Financing pulp and paper development in Latin America

by FAO STAFF

A document prepared for the Latin American, Meeting of Experts or' the Pulp and Paper Industry, Buenos Aires, Argentina, 18 October - 2 November, 1954.¹

¹Prepared in co-operation with United Nations Economic Commission for Latin America. Technical Assistance Administration, and the Economic Commission for Europe

THE problem of financing pulp and paper development in Latin America is part of the larger problem of releasing, securing and channelling investment funds into all branches of the continent's economic activity. The causes and consequences of chronic capital shortage in the less developed regions of the world and, specifically, in Latin America, have been dealt with in innumerable official and private publications in recent years. The present paper makes no attempt to deal with this problem.

The capital shortage, it should be remarked, is a relative one - relative to the tremendous capital needs occasioned by rapid economic development. In point of fact, the rate of investment in Latin American countries is, on the whole, rather high, gross investments amounting to some 16 or 17 percent of gross output. Only a fraction, somewhere between a quarter and a third, currently finds its way into manufacturing industry. Of this fraction, perhaps half represents reinvestment rather than new investment. And pulp and paper is only one of many branches of manufacturing industry in urgent need of development.

It is natural therefore to ask: how urgent is that need? How can the claims of pulp and paper be balanced against competing claims? Answers to these pertinent questions lie outside the scope of this paper, and indeed the answers will vary from country to country. But it is perhaps possible to indicate briefly some of the considerations which have to be taken into account in reaching decisions of this kind.

These considerations are primarily, but not exclusively, economic. They concern national economic policies and the institutions through which those policies are effected, whether they be planning boards, central banks, development corporations or fiscal systems. It may be assumed that, other things being equal, the flow of private investment will be directed into those channels which offer the best prospects of remuneration after taking into account the risks involved. From this standpoint, the prospect of the pulp and paper industry securing the capital it needs would seem to depend entirely on the rate of profit to be expected as compared with those to be looked for in alternative channels of investment.

Other things, however, are far from being equal; indeed it is the essence of planning, whether this consists of the mildest economic interventionism or of comprehensive regulation, that those branches of economic activity the planner considers important should be encouraged.

All the Latin American economies are free enterprise economies. But all Latin American governments are preoccupied, some intensely so, with the problem of ensuring that economic development takes place in an orderly, balanced, programmed fashion; this gives rise to the need:

(a) to ascertain development priorities;

(b) to take steps to ensure that these priorities are made effective. The means available for making priorities effective are many and varied: state enterprise, state lending, lending by public and semi-public institutions, discriminative taxation, tariff policies, preferential exchange rates, and so forth. The extent to which these various means are employed differs from country to country in Latin America. But it is safe to say that nowhere can governments afford to allow development patterns to be set solely by the investment flows that would correspond to freely competing profit expectations. To attempt to assess the likelihood of pulp and paper ventures obtaining the necessary capital by comparing estimated rates of profit in that industry with those obtainable in other fields would therefore be both naive and fruitless.

Rather we must ask ourselves what are the criteria for deciding what fields of investment a government should sponsor or encourage, and how the pulp and paper industry measures up to these criteria.

Ideally the development priority rating of a particular project would be based on a marginal social productivity assessment. An examination of the availability and location of the physical resources required would be followed by an estimate of the project cost. This would include:

(a) fixed capital, distinguishing foreign exchange needs;

(b) operating capital; with separate estimates of foreign exchange needs for any materials, fuel

(c) indirect costs not allowed for in the planned project, such as additional power, transport and community facilities. From the gross total should be deducted various cost offsets which, in the main, flow from the indirect costs, e.g. the opening-up of new raw material supplies may permit the development of other industries based on that material or materials found in association with it; by-products, not taken into account in the original project, may enable an associated development to take place; some of the community facilities may have a value not confined to the project, and so forth.

The net cost of the project can now be compared with its contribution to the national income over the expected life of the productive assets. The foreign expenditures involved can be compared with the export-earning or import-saving power over the same period. Both these criteria offer a means of comparing one project with another in economic terms, and thus assessing development priorities.

This is the ideal procedure, but in practice the ideal is seldom attainable:

1. There are usually considerable margins of error attached to even those estimates which at first sight seem capable of fairly exact measurement.

2. It is extremely difficult to measure the indirect costs, and even more difficult to reduce the possible cost offsets to figures.

3. There are considerations which lie outside the economic field which may call for a readjustment of benefit-cost assessment.

Clearly, it would be outside the scope of this paper to attempt to measure the development priority which should be accorded to pulp and paper projects in each Latin American country; only the governments concerned possess all the data permitting such a calculation to be made. It is possible, however, to offer a few observations.

Other papers submitted on this subject contain original data relating to the capital requirements for, and production costs at, hypothetical mills to be established in various parts of Latin America. These models enable us to form an idea of the orders of magnitude involved. One conclusion which may be drawn is that about 50 percent of the total capital required will normally have to be spent abroad. This sets a lower limit to the foreign exchange needs for servicing foreign capital, since foreign capital may also be sought to meet locally incurred capital costs.

Let us consider, for example, one of the hypothetical mills which has been the subject of pre-conference study, a 30,000 ton annual capacity pulp mill to manufacture unbleached sulphate pulp from mixed tropical woods in the Yucatan region. It is estimated that to establish this mill a total capital would be required of US $14 million. This would cover land, buildings, the cost of mill machinery and of erecting the mill, investment in the forest, the provision of housing and community facilities, capital costs during the erection period and working capital. Foreign capital would perhaps be obtained for about half the total amount say US $7 million. Now capital charges, as the cost sheet shows, amount to US $43 per ton of product. The capital 'import content' will probably be less than half this amount, since foreign capital will probably be at a lower rate of interest, covering machinery purchase; let us say US $20.

Actually, this US $43 is not the whole of the capital charge, since the capital costs on the forest operations are separately included in the pulpwood cost, of just under US $20 per ton. A part of this is for equipment which will be purchased abroad; let us assume that US $7 of the unit pulpwood cost represents service on foreign capital. This gives us a total capital 'import content' of US $27 in the cost of production per ton. None of the cost components other than capital charges call for substantial foreign expenditures. In this instance all the chemicals will be obtained locally. Let us assume that clothing, felts, wires, etc. (US $2 per ton) are purchased abroad, all repair and maintenance material (US $3) likewise, and take into account half (US $2) of the contingency item. This gives us a total import content of US $34 of the cost of production per ton. Comparing this with the c.i.f. cost of unbleached sulphate pulp we see that there is an import saving of US $100-110 per ton, and an annual saving of around US $3 million. If we reckon the life of the assets at 10-15 years, this means an aggregate saving over that period of US $30 to 45 million.

If we take another example, a 60,000 ton integrated paper mill at Amapá, Brazil, costing around US $40 million, would have an import content (capital and other items) in its mill cost per ton of about US $80-100. This, at current prices, corresponds to an import saving of about US $100 per ton, or US $6 million annually.

These examples give a very rough indication of the import-saving value of new pulp and paper projects. If a bigger proportion of the capital were raised abroad, including some risk capital requiring a higher return, the import saving would diminish. Since the cost estimates allow for only a conventional rate of profit (12 percent) on investment capital, a part of any additional profit obtained would also have to be repatriated.

Nevertheless, the figures just quoted suggest that pulp and paper projects will have a considerable import-saving value. It is not possible, of course, to say how this value compares with that which might be expected in other investment fields. And in any case, one must beware of setting too much store on the import-saving power of pulp and paper investment. The experience of pulp and paper development in Latin America over the last two or three decades suggests that the main effect of new indigenous production is not to replace imports but to enable latent, hitherto frustrated, demand to become effective. With limited foreign exchange resources available, the tendency is increasingly to give more and more priority to capital equipment items in total import programs. This may operate through quotas, setting quantitative or value limits to the volume of paper which may be imported, or through tariffs, allowing prices to damp down effective demand. In other words, pulp and paper imports are already below the level that would correspond to a full and free satisfaction of internal demand. Thus the establishment of a new pulp and paper project will not necessarily lead to a commensurate reduction in pulp and paper imports; rather it will admit of local paper consumption standards rising to a level more appropriate to the stage of economic and cultural development reached in the country. This, of course, is a real gain which must be taken into account. Governments embarked on campaigns to reduce illiteracy and raise educational standards will not be oblivious to this fact.

The establishment of a new or enhanced local paper supply can permit many other developments to take place. For example, it may facilitate the setting-up of a local book-publishing industry, with all its cultural implications, of bag, carton, cardboard box, manufactured stationery, and various other paper-converting industries, which did not exist before.

It may open up new possibilities in wood-using industries. There is a general impression that the key to opening up the mixed tropical forests for exploitation lies in integrating the activities of appropriate groups of wood-using industries - pulp and paper mills, plywood and sawmills, fiberboard mills, - so that some of the heavy development costs can be spread. This view is not borne out by the investigations which have preceded this meeting, and in all the calculations which have been made it has been considered safer to make the pulp and paper estimates independent of other forest product enterprises; not, however, independent of all other developments since sites have been located so as to take advantage of impending developments in other fields. This procedure has been dictated partly by the technical difficulties of planning other elements of an integrated group of industries, partly because the investment costs in pulp and paper heavily outweigh those which may be envisaged in the other industries. In consequence, many of the items that appear as charges in the pulp and paper calculations will contribute to lowering the capital cost of subsequent developments in other wood-using industries.

The size of the problem

It is now pertinent to indicate, in very general terms, the size of the problem involved - the investment which is likely to be necessary if the rise in the continent's paper needs over the next few years is to be met from the continent's own resources - it having been established that particularly favorable conditions exist for the development of pulp and paper industries in many Latin America countries, and that, in view of prospective world supply conditions, such a development indigenous production will be necessary if paper consumption in these countries is to increase at a reasonable rate. A development of indigenous production of pulp and paper on the scale required will require heavy investment. It is impossible to give any very precise figures since, as is made clear in Table 1, so much depends on the scale of operations and on the kind of mills that go to make up that development. However, by making reasonable assumptions as to the probable size of future projects and as to the proportion of them which will be established as integrated projects, it is possible to arrive at the following approximate figures:

TABLE 1. - CAPITAL REQUIREMENTS FOR SELECTED PULP AND PAPER MILLS OF VARIOUS TYPES AND SIZES

(Millions of US dollars)

Capacity (thousand tons annually)	Newsprint mill1	Sulphate pulp mill (bleached)	Integrated paper mill (bleached)	Non-integrated paper mill
15	-	13	17	8
30	17	18	24	11.5
60	25	27	38	18
90	32	35	53	-

¹Newsprint, United states. All others, Yucathàn model.

TABLE 2. - CAPITAL REQUIREMENTS OF A LATIN AMERICAN PULP AND PAPER PROGRAM

Capacity	Program				Capital requirements in million US $
	News-print	Other paper and board	Mechanical pulp	Chemical pulp
	thousand metric tons annual capacity
Total 1950 - 65 capacity additions, if all realized:	140	465	190	580	515
(includes capacity completed since 1950 or presently under construction, and all other projects in sight, ranging from advanced planning stage to preliminary study)
Further capacity required over and above the fore going totals: assuming that pulp and paper imports will be maintained:
(a) given only minimum economic growth	220	375	255	35	220
(b) given favorable economic development	435	1000	525	445	800

Thus present plans, very freely construed, imply a total investment of US $515 million over the period 1950-1965, or an annual investment of about US $35 million. The amount of investment that would be required over that period, assuming that only minimum economic growth is realized, to assure a reasonable standard of paper consumption without incurring an increased burden of imports, is around US $ 750 million, about US $ 50 million annually. If a more favorable economic development takes place, then over US $ 1,300 million investment would be required, or about US $90 million each year.

These figures would cover the construction and equipment of the industrial plants themselves, the necessary forest investment, and most, though probably not all, of the concomitant heavy investments for power capacity. For a realistic discussion of the potentialities for paper and pulp development in Latin America, the question of the supply of capital must therefore be taken into consideration. The purpose of the present paper is not to propose specific solutions, but merely to supply some factual background information for consideration of general problem of financing.

The rate of investment in Latin American countries is, on the whole, rather high. Gross investments amount to some 16 or 17 percent of gross output, or about US $ 7,000 million (at 1950 prices).² Out of this total, something between 25 and 35 percent, say US $ 2,000 million, may be in manufacturing industry. Thus the direct capital requirements for new paper and pulp capacity on the scale mentioned above, might represent around an additional 5 percent of total industrial investment in Latin America.

²ECLA Economic Survey of Latin America, 1951-52, p. 89. Conditions were more favorable at that time than they are today. The current proportion is probably no

At first sight, this figure may appear to be modest. But it must be remembered that this would be the figure for gross investment in manufacturing, and that replacement investment is a sizeable proportion of the total. Furthermore, a large part of the remaining net capital formation represents self-financed additions to the capital of existing industries. Since we are considering mainly the financing of new industrial plants, the relevant figure with which to compare the annual requirement of US $ 50 to 90 million would be the amount of capital annually channelled to industry in the form of bank loans or long-term capital raised on the capital market. No reliable figures are available for such a comparison, but it can safely be assumed that, on this basis, the capital requirements for the desirable development of the paper and pulp industries would appear to represent a very considerable addition to the demand for capital from internal sources.

Before considering the various possible sources of finance, it may be as well to enumerate the main purposes which the capital raised will have to serve. Here we can only generalize, but a typical case might show that around 40 percent of the total is needed for the purchase of machinery abroad, another 3 percent for foreign technical skill (engineering and other consultancy fees, etc.), 10-15 percent for forest investment (including housing, but excluding equipment, already included in the preceding figure for machinery), 30-35 percent for buildings and such local capital costs as community facilities and transport, and 8 percent for working capital. These figures reflect the investment pattern for a 60,000 - ton pulp mill in an undeveloped area. They would vary from site to site, and with mill size. For an integrated paper mill, a higher proportion of the total would be required for machinery, perhaps up to 50 percent, and a lower proportion for forest investment and other headings.

Normally one would expect that domestic capital would be forthcoming to cover at least the locally incurred items, and some of these (forest investment, community facilities, transport and the like) are of the kind that should encourage public loans at reasonable rates of interest, since they constitute development expenditure in its wider sense.

Sources of capital

Domestic capital may be forthcoming either from the state itself or from private investors. The state has, of course, means of encouraging private investors.

The degree of state participation in investment varies widely between the different countries, although there seems to be a tendency in most Latin American countries towards direct state action. Argentina is about to enter on its second five-year plan, and in a number of other countries many projects are being carried out by state development corporations, either of a comprehensive kind or formed to deal with a particular supply difficulty. Of the other larger countries, Mexico is the one in which there is the greatest degree of state participation in investment. In every year between 1944 and 1952, the proportion of total investment accounted for by government expenditure has been between 40 and 50 percent.³

³ECLA Economic Survey of Latin America, 1951-1952,

Except in one or two cases, in the past, pulp and paper making have not figured in the first rank of industries to be developed by government initiative in non-industrialized countries. Other and more basic industries have usually been considered to have a prior claim, either because they have been thought to hold a key position in a balanced program of development, or because they have been considered to be capable of replacing more, or more essential, imports.

Nevertheless, in Argentina, Brazil and Mexico, the governments all plan direct large-scale expansion of the pulp and paper industries. These countries, in addition to being the ones with the most comprehensive government development plans, are the ones which offer the largest markets for paper at the present time, for Argentina, Brazil, Chile and Mexico are the only countries with significant book-publishing industries.

A number of other Latin American governments, while they may not as yet have embarked on any specific investments in this field, are also known to be closely interested. The alacrity with which they have solicited the despatch of survey missions under the Expanded Technical Assistance Program, and the close attention they have given to the resultant reports, bespeak a more than academic interest.

It is, in fact, becoming increasingly recognized that for a variety of reasons investment in pulp and paper should not be accorded a low priority. Thus while each government will inevitably have to decide its own priorities itself, in accordance with the total economic situation confronting it, the coming years will probably bring rather more government interest than has been displayed in the past, both in the shape of direct government investment (or investment by quasi-government institutions) and in encouragement offered to private investors.

The practical difficulties of channelling personal savings to investment in manufacturing industry have been found to be very great in Latin America. Although capital markets exist in some of the larger countries, their scope is limited. Only in Argentina is the volume of security transactions appreciable in relation to income and investment.

In the absence of well-developed capital markets, internal financing of private investment has to rely to a large extent on self-financing by enterprises, the most direct form of application of savings for investment purposes, on group subscriptions or on bank loans. As far as self-financing is concerned, although it is of great importance in many countries, it is by definition not a means of developing a new industry, and although it will undoubtedly have its part to play in any pulp and paper program, it is certainly not capable of supporting expansion of a small industry on the scale envisaged.

Hitherto much of the financing, from domestic resources, of new industrial enterprise has been in the form of credits from private banks, special investment banks, or, in some cases, even from central banks. So far as the commercial banks are concerned, rates of interest are high, as is to be expected, while many of the loans are only of short term with the necessity of frequent renewal. Generally speaking, it seems unlikely that new pulp and paper mills will be able to rely on them for more than their working capital which, as we have seen, accounts for but one-tenth or less of the total capital required.

The absence of large and well-organized capital markets, however, by no means implies that the possibility of raising private capital for new industrial investment is negligible. Private capital does exist, and can be mobilized, without necessarily passing through agencies and institutions typical of countries in a more advanced stage of development. And in recent years a number of large-scale industrial ventures, calling for large capital investments, have been financed by domestic private capital, sometimes with the participation of government financial institutions, in a variety of ways, including private subscription.

This means that there is a considerable reserve of private capital which can be tapped for new pulp and paper ventures, providing ways and means of mobilizing it can be found. And indeed this is what one might expect in countries where the need for modern and well-organized financial institutions has not yet been strongly felt. It is customary to lay emphasis on the low level of per capita in the less developed countries. It is often overlooked that here an average figure tells far less of the whole story than in advanced countries, for both the income and capital frequency curves are much steeper, the contrasts in wealth much sharper. A corollary of this is that the possibility of raising capital by concentrating on a relatively narrow band of higher incomes is much greater.

Loans from the International Bank or the United States Export-Import Bank constitute the main sources of official foreign long-term capital. To secure these loans, projects have to fulfil relatively severe criteria of necessity for economic development. Out of more than 100 credits to Latin America authorized by the Export-Import Bank between the beginning of 1946 and the middle of 1953, two were for machine tools and industrial equipment, two for textile machinery and one for a plastic material factory. In addition, there were a few for chemical plants and heavy industry, but almost three-quarters were for the development of electric power, transport systems or mining and metal processing. In the value of credits authorized, the preponderance of these three groups was even greater.⁴ The loans granted to Latin American countries by the International Bank for Reconstruction and Development have been overwhelmingly for the construction of power plants.

⁴Export-Import Bank of Washington - 16th Semiannual Report to Congress.

However, there has been recently one important loan by the International Bank for the development of a pulp and paper project in Latin America - US $20 million to Chile - and the possibility of others must not be ruled out. A pointer, if needed, is to be found in the reports of the general survey missions dispatched to various countries by the International Bank at the request of Member Governments. The object of these missions is to make recommendations for long-term development programs after evaluating, in the light of the overall economic situation, the relative claims of the various sectors of the economy, and the fields within each sector, for priority in investment. Most of these missions have reported insufficient utilization of forest resources and envisaged a place for pulp and paper making in a balanced forest program. Where specific recommendations have not been made by the missions, it has usually been because of lack of industrial experience relating to the pulpability of non-traditional materials. One might suppose, therefore, that a soundly based, well-prepared scheme for pulp and paper, integrated into a balanced general program of economic development, would, if submitted to the International Bank along with a request for a loan, receive very careful consideration.

It is well-known that, since the war, the principal international flows of private capital have been from the United States to Canada and Latin America and from the United Kingdom to the sterling area. United States direct net private investments in Latin America were US $1,562 million in the period 1950-53, of which US $858 million represented reinvestment by American interests (see Table 3).

Unfortunately, there is an obvious tendency for these funds to flow into particular countries and industries. Thus, of the US $1.4 billion of 'new' investment in the years 1946 to 1950, more than US $600 million went to Venezuela and a further US $180 million to Brazil, no other country receiving more than US $100 million. Almost 90 percent of the money going into Venezuela and two-thirds of the total to Latin America went into the petroleum industry, while manufacturing industry received less than 10 percent (though about 20 percent of reinvestments are included). More recently, however, the proportion going to manufacturing industry has been increasing; in the years 1951-52 it represented about a third of the total, both for ' new ' investment and reinvestment. But the only two countries which received considerable amounts of capital for manufacturing industry were Brazil and Mexico.

In a recent United Nations report, prepared for the Economic and Social Council, on the International Flow of Private Capital,⁵ it is pointed out, in the discussion of the movement of capital for the development of manufacturing industry,⁶ that these two countries, together with Argentina, where there had been considerable investments in earlier periods, are the ones which offer a market large enough to make profitable the mass production methods for which foreign capital is needed.

⁵The International Flow of Private Capital, New York, 1954.
⁶Op. cit., page 49.

This observation is not, of course, directly pertinent to the pulp and paper industry, which is a highly mechanized industry once it has moved out of the handicraft stage. A more relevant consideration is whether the size of the domestic market will enable mill operations to be carried out on a scale that is economic in relation to alternative supply sources. Determining the economic size of a plant in Latin America is no easy matter - some of the complexities are dealt with in Secretariat Paper 3.03. But generally speaking it can be said that already there are at least ten, and perhaps more, domestic markets in Latin America capable of sustaining pulp and paper production in economically-sized mills, and increasing demand in the coming years will probably add another half dozen to the list.

TABLE 3. - NET UNITED STATES DIRECT INVESTMENT (A) AND REINVESTED EARNINGS (B) IN LATIN AMERICA, BY INDUSTRIES¹

		1946-492	1950	1951	1952	1953
	millions of US dollars
Manufacturing	A	90	64	116	80	..
	B	233	49	96	94	..
Trade	A	93	18	38	11	..
	B	46	12	28	30	..
Agriculture	A	25	- 7	22	- 4	..
	B	90	14	15	11	..
Mining & Smelting	A	65	29	60	120	..
	B	10	4	48	15	..
Petroleum	A	748	- 62	- 31	79	..
	B	106	10	75	137	..
Public Utilities	A	- 43	3	- 7	21	..
	B	58	9	10	11	..
Miscellaneous	A	63	7	11	18	..
	B	23	7	9	8	..
ALL INDUSTRIES	A	1 0273	47	209	324	93
	B	5353	105	276	305	172

¹Net capital movements exclude ship sales to United State-controlled foreign operators.
²Figures not strictly comparable with subsequent years, since the have not been revised according to the 1950 United States Census of foreign investment.
³Total does not add up to the sum of the parts due to later revision of the former.

Hitherto, however, it would seem (judging from the scant evidence available on this point) that little or no 'abstract' private foreign capital has found its way into the pulp and paper field in Latin America. There are two main reasons for this. Pulp and paper has not offered returns as attractive as those in, for example, oil and mining; and this field is so specialized that it has not engaged the attention of the private foreign investor.

Nor can it be expected than the situation will undergo any significant change in the near future. But there is a possibility that 'particular' private foreign capital arising in pulp and paper industries in other parts of the world, may seek outlets in Latin America in the particular industrial field with which it is technically familiar. Two different considerations could bring this about. Firstly, there may be some industries, particularly in Europe, which, by reason of either market limitations, home or foreign, or of increasingly stringent raw material supplies, are denied opportunities of reinvesting in their own country; it would be logical for them to seek outlets in their own field abroad. Secondly, a number of well-established paper industries in countries lacking pulpable resources and depending on imported pulp are becoming increasingly anxious about the prospects of securing the increasing amounts of pulp they will require in the future from their traditional sources of pulp supply. This may well lead them to take an interest in assisting the development of new sources of pulp supply. This is by no means as far-fetched as it sounds. German capital is already helping to develop in Chile the production of rayon pulp, partly for export to the important West German rayon industry. A similar development for the West European paper industry could well attend any initial successes experienced in the exploitation of Latin American tropical woods for pulp.

In fact, referring again to the report just quoted, mention is made in the same section of one leading characteristic of investment in manufacturing industry which bears on the present problem, namely, that much of the capital investment is of the most direct kind, i. e. the setting-up of subsidiaries in Latin America by firms established in the more industrialized countries. Not all that is said in the report is strictly applicable to the case of the pulp and paper industry, but this solution is obviously a simple one if it can be reached. It simplifies the problems of the authorization of the import of machines, of obtaining the technical assistance and of the possibilities that, at the earliest stages at least, production would not be at strictly competitive prices. On the other hand, it must not be overlooked that direct investment of this kind involves the country concerned in capital servicing costs which may, under certain circumstances, impose a strain on the balance of payments situation.⁷

⁷Many countries, especially Argentina, used up a large part of the foreign balances accumulated during the war in re-purchase of foreign-owned assets.

Capital flows from Europe to Latin America in the form of direct participation or through the setting-up of subsidiary branches of European industrial establishments, have been very small in recent years. It deserves to be mentioned, however, that in a very recent Franco-Brazilian Agreement, dated 24 April 1954, the French Government, amongst other things, declares its willingness to authorize French enterprises to participate in Brazilian firms or to install branches on their own account in Brazil.⁸

⁸See Moniteur Officiel du Commerce et de l'Industrie, No. 1609, p. 1417.

Commercial credits

One other important form of external assistance deserves special mention - credits extended by foreign suppliers of equipment for pulp and paper making.

TABLE 4. - EXPORTS OF PAPER AND PULP-MAKING MACHINERY

This can be of considerable importance since, as we have seen, machinery costs represent about 40 percent of total capital requirements, on average. The proportion could fall as low as 30 or 35 percent, but in the case of an integrated paper mill it might well rise to over 50 percent.

Table 4 shows the value of exports in recent years of pulp and paper-making machinery from the United States, Canada and the leading European exporting countries to Latin America. It can be seen that, before the war, by far the greater part of these exports was supplied by Europe. In the post-war years the United States has been the largest supplier, although recently the share of Europe, and particularly of Western Germany, has increased considerably. In 1953, more than one-third of the total Latin American imports of pulp and paper-making machinery originated in Western Germany. More detailed information, by individual countries of origin and destination, is given in Tables 5 and 6.

In the period of acute shortage in the first post-war years, exporters of industrial equipment were in a position to demand pre-payment of part of the price and payment of the rest at the time of shipment or shortly after. But those times are now past, and the last few years have seen a renewal and strengthening of the pre-war trend towards the provision of fairly long export credits by the exporters of capital goods, capital after the first world war and, at the same time, the tendency for more vigorous investment policies in the less developed countries, the problem of capital shortage has become acute almost everywhere, and not least in Latin American countries.

From the point of view of government policy, in the less developed countries, the possibility of importing equipment on some years' credit gives some relief, provided that the investment in question can within a short span of years contribute to improve the balance of payments, through saved imports or increased exports.⁹ From the point of view of the private investor in the less developed countries, this kind of commodity credit is often an essential condition for his investment being at all possible, because internal credit cannot be had in sufficient amount, or only at interest rates which may be so high as to be prohibitive. In any case, interest rates are likely to be higher than those which would eventually be charged in the country exporting the equipment.

⁹Failing this assumption, such commercial credits

For the exporting country, on the other hand, the granting of favorable terms of payment teas increasingly become a weapon in the competition for export markets. The possibilities of the exporting firm (or its bank) to take upon themselves the additional financial burden (including the risk) of such credits, is, however, very limited in most eases. Therefore, special banking facilities for the provision of export credits 10 have been instituted in most of the major exporting countries.

TABLE 5. - IMPORTS OF PULP AND PAPER-MAKING EQUIPMENT FROM SELECTED COUNTRIES¹ INTO LATIN AMERICA

Country	1938	1950	1961	1952	19532
	thousands of current dollars, f.o.b
Argentina	250	1001	582	266	111
Bolivia	-	-	1	-	-
Brazil	73	803	951	3 212	4 670
Chile	310	62	141	104	131
Colombia	42	6	601	813	52
Costa Rica	-	125	56	60	4
Cuba	269	211	92	29	72
Dominican Republic	1	-	13	-	-
Ecuador	-	-	-	57	-
Guatemala	-	11	11	-	-
Haiti	-	20	-	-	-
Honduras	-	-	-	-	-
Mexico	21	389	545	2041	1517
Nicaragua	-	-	-	-	-
Panama	-	-	-	-	-
Paraguay	-	-	70	-	11
Peru	268	29	94	139	189
Salvador	-	1	-	12	2
Uruguay	34	94	103	522	205
Venezuela	2	27	62	20	80
TOTAL, Latin America	1 270	2 789	5 322	7 275	7 034

Source: National Trade statistics.

¹Germany, Belgium-Luxembourg France, Italy, Austria, Sweden Finland, United states and Canada, United Kingdom
²Figures for France and Finland are not available for 1953.

The present trend is for such export credit arrangements to be given more scope, and this is to be welcomed as a pis aller, since it does amount to at least a modest flow of capital from the highly industrialized to the less developed countries, although it must be emphasized that it would be more desirable to have this kind of credit supplied by one or more agencies specialized in the granting of international medium-term credits, and having the exporters compete for markets through low prices and high quality, rather than through generous credit facilities.

Although Denmark is of little importance as an exporter of pulp and paper-making machinery, a recent official report on the question of export credits may be mentioned as symptomatic of present thinking in these matters in European countries. The report recommends government credits in favor of importing countries other than the Organization for European Economic Co-operation (OEEC) countries.¹¹ Eastern Europe, Spain and a number of Latin American countries are mentioned as some for which such credits might be made available, and it is explicitly said that "in the case of a fall in business activity in Denmark, it might prove desirable to combat the depression through an expansion of such credits for exports rather than through an expansion of credits for public works or similar traditional weapons."¹²

¹¹As for exports to the OEEC countries, such credits would presumably not be compatible with the rules of non discrimination to which the member countries have pledged themselves.
¹²See Finanstidende, Copenhagen, 11 June 1954, p. 1094.

Hitherto German, Italian and French firms have been more disposed to grant long-term credits than, for example, their United States or British counterparts, but symptomatic of new thinking in the latter countries are the views expressed by Senator Homer E. Capehart, Chairman of the United States Senate Committee on Banking and Currency, on his return from an extended investigatory tour of Latin America.¹³ A Bill promoted by the Senator, already voted by the Senate, would restore the status of the Export-Import Bank as an independent agency and enable it to expand its operations. It is hoped that, if this Bill becomes law, the Bank will find a means of satisfying the needs of the export community as regards the long-term financing of capital goods export sales.

¹³Reported in Export Trade and Shipper, 19 July 1954.

Conclusion

Assuming that the economies of Latin American countries develop favorably in the coming years, then the expansion of the pulp and paper industry by 1965 to the point where it is capable of satisfying reasonable demands for paper, without incurring an import burden higher than that of today, would call for an annual investment of around US $90 million over the period 1950-1965. Should economic growth be limited to a bare minimum rate, an annual investment of US $50 million would suffice.

The realization of all present plans for expanding capacity, including those at a very early stage of study, would imply an annual investment over the period of US $35 million. The rate of investment currently and in recent years seems to have been at or near this figure.

The considerable amounts of capital involved prompt the question: What priority should pulp and paper be accorded in a balanced development program? This question can only be answered in the light of the special circumstances confronting each national economic programming authority. Its claim at first sight is not high. It is not a basic industry. Though import-saving, it is probably less so than some other manufacturing industries. A pulp or paper mill, by itself, requires little labor in relation to the capital employed. Usually, however, a pulp or paper project will be accompanied by forest investment and development. This requires considerably more labor. It opens up possibilities of developing other wood-using and associated industries. It creates a new nucleus for industrial development. It may form part of a co-ordinated program of resources utilization. In addition, an enhanced domestic production of paper makes possible the development of many varied paper-converting industries with important labor-employing and import-saving possibilities. Finally, there are powerful non-economic reasons why domestic production of paper should be increased.

TABLE 6. - IMPORTS PULP AND PAPER-MAKING EQUIPMENT FROM SELECTED COUNTRIES IN 1952

For these reasons the interest of Latin American governments in promoting pulp and paper investment may be expected to increase. This may take the form either of direct investment or of assistance and encouragement given to private investors. For the same reasons it should prove possible to secure additional amounts of foreign official capital. An influx of foreign private capital could be encouraged by appropriate action on the part of Latin governments; one form this might take is the setting-up of Latin America subsidiaries of overseas concerns.

Machinery costs represent the biggest item in total investment, and the supply of foreign equipment on favorable long-term credit terms can make a very important contribution to Latin American pulp and paper development. Nevertheless, an annual investment over the period of US $90 million implying well over US $100 million a year during the next 11 years is a target which is bound to prove difficult, and perhaps impossible, to realize. Since a wide margin of failure would entail a serious lag in paper consumption standards, hampering both material and cultural progress, conscious efforts on the part of Latin American governments seem to be required.

The foregoing paper, together with others bearing on the same topic, was discussed at the Buenos Aires conference, A drafting committee, composed of experts from Argentina, Brazil, France, Mexico and the United States, under the chairmanship of Mr. Stacy May (United States), prepared a report on this item of the agenda which was subsequently adopted by a plenary meeting. The complete text will appear in the report of the Buenos Aires meeting, which will be published shortly, but the final paragraphs may be quoted here:

1. An expansion of the pulp and paper industry in Latin America is vitally necessary. There is every indication that well-placed investment in this field will prove profitable.

2. For a variety of reasons, this industry is one in which joint investment of domestic and foreign capital offers advantages over what can be achieved by either operating alone.

3. To ensure this needed industrial development it is necessary to stimulate the flow of domestic capital in a measure which will at least cover locally-incurred investment costs, working capital requirements and the requisite down-payment on foreign equipment. There is a similar need to encourage a flow of foreign capital to France the purchase of equipment and the contracting for those technical services that must come from abroad.

4. Various forms of financing this development exist, including long-term loans by international financing agencies, medium-term credits for machinery purchases and direct investment by both local and foreign capital. Projects must be carefully drawn up to establish that they are sound business risks and that the climate for investment in the intended area is favorable.

5. It is considered that the attention of Latin American governments should he drawn to the special part which pulp and paper industries can play in general economic and cultural development and therefore the desirability of:

(a) according priority to these industries in establishing development plans;

(b) ensuring that these plans are carefully drawn and documented to set forth the order of feasibility of potential projects in terms of their respective prospects for fulfilling, in the most effective and economic manner, the needs of Latin America as a whole and its several Republics;

(c) mobilizing domestic capital and facilitating the movement of international capital in order to realize this expansion.

6. Because an adequate and sustained raw material supply is basic to the industrial development contemplated, the meeting considered that Latin American governments should take steps to establish or improve credit terms for forestry as well as for industrialization.

7. Certain developments would involve "settlement" Cost., so high as to inhibit private investment if charged as capital costs on the paper operations. The meeting considered that in those cases where developments of this kind are deemed to be in the national interest public authorities should provide basic community services.

8. The meeting expressed the hope that the conclusions of this meeting would be made known to those banks and financial institutions likely to be interested, so that the attention of those concerned in countries outside Latin America be drawn to the desirability of taking all the necessary measures to:

(a) facilitate the financing of equipment sales;

(b) facilitate the export of private capital.

The photograph' show debarked poplar logs before being fed to the grinder house of a pulp mill in Zarate, Argentina;

Radiata pine logs for pulping in a mill at Puente Alto, Chile. (Photographs by G. Welsh).