Trade and Globalization

A Global Marshall Plan

May 1, 2015  • Jomo Kwame Sundaram & Erik Reinert

ROME – Despite ongoing efforts to catalyze global development cooperation, there have been significant obstacles to progress in recent years. Fortunately, with major international meetings set for the second half of 2015, world leaders have an important opportunity to overcome them.

Such a turnaround has happened before. At the turn of the century, international negotiations on economic development had also come to a grinding halt. The Seattle ministerial of the World Trade Organization ended without decision, and after two decades of the Washington Consensus, developing countries were frustrated at the US-led international financial institutions. Negotiations for the inaugural United Nations Financing for Development (FfD) conference in Monterrey, Mexico, seemed to be headed nowhere.

Then, on September 11, 2001, the United States was hit with major terrorist attacks – a tragic development that somehow catalyzed progress. World leaders agreed to begin the Doha Development Round to ensure that trade negotiations would serve developing countries’ development aspirations. And the 2002 Monterrey FfD conference produced major breakthroughs on foreign and domestic investment, foreign debt, international cooperation, trade, and systemic governance issues.

Of course, tragedy is not needed to kick-start progress. This year’s major global meetings – the Conference on Financing for Development in July, the meeting at the United Nations to adopt Sustainable Development Goals in September, and the UN Climate Change Conference in Paris in December – should be sufficient. And the efforts that have gone into preparing for these meetings suggest that there is a will to move forward.

But the right program is key. The world needs a well-designed and far-reaching strategy to stimulate industrialization, modeled after the European Recovery Program – the American initiative that enabled Europe to rebuild after World War II. The Marshall Plan, as it is better known, entailed a massive infusion of US aid to support national development efforts in Europe, and is still viewed by many Europeans as America’s finest hour.

The Marshall Plan’s impact was felt far beyond Europe’s borders, developing over the following decade into what is probably the most successful economic-development assistance project in human history. Similar policies were introduced in Northeast Asia following the establishment of the People’s Republic of China and the Korean War.

Of course, there was a political motivation behind the Marshall Plan’s expansion. By creating a cordon sanitaire of wealthy countries from Western Europe to Northeast Asia, the US hoped to contain the spread of communism at the start of the Cold War. Developing countries that did not serve the same political ends were left out.

At its core, however, the Marshall Plan was an economic strategy – and a sound one at that. Crucially, it represented a complete reversal of its predecessor, the Morgenthau Plan, which focused on de-industrialization – with poor results. The plan’s aim – articulated by Treasury Secretary Henry Morgenthau, Jr., in his 1945 book Germany is Our Problem – was to convert Germany into a “principally agricultural and pastoral” country, in order to prevent its involvement in any new wars.

By late 1946, however, economic hardship and unemployment in Germany spurred former US President Herbert Hoover to visit the country on a fact-finding mission. Hoover’s third report of March 18, 1947, called the notion that Germany could be reduced to a pastoral state an “illusion,” which could not be achieved without exterminating or moving 25,000,000 people out of the country.

The only alternative was re-industrialization. Less than three months later, Secretary of State George Marshall made his landmark speech at Harvard University announcing the policy reversal. Germany and the rest of Europe were to be re-industrialized, he stated, including through heavy-handed state interventions, such as high duties, quotas, and import prohibitions. Free trade would be possible only after reconstruction, when European countries could compete in international markets.

Marshall made three other important points in his short speech. First, in noting the role that the breakdown of trade between urban and rural areas played in Germany’s economic slowdown, he recalled a centuries-old European economic insight: all wealthy countries have cities with a manufacturing sector. “The remedy,” Marshall explained, “lies in…restoring the confidence of the European people,” so that “the manufacturer and the farmer” would be “able and willing to exchange their products for currencies, the continuing value of which is not open to question.”

Second, Marshall argued that participatory institutions emerge from economic progress, not the other way around – the opposite of today’s conventional wisdom. As he put it, the policy’s “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.”

Third, Marshall emphasized that aid should be comprehensive and strategic, in order to foster real progress and development. “Such assistance,” he declared, “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.”

Marshall’s vision offers important lessons for world leaders seeking to accelerate development today, beginning with the need to reverse the effects of the Washington Consensus on developing and transition economies – effects that resemble those of the Morgenthau Plan. Some countries – including large economies like China and India, which have long protected domestic industry – have been in a better position to benefit from economic globalization. Others have experienced a decline in economic growth and real per capita income, as their industry and agricultural capacity have fallen, especially over the last two decades of the last century.

It is time to increase poor economies’ productive capacity and purchasing power, as occurred in Europe in the decade after Marshall’s speech. Marshall’s insight that such shared economic development is the only way to create a lasting peace remains as true as ever.