Marshall Plan
Introduction and History
World War II brought adverse economic effects in Western European countries. The war had resulted in total physical destruction of structures, economic dislocation, and inability to liquidate assets. This trend posed a threat of total breakdown of normal social and economic life in the countries concerned. Therefore, with the help of U.S.A., a large scale economic recovery program was set up to assist Western European Countries. The program was called Marshall Plan and it started in 1948 lasting for four years (Schain 2001). The program was named after the Secretary of State George C. Marshall who was supported by state department that was controlled by largely Democrats. Marshall announced the plan through a speech delivered in Harvard University on June, 5th 1947 (Schain 2001).
According to Susan (1987), the outer aim for US starting the program was to reduce political restlessness, unemployment, homelessness, hunger, and joblessness of more than a quarter million people in 16 Western European nations. However, internally the main goal for the program was to halt the threat of the spread of communism that would have occurred of no effort was made to make the countries self-sustaining. Therefore, the funds were aimed at anchoring economic blueprints such as power and iron-steel industries, instead of feeding people or building individual schools, houses, or factories (Susan 1987).
Over $ 12.5 billion of American tax money was transferred to the program in terms of loan over a four year program. The plan was a success as it targeted people and structures that were down and not finished. The recovery of Western Europe from war was shortened, and various positive economic results were recorded. The idea of transferring money to certain economies at first faced resistance because it had been tried before and failed. “However, the difference here is that the program required that recipients organize their ideas into a rational, multilateral approach to their common economic problems” (Schain 2001, p. 121). Furthermore, the program had a limited duration of four years; hence Americans and representatives were assured of the program not being indefinite.
The implementation of the program first began in Greece and Turkey on January 1947, which were anti-communist battle front lines (Eichengreen & Uzan 1992). The aid was little since the region was also receiving funds under the Truman doctrine. However, on July 1948, the Marshall Plan was officially operational. Governments of the nations received the funds and in turn both the governments and the program administered the funds to the needed sectors. In fact, each capital city had an Envoy representing the Marshall program. The envoy was normally an American businessman, and would advise the funding process. Funding was done through cooperative allocation, and the economy was examined by critical societal leaders to see where aid was needed.
Funds from the Marshall Plan were used for procuring goods from USA. European states had by that time of the war exhaust their monetary reserves, and so the fund was the only way of importing goods (Eichengreen & Uzan 1992). When the plan began, the imports were mainly food and fuel, but later on reconstruction needs. Furthermore, later years saw the rebuilding of militaries using the financial aid, mainly because of the Korean War. According to Eichengreen and Uzan (1992, p. 16), “the breakdown of the funds in the mid-50s was: $3.4 billion on importing raw materials and semi-manufactured products; $ 3.2 billion on food; $ 1.9 billion on vehicles, machines, and equipment; and $ 1.6 billion on fuel”.
In the four years of implementing the plan, $12.5 billion of aid was allocated to Western Europe. Funds allocation did not follow a simple format, but was determined by dollar balance of payment deficits of beneficiary economies, and geographical factors especially in the scenario of Britain and France (Schain 2001). The Aid from Marshall Plan accounted for 2.1% of US GNP in 1948, rising to 2.4% in 1949, and dipping to 1.5% in the remaining two years (Schain 2001). In the Western European countries, the fund represented the highest GDP in France and the lowest in Germany.
Impact of the plan on Europe
The plan resulted in numerous impacts, which can be described as both negative and positive. Eichengreen and Uzan (1992) posit that the plan was important for: development of crucial institutions amid former foes, re-establishment of European confidence in market capitalism, and modernization of productive capacity. This is also ascertained by Alvarez-Cuadrado and Pintea (2008, p.17) who states that “Marshall Aid was a prerequisite of all future prosperity and economic miracles, as well as steps towards European unity.” Furthermore, the plan helped aid recipients have a better political economy than macroeconomics. This is because Marshal Funds credited European nations with the political space required to avoid continued wars characteristic of the period then; hence allowing a safe environment suitable for growth (Schain 2001).
Many literatures argue that Marshall Aid was instrumental in Western European growth. The notion is reinforced by the fact that, the money enabled reconstruction of capital stock, eliminated bottlenecks hindering production, provided infrastructure, and accelerated intra-European trade (Susan 1987). However, a superficial analysis of data posits that the impacts are exaggerated. Eichengreen and Uzan (1992) prove the assertion by computing the growth rate of per capita GDP for economies receiving funds. The findings were that three years prior to when the aid was offered; the growth rate averaged 6.5%. Conversely, during the plan the growth was 4.4%, with a fall of 4% witnessed in the years 1953 and 1956. Schain (2001) argues that if the impact of the plan functioned through public and private accumulation, then there would be a positive correlation between funds granted as a share of GDP and growth output. This is not in line with recorded coefficient on Aid allotments.
Alvarez-Cuadrado and Pintea (2008) through a two-sector neoclassical growth model showed the direct impact of Marshall Plan. Their analysis prove that the loans improved private investment rates by less than a percentage point resulting to a maximum of half a percentage point rise in an economy’s growth. As mean annual allotments signify exactly half a year worth of post-war growth, it is noted that the effects of the plan through capital accumulation are limited. More so, Alvarez-Cuadrado and Pintea (2008) indicate that the improved performance of Western European nations would have still occurred even if the plan was present. His view was that the aid was limited in its roles, and in sustaining the flow of capital imports necessary for prolonged recovery.
Alternatively, Eichengreen and Uzan (1992) argue that considerations in political economy are the main reasons of the true impact of the plan. The plan provided funds essential to relieve constrains of foreign exchange, giving European policy makers room to think creatively and free. The extra political space and funds from the plan, convinced European nations to restore fiscal stability, sustain their pledge to free markets, and balance budgets. The imaginative idea about Western Europe shows extreme influence of communism, expansion of government regulations and controls, and revival of economic autonomy and pride. However, this argument might be wrong because it does not consider various organizational arrangements found in beneficiary economies. For example, France and Germany, two fastest growing nations, embraced dissimilar growth strategies. France involved itself in crucial economic sectors, while Germany followed the strategy of free markets. Personally, even though the functioning of market mechanism was limited in many countries because of war priorities, there was a strategic agreement that this was only a transitory disturbance of the long European involvement with free markets, and therefore the impact of the plan was constrained.
In conclusion, the direct impact of the plan resulted in a maximum of half a percentage point of growth annually. In reinforcing the assertion of Eichengreen and Uzan (1992), Marshall Plan provided European nations with ways of extending the recovery process, which began after World War II. At other times, the funds supported revenues from exports preventing crisis in balance payments, while in other times, the funds only put on hold their occurrence. Although the political economy argument is difficult to evaluate, it is highly improbably that communism might influence Western European economies. This is because the nations had prior experience with free markets, and had a fully functional system of property rights. Also, the Plan had an impact of enabling France and Britain to back the inconceivable idea of strong Germany. The plan aided in promoting collaboration among former foes, even though, the forces that led to European integration responded more to internal political and economic development in European nations compared to American pressure.
Alvarez-Cuadrado, F & Pintea, M 2008. A Quantitative Exploration of the Golden Age of European Growth. Montreal, Canada: McGill University.
Eichengreen, B, & Uzan, M 1992, 'The Marshall Plan: economic effects and implications for Eastern Europe and the former USSR',Economic Policy, 7, 1, pp. 14-75, Business Source Complete, EBSCOhost, viewed 3 June 2012.
Schain, M 2001. The Marshall Plan: Fifty Years After. New York: Palgrave. Pp. 119-147
Susan J., S 1987, 'IMPACT OF MARSHALL PLAN STILL FELT IN EUROPE TODAY; U.S. `lifeline' is called impetus for Common Market and NATO', The Dallas Morning News, 31 May, NewsBank - Archives, EBSCOhost, viewed 3 June 2012.
