Thursday, June 5, 1997, marks the 50th anniversary of the Marshall Plan. Announced by Secretary of State George Marshall, it ultimately gave about $13 billion to 16 nations in Europe (equivalent to about $75 billion today). Although there is no doubt about the political success of the Marshall Plan, recent economic analyses are more skeptical about its economic impact. Economists today place far more weight on the economic reforms initiated by the Marshall Plan, and much less on the actual aid itself (see table). For example,

• A 1991 study by the Institute for International Economics concluded: "The Marshall Plan experience does not suggest that capital inflows -- in the absence of economic reform --will lead to sustainable economic growth."

• And a 1993 study by Brad De Long and Barry Eichengreen of the University of California at Berkeley found that investment, the main channel through which one would expect capital inflows to raise growth, was largely unaffected the Marshall Plan; rather, its crucial role was to restore financial stability and liberalize production and prices.

While this is somewhat of a revisionist view, its is actually consistent with Marshall's own view. In his June 5th speech he emphasized that much of Europe's economic problem resulted from breakdown of the division of labor, commercial ties between businesses, and consumer confidence. These were much more important, Marshall said, than the physical destruction of buildings and machinery by war.

It is important to remember that Marshall Plan aid was very conditional. Recipients had to agree to balance their budgets, stop inflation and stabilize their exchange rates at realistic levels. They were also encouraged to decontrol prices, eliminate trade restrictions and resist nationalization of industry. In short, the Marshall Plan imposed free market policies on Western Europe in return for aid. This is the reason why the Soviet Union rejected the Marshall Plan for itself and its allies in Eastern Europe.

West Germany is the best example of how free market reforms, rather than foreign aid, were the key to growth. There the economics minister, Ludwig Erhard, abolished all price controls and introduced currency reform overnight on June 20, 1948. Economist Henry Wallich described the result: "On June 21, 1948, goods reappeared in the stores, money resumed its normal function, black and gray markets reverted to a minor role, foraging trips to the country ceased, labor productivity increased, and output took on its great upward surge."

The Marshall Plan worked, but by stimulating and initiating free market economic reforms, not just transferring resources. It is a lesson that many developing nations in Africa, Latin America and Eastern Europe still need to learn.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, June 2, 1997.