ECONOMIC

that this phenomenon was general among industrial countries. Of course,it reflects to some extent the weakness of investment demand, but the structureof the financial flows themselves was a significant contributing factor.If neither the low level of capacity utilization nor financial constraints canfully explain current investment behavior, the explanation for the failureof investment demand to turn up decisively in the second year of recoverymay be linked to a number of the longer-run factors discussed in Chapter 1.Data for most countries show that there has been an erosion of profitsapparent since at least the late 1960s and earlier in some countries. Atthat time, however, concerns regarding the downward trend of profitabilitywere alleviated by a growth-oriented business climate. Hence privateinvestment demand responded strongly in the 1972-73 upswing. The currentpause in investment spending appears to reflect a stronger awarenessof the earlier underlying uncertainties and the addition of new ones.The risks associated with committing capital for long periods thereforeappear to be weighing more heavily on the appropriation process and therisk premiums required have increased. The costing out of rates of returninto the future, never easy, is compounded by the fact that recent experienceshave led to greater uncertainties regarding future changes in demand,inflation rates, and financial conditions. The lack of clear guidelinesregarding government policies in various areas, but more generally also afear that governments may have lost control over economic conditions andthat the economy in a number of countries may fall into stop-go cycleshave added to the difficulties involved in the forward projection of profitability.A major new element affecting investment decisions is the large increasein the relative price of energy that was effected in 1973-74 by the OPECcartel. By raising inflation rates and making many processes in industrialand agricultural production uneconomic, the sextupling of the exportprice of OPEC oil since 1970 has had much more far-reaching effects thanthe directly obvious ones of deepening the world recession and creatingserious international financial problems. The success of the OPEC cartelhas also raised uncertainties regarding future price decisions and the securityof supply. Investment decisions have become vastly more complicated underthese circumstances; and adjustment, while creating new needs for physicalcapital, may take a long time. In the meantime, capital shortages mayappear in various sectors and intensify inflationary tendencies, which in turnwill inhibit the adjustment.In countries where for one reason or another nominal interest rates haverisen to recent cyclical highs, the problem surrounding investment decisionsis further complicated by the fact that interest payments on debt create cashflow problems. Under such circumstances the longer-run problem of buildingand sustaining confidence is therefore compounded by the more immediatefinancial situation.110