No Marshall Plan for the Former Soviet Republics

STEVE H. HANKE

January 22, 1992|By STEVE H. HANKE

The State Department is hosting a conference today andtomorrow to coordinate distribution of aid to the new nations of the Commonwealth of Independent States. Even though the U.S. diplomats have indicated the conference will be restricted to discussions about so-called humanitarian aid and self-help programs, it may be politically difficult for Secretary of State James A. Baker III to hold off demands for more aid by the foreign aid lobby.

Led by Boris Yeltsin's adviser, Harvard University professor Jeffrey Sachs, the aid lobby is in full swing. Mr. Sachs claims the transition from socialism to capitalism in the Commonwealth's member states will be impossible without significant amounts of foreign aid.

In making his case to limit the scope of the conference, Secretary Baker should recall that Mr. Sachs is using smoke and mirrors, rather than economic analysis, to make his case. Consider the magnitude of the professor's aid request. After careful study, Mr. Sachs concludes that the Commonwealth of Independent States needs $20 billion in foreign aid this year.

That is calculated as follows: Poland, where Mr. Sachs is also an adviser, is going through a painful, transition-shock therapy. To ease the pain, Poland is receiving almost $3 billion a year from Western governments. Since the population of the Commonwealth states is about 7.25 times greater than Poland's, the Commonwealth of Independent States collectively should receive 7.25 times more aid than Poland, or $20 billion per year.

Numbers of such magnitude numb the mind. As the late Sen. nTC Everett Dirksen would say, ''a billion here, a billion there, and soon it adds up to real money.'' Well, $20 billion is real money. Indeed, an additional $20 billion would increase the world's foreign-aid disbursements by about 60 percent.

Let's go beyond the complex calculations required to arrive at the $20 billion figure and examine Mr. Sachs' general argument. The most notable cases of successful transformations from socialism to capitalism are Chile and China's Guangzhou region, which is located directly north of Hong Kong.

In 1973, General Pinochet inherited a socialist economy that was collapsing and suffering from hyper-inflation. Today, after a Pinochet-directed transformation, Chile's economy receives high marks. For example, according to a recent report on third-world economies issued by the secretariat of the General Agreement on Tariffs and Trade (GATT) in Geneva, ''Chile emerges as a third-world superstar.''

As for the Guangzhou region of China, it transformed itself from communism into a vigorous market economy over the past 12 years, with a real growth rate of about 12 percent a year.

In both cases, foreign aid was not required. During the Pinochet years most countries withdrew aid to Chile. As a result, Chile realized a net outflow, rather than inflow, of aid. In the 1980s, China, as a whole, received less aid on a per-capita basis than any third-world nation. These facts explain why Mr. Sachs and other aid lobbyists refrain from playing the Chile and China cards.

One card Mr. Sachs and his associates play with great regularity, however, is the Marshall Plan card. The folk image painted by biographers of statesmen and historians of international relations is one in which Western Europe was little more than a corpse, incapable of economic recovery without U.S. foreign aid. Hence, the image makers conclude that the rapid recovery of Western Europe's economies resulted from the Marshall Plan, which committed the United States to $13.2 billion in aid from 1948-1951, with 25 percent of that going to the United Kingdom.

Serious analysis has all but destroyed the widely-held folk image of the Marshall Plan, however. By 1948, when the Marshall Plan began, the reconstruction of devastated public infrastructure was largely complete and Western Europe's economies were already bouncing back. For example, by the last quarter of 1946 almost as much freight was loaded on the railways of Western Europe as had been transported in 1938.

The Marshall Plan was also not large enough to stimulate Western European growth by accelerating the replacement and expansion of its capital stock. Indeed, calculations show that, after four years of the Marshall Plan, Western European national income levels were, at best, only two percent higher than would have been the case otherwise. While this was a welcome addition, it is hardly the sort of dramatic change trumpeted by the Marshall Plan's makers and Mr. Sachs. Indeed, the Marshall Plan was simply not a decisive factor in Western Europe's post-World War II boom.

Contrary to Mr. Sach's claims, foreign aid is clearly not a necessary condition for a successful economic transformation and restructuring. But, perhaps more importantly, there is considerable evidence to suggest that aid impedes the transformation process. For example, Israel and Egypt are the two largest recipients of U.S. aid largesse, and both have been unable to transform their largely socialist economies.

In ''Toward Growth: A Blueprint for Economic Rebirth in Israel,'' Dr. Alvin Rabushka and I document that, in the case of Israel, aid has done nothing more than fuel Israel's war against capitalism.

In resisting the aid lobby, Secretary of State Baker is holding all the high cards. It's time for him to call Mr. Sachs' bluff.

Steve H. Hanke is professor of applied economics at Johns Hopkins University.

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