A RESTRUCTURED CAPITAL MARKETS MODEL FOR DEVELOPING COUNTRIES- A NEW APPROACH TO FOREIGN AID AND ECONOMIC DEVELOPMENT

(By Dr. David T. Kleinman, Consulting International Economist and Finance Professor at Fordham University in New York City)

The failure of successive foreign aid programs has been due to fundamental errors in the basic development concept used. To criticize is easy; to propose viable alternatives is more difficult. This I have tried to do. Much of what I immodestly call the Kleinman Plan is now being adopted in Brazil. I am confident it will multiply the impact of our foreign aid at least fivefold and would greatly spur domestic investment. With modifications for local conditions, it could be adopted in other developing countries.
Before examining the Kleinman Plan alternative, it might be useful to review the present model and its shortcomings. First, the rate of economic development in the less developed countries has been directly proportional to the amount of long term capital available. This long

Thus, instead of using scarce international and national public development funds to finance generally 100% of the cost of new projects, and for periods often lasting fifteen to twenty years, the same project could now be financed with only half of the public development funds that would have been required previously. It would also be possible now to re-use this half every three or four years instead of once every fifteen to twenty years.
The use of this technique alone could multiply the development impact of a given amount of public development funds by a factor of up to ten.

MOBILIZING NEW SAVINGS

A growing variety of new investment instruments, that would now trade in a very liquid market, where long term debt instruments are fully corrected against inflation-should all create very sizable new savings that would flow into new investments.
The sources of these new savings now available to finance development, would be:

(a) A diversion of savings now flowing to consumption (which has already begun to happen in Brazil).
(b) A diversion of investment funds, away from socially unproductive land and real estate speculation, into more productive investments (this. also, has already begun to happen in Brazil).
(e) Higher rates of return on industrial investments because funds would now tend to flow to the more productive economic sectors and enterprises (be- cause of the operation of market mechanisms), rather than to those enterprises which merely enjoy greater political support.
(d) An increase in the number of savers and in amounts saved per capita (stimulated by (1) new opportunities to invest,

(2) a new liquid market, and

(3) the possibility of obtaining higher yields, because of monetary correction that would now be used for debt securities).
(e) A reduction in capital outflows to developed countries because of a developing local liquid market.
(f) Gradually developing net inflows of foreign-owned portfolio funds that would start as the capital markets develop.

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4/12/2025

3:40 Am 4/12/2025