Marshall Plan – a lesson for Aid donors?

I discovered this excellent paper by Barry Eichengreen and Brad Delong (Thanks a ton to Chris Blattman for the pointer). Blattman calls it his one of the favorite papers and it clearly breaks in my list of favorite papers as well. The paper is quite old was written in 1991. 

In the paper, the authors discuss about Marshall Plan and why was it successful?

The Marshall Plan (from its enactment, officially the European Recovery Program, ERP) was the primary plan of the United States for rebuilding and creating a stronger foundation for the countries of Western Europe, and repelling communism after World War II.

The reconstruction plan, developed at a meeting of the participating European states, was established on June 5, 1947. It offered the same aid to the USSR and its allies, but they did not accept it.The plan was in operation for four years beginning in April 1948. During that period some USD 13 billion in economic and technical assistance were given to help the recovery of the European countries that had joined in the Organization for European Economic Co-operation.

By the time the plan had come to completion, the economyof every participant state, with the exception of Germany, had grown well past pre-war levels. Over the next two decades, many regions of Western Europe would enjoy unprecedented growth and prosperity. The Marshall Plan has also long been seen as one of the first elements of European integration, as it erased tariff trade barriers and set up institutions to coordinate the economy on a continental level.

The authors point Marshall Plan was not successful because of the usual folklore reasons- alleviating resource shortages, providing aid to needy economies etc etc. Instead it was successful because it revived market economy in European economies. Just after WW-II and Great Depression the European political eco was divided into markets vs government. And Marshall Plan with its conditions that “emphasised markets at the centre”, led to much of the restoration of EU economies and success of the plan.

The plan had 3 separate impact:

  • Restored Financial Stability and its usefulness was appreciated
  • Sound Macroeconomic policies (balance govt deficits, exchange rate stabilization etc) with a focus on markets
  • The above two led to a social contract towards longer term growth

Read the paper for details.

The paper then looks at whether similar experience can be drawn to help Eastern Europe?

Important differences weaken the case for a Marshall Plan, especially for the regions of the Soviet Union. In post-World War II Western Europe there already existed widespread support for and experience with the market. The Marshall Plan only tipped the balance.

It is not clear that comparable support exists in the Soviet Union today, or in much of Eastern Europe. Powerful elements still oppose economic liberalization. And many advocates have no clear idea of what liberalization entails.

In post-World War II Western Europe, Marshall Plan aid was effective at least in part because Europe had experience with markets. It possessed the institutions needed for their operation. Property rights, bankruptcy codes, court systems to enforce market contracts—not to mention entrepreneurial skills—all were in place. None of this holds in Eastern Europe today.

For fifty years potential entrepreneurs have been labeled as “speculators” and attacked as public enemies.  One principle of a market economy is that entrepreneurial profits tell not how much the entrepreneur is an exploiter but how wasteful of resources the situation would have been in his absence. This principle is not yet established, and so political leaders will be tempted to try to earn populist applause by renewed crackdowns on “speculators.”

Hmm..the problem was of lack of institutions which led to disbelief in markets and entrepreneurs.  No wonder the various aid programs to East Europe etc did not work out initially. In most it was a disaster and there was massive wastage. I really have no idea on how East Europe overcame this problem. How was the change really brought about? I am sure there is tons of research on the same. Need to discover them.

Great paper. Tells you so much about Economic History and breaks the myth regarding Marshall Plan. Blattman’s post adds more questions on the relevance of Marshall Plan for Africa. Wow!! I suddenly have learnt something new altogether. I can look at the various aid papers with some other perspective now.

3 Responses to “Marshall Plan – a lesson for Aid donors?”

  1. Marshall Plan – a lesson for Aid donors? ERP Terms Says:

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  2. links for 2009-08-28 | Bailout and Financial Crisis News Says:

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  3. TheTradingReport » Blog Archive » links for 2009-08-28 Says:

    […] Amol Agrawal: Marshall Plan – a lesson for Aid donors? […]

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