The Marshall Plan: Historys most successful structural adjustment program

The Marshall Plan:Historys most successful structural adjustment programI. IntroductionPost-World War II reconstruction was an extraordinary success:

Growth was fast

Distributional conflicts in large part finessed

World trade boomingI. IntroductionStability in the representative democracies of the Western Europe

Greatest success: establishment of representative institutions and mixed economiesI. IntroductionSimilar opportunity today in Eastern Europe for the West.

The Plan Marshall as a precedent

United States lended $13 billion in aid to Western Europe in the years from 1948 to 1951I. IntroductionThe Marshall Plan helped:

Alleviating the resource shortage

Dismantling of controls over product and factor markets in Western Europe

Pushed governments towards versions of the mixed economy with more market orientation

II. The Marshall Plan: Image and Reality The Folk Image:

The first phase of postwar expansion and recovery had come to an end.Reserves of foreign assets had been depleted.Export earnings were insufficient to finance purchases of raw materials and equipment from the only remaining functioning industrial economy, the United States.Incomes were too low to provide savings needed to finance reconstruction. Taxes were inadequate to balance government

The Marshall Plan solved these problems at a stroke.It provided funds to finance investment and public expenditure.It allowed countries to import from the United States.It eliminated bottlenecks that had obstructed economic growth.It set the stage for prosperity. European growth was very rapid after 1948 and the beginning of Marshall Plan aid

II. The Marshall Plan: Image and Reality

Within two years after the end of the war it became U.S. government policy to build up Western Europe politically, economically, and militarily.

The first milestone was the Truman Doctrine: President Truman asked Congress to provide aid to Greece to fill the gap left by the retreating British.

Employing Secretary of State George C. Marshall's reputation as the architect of military victory in World War II

II. The Marshall Plan: Image and RealityIn the first two postWorld War II years the U.S. contributed about four billion dollars a year to relief and reconstruction through UNRRA and other programs

From 1948 to 1951, the U.S. contributed $13.2 billion to European recovery

$3.2 billion went to the United Kingdom

$2.7 billion to France

$1.5 billion to Italy

$1.4 billion to the Western-occupied zones of Germany that would become the post-World War II Bundesrepublik

II. The Marshall Plan: Image and RealityThe Reality: The European Economy Following the Two Wars

World War II was more destructive than World War I

Economic recovery was significantly faster after World War II

Rapid growth after World War II was not mainly a "rubber band effect" (the reversal of wartime output losses); rather, it was a sustained acceleration

Not all countries experienced comparable 16 accelerations despite all being exposed to the same favorable international economic climate

II. The Marshall Plan: Image and RealityWorld War II was more destructive

World War II's battle sites were scattered more widelyWeapons were a generation more advanced and more destructive

Europe's ability to draw resources and import commodities from the rest of the world was heavily compromised by World War II

II. The Marshall Plan: Image and RealityTraditionally, Western Europe had exported industrial and imported agricultural goods from Eastern Europe, the Far East, and the AmericasNow Eastern European nations adopted Russian-style central planning and looked to the Soviet Union for economic links Industry in the United States and Latin America had expanded during the war to fill the void created by the cessation of Europe's exports

II. The Marshall Plan: Image and RealityEconomic recovery was significantly faster after World War II

In 1946 national product per capita in the three largest Western European economies had fallen at least 25 per cent below its 1938 level.

II. The Marshall Plan: Image and Reality

This was "Supergrowth" and not simply a "rubber band effect"Post-World War II reconstruction did more than return Western Europe to its previous growth path

French and West German growth during the post-World War II boom raised national product per capita at rates that far exceeded pre-Worid War 11, pre-1929, or even pre-1913 trends II. The Marshall Plan: Image and Reality"Supergrowth" reflected more than a favorable environmentYet such rapid growth and recovery as Western Europe saw after World War II was not inevitable. It was not a natural consequence of a favorable international regime

II. The Marshall Plan: Image and RealityIII. The Marshall Plan and Private InvestmentInvestment is an obvious channel trough which the Marshall Plan accelerated economic growth

Post-World War II Western Europe was poor and capital-scarce

Relative to total investment, the Marshall Plan was not large. It was not much greater than the previous UNRRA aidIII. The Marshall Plan and Private Investment17% of the Marshall Plan $ spent in machinery, vehicles and miscellaneous

Rest devoted to imports of industrial materials, semi-finished products and agricultural commoditiesIII. The Marshall Plan and Private InvestmentEichengreen and Uzan (1991) pointed out that out of each dollar of aid, some 65 cents were to increase production and 35 cents to increase investment

They suggest that social returns may have been as high as 50% a yearIII. The Marshall Plan and Private InvestmentOver the 4 years of the Marshall Plan, the increase in growth cummulates to 2% of national product

It was too little to make the difference between prosperity and stagnation

Not enough to make the Marshall Plan a decisive factor in the long boom of the post-World War II periodIV. The Marshall Plan and Public InvestmentSecond channel: by financing public spending on infrastructureSocial rate of return of repair and reconstruction was very highPrincipal objective of postwar governmentsNational tax systems were in disarray due to the tax base was eroded by the warIV. The Marshall Plan and Public InvestmentHow tightly the fiscal constraint limited public investment on infrastructure repair?

By the last quarter of 1946 almost as much freight was loaded onto railways as had been in 1938Total goods loaded and shipped amounted to 97% of pre-war traffic

European recovery was not significantly delayed by the lack of track and rolling stockV. Bottlenecks and Foreign Exchange ConstraintsAnother channel: relaxing foreign exchange constraints

Coal, cotton, petroleum and other materials were in short supply

The Marshall Plan allowed them to be purchased in a higher rate

The Marshall Plan added liquidity ans played a role in restoring intra-European tradeV. Bottlenecks and Foreign Exchange ConstraintsIn 1938 Western Europe consumed 460 million tons of hard coal

It produced 400 million tons in 1948 and imported about 7% from the United States

Elimination of coal imports would have decreased Western Europe total product by no more than 3%V. Bottlenecks and Foreign Exchange ConstraintsInput-output analysis example: Italy imported $72 million worth of coal during the Marshall Plan

Without the Marshall Plan aid, production would have decreased 6.8% and transportation by 7.3%

Coal bottleneck would have produced secondary bottlenecks in steel production, refining and transport

Agriculture and services unaffected, the latter would have fallen by 3.2% of a years production V. Bottlenecks and Foreign Exchange ConstraintsWe can conclude that the elimination of bottlenecks as a result of Marshall Plan aid is unlikely to have been a significant factor driving the rapid Western European recoveryThe political economy of European reconstruction1930 Context:Defficiencies in aggregate demandProduction below normalMarket forces failed to restore demandFear for Depression

In case no Marshall Plan No laissez faire Intervention and regulation

Marshall Plan era:Rapid dismantling of controls over productRestoration of price and exchange rate stability

Europe in the Argentine mirrorAdopted:Demand stimulation and income redistributionDistrust of foreign trade and capitalAllocative mechanisms as control methods

Daz Alejandro analysis:Collapse of world trade in Great DepressionNo partners Free trade undermined

Juan Pern political programme:Redistribute wealth to urban workersTaxes increased Urban real wages boosted

First half decade experiencied a very rapid growth. Exports fell sharplyEarly 1950s:Low exportsUnable to invest1960s:Poorer than ItalyLess than 2/3 of France and Western Germany GDP per capitaEurope in the Argentine mirrorEuropean AnalogyIf no Marshall Plan, would Western Union have followed a different trajectory?

Argentinas decline was due to economic nationalism and sharp division of classes

In 1947 Western Europe was at least as vulnerable as Argentina, but avoided populist overregulationThe role of The Marshall PlanRestoration of financial stabilityFarmers refused to market produce. Solution: decontrol prices and balance budgetsConsumers had to accept higher posted prices and workers moderated demand for higher wagesU.S. approval needed to spend on external goodsThe free play of market forces

Renewed growth was requiredCommunist and some socialist were opposed to return to marketEuropean economic integration was pursued intenselyIn 1950 the European Payments Union is created to promote tradePost WWII was far from laissez-faire

The role of The Marshall PlanThe social contract and long-term growth.Financial stability and market forces brought two decades of rapid growthTempting to say it was thank to Keynes, but the key where the inflation resistant labor marketsThis key was tried to be explained by Kindleberger, through History, by Breton Woods System and by the Marshall PlanFor a social contract to be advantageous it is needed to be generally accepted

The role of The Marshall PlanDo conditions like those that made the Marshall Plan a success after WWII exist in Eastern Europe and the Soviet Union today?

In Eastern Union those who started the rebellion against communism were the privileged workers

They have to be lucky to avoid post WWI distributional conflict and Argentinian populist overregulation.

Implications for Eastern EuropeSupporting Eastern European living standards could limit public oposition to economic reforms Ideological opposition to economic liberalizationConclusion is that elaborating a plan to save Eastern Europe would be a gamble, as the Marshall Plan was

Implications for Eastern Europe