The present contribution presents an analysis of the bilateral economic policies developed by Washington towards its allies in the Cold War context. The Marshall Plan replaced the World Bank’s intervention since the US came to the conclusion that reconstruction gifts to Europe would be more efficient and cost-effective than loans. This bilateral policy aimed to buttress the capitalist Western block spearheaded by Washington against the Eastern bloc dominated by the USSR.
The United States cancelled the debts of some of its allies. The most obvious instance of this kind was the way the German debt was largely cancelled by the 1953 London Agreement. In order to make sure that the economy of West Germany would thrive and thus become a key element of stability in the Atlantic bloc, the creditor allies led by the United States made major concessions to German authorities and corporations - concessions that went beyond debt relief. A comparison between the way West Germany was treated after WWII and the current attitude to developing countries is a telling story.
The US governments had learned from the mistakes made in the 1920s and 1930s
With the Treaty of Versailles at the end of the first World War, the victors demanded that Germany pay huge amounts as war debt and reparation |1|. Germany soon found it difficult to pay and social discontent grew as a consequence. The Wall Street crash occurred in 1929, leading to a global economic crisis. The US drastically reduced capital outflow. Germany stopped paying its debt to France, Belgium and Britain, and these countries in turn stopped paying their debts to the United States. The more industrialized world sank into recession and massive unemployment. International trade plummeted.
To prepare for a different outcome after WWII, Washington decided on policies that would be completely different from those implemented after WWI and until the early 1930s. It set up the Bretton Woods institutions and the United Nations. This was the international institutions approach.
We now have to analyse the bilateral economic policy developed by the United States.
Give rather than lend money
The US government’s major concern at the end of the Second World War was to maintain the full employment that had been achieved thanks to the tremendous war effort. It also wanted to guarantee that there would be a trade surplus in relations between the US and the rest of the world. |2| But the major industrialized countries that could import US commodities were literally penniless. For European countries to be able to buy US goods they had to be provided with lots of dollars. But how? Through grants or through loans?
To put it simply, the US reasoning line went as follows: if we lend European countries on our side the money they need to rebuild their economy, how are they going to pay us back? They will no longer have the dollars we lent them since they used them to buy from us. So there are only three possibilities. First possibility: they pay us back in kind. Second possibility: they pay us back with dollars. Third possibility: we give them the money so that they can recover.
In the first hypothesis, if they pay us back in kind, their goods will compete with ours on our home market, full employment will be jeopardized, profits will fall. This is not a good solution.
In the second hypothesis, they cannot use the dollars they received on loan to pay us back since they have used them to buy our goods. Consequently, if they are to pay us back, we have to lend them the same amount (which they owe us) again, with interest added. The risk of being caught in an infernal cycle of indebtedness (which puts a stop or slows down the smooth running of business) is added to the risk attached to the first possibility. If Europeans try not to accumulate debts towards us they will try and sell their goods on our home market. They will thus get some of the dollars they need to pay us back. But this will not be enough to rid them of their debts. And it will lower the rate of employment in the US. |3|
We are left with the third possibility: rather than lend money to Europeans (via the World Bank or not) it seems appropriate to give them the amount of dollars they need to build up their economy within a fairly short time. Europeans will use the donated dollars to buy goods and services from the US. This will guarantee an outlet for US exports, hence full employment. Once economic reconstruction is achieved Europeans will not be riddled with debts and will be able to pay for what they buy from us.
The US authorities thus concluded that they had better proceed by grants, and therefore launched the Marshall Plan.
The Marshall Plan |4|
Between 1948 and 1951 the United States devoted over thirteen billion US dollars (eleven of which were freely given) to restore the economy of seventeen European countries in the context of the Organisation for European Economic Cooperation (OEEC, today OECD). The total of US aid amounted to approximately 90 billion of today’s US dollars. The United States demanded a number of commitments in exchange for their aid: first, European countries had to coordinate reconstruction expenses within the OEEC. The United States thus contributed to European cooperation, a prelude to the construction of Europe in order to reinforce the Western bloc against the Soviet bloc. Then they demanded that the money received be used to buy goods produced by their industry.
To those grants within the Marshall Plan we must add the partial cancellation of France’s debt to the US in 1946 (2 bn USD were written off). Similarly Belgium benefited from a reduction of its debt to the US as compensation for the uranium provided to make the first two atomic bombs which were dropped on the Japanese cities of Hiroshima and Nagasaki and which resulted in a first nuclear holocaust. The uranium had been extracted in the mines of Shinkolobwé (near Likasi, then Jadotville) located in the province of Katanga in the Belgian Congo. First move: Belgium was granted debt cancellation thanks to its colony, the natural ressources of which it lavishly exploited. Second move: some fifteen years later, Belgium transferred to the newly independent Congo the debts it had incurred in order to exploit those natural ressources as well as its population.
The 1953 London Debt Agreement, or the German debt
If West Germany could redeem its debt and rebuild its economy so soon after WWII it was thanks to the political will of its creditors, i.e. the United States and their main Western allies (United Kingdom and France). In October 1950 these three countries drafted a project in which the German federal government acknowledged debts incurred before and during the war. They joined a declaration to the effect that “the three countries agree that the plan include an appropriate satisfaction of demands towards Germany so that its implementation does not jeopardize the financial situation of the German economy through unwanted repercussions nor has an excessive effect on its potential currency reserves. The first three countries are convinced that the German federal government shares their view and that the restoration of German solvability includes an adequate solution for the German debt which takes Germany’s economic problems into account and makes sure that negotiations are fair to all participants.” |5|
Germany’s prewar debt amounted to 22.6 bn marks including interest. Its postwar debt was estimated at 16.2 bn. In the agreement signed in London on 27 February 1953 these sums were reduced to 7.5 bn and 7 bn respectively. |6| This amounts to a 62.6 % reduction.
The agreement set up the possibility to suspend payments and renegotiate conditions in the event that a substantial change limiting the availability of resources should occur. |7|
To make sure that the West German economy was effectively doing well and represented a stable key element in the Atlantic bloc against the Eastern bloc, allied creditors granted the indebted German authorities and companies major concessions that far exceeded debt relief. The starting point was that Germany had to be able to pay everything back while maintaining a high level of growth and improving the living standards of its population. They had to pay back without getting poorer. To achieve this creditors accepted first, that Germany pay its debt in its national currency, second, that Germany reduce importations (it could manufacture at home those goods that were formerly imported), |8| third, that it sell its manufactured goods abroad so as to achieve a positive trade balance. These various concessions were set down in the above-mentioned declaration. |9|
Another significant aspect was that the debt service depended on how much the German economy could afford to pay, taking the country’s reconstruction and the export revenues into account. The debt service/export revenue ratio was not to exceed 5%. This meant that West Germany was not to use more than one twentieth of its export revenues to pay its debt. In fact it never used more than 4.2% (except once in 1959).
Another exceptional measure was that interest rates were substantially reduced (between 0 and 5%).
Finally we have to consider the dollars the United States gave to West Germany: USD 1,173.7 million as part of the Marshall Plan from 3 April 1948 to 30 June 1952 with at least 200 million added from 1954 to 1961, mainly via USAID.
Thanks to such exceptional conditions Germany had redeemed its debt by 1960. In record time. It even anticipated on maturity dates.
Some elements towards a comparison
It is enlightening to compare the way post-war West Germany was treated with the treatment of developing countries today. Although bruised by war, Germany was economically stronger than most developing countries. Yet it received in 1953 what is currently denied to developing countries.
Proportion of export revenues devoted to paying back the debt
Germany was allowed not to spend more than 5% of its export revenues to pay back its debt.
In 2004 developing countries had to spend an average of 12.5% of their export revenues to pay back their debts (8.7% for subsaharian African countries and 20% for countries in Latin America and the Caribbean). The proportion was even higher than 20% by the end of the 1990s.
Interest rate on external debt
As stipulated in the 1953 agreement about Germany’s debt the interest rate was between 0 and 5%.
By contrast, the interest rates to be paid by developing countries was much higher. A large majority of agreement had rates that could be increased.
From 1980 to 2000 the average interest rate for developing countries fluctuated between 4.8 and 9.1% (between 5.7 and 11.4% for Latin America and the Caribbean, and even between 6.6 and 11.9% for Brazil from 1980 to 2004).
Currency in which the external debt had to be paid
Germany was allowed to use its national currency.
No third world country can do the same except in exceptional cases for ludicrously small sums. All major indebted countries must use strong currencies (dollars, euros, yens, Swiss francs, pounds sterling).
Possibility of revising the agreement
The London Debt Agreement set up the possibility to suspend payments and renegotiate conditions in the event that a substantial change should curtail available resources.
Loan agreements with developing countries do not include such possibility.
Policy of import substitution
The London Debt Agreement stipulated that Germany could manufacture commodities it used to import.
By contrast the WB and the IMF prohibit developing countries from manufacturing anything they can import.
Cash grants in strong currencies
Although it was largely responsible for the Second World War Germany received significant grants in strong currencies as part of the Marshall plan and beyond.
While the rich countries have promised developing countries assistance and cooperation, the latter merely receive a trickle by way of currency grants. Whereas they collectively pay back some 300 bn US dollars a year, they receive about 30 bn. The largest indebted countries in the Third World receive no cash aid whatsoever.
Undoubtedly the refusal to grant indebted developing countries the same kind of concessions as to Germany indicates that creditors do not really want these countries to get rid of their debts. Creditors consider that it is in their better interest to maintain developing countries in a permanent state of indebtedness so as to draw maximum revenues in the form of debt reimbursement, but also to enforce policies that serve their interests and to make sure that they remain loyal partners within the international institutions.
What the United States had done via the Marshall Plan for industrialized countries that had been ravaged by war they repeated towards some allied developing countries at strategic locations on the outskirts of the Soviet Union and China. They gave them much higher amounts than those lent by the WB to the rest of the developing countries. This particularly applies to South Korea and Taiwan, which were to receive significant aid from the 1950s, an aid that largely contributed to their economic success story.
From 1953 to 1961, for example, South Korea received more from the United States than what the WB lent to all independent countries in the Third World (India, Pakistan, Mexico, Brazil and Nigeria included), over USD 2,500 millions vs 2,323 millions. During the same period Taiwan received about 800 million dollars. |10| Because it was strategically located in relation to China and the USSR, a small farming country like South Korea benefited from US largesse. The WB and the United States were tolerant towards economic policies in Korea and Taiwan that they banned in Brazil or Mexico.