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
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.
– from Economic Reform, December 2004