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The Forgotten Lessons of the Marshall Plan

To combat poverty in Africa, government should redirect aid to foster local business.

By R. Glenn Hubbard, William Duggan | strategy+business | June 20, 2008

Cloth for sale in Accra's Makola market,
Ghana. Photo by Transaid (CC).

More than 60 years ago, on June 5, 1947, U.S. Secretary of State George Marshall announced the European Recovery Program (later known as the Marshall Plan) in a famous commencement address at Harvard University. He said that it was "logical" for the United States to do whatever it could to restore the region to economic growth, "without which there can be no political stability and no assured peace."

The plan, funded by the U.S. government and administered by a Europe-wide commission, spent US$13 billion over four years and engendered the highest rate of economic growth (about 35 percent per year) in European history. When the work of the plan was finished, the economies of every western European country had not just returned to prewar levels of growth and economic development, but surpassed them.

Ever since, the Marshall Plan has been widely hailed as a triumph, an example of foreign aid as an enabler of economic revitalization on a grand scale. During the past few years, some leaders have proposed it as a model for helping an entirely different region. A call has gone out for a Marshall Plan for Africa. Extreme poverty, civil wars, and disease have ravaged much of the continent, leaving it poorer today than it was 20 years ago.

There is much reason to agree with the objectives of a Marshall Plan for Africa. Raising the economic growth rates and standards of living in Africa, especially in sub-Saharan Africa, would have many beneficial effects. But most of the existing proposals represent a great misunderstanding of the intention of the original Marshall Plan and the way it worked. It was less a sweeping program of foreign aid to governments and agencies than a large-scale effort to restore the power of business as a growth engine.

A true Marshall Plan for Africa could ignite growth and reduce poverty, but only through a set of institutions that are different from those the current aid system is using.

Marshalling Resources

The plan had four components. The first involved the way aid money was gathered and spent. The United States was the source; it channeled all grants through an independent funding and monitoring mechanism with its own global and local institutions. These included the Economic Cooperation Administration (ECA), which ran the entire program, with headquarters in Washington and small missions in every western European country. Each country had a special ECA account. The receiving countries formed their own regional coordinating body, the Organisation for European Economic Co-operation; this was a forerunner of both the Organisation for Economic Co-operation and Development and the European Union.

The second component was the intensive involvement of the private sector. The original initiative was run by business leaders, including the top administrator, Paul Hoffman of Studebaker Motor Company, then a major carmaker based in Indiana. The ultimate recipient of each loan—in effect, the unit of economic development—was an individual entrepreneur or business, not a government agency or nongovernmental organization (NGO). Money went directly to European governments, but they were required to use it to make loans to local businesses.

The borrowers later repaid the loans to these governments, which could then lend them out again. This virtuous circle meant that all money spent on public projects would come from loans, most of which were repaid. It also helped ensure a focus on restoring the commercial infrastructure—such as ports and railroads, supply chains, banks and other financial institutions, and telecommunications networks—that would further boost economic activity.

Third, each European government made economic policy reforms to support its domestic private sector. They made it easier for all businesses, from upstart entrepreneurs to midsized manufacturing and larger enterprises, to thrive. The closest that [then British Chancellor of the Exchequer Gordon] Brown's proposal for Africa came to enabling business-sector development was the provision to cut trade barriers in donor countries. The original Marshall Plan did the opposite: It cut trade barriers in recipient countries, thereby increasing the markets and prospects for the entire region through increased trade.

The fourth component was a regional coordinating body that handled the distribution of funds among countries. This ensured that countries (and their resident businesses) would compete for funds. If one country did not cooperate, another was happy to take its funds.

Current Economics

Of course, the new Marshall Plan would not look exactly like the original. Africa today is not the same as Europe in 1947. Despite the ravages of World War II, Europe then was in better shape than Africa is now. The Marshall Plan aimed to restore the European economy to its prewar prosperity. But most of Africa has never had such prosperity to restore. It has always been poor. Yet the essential elements of the original Marshall Plan offer a way forward that any program of development aid must follow.

An effective Marshall Plan for Africa should concentrate exclusively on business development. It should have its own institutions designed to match those of the original plan. Last time, the U.S. Congress created a commission to oversee the plan. The new plan should require an international commission to provide oversight. And a structure should be put in place, equivalent to the original plan's ECA, to collect and manage the funds on the donor side.

Under such a plan, an African country would become eligible by putting policies in place to foster business development; each member government would then have its own revolving fund in a special account. In the original Marshall Plan, governments spent the repaid loans on economic infrastructure projects approved by the ECA. A Marshall Plan for Africa should establish a similar structure. Given Africa's size and diversity, there might be regional ECAs rather than a single one for the whole continent.

A plan like this would not be redundant; it would complement the existing private-sector efforts in Africa—such as those sponsored by the Africa Development Bank (ADB), the International Finance Corporation (IFC, the private-investment arm of the World Bank), the Grameen Bank and other microlending institutions, and the emerging networks of Chinese investors. These private-sector efforts are all beneficial, but they are tiny compared to the public-sector aid going into Africa today.

And the existing business-related efforts are limited in their effectiveness. The ADB, for example, makes more loans to government agencies and NGOs than it does to private companies, and neither it nor the World Bank insists on pro-business policies, as the Marshall Plan did.

In the new Marshall Plan, the funds themselves should be dedicated to a variety of purposes. Above all, they should not go for government-designed economic development plans, whose track record has not been successful. Competitive regional funds would support activities based on best practices accumulated over the history of aid, from the original Marshall Plan to today.

The Software of Business

This leads to the last key element of a Marshall Plan for Africa: As with the original, the business sector must lead it. Administrators and decision makers should, once again, be drawn from that sector, present in flesh as well as spirit.

Like the original, the plan should focus on business infrastructure. In Africa, that would mean not just hardware—upgrades in electricity distribution, telecommunications, and transportation—but also a sort of software. This software would include financial institutions, business schools and associations, anti-corruption units, and courts, all of which must be improved or created in most African countries to enable their business communities to expand.

Despite its scale and speed, the original Marshall Plan was an incremental program. It built on what came before—it made existing European businesses stronger. A Marshall Plan for Africa would do the same: It would take different kinds of African businesses a step further in their development. The overall effect would represent the sum of many small actions. That's how a market system works. It could also be a template for other distressed parts of the world—parts of Latin America and of the Middle East, for example.

A thriving business sector is the key to improving political and social conditions in Africa today. And Africa today needs that sort of help. The first Marshall Plan accomplished even more than its creators had hoped; if its successor is designed with the same conceptual base, then history could repeat itself in another part of the world.

This article was extracted from "The Forgotten Lessons of the Marshall Plan," in the Summer 2008 edition of strategy+business.

Read More: Business, Charity, Development, Economy, Governance, Poverty, Africa, Americas, Europe

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