The Marshall Plan is often hailed as one of the great foreign economic policy achievements of the twentieth century. Between 1948 and 1951 the United States transferred $13 billion to the war-torn economies of Western Europe; this timely and generous aid programme is widely believed to have solidified US leadership of the Western alliance, buttressed moderate elements in West European politics, smoothed Europe's labour-management relations and checked the westward march of communism.

In Discussion Paper No. 638, Research Fellow Barry Eichengreen and Marc Uzan focus on the Plan's economic effects, which are less transparent but have clear relevance for Eastern Europe and Russia today. They focus on whether the Plan was really instrumental in initiating Europe's post-war economic recovery and whether it also had permanent growth effects. They then assess the importance of the conditions attached to US aid in shaping these effects and whether a concerted programme of foreign aid could have a similar impact in Eastern Europe and Russia today.

Eichengreen and Uzan find that the Marshall Plan did indeed have a significant impact on Western Europe's post-war recovery. The recipients of large amounts of Marshall aid recovered significantly faster than other industrial countries. Strikingly, however, the obvious channels through which the Marshall Plan may have affected European recovery by stimulating investment in plant and equipment, augmenting capacity to import and financing public investment in infrastructure repair were relatively unimportant.

Eichengreen and Uzan maintain that post-war Europe's crisis did not result from insufficient investment, inadequate capacity to import raw materials or any inability to repair its devastated infrastructure. Rather, on the eve of the Marshall Plan, Europe was experiencing a `marketing crisis', in which producers would not bring goods to market while workers and managers limited the efforts they devoted to market activity. Political instability, shortages of consumer goods and fears of financial chaos led them to hoard commodities and withhold effort. The Marshall Plan played a critical role in overcoming this crisis by facilitating the restoration of financial stability and the liberalization of production and prices.

The Marshall Plan: Economic Effects and Implications for Eastern Europe and the Former USSR
Barry Eichengreen and Marc Uzan

Discussion Paper No. 638, March 1992 (IM)