DISCUSSION PAPER / 2006.07 Returns on Investments during the Colonial Era: The Case of Congo Frans Buelens Stefaan Marysse Comments on this Discussion Paper are invited. Please contact the authors at <[email protected]> or <[email protected]> Instituut voor Ontwikkelingsbeleid en -Beheer Institute of Development Policy and Management Institut de Politique et de Gestion du Développement Instituto de Política y Gestión del Desarrollo Venusstraat 35, B-2000 Antwerpen België - Belgium - Belgique - Bélgica Tel: +32 (0)3 220 49 98 Fax: +32 (0)3 220 44 81 e-mail: [email protected] http://www.ua.ac.be/dev DISCUSSION PAPER / 2006.07 Returns on Investments during the Colonial Era: The Case of Congo Returns on Investments during the Colonial Era: The Case of Congo Frans Buelens* Stefaan Marysse** April 2006 * Frans Buelens is a researcher at the Faculty of Applied Economics, University of Antwerp. ** Stefaan Marysse is a professor at the Institute of Development Policy and Management (IOB), University of Antwerp. CONTENTS Abstract 3 Résumé 3 Introduction 5 Section 1 5 Section 2 8 Section 3 12 Section 4 15 Section 5 21 Section 6 27 Section 7 28 Appendix 1. 29 References 30 ABSTRacT Returns on Investments during the Colonial Era: The Case of Congo Before the First World War a global wave of for- eign direct investment materialised. Belgium participated in it on a global scale but after the War a shift towards the Belgian colony (Congo) was observed. With regard to these colonial in- vestments, it is commonly argued that higher (expected) profit rates were a strong incentive, although others propose that the colonial powers actually lost money on their overseas posses- sions. We measure ex-post performance in terms of the time weighted rate of return by making use of a new database on Congo stocks. We demonstrate that, as far as the Congo sam- ple is concerned in comparison with the Belgian sample, returns on Congo stocks were much higher, at least until country risk became a reality (1955-1960). JEL Classifications : O16 G15 F21 Keywords : Stock Exchange, Returns, Congo, Colonialism, Financial Markets, Development Economics RÉSUMÉ Rendement sur les investissements durant la période coloniale: le cas du Congo Une vague globale d’investissements se matéri- alisa avant la Première Guerre Mondiale. La Belgique y partic- ipa sur une échelle globale mais après la guerre on observa un glissement vers la colonie Belge. En ce qui concerne les inves- tissements coloniaux, on prétend généralement que des taux de profits (escomptés) plus élevés constituaient un stimulus puissant bien que d’autres avancent que, en réalité, les puis- sances coloniales perdirent de l’argent dans leurs posses- sions d’outre-mer. Nous mesurons la performance ex-post en termes de temps pris pour le rendement en utilisant une nou- velle banque de données sur les actions (bourses) Congolaises. En ce qui concerne l’échantillonnage Congolais et comparé à l’échantillonnage Belge, nous montrons que les rendements sur les actions Congolaises étaient beaucoup plus hauts, au moins jusqu’au moment où le risque dans le pays devint une réalité (1955-1960). Mots clefs : bourse, rendement, Congo, colonialisme, marchés finan- ciers, économie du développement. IOB Discussion Paper 2006-07 • INTRODUCTION From the very early days of capitalism, Belgium was making foreign investments across the world. Belgian com- panies such as Cockerill and Vieille Montagne were already in- vesting abroad before 1850. Towards the end of the nineteenth century, a first global wave of foreign direct investment (FDI) materialised, followed after the First World War by a concen- tration on colonial trade. In the case of Belgium, this meant a shift of focus towards Congo. After the Second World War, and especially from the 1970s, a new global wave of FDI occurred in which Congo would, for that matter, only participate up until 1960, when the country gained independence. This particular type of FDI, namely investments in colonies, gave rise to the so-called cost-of-empire debate. In the present article, we con- sider this issue from the perspective of investors on the basis of returns on stocks, making use of a brand new database on colonial stocks. The article is organised as follows. Section one highlights the relevance of the returns on investments on Con- go stocks and discusses the issue at hand in the light of the cost- of-empire debate. Section two briefly introduces the historical settings of Congo during the colonial era1. Section three offers 1 There is an extensive literature on the Congo economy. For a general overview, see Ndaywel è Nziem, Histoire générale an overview of available data and the methodology used. In du Congo. For the period after the Second World War see Ber- tieaux, Aspects de l’industrialisation en Afrique Centrale. section four, we compare the total sample of Congo with Bel- gian data of the same period. We divide the Congo colonisation period in two parts, one before the First World War and one from the end of the First World War until 1960 (Congo independ- ence). We discuss first the stock price index, which allows us to identify important events and significant moments within each period. Section five continues the discussion but concentrates on the total return on Congo stocks, whereas section six dis- cusses the dividend yield. Section seven summarises and con- cludes. SECTION 1 Various economic motives (in addition to non-eco- nomic ones) behind globalisation waves have been identified, including hunger for new markets, raw materials and higher profits. Ultimately, always most theories assume that one of the principal driving forces behind FDI is the prospect of higher profit than could be achieved in the home country, given that investors can demand a country risk premium when investing IOB Discussion Paper 2006-07 • abroad. Of course, the higher (ex ante) expectations hypothesis does not automatically imply that higher ex post profit rates were actually realised, so that the entire issue remains open to debate and empirical scrutiny. History shows that country risk can become a harsh reality, though it need not, of course, nec- essarily materialise. However, as far as colonial possessions are concerned, the debate is still ongoing whether the institutional settings were actually beneficial to the home countries. Some observers, including Hobson2, assume that FDI in colonial pos- 2 Hobson, Imperialism. sessions yielded higher profits than other FDI. Others, like Fieldhouse, question this assumption, arguing that it makes lit- tle difference whether or not the foreign country invested in is a colony or not3, thus giving rise to the cost-of-empire debate.4 3 Fieldhouse, Les empires coloniaux. The higher-profit rationale behind FDI waves still persists to- 4 Marseille, ‘L’investissement privé dans l’empire colonial’. day. Proving or disproving it requires detailed empirical investi- gation of as broad a range of datasets as possible. In the present article, we examine one particular case, namely foreign investments in the Belgian Congo during the colonial era from 1885 to 1960. The Belgian Congo was not the only place where Belgium made FDI. Before the First World War, the bulk of Belgian FDI went to countries such as Russia, China, Argentina, Brazil, and Egypt. The concentration of FDI on colonial possessions dates from between the end of the First World War and 1960, the year of Congo’s independence. Congo is typically a country where the international settings for for- eign investment are to a great extent controlled by the investor. While we believe the country represents an interesting case for study, we remain well aware that it could in fact be a special case among others. This contribution ties in well with an important field of historical study, namely the comparison between re- turns on investments in colonial countries and returns on do- mestic investments. However, empirical research into this issue has thus far been limited to a handful of countries, including France.5 As we have previously pointed out, this is a rather 5 Marseille, Empire Colonial et Capitalisme Français. special area of scientific investigation, as colonial investments represent a particular kind of geographically diversified invest- ment. It also goes without saying that this research question is just one among many others in the field of colonial history, as the multiple effects of colonialism go far beyond the return-on- investment issue. Indeed, there is growing awareness among scholars that performance cannot be measured merely in terms of profit rates. Notwithstanding these reservations, we feel the issue at hand is an important one, as it has particular bearing 6 • IOB Discussion Paper 2006-07 on the colonial evaluation debate. It is often asserted in the lit- erature on the financial evaluation of colonialism that colonies tended to cost the home country money rather than generate a profit for it. Indeed, this was one of the main arguments put forward by such free-trade economists as Bright and Cobden in the nineteenth century, and it was reiterated during the 1930s when many colonies required financial assistance from the home countries. Congo was indeed at the point of financial col- lapse during these years and huge subsidies from Belgium were required in order to survive. Exports diminished from 1,5 billion BEF (in 1930) to 667 million BEF (in 1932).6 State income dimin- 6 Stengers, Combien le Congo a-t-il coûté à la Belgique?, p. 98. ished from 690 million BEF to 380 million BEF during the period 1929-32, as state income was highly dependent on export taxes, which declined from 234 million BEF to 65 million BEF for the 7 same period.7 Ibid., p. 101.