Leaders of the World Bank and International Monetary Fund met in Washington over the weekend for their annual spring meeting. They were under great pressure from the United States to step in to Iraq and help get that country's economy back on its feet. However, if the Iraqis really want to restore prosperity to their country, they might be better off if the World Bank and IMF stay out.
It is worth remembering that the greatest war reconstruction in history -- that following World War II -- took place without any World Bank or IMF around to help, which may explain why it went so well. However, the conventional wisdom is that foreign aid in the form of the Marshall Plan was the key to restoration of the German and Japanese economies following the war. Hence, the IMF and World Bank are just doing what the Marshall Plan did, many believe.
In fact, the flow of aid from the Marshall Plan was far less significant than the policy changes that it imposed. The most important were requirements that aid recipients permit free trade with other recipients and allow their currencies to be freely convertible. This, far more than the aid itself, is what got Europe growing after the war.
Moreover, the actions of key leaders in the occupied countries probably had more to do with the economic success of those countries than anything the Marshall Plan did. In West Germany, Economics Minister Ludwig Erhard eliminated price controls, stabilized the currency, cut taxes and implemented free market policies. In Japan, Gen. Douglas MacArthur had the good sense to follow the advice of American economists who told him to do the same thing there.
Nevertheless, the myth persists that it was foreign aid and foreign aid only that rejuvenated Germany and Japan. The ultimate refutation of this view, however, is that many of the largest Marshall Plan recipients, such as Britain, did not revive for decades after the war, because they did not implement free market policies. Indeed, Britain went in the opposite direction and imposed socialism, which caused its growth to lag far behind Germany's until Margaret Thatcher finally swept away the wartime taxes and controls beginning in the late 1970s.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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