The Marshall Plan:

Historys most successful

structural adjustment program

I. Introduction
Post-World

War II reconstruction
was an extraordinary success:
Growth was fast
Distributional conflicts in large part
finessed
World trade booming

I. Introduction
Stability

in the representative
democracies of the Western
Europe

Greatest

success: establishment
of representative institutions and
mixed economies

I. Introduction
Similar

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 1951

I. Introduction
The

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

II. The Marshall Plan: Image and

Reality
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

Reality
In

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

Reality
The

Reality: The European Economy Following the Two

Wars
A. World War II was more destructive than World War I
B. Economic recovery was significantly faster after World
War II
C. 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
D. Not all countries experienced comparable 16
accelerations despite all being exposed to the same
favorable international economic climate

II. The Marshall Plan: Image and

Reality
World

War II was more destructive

World War II's battle sites were scattered

more widely

Weapons 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

Reality
Traditionally,

Western Europe had exported

industrial and imported agricultural goods from
Eastern Europe, the Far East, and the Americas

Now

Eastern European nations adopted Russianstyle 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

Reality
Economic

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 environment

Yet 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

III. The Marshall Plan and Private

Investment
Investment

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 aid

III. The Marshall Plan and Private

Investment
17%

of the Marshall Plan $ spent

in machinery, vehicles and
miscellaneous

Rest

devoted to imports of
industrial materials, semi-finished
products and agricultural
commodities

III. The Marshall Plan and Private

Investment
Eichengreen

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
year

III. The Marshall Plan and Private

Investment
Over

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 period

IV. The Marshall Plan and Public

Investment
Second

channel: by financing
public spending on infrastructure
Social rate of return of repair and
reconstruction was very high
Principal objective of postwar
governments
National tax systems were in
disarray due to the tax base was
eroded by the war

IV. The Marshall Plan and Public

Investment
How

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
1938
Total goods loaded and shipped amounted to
97% of pre-war traffic

European

recovery was not significantly

delayed by the lack of track and rolling
stock

V. Bottlenecks and Foreign

Exchange Constraints
Another

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 trade

V. Bottlenecks and Foreign

Exchange Constraints
In

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 Constraints
Input-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 Constraints
We

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 recovery

The political economy of European

reconstruction
1930

Context:

Defficiencies in aggregate demand

Production below normal
Market forces failed to restore demand
Fear for Depression

case no Marshall Plan No laissez faire

Intervention and regulation

In

Marshall

Plan era:

Rapid dismantling of controls over product

Restoration of price and exchange rate stability

Europe in the Argentine

mirror
Adopted:

Demand stimulation and income redistribution

Distrust of foreign trade and capital
Allocative mechanisms as control methods
Daz

Alejandro analysis:

Collapse of world trade in Great Depression

No partners Free trade undermined
Juan

Pern political programme:

Redistribute wealth to urban workers

Taxes increased
Urban real wages boosted

Europe in the Argentine

mirror
First

half decade experiencied a

very rapid growth. Exports fell
sharply
Early 1950s:
Low exports
Unable to invest
1960s:

Poorer than Italy

Less than 2/3 of France and Western
Germany GDP per capita

European Analogy
If

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

The role of The Marshall

Plan
Restoration

of financial stability

Farmers refused to market produce.

Solution: decontrol prices and balance
budgets

Consumers had to accept higher

posted prices and workers
moderated demand for higher wages
U.S. approval needed to spend on
external goods

The role of The Marshall

Plan
The

free play of market forces

Renewed growth was required

Communist and some socialist were
opposed to return to market
European economic integration was
pursued intensely
In 1950 the European Payments Union
is created to promote trade
Post WWII was far from laissez-faire

The role of The Marshall

Plan
The

social contract and long-term

growth.

Financial stability and market forces brought

two decades of rapid growth
Tempting to say it was thank to Keynes, but
the key where the inflation resistant labor
markets
This key was tried to be explained by
Kindleberger, through History, by Breton
Woods System and by the Marshall Plan
For a social contract to be advantageous it
is needed to be generally accepted

Implications for Eastern

Europe
Do

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

Europe
Supporting

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