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Published online by Cambridge University Press: 07 November 2014
No one can delineate the precise state of affairs likely to prevail at the conclusion of the present world conflict. The drama is too kaleidoscopic, too much is hidden in the wings, and the number of acts is uncertain. The best that one can hope for is to distinguish the main threads of the unfolding mystery and to guess the probable position of the dramatis personae at the final curtain. Yet a few things are becoming increasingly apparent.
From facts already before our eyes it is clear that economic rehabilitation and reconstruction on a grand scale will be necessary before life can begin to function again in many parts of the world. Moreover economic reconstruction will be something more than the distribution of “K” rations and bowls of soup to the undernourished peoples of Europe and Asia. The physical destruction of factories, industrial plants, railways, harbours, gas and electric works, and all the rest of the means of production by which civilized peoples provide themselves a living, of course will have to be made good. Yet this is not all. Much of the world's population—in south-eastern Europe, in China, in India—subsisted at an almost unbelievably low standard of living even before the war began. To tender these peoples no better prospect than a return to the miserable pittance that was theirs before the war would not augur well for world peace and order, nor make more than a hollow mockery of the solemn promises of the United Nations. Their standards of living cannot be raised by driblets of charity and pious good wishes, but only by making available to them the capital instruments by which they themselves can raise their per capita productivity and hence their material welfare. The task of relief, rehabilitation, reconstruction, and development that will confront the world at the war's end promises to exceed anything of a similar nature that has ever been undertaken. Yet it is a task which lies inevitably before the world and one for which the penalties of inept handling are certainly severe and possibly disastrous.
1 By price elasticity of demand for exports is meant the responsiveness of foreign purchasers, at a given level and distribution of national income abroad, to changes in the price of imports. If, as the price falls an amount more is purchased sufficiently great to increase the total proceeds accruing to the exporting country the demand for its exports is said to be elastic. And conversely. Income elasticity of demand for exports relates to the changing purchases at given prices abroad of a country's products as national income varies in the importing country. If, for example, as national income rises abroad, exports to the country in question rise more than proportionately to the rise in national income then the income elasticity of demand abroad for a country's products is said to be greater than unity. And again conversely. These definitions are rough but they suffice for the present context. A little reflection will show, however, that both price elasticity and income elasticity will probably vary substantially from product to product and from country to country.
2 It is reported, for example, that in England one house in five has been damaged by bombing. On the European continent the ratio in the bombed areas must be much higher. Since the objective of the more intensive Continental bombing has been to cripple industrial output in Axis-controlled territory rather than to render civilians homeless, one would infer that the physical destruction of plant and equipment has been of a high order.
3 It may be that one of the most severe depletions of this type will be in agriculture. Fortress Europe has had to be self-sufficient in food and the information available suggests that soils have not been maintained by sufficient dosages of fertilizers. This type of capital depletion may be permanent.
4 Small, that is, in relation to other forms of investment within the country. Capital developments such as harbours and roads and power plants are not “speculative” in the sense that very large, though uncertain, returns are possible, as, for example, in mining. The returns may well be high, of course, by comparison with investment in the same industry in the industrialized lending country.
5 This will be especially true in already backward areas where capital destruction has been heavy during the war, e.g. Greece and Yugoslavia and China.
6 Cairncross, A. K., “Did Foreign Investment Pay?” (Review of Economic Studies, vol. III, 1935–1936, pp. 67–78), at p. 76.CrossRefGoogle Scholar
7 The argument is most frequently advanced by those who subscribe to some form of the “Stagnation Thesis” as originally set forth by Alvin H. Hansen on theoretical foundations laid down by Lord Keynes. Apparently the argument has gained rather wide acceptance recently in official government circles in the United States.
8 This will not be true, of course, until after the volume of new loans falls short of the debt service charges. But presumably new loans will not continue indefinitely, especially where rehabilitation is the objective.
9 U.S. Department of Commerce, The United States in the World Economy (Economic Series, no. 23, Washington, 1943), p. 40.Google Scholar
