Buy this book

The Open Door Policy: An Overview

The Open Door Policy of Liberia
An Economic History of Modern Liberia (1847 - 1977)
 

Introduction

This study on Liberia’s economic development before the violent coup of 1980 which ended over 130 years of exclusive Americo-Liberian rule was initially published in the early 1980s. The decision to again publish its main findings and conclusions - this time on the web -  is motivated by the renewed interest in the importance of Foreign Direct Investments and private sector development in developing countries. In general, many of the lessons which the Liberian experience teaches us are as applicable to Sub-Saharan African countries in the beginning of the 21st century as they were for Liberia at the end of the 20th century.     

Liberia Publications

home

 


The study has been realised after a four year residence in Liberia which enabled the author to benefit from unique material from the National Archives and from various Ministries in Monrovia. Visits to many foreign companies and numerous conversations with Liberians of all classes have also contributed to it. The disappearance of historical material with respect to Liberia’s economic history as a result of climate, carelessness, and the civil war added another reason for publishing the summary of the study which is also available in the libraries of the World Bank, the I.M.F. and the Library of Congress, Washington D.C.

The author has analysed the capacity of the Government of Africa’s oldest republic to effectively deal with the foreign investors it had invited and to supervise the resulting investments. Furthermore, the financial contribution of foreign companies to the Liberian Treasury and the use of these financial means by the Liberian Government have been analysed. The consequences for the Liberian economy and society of the activities of foreign investors have also been studied.

Liberia’s foreign investments boom was at its zenith during the 1960s. As a result, the economy grew spectacularly and with a two-digit rate the country even shortly belonged to a small group of countries which had the fastest growing economies in the world.

Since the publication of this study on foreign investments and economic development  nearly twenty years have elapsed. This period brought tremendous changes to Liberia and its population. The increasing political chaos which followed the 1980 coup culminated in the civil war that raged during the 1990s. When the war ended the country was devastated, the foreign investors had left and the economy had fallen into ruins.    

Below follows the study’s summary as originally published. 

SUMMARY

19th century - conquest and colonization

In the beginning of the 19th century, groups of free-born blacks, freed slaves and mulattoes from the United States of America emigrated to the west coast of Africa. In 1847, 25 years after the first successful colonisation, they proclaimed an independent Republic, which they named Liberia. At that time they numbered about 3,000: men, women and children.

Conflicts

The indigenous population in the area of the new Republic outnumbered them by far. They reacted hostilely to the new arrivals, who soon made their lands a part of their republic although they did not consider them as fellow citizens. Consequently, many armed conflicts resulted which threatened the survival of the country. The continued existence of the Republic, however, was not only threatened from within. Especially in the case of English merchants who, supported by their government, refused to acknowledge the political souvereignty of Liberia and evaded the import and export duties to a large extent. This refusal on the part of European merchants was one of the reasons which motivated the Liberians to partially close the country to foreigners. Hence, foreign trade activities were limited by the “Ports of Entry” Law in 1864 to six areas along the coast. This protective policy was also based on the desire to safeguard the economic interests of the political leaders.

On the other hand, the 1864 law had unexpected and undesirable consequences. For the coastal tribes who did not live near one of the six ports, trade with the Europeans, their usual practice, became illegal. Therefore they rebelled and it forced the central government to finance many military expeditions. These increased government expenditures coincided with diminishing public revenues, partly caused by the fall in trade which ocurred after 1864. Hence, the financial situation of the Republic deteriorated continuously. Moreover, during the last 25 years of the 19th century, the Liberian leaders witnessed the colonisation of the areas surrounding the Republic by England and France. Specifically, since 1880, the political independence of Liberia was menaced by the increasing colonial imperialism of Europe.

The role of foreigners

The Americo-Liberians, as the descendants of the founders of the Republic preferred to call themselves, were internally divided about the role of foreigners, particularly Caucasians, in the development of the country. At the turn of the century, the group in power favoured cooperation in order to promote the economic development of the country. Simultaneously, they hoped to obtain protection for themselves against the intrusive European colonial powers which had succeeded in seizing territory that the government in Monrovia claimed.

The turn of the century: The ’Open Door Policy’

In the present study, it is shown for the first time that the Open Door Policy, first introduced by U.S. President William McKinley and his Secretary of State, John Hay with respect to China at the end of the 19th century, served as a model for the policy of the same name which the Liberian Government also wanted. The Liberian leaders, however, did not succeed in otaining the political and diplomatic support of the United States, which country they still considered their homeland even after the creation of the republic. For this reason, the idea of a political Open Door Policy slowly shifted to an Economic Open Door Policy.

The exploitation of the country’s natural resources was severely hampered, if not prevented, by the lack of control exercised by the Liberian Government over the rebellious tribes in the hinterland and by the lack of physical infrastructure, notably ports. Only after these obstacles had been removed was the road paved for the entry of foreign investors. Shortly hereafter, the European colonial powers began the political decolonisation of Africa, thus removing the need for a political Open Door Policy.

The early 20th century: the ’Firestone Colony’

Before the end of the Second World War, the only important foreign investor in Liberia was the American “Firestone Tire & Rubber Company”, which in 1926 had obtained an enormous concession agreement from the Liberian Government. During the 1926-1951 period, Liberia’s dependence on this company slowly increased and was finally complete. For this reason the country became colloquially known in this period as the “Firestone Colony”. This changed when iron ore production was begun in 1951. The mine was exploited by another U.S. company, the “Republic Steel Company”.

In the following 20 years, the highly attractive investment facilities offered by the Liberian Government, the abundance of natural resources and the political and social stability caused an invasion of foreign investors.

The Open Door Policy: a success?

Since the arrival of foreign investors, Liberia has changed tremendously. Before the arrival of Firestone, the monetary economy was virtually negligable and, significantly, was found only in the coastal areas. Even in 1950, one could hardly speak of ‘one country’’ because of the separation between coastal areas and hinterland. The two regions were separated by lack of roads and other means of communication and even by different laws. The latter was changed as late as the 1960s. The political power stayed, however, in the hands of the Americo-Liberians.

In the 1970s the results of the Open Door Policy were impressive at first sight: Liberia had the largest registered merchant fleet in the world as a result of a flag of convenience policy. Liberia had become Africa’s first and the world’s third exporter of iron ore. The most important investors were giants of the U.S. rubber industry: Firestone, Goodrich and Uniroyal. Important American industries in the steel sector such as Bethlehem Steel Corporation and Republic Steel Corporation both have large  investments in Liberia’s iron ore mines.

Within a period of 25 years, Liberia had succeeded in attracting foreign investments exceeding 1 billion U.S. dollars, among which was the largest post-war Swedish investment abroad and the largest German investment in tropical Africa.

The Open Door Policy: some questions

In spite of this apparent success of the Open Door Policy, some questions arise of which the most important are:

  • Did the Liberian Government succeed in using the foreign investments to promote the economic development of, particularly, the Liberian hinterland as one of Liberia’s Presidents had imagined at the beginning of the present century?

  • What has been realised of the Liberian Government’s desire to share equally with the foreign investors in the profits of their investments?

  • Has the Liberian Government been capable in dealing with the foreign investors who often had more political power and more financial means than the Republic?

The Open Door Policy: the negative side       

At the time of the introduction of the Open Door Policy, Liberia was characterised by a shortage of skilled labour, the lack of institutions which could check upon or supervise the arriving multinationals and an underestimation at the government level of the necessity to integrate all foreign investments in one overall development policy. Liberia did not escape from some of the negative consequences which may accompany foreign investments. The use of foreign capital and labour cost Liberia an average of $ 100 million per year at the end of the 1970s. The depenence of the government on the concession sector prevented the Liberian Government from following an independent policy without risking the collapse of the national economy. The many labour intensive investments for other than rice production which the Liberian Government naievely accepted, drew on the available labour force in the subsistence sector. Even as the population grew, this caused a lower output of rice which made increasing imports of the country’s staple food a necessity. This was further complicated by the indifferent agricultural policy of the government.

A dual economy

The national economy had developed into a dual system in which the concession sector had litttle or no connection with the rest of the economy. Above all, the Liberian economy was marked by: an exceptional dependence on foreign investors who exported their production, nearly all unprocessed, to processing industries in economically more developed countries.

The Liberian Government shared less in the profits of foreign investments than it had initially thought. As this study shows, the Liberian Government owes this particularly to itself by allowing (i) long tax holidays, (ii) long exemption periods of import and export duties, (iii) special tax tariffs for some investors and (iv) many and large tax deductable items in cases where investors were liable to taxes.

On the other hand, investors sometimes abused the lack of control by the Liberian State on their activities, resulting in tax evasion, illegal exploitation of natural resources of the country and the use of complicated structures which negatively affected the Liberian Treasury. The country could not cope with this adverse situation because of the absence of experienced administrators.

Two illustrative examples

The unequal relation existing between the Liberian State and the foreign investors can be illustrated with two striking examples:

  • The profits retained by Firestone-Liberia after taxes was paid to the Liberian Government in 1951, still amounted to three times the total income of the Liberian Treasury for the same year.

  • Revenues of the “Liberian Mining Company”, the country’s first iron ore mine, surpassed the total revenues of the Liberian Government until 1960.

Conclusion

One of the most important conclusions of this study is that the disappointing results of the Open Door Policy cannot be blamed only on ignorance and the lack of knowledge on the part of Liberia at the time of negotiations with foreign investors. They were also caused by the fact that the ruling Americo-Liberian minority voluntarily accepted the dependence on foreign investors and refused to cooperate and integrate with the tribal population of the country. Because of this, the economic, as well as the political future of the country depends on the realisation of an acceptable combination of foreign investments, economic development and national unification for all parties concerned. 

For more information on this subject:
Lessons from foreign investments 1900 - 1980

© fpm van der kraaij   

F.P.M. van der Kraaij
Publication Ubersee-Museum Bremen
2 vols. 703 pp. 1983