries' share of profits will be rtduced, the absolute level of their earnings from LDCs is

unpredictable.

over compensation for rationalized properties will be almost "he outcry raised by Important firms whose properties are taken over will tend to lessen existing enthusiasm for aid to underdeveloped countries on the part of the major donors. This may also diminish their willingness to offer better tradeto the exports of the LOCs. And friction is likely to rub off on other matters under discussion between rich and poor. over the law of the sea, for exarple, can only beif the major .maritime nations appear to be pushing their claims of narrow territorial waters and fishing rights while simultaneously reducing their aid to poor maritime countries and demanding "full- compensation for nationalized properties.

37. This friction will probably offer the communist powers increasing opportunities to improve their positionumber of LOCs. They are not likely to rush into many breaches,ecauseddition to their own political and economic constraints they too are leery of fluctuating policies among the LDCs. For some LDCs, loans and technical assistance from communist powers may take the place of private foreign investment, as has already happened,arge extent, in Egypt. Romania has offered Nigeria help in establishing ational oil company. There may be many

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more such instances. Trade between LOCs and the developed free world countries, however, is unlikely to be greatly affected by such developments. Uithin the next few years, the communist countries are not likely to absorb much of the LOC products that are now sold in the free world, nor are the LDCs likely to shtft to the communist countries for the bulk of their import

In the longer run,uch longer run, some aspects of the relations between the rich and the poor countries are likely to improve. The bitterness of seizures, punitive laws, and protracted negotiations will fade in time and there will be fewer causes of friction when the role of the foreigner In the LDCs is reduced. ired expert who can be fired if he does not please the government, for example, is much less an offense to nationalistic sensibilities than Is an owner-manager of ancompany. Moreover, if employment and investment decisions are made locally, the fear of foreign manipulation is greatly lessened, though not eliminated so long as the relatively weak must deal with the economically powerful.

Other sources of friction between rich countries and poor will remain, however, and some are likely to worsen. Trade

arrangementsariffs, quotas, and prices in particularwill be salient points of disagreement. Population pressures and their ramifications will also cause great problems in many of the poor countries, hindering advancement in numerous ways. The gap in levels of living between rich and poor is certain to widen, whether or not the poor countries act to reduce the inflow of foreign funds. Growing awareness of this gap among inhabitants of the LOCs will add to these frictions between developed and less developed countries.

40. As economic nationalism grows in the LDCs and the foreign presence is reduced, the relative Importance of the developed countries' relations with the LDCs is likely toto decline. Trade will continue to expand, but the rich will come to focus increasingly on economic relations among themselves. The bulk of their trade and investment is already with others in the developed world.* Economic and political

The shara of the less developed countries in US trade, far escr-ple, has declined steadily over the past feu years. Aboutercent of our exports went to these countries, onlyercent Imparts from LDCs dropped fromercent of total US importscercent The 'same trend appears in direct investment by US companies, nearlyercent of the book value cf US direct investment was in less developed countries9 it had dropped to aboutercentuch larger total. The value of US investment abroad rose fromillion0 toillion (US Department cf Commerce, Survey of Current Business, and Overseas Business0na.)

-CONFIDl^lfriAL

ties can only increase as the muUinatfonal companies extend their activities across national boundaries.

41. Thus, the economic nationalism of the LOCs is likely to achieve its primary aimeduction of the role of foreigners in their economiesut often at the expense of economic growth and technological linkages with the advanced countries. In the eyes of many LOCs. the gains in self-confidence and national pride will outweigh the cost.

CONFID

TIAL

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