Marshall Plan: The first Structural Adjustment

The year 1998 marks the 50th anniversary of the Marshall Plan. This is famous for pulling Europe out of the wreckage of World War II and propelling it to prosperity. But it was also the first great structural adjustment programme, and this is little known. Today, when Bank-IMF programmes in many other countries have failed, it is worth drawing lessons from the first (and perhaps the biggest) adjustment.

Marshall Aid channelled $ 13 billion (worth $ 90 billion at today’s prices) to 16 European countries between 1948 and 1951. Total US aid averaged 1.5 per cent of GNP in this period, touching a peak of 3.07 per cent in 1948. To see that in perspective, note that net concessional American aid today is just 0.12 per cent of GNP.

Winston Churchill called the Marshall Plan the most unsordid act in history. Yet it was not simply charity, nor just a reconstruction scheme. It was also Cold War by other means. It was driven by the US need to meet the challenge from Communism. So badly had capitalism performed between the two world wars that many intellectuals had written it off. Marxist parties in the European democracies were strong and confident. The Soviet had occupied eastern Europe, fomented coups in Central Europe, and breathed down the neck of western Europe.

General Marshall, author of the Plan, sought to stem the Soviet advance with a vision of a new Europe, a sort of United States of Europe. He wanted this to end old antagonisms and have all Europeans pull together in a thriving market framework. The US wished to recreate Europe in its own image.

Right-wing Republicans in the US Congress initially opposed the Marshall Plan. Then Stalin unwittingly lent a hand: He refused to let Poland or Czechoslovakia receive any aid: This reduced resistance in Congress. Then came the communist coup in Hungary, which clinched the issue.

The Plan was ideologically motivated in not just political, but economic terms too. It aimed to recreate markets that had been destroyed by the war.

In the war, virtually all normal markets were replaced by command economies, even in supposedly capitalist countries. Governments decided who should produce what and at which price, in civilian as well as military production. Rationing of food and other consumer items was standard practice. Normal international trade disappeared, and was replaced by barter. All currencies became non-convertible except the dollar.

Commodity markets were strangled by price controls, and capital markets disappeared, save in the US.

When the war ended, all European countries were command economies in greater or lesser measure. In the absence of normal markets, no government dared lift wartime controls quickly. In 1948, three years after the end of the war, all European economies were hamstrung by controls and debt, no less than war damage.

To use today’s vocabulary, these countries were in urgent need of structural adjustment. They needed reconstruction of infrastructure, but needed even more to return to a market system. Non-convertibility was a major problem in trade:

You could not use a trade surplus with any one country to buy goods from another, so the usual gains of trade could not be realised. Yet countries were reluctant to abandon controls unless they had enough finance to tide over the transition, and confidence that Europe as a whole would open up. It was too risky for any country to open up unilaterally: It might quickly accumulate piles of non-convertible currency while its gold and dollars disappeared.

Marshall Aid provided the finance, policy conditions and institutional change needed for a great structural adjustment countries were left to work out the division of aid between them. But the money came with conditions: They all had to promise to deregulate, especially on trade account. The policies demanded by the US read like a standard IMF-World bank list of conditions—thou shalt reduce trade barriers, thou shalt be fiscally prudent, thou shalt aim at currency convertibility in stages.

The structural adjustment was a thundering success. Command economies gave way to markets throughout Europe. Major European countries formed first an iron and steel community and later a common market. This expanded steadily, and today is approaching Marshall’s vision of a United States of Europe.

From 1948 onwards, rationing and controls on production were lifted. Production and trade soared, incomes rose everywhere. In England, the Tories won an election on the slogan “You never had it so good”, Germany witnessed an economic miracle. Industrial production more than doubled between 1948 and 1951. Its economics minister Ludwig Erhard kindled the German miracle by making a bonfire of controls overnight. But that would not have succeeded, but for the money, policy thrust and institutional thrust of the Marshall Plan.

As with the structural adjustments of the 1980s, there were also serious glitches, the biggest occurring in Britain just before the Plan. The US agreed to bail Britain out of its post-war bankruptcy, but attached a major condition: Sterling must be made convertible. Britain agreed. But there was a run on the sterling as soon as it became convertible in July 1947.

Convertibility was suspended within a month, and could be resumed only in 1958.

Despite such glitches, structural adjustment in Europe was a huge success. Capitalism, which had failed miserably between the wars, suddenly emerged self-confident and blooming. This owed much to other factors like Keynesias demand management, new technology, GATT, and the rise of the welfare state. But none of these factors would have accomplished much without the surge in incomes created by adjustment.

This needs to be understood by all Indians. The Indian Left thinks, mistakenly, that all Europeans and Americans are free-market ideologues. Not so. They are practical people who know from experience what blessings can flow from structural adjustment. They urge others to adjust on pragmatic grounds, not ideological ones. |

Adjustment succeeded in India, as in Europe and many other countries.

So why did adjustment programmes fail in many African countries? Because Europeans and Indians were serious about reform and the Africans were not. Listen to The Economist.

“Over the past few years, Kenya has performed a curious mating ritual with its aid donors. The steps are: One, Kenya wins its yearly pledges of foreign aid. Two, the government begins to misbehave, backtracking on reforms. Three, a new meeting of donor countries looms with exasperated foreign government preparing sharp rebukes. Four, Kenya pulls a placatory rabbit out of the hat. Five, the donors are mollified and the aid is pledged. The whole dance then starts again.” The dance was popular in most African countries. For them, structural adjustment was a con game in which you made false promises to extract money from donors. The ploy succeeded, but the countries failed. On the other hand, serious African reformers like Ghana and Mauritius succeeded.

The lesson: The success or failure of structural adjustment depends on not IMF conditions, but the reformist zeal of countries themselves. We should have known that from the Marshall Plan. The US did not thrust reforms down unwilling European throats (as IMF and World Bank did in Africa).

Europe had gung-ho reformers like Erhard. And that made all the difference.

What do you think?