President Bill Clinton was just in Europe to commemorate the anniversary of the Marshall Plan, which was announced 50 years ago this week. Much of the commentary marking the anniversary is claiming that the program saved Europe after the war. But in fact, the $13 billion worth of grants and loans transferred from 1948 to 1952 was not the engine behind Europes postwar economic recovery.
Many assume that because there was a Marshall Plan and a recovery, the latter followed from the former. But this is faulty logic. And before the West embarks on another Marshall Plan for Eastern and Central Europe as Mr. Clinton and others have recently suggested, it is important to examine the original plan in a more objective light.
As George Mason University economist Tyler Cowen pointed out in his seminal study of the Marshall Plan, it was used by American advocates of a socialistic, planned economy to increase the degree of government intervention in European economies. It was essentially a matching plan: For every Marshall Plan dollar the U.S. gave to a European government, that government had to enlarge its own government sector by an equivalent amount by spending on public works or other government projects. Thus, the plan required European governments to siphon billions of dollars of desperately needed capital from the private sector, making it all the more difficult for Europes economies to recover. This practice of tying foreign aid to the enlargement of government has been adopted by the World Bank over the years, with equally abysmal results.
Mr. Cowen found that those European countries that received the largest amounts of Marshall Plan aid per capita, such as Greece and Austria, did not begin to recover economically until the U.S. aid was phased out. Germany, France and Italy, on the other hand, began vigorous recoveries before the Marshall Plan was adopted. Great Britain received more Marshall Plan aid than any other nation, yet it had the lowest postwar economic growth rate of any European country.
The American proponents of socialism who administered Marshall Plan funds also managed to slow economic recovery by advocating harmful policies. In Greece, American advisers pushed for price controls and fixed exchange rates. Corruption was also rampant, as is inevitable whenever such a gigantic slush fund is placed into the hands of politicians.
To a large extent, the main purpose of the Marshall Plan was to provide a veiled form of corporate welfare for American businesses through the practice of tied aidtransfers linked to an agreement that the money would be used to purchase U.S. products. Tied aid enriched many American businesses but was devastating to some European industries. For example, the export of American tobacco to Europe, paid for with Marshall Plan funds, caused Greek tobacco exports to fall to 2,500 tons in 1948 from over 17,000 tons in 1947. The industry never recovered. A similar crowding out of European business occurred in many other industries.
Germanys postwar economic miracle has often been linked with the Marshall Plan, but there is little or no connection. Germanys success was due almost entirely to Economic Minister Ludwig Erhards secretive July 1948 abolition of all wage and price controls and of all of the rest of the regulatory regimentation of the German economy that the Nazis had implemented. Until then these controls were kept in place by the American occupation authorities. The Allied Control Commission apparently believed that the Nazi economic controls were not such a bad idea, as horrible as the rest of the regime was. Its fortunate that Mr. Erhards reforms predated the Marshall Plan, otherwise the American administrators may have opposed them.
Proponents of a modern-day Marshall Plan for Eastern and Central Europe will undoubtedly argue, as much of the emerging new left is, that they have learned the mistakes of the past and will not repeat them. But such arguments are nonsensical. The reason is that government aid is always necessarily accompanied by governmental controls, as the past half-centurys history of foreign aid proves. As the late development economist David Osterfeld observed in Prosperity Versus Planning, in practically every case, the influx of aid has been immediately followed by the emergence of a massive, unproductive, parasitic government bureaucracy whose very existence undercuts the recipients ability for sustained economic growth.
A new Marshall Plan would do more harm than good for Eastern and Central Europe and would add to budget deficits in the U.S. and Europe. It is an idea that truly deserves to be strangled in its crib.