No Marshall Plan for Soviet Union

Should we borrow from Japan and others to lend to the Soviet Union? That’s what we would do if we followed the advice of those who urge a Marshall Plan for the Soviet Union.

For Eastern Europe, the case is a bit more complicated. Most of these countries pay imperial tribute to the Soviet Union by exporting food and manufactured goods in exchange for the low-quality goods that they are required to buy from the Soviets. Part of any help we give to Eastern Europe will be transferred to the Soviets in this indirect way.

The analogy to the Marshall Plan is misleading. In 1947, Secretary of State George Marshall proposed a plan to aid European recovery by lending money to the war-devastated countries. These countries had ample skilled labor but few tools and little machinery with which to work. U.S. loans were used to purchase machine tools, road building equipment, power plants and other capital equipment. The workers and managers quickly learned how to use the new equipment. Productivity boomed. Within a few years, the war-devastated economies were producing for export and earning the dollars to pay off their loans.

The Marshall Plan was important, but it was not the only factor in the revival of Western Europe. A story that may be apocryphal is told about Ludwig Erhard, the economics minister who deregulated the German economy in 1948 and ended price and wage controls. According to the story, the American general, Lucius Clay, told Erhard that his advisers believed that it was a mistake to remove controls. Erhard replied: “My advisers tell me the same thing, but I intend to go ahead anyway.” Of course, Erhard was right.

Deregulation, free markets and the Marshall Plan were reintroduced to an economy with a long history of property rights and ownership. There was a court system to enforce contracts and a tradition of having them enforced. A commercial code was in place specifying the rights and obligations of buyers and sellers. An accounting system properly recorded values, gains and losses. The benefits of freedom were widely understood and appreciated. So was the discipline to accept the outcome of the market process.

The requisite legal and institutional framework does not exist in the Soviet Union and in large parts of Eastern Europe. Freeing an economy means more than just letting prices of goods and labor be set in markets. People must be able to invest and plan with reasonable confidence that the rules of the game will not shift about at the whim of some planner or official. Contracts, agreements and rights to property and income must be enforced, and people must perceive that they will be enforced. Confiscation of gains either directly or by arbitrary changes in taxation must be avoided.

The problem can be solved most easily in East Germany by adopting West German law and enforcement. None of these traditions exist in Poland or the Soviet Union, and there does not appear to be much understanding of their importance.

Further, the economies of the Soviet Union and much of Eastern Europe are in a much different position from those of Western Europe in 1947. Many factories are poorly located and inefficient. Some will have to be closed because they cannot compete under any foreseeable configuration of costs and product prices. Some workers and managers will face unemployment and lower real incomes, at least for a time. None of these basic changes were required in Western Europe at the time of the Marshall Plan.

The difference is important. No matter how good our intentions, and theirs, loans or aid will not help, and may hinder, Eastern Europeans if they are used to maintain inefficient plants. The loans would merely subsidize inefficiency and delay the changes that are required to meet the market test. Until a credible reform program with vested property rights, a commercial code, a reliable accounting system, and free markets in products, capital and labor services is in place, there is a good chance that loans will be used to maintain the status quo or delay adjustment. The countries will have more debt but not higher productivity and more output to service the debt.

There is a further problem in lending to the Soviet Union and, because resources are transferred, in lending to Eastern Europe. The most efficient part of the Soviet economy produces for the military. One of the Soviets’ main problems, but also their best opportunity, is to transfer production from military to non-military uses. That’s why the Soviet Union seeks detente and disarmament. It is in our interest to encourage the transfer to non-military uses by demonstrating our willingness to reduce our military spending as they reduce theirs.

A Marshall Plan for the Soviet Union works against our interest. The more external support they get, the less they have to transfer from their own military production to improve their economy. Our interest, the interest of a peaceful world and the interest of the nations in Eastern Europe is to have the largest possible reduction in Soviet military spending at home and abroad in places such as Cuba, Nicaragua, Syria, the Indian Ocean and elsewhere.

Finally, there is the problem of financing the plan. In 1947, the United States had a large surplus of exports over imports. The Marshall Plan recycled the cash flow that we received from abroad. Now we’re net borrowers. We sell our assets and debt to countries such as Japan.

A Marshall Plan for Eastern Europe and the Soviet Union would mean loans to Eastern Europe financed by asset sales to Japan and others. The original Marshall Plan helped to finance the development of the peaceful, market economies of Western Europe. The new Marshall Plan would likely delay rather than accelerate the transfer of the 20% or 25% share of the Soviet economy taken by the Soviet military.

We should welcome the Soviet Union and the Eastern Europeans as trading partners in non-strategic goods and services. But we help them and ourselves most by encouraging them to solve their internal problems on their own.