Review of a book by Robert E. Wood, University of California Press, Berkeley, 1986

5:   From Marshall Plan to Debt Crisis   Foreign Aid and Development Choices in the World Economy

William Krehm

An apology for our habit of reviewing books  long in the tooth and falling short of  best-seller status. The Nazis burned books.  Allowing them to languish virginally on  library shelves is a more efficient way of  sending them to Coventry.

“In 1955, at the close of his account  of the origins of the Marshall Plan,  ex-US State Department official  Joseph Jones [remarked], ‘The Marshall Plan’s creation suggested ‘not the  limits but the infinite possibilities of  influencing the politics, attitudes and  actions of other countries by statesmanship in Washington.’”

As a sociologist, Wood begins with an  apology for “his boldness in tackling a  subject generally the preserve of  economists, and to a lesser extent of  political scientists. I have not felt that  I have left my sociologist’s craft  behind. It has become increasingly  apparent to me that foreign aid plays a  significant role in shaping those  aspects of the social world that  sociologists commonly look at: social  equality, class structure, politics,  gender relations, rural-urban relations,  and so forth.” It is high time that  economists availed themselves of help  from other disciplines to tidy up the  mess in their workshop.

“The central focus is on how this  structure of access to aid has changed  over time and shaped development  options in the Third World. From this  perspective, the emergence of the debt  crisis is closely connected to the role  of aid in the world economy. The  debt crisis has profoundly altered the  international environment that Third  World countries face; and the legacy  of debt will continue a central focus  of international relations and development choices for years to come.”

A far cry from the self-congratulation  of official scribes on the success of  the Marshall Plan that put the show  on the road!. “For one thing, the  activity financed by aid may not be the  true measure of aid’s impact because  the recipient government might have  carried out such activity in the absence  of aid. The real impact of aid in such  cases may be to finance some alternative government activity or simply to  underwrite higher domestic (often  luxury) consumption.

“The Marshall Plan has come to  symbolize boldness and success, and  virtually whenever new directions in  US foreign aid programs have been  proposed, the theme of ‘a new  Marshall Plan’ has been pressed into  service. Officially known as the  European Recovery Program (ERP),  the Marshall Plan dispensed over $13  billion between 1948 and 1952 to  Western European countries. Over  90% of this aid was in the form of  grants.

“By the end of 1951, indeed, the  Marshall Plan was in a deep crisis that  was resolved only through rearmament  and the expanded aid of its successor,  the Mutual Security Agency. The real  success of the Marshall Plan lay in its  contribution to the construction of a  new international order, not in the  quantity of capital and raw material it  provided Western Europe.

“Five sets of changes in the world  economy created the dollar shortage  that was the basis of the worldwide  postwar economic crisis.

The Breakdown of Trade between  Eastern and Western Europe

“First, the breakdown of trade between Eastern and Western Europe.  In 1948 Western European exports to  Eastern Europe were less than half of  the prewar level, and imports from  Eastern Europe were only one third.  Instead of recovering, this trade  declined over the next five years. This  meant that European countries had to  rely on dollar imports from the US to  fulfil needs formerly met by trade  with Eastern Europe.

“Second there was the loss of important colonial sources of dollars.  Vietnam was in rebellion. So was the  Netherlands’ major dollar earner,  Indonesia. Guerrilla insurgency was  increasing in Britain’s most profitable  colony, Malaysia. France had 110,000  troops in Indochina, and the Nether- lands had 130,000 in Indonesia.  Britain had 1.4 million troops around  the world. South Africa took its gold  sales out of the sterling area dollar  pool.

“Third, there was Europe’s loss of  earnings on foreign investments.  Continued sales of these investments  was a condition of lend-lease aid  during the war. For both France and  Britain, overseas investment earnings  had long helped offset trade deficits.

“In addition, Britain had run up $13.7  billion in debts, known as sterling  balances, to other sterling area coun- tries, particularly India. These coun- tries now clamored for the balances to  finance their development plans.

“Fourth, many of the European  countries and their overseas territories  were hit with declining terms of trade.  ‘Had the price of gold and rubber  gone up as those of other items  traded, the same exports to the US  during the five years following the war  would have earned an additional $3.5  billion for the sterling area. Total  Marshall Plan aid to Great Britain  came to $2.7 billion.

“This left them susceptible to small  fluctuations in the US currency at the  same time that no new mechanisms  had yet been approved to provide the  kind of international liquidity that  sterling had once provided. Britain’s  need for aid after the war was partly  rooted in US aid policies during the  war. It was official US policy to  administer lend-lease in such a way  that the UK’s gold and dollar balances  would not fall below $600 million or  rise above $1 billion. This was secured  by altering what the British were  expected to pay for in dollars and  what would be included in lend-lease.  The US reasoning was that reserves  less than $600 million would force  Britain to resort to the kind of  economic controls the US was  dedicated to preventing, whereas over  $1 billion would leave Britain too  independent of postwar US influence.” That fell short of “leaving it all  to a free, competitive market.”

However, largely domestic concerns  prompted Washington to begin  preparing the Marshall Plan long  before the Cold War cast its shadow  over the landscape and was fully  exploited to get the Marshall through  Congress. “A 1941 survey of the  American Economic Association  found 80% of its members predicting  a postwar depression.”

It early became evident that Europe’s  dollar-earning capacity would not  solve the US’s problem in exporting  enough to keep their economy from  relapsing into depression. “US imports  from Europe constituted only 0.33%  of US GNP. Politically untouchable  tariff walls made increasing most  European imports impossible. US  policymakers looked instead to the  overseas territories of European  countries to bail out their colonial  masters. This description does not  accurately portray the way the colonial  powers acquired the dollars their  colonies earned. The basic idea of  triangular trade was reiterated again  and again throughout the Marshall  Plan.

“Its most fateful error was that it  overlooked the powerful movements  arose throughout the colonial territories to cut their ties with the wounded  imperial powers. It imparted an  incoherence to Washington’s policies  vis à vis the colonial insurgencies –  encouraging them at times and  supporting the colonial powers’ efforts  to suppress them at others. Arms sales  were not an unimportant overarching  factor in this ambiguity. Military  Keynesianism, of all versions of the  doctrines of the Wizard of  Bloomsbury, was most acceptable to  the US Congress. Europe’s quality  troops were never where Washington  wanted them.

“Secretary of State Marshall reported  in 1949: ‘When we reached the  problem of increasing the security of  Europe, I found the French troops of  any quality were all out in Indochina,  and the Dutch troops of any quality  were all out in Indochina, and the one  place where they were not was in  Western Europe.’” In one way or  another the colonial wars had to be  resolved (p. 43).

“The brutality with which the message  to was imparted to Latin America that  the Marshall plans they expected were  not in the cards contributed to the  riots [the “Bogotazo”] that marred the  Bogota Conference of 1948. For Latin  America reliance would be entirely on  private investment. The unspoken footnote  was that the CIA and the American  military, were already mobilized to guarantee  that the economy of the region would be wide  open to American corporate investment on its  terms. [Our italics.]

“But bridging the dollar gap with the  rest of the world – the initial goal of  the Marshall Plan – was not doing  well. In 1951 the dollar gap was the  worst since 1945. However, the  [Marshall Plan] came to be popularly  defined as a success partly through a  redefinition of goals. At the end of the  Marshall Plan, conservative social  forces had greatly strengthened their  political control in all Western European countries. European resistance to  rearmament had been overcome. In  the popular mind, the Marshall Plan  had prevented Europe from ‘going  communist.’

“In this context of deep pessimism  about an economic solution to the  dollar gap by 1952, a massive military  buildup emerged as the only practical  solution of the Truman administration  months before the Korean war broke  out. One State Department document,  for example, justified a military  approach by observing that Congress  was more favorably disposed to  military aid than to aid for economic  recovery.” There was the added  advantage to military Keynesianism  abroad, that it ensured a sustainable  relationship with Europe by tying it to  American military hardware, whereas  purely economic aid might prepare the  recipient nations for uniting to assert  their autonomy from the US.

“The Marshall Plan created a body of  operating principles and procedures  that remain an integral part of the aid  regime. Although aid’s use to block  socialism has been well understood, its  role in limiting national capitalism  extends beyond the Marshall Plan  period. The hammer to achieve this  has been debt.

“Over one-fifth of US aid between  1948 and 1952 went directly to the  underdeveloped areas. In both Europe  and the underdeveloped world,  specific procedures and techniques  were devised in the aid regime. The  use of counterpart funds (money to be  advanced, but held back as security for  the fulfilling of specified conditions),  became a widely emulated method of  expanding the leverage of aid.”

The Proliferation of the Aid Regime

“By the 1980s, however, the aid  picture had become enormously  complex. Separate aid programs were  now administered by all sixteen  countries of the Development Assistance Committee (DAS); by at least  eight communist and ten OPEC  countries, by approximately twenty  multilateral organizations in addition  to various components of the United  Nations system, by hundreds of  private organizations. Aid programs  had even been initiated by Third  World countries.

“The 1950s were a period of the  dominance and diversification of  bilateral aid programs of the advanced  capitalist countries – a state of affairs,  ironically, assured by the advent of  smaller Soviet and Chinese aid programs. The 1960s were marked by the  emergence of new forms of multilateralism, largely either under the auspices  of, or modelled after, the World Bank.  The 1970s witnessed the sudden  emergence of Middle Eastern oil- producing countries as major aid  donors, as well as an expansion of  World Bank that consolidated its  position as leading aid institution. In  the mid-to-late 1970s, the expansion  of non-concessionary private bank  lending in lieu of official financing  came to constitute a fundamental  challenge to the aid regime, culminating in the debt crisis.

“The specter of communist aid led the  US to press the OEEC countries  (constituted in 1961 as the Organization for Economic Cooperation and  Development [OECD], with an  expanded membership including  Canada and Japan) to initiate or  expand their own aid programs.

“New multilateral institutions accounted for 40% of multilateral aid in  1970, and 50% by 1980.

“The institutions emerged largely in  response to Third World pressure, but  they represented a defeat of the effort  of Third World countries to establish  a UN institution providing capital  assistance over which they would have  control.

“The most unexpected institutional  development during the 1970s was the  explosion of aid flows from the major  oil-producing countries of the Middle  East, members of the Organization of  Petroleum-Exporting Countries  (OPEC). By far the greatest proportion of their enormous dollar reserves  was placed on deposit with commercial banks in the advanced capitalist  countries, but some was lent directly  to Third World countries at concessionary rates.

“Marshall Plan aid was overwhelmingly in the form of grants, but aid to  Third World countries in the later  1950s and 1960s was increasingly on a  loan basis.“The most striking innovations in  external financing in the mid to late  1970s occurred not in the aid regime  but in the practices of private commercial banks. But whereas in the  1950s they consisted almost entirely of  direct private investment, in the later  1970s lending by private commercial  banks far surpassed direct private  investment.

“This had to do with the growth of  the Eurodollar market. This refers to  the offshore markets for loans in any  strong currency. The offshore venue  of such loans not only kept them free  of taxation and other restrictions.  Those who lent on the eurodollar  market, in effect created their own  notional money supply, effectively off  their balance sheet so long as contractual obligations were honoured. Not  only did it by-pass home-based  restrictions and controls, but circumvented invasions of privacy in other  respects. Unless repatriated, it has a  tenuous connection with the real  economy.

“The Third World thus became  entangled with the wrong end of the  credit spectrum. Its finances, at best  vulnerable enough, became exposed to  every wiggle in short-term funds. That  tended to repel productive investors.

“The oil price increases in 1973-4,  resulted in OPEC countries placing  $22 billion in Eurocurrency deposits  in 1974. But the expansion of the  banks’ financing of the Third World  began earlier. Between 1965 and 1976,  the number of US banks with foreign  branches rose from 13 to 125 and the  number of branches from 211 to 731.  Faced with stagflation at home, the  banks of the First World turned to the  Third World for expansion. It was  seen as an “economy of scale” making  multimillion dollar loans to a single  minister or dictator, rather than having  to deal with thousands of small  borrowers at home. Besides, the  buzzword of the day was the risklessness of ‘sovereign debt,’ i.e., loans to  governments. Corruption took care of  any doubts that surrounded that  concept. Much of the money lent to  Third World lands stayed in special  accounts in the US as undeclared  commissions.

“External financing for underdeveloped countries has become highly  differentiated. The number of bilateral  donors has increased, and multilateral  institutions have proliferated. No  formal mechanism of system-wide  coordination exists. The United  Nations has virtually no influence over  bilateral aid programs and practically  none over the multilateral institutions  officially affiliated with it, such as the  IMF and the World Bank.”

The jungle that dominates the international aid field flies in the face of  proposed sets of principles.

William Krehm

– from Economic Reform, December 2004