A Look Behind The Marshall Plan Mythology

This article originally appeared in the Investor’s Business Daily.

Fifty years ago this week, Secretary of State George Marshall proposed an aid program for Western Europe. Within a year the plan was law. And as Europe recovered, the plan became, in economist Tyler Cowen’s words, “a modern myth.”

Whenever people propose a new government program, whether for the former Soviet bloc or urban America, they call for a “Marshall Plan.” There is apparently no problem which could not be solved by a new “Marshall Plan.”

Yet Marshall Plan enthusiasts simply assume its efficacy. The truth is not so simple.

First, the Marshall Plan model has routinely failed when applied elsewhere.

Between 1948 and 1951, the U.S. provided about $13 billion in cash goods and services—about $90 billion in today’s dollars—to Europe. That was a significant amount of money, but is dwarfed by subsequent “Marshall Plans.”

For instance, since World War II the U.S. alone has provided $1 trillion (in current dollars) in foreign aid to countries around the world. The result? According to the United Nations, 70 countries, aid recipients all, are poorer today than in 1980. An incredible 43 are worse off than in 1970.

After the fall of the Berlin Wall, Germany launched its own massive Marshall Plan to rebuild the formerly Communist East. Bonn has spent about $600 billion since 1990; private firms, in response to special government incentives, have invested another $500 billion. The result is mass unemployment and underemployment, low productivity, uncompetitive industry, minimal growth and de facto bankruptcy.

Norbert Walter, chief economist at Frankfurt’s Deutsche Bank, told The New York Times that “Never before in history has one country spent so much money building pyramids.”

American domestic Marshall Plans have worked no better. Over the last 30 years, the U.S. has spent about $6 trillion (in today’s dollars) to fight poverty. Yet the poverty rate remains largely unchanged, while families and communities have imploded.

These failures would not have been surprising had policy-makers looked more critically at the initial Marshall Plan experience. If massive government spending could work anywhere, it was in Europe in 1948: Human capital was largely intact, the rule of law had a long history, and the customs of a commercial society were readily recoverable. The only thing lacking was physical plant, since so much had been destroyed during the war.

Even in these circumstances, however, there is no convincing evidence that the Marshall Plan caused Europe’s growth. For instance, U.S. assistance never exceeded 5% of the GDP of the recipient nations. As Cowen points out, “The assistance totals were minuscule compared to the growth that occurred in the 1950s.”

Moreover, receipt of aid did not track with economic recovery. France, Germany and Italy began to grow before the onset of the Marshall Plan, while Austria and Greece expanded slowly until near the program’s end. Great Britain, the largest aid recipient, performed most poorly.

Far more important for Europe’s growth was policy reform. In occupied Germany, for instance, the Allied Control Commission maintained Nazi-era economic controls and imposed new ones, such as a ban on trade. Only in mid-1948 were these counterproductive regulations lifted and sound money established. In contrast, Belgium acted right after its liberation, and therefore started growing well before American aid.

Ironically, the Marshall Plan, like so much later foreign aid, did not encourage economic freedom. Rather, U.S. officials advocated high taxes, extensive public spending and Keynesian economics. It was the end of U.S. assistance that most encouraged recipient nations to adopt reforms.

The Marshall Plan may have been a generous act, but that doesn’t mean it spurred Europe’s recovery. The real lesson of the Marshall Plan is that entrepreneurial culture, legal stability and free markets are necessary for economic success. Liberty, not money, is the key to prosperity.

Doug Bandow is a senior fellow at the Cato Institute and the editor (with Ian Vásquez) of “Perpetuating Poverty: The World Bank, the IMF, and the Developing World.”