World Bank Document

2 A historical perspective
The history of international finance is full of exam- ment did not keep up fully with inflows of interest
ples of its productive contribution to economic and dividends. As a proportion of British savings,
development. It has also produced occasional capital outflows ranged between 25 and 40 perfinancial
crises and, more frequently, debt-servic- cent. France and Germany also invested heavily
ing difficulties for a variety of countries. This chap- abroad, though not as much as Britain. By the late
ter starts by examining the role of international nineteenth century, French and German gross
capital since the late nineteenth century. The capital exports were averaging 2 to 3 percent of
object is to highlight lessons that help to analyze GNP.
the experience of the 1970s and 1980s, rather than The nature of the capital flows varied considerto
provide a detailed history. The chapter then ably in 1870-1914. The largest single group
pays closer attention to the postwar period and included the market-oriented investments, largely
particularly to the past two decades.
undertaken by Britain, in the resource-rich countries
of North America, Latin America, and
The pre-1945 period
Oceania. In 1914, these accounted for 70 percent of
Britain's total foreign investments and more than
The years before 1945 an be conveniently divided half of all gross foreign assets. A second group,
into two parts, 1870-1914 and the interwar period, accounting for a quarter of all foreign investment,
each of which had its own distinctive features. involved investments in Russia and other Eastern
European countries and in Scandinavia; France
From 1870 to 1914
and Germany were the principal investors. A third
group covered the primarily politically motivated
This period was dominated by the London finan- investments in China, Egypt, India, Turkey, and
cial market as a source of capital for other coun- some African colonies. These three groups
tries. Europe's industrial revolution produced a received capital at different times, so new regions
strong demand for food and raw materials, which were financially linked with the world economy
could be satisfied only by investment in many only gradually.
other parts of the world. Expansion of railroads For the large debtors in the nineteenth century,
and other infrastructure was externally financed, capital inflows had only a small weight in their
and foreign investors were repaid later from the economies. For most decades, capital inflows to
resulting export earnings. Some of the countries the United States were around 1 percent of its
where these investments were made-such as GNP and never exceeded 6 percent of its domestic
Argentina, Australia, Canada, and the United investment. For the smaller debtors, however,
States-were able to buy imports of manufactures capital inflows as a proportion of GNP were higher
from the more industrialized countries in Europe. than they are for many developing countries
Then, as now, this growing economic interdepen- today. Capital inflows to Canada averaged 7.5 perdence
was facilitated by international finance. cent of its GNP, accounting for between 30 percent
What was unique about the years 1870-1914 was and 50 percent of annual investment from 1870 to
the scale of international finance. Over the period 1910. Ratios were similar in Australia and the
as a whole, Great Britain invested 5 percent of its Scandinavian countries. The most striking case
GNP abroad, reaching a peak of 10 percent just was that of Argentina, where capital inflows annubefore
World War I. Its net receipts of investment ally ranged between 12 and 15 percent of GNP and
income from abroad were in the range of 5 to 8 financed about 40 percent of its total investment
percent of GNP, implying that new foreign invest- during the first two decades of the twentieth cen-
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