Mr. Duisenberg assesses what we have learned from the Marshall Plan
Dinner speech held by the President of the Netherlands Bank and of the Bank for International
Settlements, Dr. W.F. Duisenberg, at the occasion of the Marshall Plan celebration in
Washington on 15/5/97.
On 5th June this year it will be exactly 50 years ago since George C. Marshall, in
a speech at Harvard University, set out his plans for the economic recovery of Europe. Although
I fear that I will not succeed in making as momentous a speech as Marshall did, I am honoured
to speak to you here today and commemorate this historic occasion, which I believe marks the
starting point of Europe's post-war economic miracle.
Anniversaries such as this present a useful opportunity to reflect on our past
successes and to draw lessons from them. This is the challenging task which the organisers of
this conference have set out before me today and I will endeavour not to disappoint them. In
doing so, I would like to start out by pondering for a moment on what it was exactly that the
Marshall Plan contributed to post-war economic recovery. Although the importance of the
Marshall Plan is relatively undisputed, the channels through which it boosted economic growth
have been the subject of lively debate. Only if the role of the Marshall Plan is put into the proper
perspective, can we hope to fruitfully draw on our past experiences. Subsequently, I will attempt
to apply what we have learned to the current transformation process in Central and Eastern
Europe, which shows some interesting similarities with post-war reconstruction. As I will argue,
however, the transformation process in transition economies is, in other respects, uniquely
different. In my view this precludes using the Marshall Plan as a blueprint for aid to transition
economies, although it harbours some important lessons.
Finally, a word of caution is in order. I am a central banker. As such, I will focus
on the economic aspects of the Marshall Plan, not the political ones. Such a discussion is
necessarily incomplete; but I will leave it to others to comment on the political and diplomatic
context in which Marshall aid took place.
The contribution of the Marshall Plan - distinguishing fact from fiction
Marshall aid was a lifeline from the United States to Europe at a time when,
economically, Europe had been brought down to its knees. Between 1948-1951 the program
annually transferred roughly 1% of American GDP, or around $ 13 billion in aid, to some 16
European countries. In net present value terms this amounts to roughly $ 80 billion. By 1951, six
years after the war and the effective end of the Marshall Plan, national incomes per capita were
more than 10 percent above pre-war levels, while the economic growth rate in the next two
decades reached levels which were twice as high as for any comparable period before or since.
This temporal coincidence between the extension of Marshall aid and the
"miraculous" recovery of Europe has induced the inferral of a causal relationship. It should be
noted, however, that, even after extensive academic research, the roots of Europe's economic
miracle are not yet adequately understood. Thus, it is difficult to isolate the contribution of the
Marshall Plan. Economically, the strong post-war growth performance is in large part explained
by the so-called Solow residual - that is, not by traditional factors such as capital and labour.
This is an economist's way of saying we do not fully understand what is going on.
A first observation in this regard is that the reconstruction of Europe did not start
in 1948 - the year in which the first Marshall aid was disbursed - but in 1945. At that time the
US was already channelling large amounts of aid to Europe through the United Nations Relief
and Recovery Administration and other programs. This aid, which was in the order of $ 4 billion
annually in the first two post-World War II years, was - in flow terms - in the same order of
magnitude as the Marshall aid.
A second observation is that, given the unprecedented magnitude of aid from the
perspective of the donor community, the Marshall Plan in a quantitative sense played a smaller
role than one would expect in accelerating the replacement and expansion of the European
capital stock. Marshall aid accounted for less than 2.5% of the combined national incomes of
recipient countries between 1948 and 1951. While this is indeed a significant sum, this resulted
in at most a 1% increase in investment, at a time when domestic investment was running at 15%
of GNP. In other words, this does not explain growth rates several percentage points above their
historic trend levels. It should be noted, however, that growth may have been stimulated through
other channels, for instance, by providing much-needed hard currency reserves which could be
used for financing industrial raw materials. Over a third of Marshall aid was used in this way.
A third observation is that the Marshall Plan also did not play a large role in
financing the reconstruction of devastated infrastructure as this had been largely accomplished
before the program got underway. In fact, countries that were major aid recipients saw the
government spending share of national income fall relative to other nations, the opposite of what
one would expect if there had in fact been a shortage of public investment capital.
So how did Marshall aid matter? Recently, there has been a shift among
academics to what might be termed as a "revisionist" analysis of the contribution of the Marshall
Plan to European recovery. According to this view, the Plan's main contribution was to alter the
environment in which economic policy was made, tilting the balance in a qualitative manner
rather than quantitatively.
As you will recall, in 1947, two years after the war, Europe was still characterised
by macroeconomic instability, inflation and an increasingly tight balance of payments constraint.
The initial response by governments had been to counter inflation by retaining controls, thereby
prompting the growth of black markets and discouraging transactions at official prices. By
distorting the allocative mechanism of the market, saving and initiative were discouraged. The
appropriate response as prescribed by economic theory would have been to decontrol prices to
induce producers to bring their goods to market. In addition, fiscal discipline and monetary
restraint was necessary, in order to reduce inflationary pressures. Such policies, however, require
political compromise and sacrifice by everyone which at that time, when the needs of Europe
were greatest, were not necessarily forthcoming. The Marshall Plan may have played a critical
role by easing decisions over the distribution of scarce resources. Of course, the extended aid did
not obviate the need for sacrifice but it increased the size of the distributional pie available to the
various interest groups.
In my opinion, however, the most important channel through which the Marshall
Plan contributed is through its conditionality, with which the US was able to exercise significant
influence over the economic policies of Marshall aid recipients. Although over the years the Plan
has become synonymous with the substantial aid flows transferred from the US to Europe, it is
useful to recall that before receiving that aid each recipient country had to sign a bilateral pact
with the US. In that pact, countries agreed to balance their budgets, restore financial stability,
stabilise the exchange rate at realistic levels and enhance mutual cooperation. Along with the
carrot, thus came the stick. In many ways this is similar to the approach followed in later years
by the International Monetary Fund in its macroeconomic adjustment programs.
Not only could the Marshall aid itself not be spent freely - it could be spent on
external goods only with the approval of the US government - but the recipient was also
required to place a matching amount of domestic currency in a counterpart fund to be used only
for purposes approved by the Marshall Plan administration. As such, for each dollar of Marshall
aid, the US had control over 2 dollars of real resources. In some instances the US insisted that
the funds be used to buttress financial stability. Britain used the bulk of its counterpart funds to
retire public debt. In the case of France, the US used the counterpart funds as a tool to pressure
the new government into reaffirming its willingness to continue policies leading to a balanced
budget. West Germany found the release of counterpart funds delayed until the nationalised
railway had reduced expenditures to match revenues.
Nations undergoing high inflation could not draw on counterpart funds until the
Marshall Plan administration was satisfied that they had achieved a workable stabilisation
program. As a condition for receiving Marshall Plan aid, each country was required to develop a
program for removing trade controls in order to promote intra-European trade. The multilateral
manner in which this was achieved - through the OECD in which all Marshall recipients were
united - contributed significantly to the European integration process. The most important
institutional innovation in this regard was the establishment of the European Payments Union in
1950, a product of the Marshall Plan. The Marshall Plan should thus be thought of as a large and
highly successful structural adjustment program.
At this stage, I believe it is useful to draw two preliminary lessons:
- The first lesson to be drawn from the Marshall Plan is that the central element
in post-war Europe's economic success was sound economic policy.
- The second lesson is that even aid flows in the order of magnitude as those
under the Marshall Plan are likely to be small compared to resources generated
domestically. Nevertheless such aid flows are likely to facilitate the adoption
of otherwise painful economic policies.
A new Marshall Plan for Eastern Europe?
An interesting question is to what extent we can apply these lessons to the current
transformation process in Central and Eastern Europe, to which I will refer as Eastern Europe
from now on? To some extent, of course, this question is rendered out of date by the fact that the
transition process in a number of countries has been underway for over seven years now.
The International Monetary Fund has more or less adopted a role similar to that of
the Marshall Plan. Through its macroeconomic adjustment programs credits are extended on the
basis of countries meeting economic performance criteria. As such, IMF macroeconomic
stabilisation programs form a crucial first step in the transformation process, without which the
longer lasting structural reforms cannot take hold. Of the early reformers - Hungary, Poland, the
Czech Republic, Slovakia, the Baltics, Croatia and Slovenia - only Hungary still has an IMF
program, but it is of a precautionary nature; no purchases are made. In fact, since 1995 these
countries have been making net payments to the Fund and some have obtained access to
international financial markets. Others, however, are less advanced and still in need of the
required reforms.
The transition process, so far, seems to mirror the circumstances leading to the
adoption of the Marshall Plan in two important regards. First, financial instability which was
pervasive in the early years of post-World War II Europe is also present in several transition
economies. As for Europe 50 years ago, an important precondition for growth to take off is the
stabilisation of prices and, after an initial adjustment, the exchange rate. This has been the
purview of the IMF in its adjustment programs, which through the extension of credits has
somewhat facilitated the adoption of painful economic policies.
Second, both Europe in 1948 and Eastern Europe at present have experienced a
period of intensive government intervention, albeit for different reasons. This has created a habit
of control and regulation along with a certain unease with the workings of the market, similar to
the mistrust of the market in post-war Europe following the failure of market mechanisms
during the Great Depression. In both periods, the myriad of restrictions needs to be abolished,
and structural reform needs to take hold.
But there are also important differences between the transformation process and
post-war recovery. The Marshall Plan 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. This institutional basis has been lacking in Eastern Europe. Moreover,
the physical allocation mechanism and absence of meaningful prices were much more extreme
than under wartime rationing.
Second, the scale on which enterprises in Eastern Europe need to be restructured
finds no comparison in post-war Europe. On the issue, for instance, how fast to close certain
factories given the absence of an adequate social safety net, the experience of post-war Europe is
of little help simply because there was little to close down. In addition, the post-war experience
does not teach us how to implement mass privatisation, nor how to put a huge sector of large
state enterprises on a commercial basis, all simultaneously.
Third, transition economies have to liberalise their economies in an already highly
liberalised international environment and of highly developed international capital markets. In
such a context, policy mistakes or a lack of market confidence can easily lead to a large and
rapid outflow of capital, thus draining away much-needed savings. These problems are
exacerbated by weak financial systems where experience and expertise in, for instance, credit
allocation is lacking.
So what does Eastern Europe need?
This leads me to believe that the needs of Eastern Europe are different from those
of post-war Europe under the Marshall Plan. At a conference several years ago, the reform
process in Eastern Europe was compared first with post-war reconstruction and then with the
reconversion of regions or industries in decline.1 Of the latter, we have plenty of examples, for
instance, the shipbuilding industry in Europe or the coal, steel and textile sectors. Generally
speaking, the transformation of these industries is a slow and painful process, usually at a high
cost. Whereas post-war reconstruction was a process of building upon what existed,
reconversion, by its nature, implies changing and perhaps destroying the existing structure, not
building upon it. This is much harder to achieve. Which experience is the more relevant for
Eastern Europe? In my opinion: reconversion. The discussion in Eastern Europe is not so much
about rebuilding existing structures, but rather about replacing them by new ones; similar to the
replacement of declining West European industries by new ones.
The question is whether we can aid this reconversion process by transferring
comparable amounts of money towards Eastern Europe as under the Marshall Plan. Transferring
the equivalent of 2.5% of national incomes of the recipient countries, has been estimated to cost
roughly $ 20 billion a year. The Bretton Woods institutions have of course been extending
credits but on a smaller scale. By comparison, the annual flow of total official financing to
Eastern Europe has been around $ 15 billion, some 25% below that which was transferred under
the Marshall Plan. Total flows, however, including private financing, reached some $ 36 billion
in 1996. From the recipient's perspective, therefore, the amount of financing transferred to
Eastern Europe is quite significant. From a donor's perspective, on the other hand, the present
effort still pales somewhat compared to the tremendous display of solidarity by the US after
World War II. In this regard, we should remember that the US financed the entire Marshall Plan
by itself. If industrial countries were to make a similar effort and transfer 1% of their GDP to
Eastern Europe, aid flows to this region would amount to more than $ 170 billion a year, much
more than the current $ 15 billion. This again illustrates the unique nature of the post-war US
contribution. It is uncertain whether increasing the amount of official financing to Marshall aid
standards would yield significant additional benefits. It could further facilitate support for
required reforms, but to measure the marginal benefit of extra aid in these political terms is very
difficult. In any case, it is critical that whatever programs are adopted, aid should be provided on
the basis of actions taken rather than need.
The achievements of the Marshall Plan suggest that the transformation process in
Eastern Europe would be significantly enhanced by intensifying mutual cooperation in the area.
Cooperation in the fields of trade, financial and monetary matters could become the engine of
economic growth just as it was during the post-war boom. Between 1948-1952 trade among
European countries increased more than 5 times as fast as European trade with other continents.
One of the lessons of the post-war era is that trade can be the engine in a process of economic
restructuring. At the same time, the post-war experience evinced the importance of foreign
demand in underpinning a supply-side response. In other words, access for the East European
countries to the markets of the European Community. The European Union has concluded
"Europe Agreements" with ten Eastern European countries. These are important steps and they
can be built upon further. Constructive mutual cooperation will be most conducive to a positive
perception of the region's stability, thereby helping attract investment.
Cooperation could gain an added dimension in the future. Several Eastern
European countries have already joined the OECD as members and are knocking on the door of
the European Union. Although eventual EU membership is a process that will require some
time, it is a realistic perspective. The European Union is in the process of completing a process
of deepening cooperation, which will find its preliminary climax in the establishment of the
euro. Subsequent to the creation of full monetary union we may expect the EU to turn its sights
eastwards, leading to an ever more integrated Europe.
Let me conclude by reaffirming that the Marshall Plan was an important part of
the foundation for post-war European recovery. At the same time, Marshall aid was more than
the transfer of money alone. The economic policy conditions attached to this aid constituted an
essential element in the realisation of the reconstruction process. Like the US after World War
II, the IMF has stepped into the transformation process of transition economies, albeit on a
smaller scale in financial terms. In part, this may reflect the lower importance attached to the
role of finance per se, and, in part, simply the lack of adequate donor funds forthcoming. Despite
this, however, Eastern Europe is on the right track. And although EU membership is still some
way off, the prospect of such membership and the economic cooperation and integration being
pursued to achieve that membership, inspires confidence that the lessons of the Marshall Plan
have indeed been taken to heart.