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Its level of national product per capita is sometimes above, sometimes below, but always in the same league as France and Germany and far above Italy until the s. Measured GDP per capita today is some 60 to 70 percent higher than in or in and taking account of unmeasured improvements in productivity perhaps gives a coefficient of multiplication of 2. But the gap between what Argentina's level of material productivity is and what it so clearly might have been is immense.

And the consequences of slow growth for Argentinian politics have filled the country with sorrow. Might Western Europe have followed a similar trajectory? At the end of World War II western Europe was at least as vulnerable as Argentina to this populist overregulation trap. The war had given Europe more experience than Argentina with economic planning and rationing. Militant urban working classes calling for wealth redistribution voted in such numbers as to make Communists plausibly part of a permanent ruling political coalition in France and Italy.

Economic nationalism had been nurtured by a decade and a half of Depression, autarky and war. European political parties had been divided substantially along economic class lines for a generation. The constrast between western Europe's successful economic redevelopment after World War II and its unsuccessful redevelopment after World War I is remarkable see Maier, And ex ante I at least cannot find strong structural factors that would ensure that western Europe's post-World War II economic trajectory would keep it in, and Argentina's carry it out, of the First World.

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The third alternative was the crucifixion of the post-World War II European economy upon what turn-of-the-century American presidential candidate William Jennings Bryan called the cross of gold: inappropriate reliance on the gold standard to manage domestic and international economies in an environment in which such reliance would generate cruel and painful deflation.

Such a scenario seems to me at least to be easy to imagine. It requires only i a much earlier end of American loans and grants to Europe, ii the failure of international capital flows from the United States to fill the gap, and iii the control over monetary and fiscal policies in western Europe then of people with the same views as those who control monetary and fiscal policies in western Europe now.

Such governments respond to rising prices or to trade deficits by deflation. They respond to trade surpluses by accumulating gold reserves. The first priority is to maintain sound finance: a balanced government budget and a firm commitment not to reduce the gold value of the currency. Suppose American aid to Europe had come to a sudden and firm end at the end of Suppose that private international capital flows had not started up to cover the gap between western European exports and imports--after all, American long-term investors in Europe after World War I had lost a fortune.

Suppose that western European countries had applied policies--mixtures of devaluation and deflation--in order to avoid running out of foreign exchange reserves. What would have happened then? Devaluations--no matter how large--would not have helped European countries balance their international accounts in the short run. Devaluation makes exports cheaper, but it also means that less foreign currency is earned for each commodity exported. In a long run of more than two years, devaluation swings the current account toward surplus and can bring imports down and into balance with exports.

But in the short run it does not. In the short run of less than two years, devaluation is more likely to increase than reduce a current account deficit. In the short run, deflation is the only way to close a gap between exports and imports: reduce demand for imports by reducing the incomes of those who buy imports, and the way to reduce the incomes of those who buy imports is to reduce national product and cause unemployment through high interest rates. The average current-account deficit for the big three western European nations--Italy, Britain, and France--was 3.

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Since imports [M] are a function of the level of national product [Y]:. As long as exports are unchanged, the magnitude of the reduction in national product depends on the size of the increase in imports needed to bring the current account into balance, and on m', the marginal effect of a reduction in national product on imports:. Thus a back-of-the-envelope estimate of the reduction in national product necessary to close the gap between exports and imports of Italy, France, and Britain in would be roughly 9 percent if the marginal effect of a reduction in national product on imports were equal to one-third: a nine percent fall in total production relative to potential output, and in all probability a five percentage-point rise in unemployment.

But this estimate holds only if exports were unaffected by the policies undertaken to bring trade into balance. In fact things are worse, for exports are not unaffected by the policies undertaken. More than half of European countries' exports in the immediate aftermath of World War II were to other European countries.

The Development of Economics in Western Europe Since 1945

Were Italy to reduce its current account deficit by reducing imports, it would reduce imports from France--and so boosts France's current account deficit. European countries' attempts to reduce their trade defiicts reduce each other's export earnings as well. Taking account of the size of intra-European trade and the fact that reductions in national product are an order of magnitude larger than the reductions in the trade deficit doubles the back-of-the-envelope estimate of the post recession required to balance western Europe's current account: requiring western Europe to balance its current account from on, using market forces, would have imposed a Great Depression-sized interruption on the course of western European recovery.

Thus I do not undertand eiher of Alan Milward's two arguments for the relative insignificance of the Marshall Plan. Milward claims that the Marshall Plan merely postponed a necessary adjustment to reality because it did not permanently solve the dollar gap. To me this seems to miss the point: expanding exports and other sources of financing to match imports was infinitely easier in the early s as a gradual process in the context of the Korean War boom and the contribution of a U.

Milward's claim that countries forced to restrict imports suddenly and substantially could still have financed imports of essential capital goods begs the question of how the reduction in other categories of imports was to be achieved. Was it through overall reductions in demand that would cause mass unemployment? Was it through the installation of an apparatus of controls and licenses that would soon have acquired a powerful native political constituency, and pushed western Europe onto the Argentine trajectory?

Milward does not say. He simply does not analyze how international payments would have been balanced in the late s in the absence of a Marshall Plan. Whatever patterns of western European economics and politics would have emerged from such a Great Depression-sized interruption of post-World War II recovery, they would not have been the s as they actually happened.

Moves forward along the Argentine trajectory toward a bureaucracy that licenses every import have proven very hard to reverse, and have had devastating consequences for economic growth elsewhere in the world see Jones, ? How realistic are these three alternative scenarios? The third is very realistic: ex ante there were good reasons to think that it might well happen. Post-World War II and pre-World War II history are littered with examples of countries that faced substantial current account financing difficulties, and found their economies in deep recession as a result.

The second in fact happened--to Argentina. It could have happened elsewhere. The first appears from our standpoint to be not so realistic. The world does not work as Lenin, or Hobson thought. Imperial markets were not essential to the manenance of First World prosperity. Nevertheless, history is full of contingencies. Neither World War I, World War II, nor the Great Depression makes any sense when analyzed as the equilibrium outcome of strategies followed by rational and well-informed governments and private economic agents.

One or two major wars or economic disasters in the post-World War II period might well have brought us all appallingly close to by Orwell, The particular combination of institutions and policies appeared remarkably well tuned to produce rapid economic growth in the s and s. But things could very easily have been otherwise. So what were the components of the European miracle? A first and important cause of rapid post-World War II growth was expanded international trade. Traditionally, western Europe had exported industrial goods to and imported agricultural goods from Eastern Europe, the Far East, and the Americas.

After World War II there was little prospect of rapidly restoring this international division of labor.

The Economic Development of Postwar Germany

Imports of food and consumer goods for relief diverted hard currency from purchases of capital goods needed for long-term reconstruction. Changes in net overseas assets reduced annual earnings from abroad. The net effect of the inward shift in demand for exports and the collapse of the net investment position was to give Europe in only 40 percent of the capacity to import that it had possessed in From this base, the successful export performance of western Europe after World War II is remarkable.


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By the end of the s the "openness" of the main continental western European economies--the sum of their exports plus their imports, measured as a share of total national product--was easily twice that of the interwar average. World War II marked a watershed between an interwar period in which international trade was a relatively small and stable share of national product, and a period in which trade underwent a strong secular increase not only in its absolute volume, but relative to GDP.

What if this expansion of world trade had not taken place? What if exports and imports as shares of national product had remained at their relatively low levels of the interwar period?

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The puzzle always facing economists trying to understand economic growth is whether trade causes faster growth or growth causes expanded trade. The most recent attempt to cut this Gordian knot was undertaken by Jeffrey Frankel and David Romer Their conclusion is that each dollar of expanded imports or exports expands total national product by some thirty-four cents: expanded exports allow an economy to shift labor into the export sectors where it is more productive, and to raise consumer welfare and producer productivity by giving them more power to purchase imports from low-price consumer and capital goods producers in other countries.

Expanded trade puts more pressure on domestic monopolies to reduce their excess profits and to become more efficient.


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  5. Expanded trade allows economies to more easily and productively soak up technological innovations made elsewhere in the world. Frankel and Romer's estimates allow us to assess how much post-World War II western European growth was aided by the fact that a wide variety of pressures--from the U. A little bit less than half a percentage point per year in post-World War II pre-mid s growth in national product in the major economies of western Europe can be attributed to increased openness. Renewed growth required, in addition to financial stability and openness to trade, free play for market forces.

    On this issue the Marshall Plan--specifically, the conditions attached to U. Each recipient had to sign a bilateral pact with the United States. Countries had to agree to balance government budgets, restore internal financial stability, and stabilize exchange rates at realistic levels.

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    Europe was still committed to the mixed economy. But the U. The demand that European governments trust the market came from the highest levels of the Marshall Plan administration. Dean Acheson describes the head administrator, Economic Cooperation Administration chief Paul Hoffman, as an "economic Savonarola. Both parts of the statement miss the mark. He did not miss his calling, and he was and is an evangelist.

    Now this point should not be overstated. The price charged for Marshall Plan aid was one that western Europeans might well have paid for its own sake in any event. Support for the market was widespread, although just how widespread was uncertain. At most U. Government ownership of utilities and heavy industry was substantial. Government redistributions of income were large. The magnitude of the "safety nets" and social insurance programs provided by the post-World War II welfare states were far beyond anything that had been thought possible before World War I.

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    But the large post-World War II social insurance states in the style of Beveridge , were accompanied by financial stability, by substantial reliance on market processes for allocation and exchange, and by openness to world trade. The powerful mixed-economy governments took the separation of powers seriously: judges remained independent, pressure from government-owned enterprises to refrain from criticizing governmental policy remained light, and political competition remained free and open.

    Fears that the social insurance state would inevitably slide into totalitarianism proved as false as the fears that the social insurance state would cripple the market economy.