The Marshall Plan at 60:
The General’s Successful War On Poverty
By Erik Reinert and Jomo K. S.
At the end of the Second World War, the United States Secretary of State, General George Marshall, announced a re-industrialization plan for war-torn Europe. Known as the Marshall Plan, this generous infusion of United States aid and favourable acceptance of national developmental policies ensured the rebirth of modern Europe. For many Europeans, this is still seen as the country’s finest hour.
In the decades that followed, the impact of the Marshall Plan would be felt far beyond Europe’s borders and develop into what is probably the most successful economic development assistance project in human history. Similar economic development policies were introduced in North-east Asia following the establishment of the People's Republic of China and the Korean War.
Politically, the Marshall Plan was intended to create a cordon sanitaire of wealthy countries from Western Europe to North-east Asia to contain the spread of communism as the Cold War began. Economic development policies following decolonization in Asia and then Africa also helped ensure rapid growth throughout the world during what has been termed the post-war “Golden Age”.
Apart from its historical importance, the Marshall Plan experience offers valuable lessons that have relevance today. It represented a complete reversal of the preceding Morgenthau Plan, named after Treasury Secretary Henry Morgenthau Jr. In his 1945 book, Germany is Our Problem, Morgenthau promoted a de-industrialization plan, “converting Germany into a country principally agricultural and pastoral” to make sure it could never again go to war.
By late 1946, however, economic hardship and unemployment in Germany were worrying the United States, and former President Herbert Hoover was sent there on a fact-finding mission. Hoover’s third report of 18 March 1947 noted: “There is the illusion that the New Germany left after the annexations can be reduced to a ‘pastoral state’. It cannot be done unless we exterminate or move 25,000,000 people out of it.” Hoover well understood that an agricultural economy would be able to sustain a much smaller population than an industrialized nation.
Hence, the only option was to re-industrialize. Less than three months later, Marshall’s landmark speech reversed policy. Germany and the rest of Europe were to be re-industrialized with policies that included heavy-handed economic interventions, such as high duties, quotas and import prohibitions. Free trade would be possible only after reconstruction and international competitiveness had been achieved.
Marshall’s short speech made four other important points. In describing how Germany’s economy had ground to a halt, Marshall noted the breakdown of trade between city and countryside. Marshall thus recalled a centuries-old European economic insight: all wealthy nations have cities with a manufacturing sector. “The remedy lies in breaking the vicious circle and restoring the confidence of the European people.” Marshall’s recognition of such “vicious circles” was to become the vogue in subsequent development economic analysis.
“Our policy is directed not against any country or doctrine, but against hunger, poverty, desperation and chaos. Its purpose should be the revival of a working economy in the world so as to permit the emergence of political and social conditions in which free institutions can exist”, said Marshall. Unlike today’s conventional wisdom, he argued that participatory institutions emerge from economic progress, not the other way around. Marshall also emphasized that aid should be neither piecemeal nor palliative, but truly developmental. “Such assistance, I am convinced, must not be on a piecemeal basis as various crises develop. Any assistance that this Government may render in the future should provide a cure rather than a mere palliative.”
In recent decades, structural adjustment and coerced trade liberalization have created effects similar to those of the Morgenthau Plan in many countries. Large nations that had protected their industries for half a century—like China and India—were in a better position to benefit from globalization, while many smaller and poorer countries saw their real incomes reduced by de-industrialization. During the last 25 years, premature and sudden exposure to world markets has brought about a loss of industry, agricultural decline and depopulation in many regions now subject to the vicious circles of immiserizing growth.
Instead, the productive capacities and capabilities of poor nations must be built. This requires a simultaneous build-up of the supply and demand sides—of productive capacity and purchasing power—as in Europe during the crucial decade following Marshall’s speech. Shared economic development, Marshall knew, is the only way to create a lasting peace. In 1953, George Marshall was awarded the Nobel Peace Prize.
Erik S. Reinert is the author of How rich countries got rich…and why poor countries stay poor, published in 2007. Jomo K. S. is United Nations Assistant Secretary-General for Economic Development and was awarded the 2007 Wassily Leontief prize for advancing the frontiers of economic thought.