A Marshall Plan for Iraq?

May 9, 2003 • Commentary
This article appeared in Investor’s Business Daily on May 9, 2003.

Nation building in Iraq has begun and it is still unclear what form it will take. Yet the lack of a policy vision has not discouraged calls for massive foreign aid spending. Already, U.S. Agency for International Development chief Andrew Natsios has compared the reconstruction effort to the Marshall Plan. Former George W. Bush cabinet member Jack Kemp is also working with prominent figures of both parties on a Marshall Plan proposal for Iraq and the Middle East based on the idea that the U.S. aid initiative led to Europe’s postwar recovery.

Iraqis should be wary of comparisons to the Marshall Plan. The fact that aid enthusiasts must go back 50 years to cite what they consider a foreign aid success is telling. Indeed, decades of aid experience show no correlation between aid and growth. Nor, as the World Bank has reported, does aid conditioned on policy reforms generally work. But those problems were evident during the Marshall Plan itself.

A study by George Mason University economist Tyler Cowen found that rapid economic growth in countries that had been occupied by Germany during the war occurred “irrespective of the timing and extent of Marshall Plan aid.” In West Germany—the plan’s most often cited success because of the subsequent “German Miracle”—economic recovery began before aid started flowing and coincided with Ludwig Erhard’s elimination of many of the Allied Control Commission’s extensive restrictions on trade, production, prices and distribution.

In every country formerly controlled by the Nazis, growth did not resume until rigid economic controls were removed. The arrival of Marshall Plan funds did not correlate with the resumption of growth. In a review of West Germany’s economy from 1945 to 1951, German analyst Werner Abelshauser concluded that “foreign aid was not crucial in starting the recovery or in keeping it going.”

The economic recoveries of France, Italy, and Belgium, Cowen found, also predated the flow of U.S. aid. Belgium, the country that relied earliest and most heavily on free market economic policies after its liberation in 1944, experienced the fastest recovery and avoided the severe housing and food shortages seen in the rest of continental Europe.

It is questionable whether the level of U.S. aid, which never totaled more than 5 percent of GNP of Marshall Plan countries, had a significant financial effect. In West Germany, U.S. policies actually led to a net loss because reparations and Allied occupation costs amounted to 11 to 15 percent of GNP. France’s military spending in North Africa and Indochina in 1949–1950 equaled nearly all of the Marshall Plan funds it received during that time. Marshall Plan aid also subsidized the Netherlands’ military repression of an independence movement in the East Indies.

The Marshall Plan allowed other countries to maintain otherwise unsustainable economic policies. Austria, Greece, and other recipients of high per capita level of U.S. funds began their recoveries only as those aid flows came to an end. Great Britain, the recipient of the most U.S. aid, had the slowest European growth rate in the postwar era.

The lessons for Iraq should be clear. Aid is not a necessary or a sufficient condition for economic recovery. The experiences of postwar Europe and parts of the developing world in recent decades confirm that economic freedom, not foreign aid, leads to growth and prosperity. The Iraqi reconstruction effort should concentrate on establishing the right policies and institutions for growth as quickly as possible. Those include the need for a sound currency, freedom of trade and exchange, and private property rights for all citizens, including the poor.

Rebuilding Iraq will be much more challenging than rebuilding postwar Europe because Iraq does not share the same economic, cultural, and legal history that over the centuries led to European prosperity and that was temporarily interrupted by Hitler’s war. Indeed, if Iraq does not focus on economic freedom as have Chile, East Asia nations, and other successful developing countries, Marshall Plan‐​type aid will only make things worse, adding to debt instead of development.

The amount of outside financing Iraq requires will depend largely on as of yet undetermined factors: the degree of physical damage in the country, a realistic measure of Iraq’s true debt, the extent of debt renegotiation, the future of the Iraqi oil market and its revenues, and so on. Whether Iraq will be able to attract that capital for productive purposes will depend almost entirely on the policies and institutions it adopts. If Iraq embraces economic freedom and property rights, then massive aid infusions will be as irrelevant as the Marshall Plan was in its time.

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