Differences between Marshall Plan in Germany after Second World War and Iraq's reconstruction aid after the Gulf War

Academic Paper, 2019

19 Pages, Grade: A

Difrine Madara (Author)


Table of Contents

Comparison between Germany and Iraq’s Economies before WWII and the Gulf War Respectively
Germany’s Economy before WWII
Iraq’s Economy before the Gulf War

Marshall Plan Instruments Used In Germany

Reconstruction Aid Instruments Used In Iraq

Absorption of Aid in Germany and Iraq




Many scholars consider the Marshall Plan (European Recovery Plan) as the most successful foreign policy initiative in the U.S history. In the recent past, the term ‘Marshall Plan’ has been used as a campaign tool for American foreign policy abroad (Beckmann, 2012). Since the end of Germany’s Marshall Plan in the 1950s, none of the subsequent economic recovery plans have had similar levels of impact. On June 5, 1947, the U.S. secretary of state General George C Marshall suggested that United States provide economic aid to assist Europe in recovering from the devastation of World War II (Lewkowicz, 2010). The Congress appropriated $13.3 billion (more than $100 billion in today's dollars) to be used over four years to reconstruct Europe. This plan is considered successful in Europe, especially in Germany, where it significantly boosted economic growth. Consequently, future administrations adopted similar approaches in an attempt to stimulate economies abroad. The most recent similar plan is the George W Bush reconstruction plan for Iraq. The ‘Marshall Plan’ for Iraq failed to spark similar success like in Germany in the 1950s. Arkes (2015) intimated that the failure of Iraq’s ‘Marshall Plan’ can be attributed to differences in political, economic, and security conditions. In this section, we critically review the Marshall Plan as a model of reconstruction aid by comparing the conditions and outcomes in Germany and Iraq.

Comparison between Germany and Iraq’s Economies before WWII and the Gulf War Respectively

Germany’s Economy before WWII

After WWI, Germany (Weimar Republic) was faced with a major economic challenge after the 1919 Treaty of Versailles, which forced it to pay for the cost of war. According to British economist John Maynard Keynes, the treaty was ruinous to Germany and could hurt global prosperity (Buchheim & Scherner, 2006). Keynes compared the treaty to a ‘Carthaginian peace’ as it was a misguided attempt to humiliate Germany instead of following the fairer principles for lasting peace. Germany was able to pay the reparation payments totalling to 20 billion German gold marks (worth $5 billion U.S. dollars, £1 billion British pounds). Germany stopped these payments in 1931, having paid around 15 percent (Vasquez, 2020). The war and the treaty of Versailles had devastating effects on the Germany economy, causing hyperinflation in the early 1920s and also threatening to destabilize Germany’s political stability and social structure. During this time, the value of the nation’s currency, the Papiermark, also collapsed from 8.9 against US$1 in 1918 to 4.2 trillion per US$1 at the end of 2023 (Shirer, 1960). Supported by large New York banks, Germany's economy began to bounce back in 1923 with the 1929 GDP per capita rising by 12 percent higher than 1913, while the 1929 exports doubled compared to 1923 numbers.

Just like any other major economy, Germany was struck hard by the Great Depression from the last months of 1927. With the depression biting the global economy, foreign lending from New York also stopped around 1930. This led to unemployment and extremism, leading to the weakening of the center of the political spectrum (Buchheim & Scherner, 2006). In 1931, Germany was hit by a currency crisis leading to the collapse of the nation’s second-largest bank, the Danat-Bank. At the peak of the crisis in the US, Hoover Moratorium and the Lausanne Conference of 1932 suspended reparations payments for one year. The failure of major banks in Austria and Germany led to the worsening of the global financial crisis. To avert the crisis, the government adopted a rigid austerity policy, which led to deflation and an increase in inflation. The economic problems propelled the socialists to power and began to pursue inhumane policies that discriminated against the minority Jews, political leftists, and many other groups (Shirer, 1960). After the election of the socialists, the government adopted autarkic trade policies aimed at canceling imports, such as foodstuff and replacing them with domestic substitutes. The government only allowed the importation of iron ore and other items, which were considered necessary for the development of military products.

Germany registered considerable economic progress during the Hitler era (1933-45). Economic growth during this era was supported by high government subsidies to sectors that could give the country military and economic independence. As Chancellor of Germany from 1933, Hitler adopted policies that aimed to revitalize Germany's economy, including privatization of state industries, economic self-sufficiency, and tariffs on imports (Shirer, 1960). Between 1932 and 1938, weekly earnings rose by 19 percent while average working hours rose to around 60 per week. Due to reduced foreign trade, Germany rationed consumer goods, including fruit, poultry, and clothing. The government also formed partnerships with leading Germany enterprises to support the regime's goals in exchange for subsidies, advantageous contracts, and suppression of trade union movement. As a result, cartels and monopolies were encouraged at the expense of small businesses despite the regime receiving significant electoral support from small business owners (Giersch et al., 1994). The Nazis also believed that war was the primary engine of human progress; thus, rearmament formed an important part of the expansionist economic policy. Germany’s military spending grew faster than any other state in peacetime. By 1940, the military was the main component of the Germany economy. The growth of military spending was financed through deficit financing. The Nazis expected to cover for this huge debt by plundering the wealth of conquered nations. For example, in 1933, more than 3.5 billion marks were spent in the production of tanks, ships, and aircraft, creating millions of jobs German workers. Hitler regime also enacted the Unemployment Relief Act in June 1933, which created the National Labour Service (Reichsarbeitsdienst (RAD)), which helped to reduce unemployment significantly and indoctrinate workers (Shirer, 1960).

Many studies considered Hitler, another protectionist central planner who presided over the collapse of the free market in Germany and the adoption of a nationally guided economic development (Vasquez, 2020). Some of the policies that Hitler adopted included the suspension of the gold standard, embarking on huge public works projects, such as autobahns, protection of industry against foreign competition, expansion of credit, the institutionalization of job programs, and price controls (Lewkowicz, 2010). The regime also enforced capital controls and established national healthcare and unemployment insurances, among others. Some scholars have argued that Hitler instituted a ‘New Deal’ for Germany. With these policies, Hitler managed to keep Germany’s unemployment levels very low and boosted wages above the market levels. Other scholars indicated that in practice, Nazi economic policies were an amalgamation of protectionism and quasi-Keynesian stimulus programs (Giersch et al., 1994). That is, Hitler had built a close relationship between the state and industries. Due to these grave distortions, the boost in Germany economy was a short run. According to economists, the collapse of this economy was inevitable as the government had overridden the voluntary decisions of savers and consumers, violated property rights, and freedom of associations (Buchheim & Scherner, 2006).

Iraq’s Economy before the Gulf War

Unlike Germany, Iraq was a relatively poor country between 1950 and 1990 when they invaded Kuwait. Economic indicators during this period painted a grim picture of the country’s economy. The country was almost entirely dependent on oil. However, financial allocation plans were poor, leading to the limited absorptive capacity of the investment capacity. The poor absorptive capacity was occasioned by lack of sound planning, inadequate infrastructure, and lack of skilled labour, institutional, social and cultural constraints, political instability, and small domestic market (Stein, 2018). This period can be divided into three sections, i.e., 1950-1960, 1960-1980, and 1980-1990. The first and third periods were characterized by low economic progress. However, between 1960 and 1980, the country registered vibrant growth averaging 8 percent per annum and a real per capita GDP growth of around 4.7 percent per annum. These growth rates were among the highest in the world at the time. In 1980, Iraq’s GDP per capita was $3985 (Cordesman, 2015). In the 1970s, the Iraq government placed a strong emphasis on import substitution and establishment of food processing industries in towns around the country (Foote et al., 2004). Nonetheless, the economic focus of the country was the development of the petroleum sector, natural gas processing, and oil refining. With more money coming into the economy, cement and building supplies industries also saw rapid expansion.

Towards the late 1970s, Iraq's development planning focus shifted towards heavy industry and diversification from oil. This period saw the establishment of iron and steel production industries. The defence industrial sector also received much attention. The economic situation in Iraq began to turn to the worst from 1979 when Saddam Hussein assumed power (Tooze, 2006). Hussein oversaw repression of people and increased hostility towards its neighbours, thus adversely impacting the economic stability and development of the country. The economic growth that Hussein had inherited was halted at the beginning of the Iran-Iraq war in 1980. From then, the economy deteriorated with Iraq turning from a creditor to a debtor country. Due to the economic embargo following the war, Iraq’s infrastructure collapsed, dinar crumbled, and hyperinflation set in (Cordesman, 2015). The war and economic sanctions resulted in a catastrophic decline in all aspects of Iraqi life. The economic collapse of Iraq is one of the reasons they invaded Iran and later Kuwait to steal some of its wealth. Though Iraq was traditionally a debt-free country, rearmament programs of the 1980s led to the accumulation of massive foreign debts. In the 1980s, the country faced a dilemma of paying western creditors between $35 to 45 at a relatively high-interest rate (Cordesman, 2015). Iraq's foreign debt was largely used in military expansion.

Marshall Plan Instruments Used In Germany

WWII devastated all aspects of life and the economy in Germany. It took almost a decade for all Germany prisoners of war to return. In West Germany, food production had fallen to the lowest levels, and standards fell to the lowest levels in a century. Due to inflation, savings had lost their value by almost 99 percent, while the rise of black markets distorted the economy (Arkes, 2015). Under the leadership of Ludwig Erhard, Germany implemented various measures to attain a different kind of economy. He worked closely with the United States and other Western allies to restructure and reconstruct an economy that had been destroyed by war under the Marshall Plan. The Marshall Plan was a joint initiative between the United States and Europe and among various European countries working together (Giersch et al., 1994). Before the formulation of the plan, the United States required European nations to agree to a financial proposal that included a plan of action that had Europe committing to various steps of addressing its economic problems. In conjunction with the Congress, Truman Administration formulated the European Recovery Program, which availed roughly $13.3 billion to assist 16 countries (Giersch et al., 1994). This program consisted of various financing instruments as shown in Table 1.

Table 1: Funds made available to ECA for European Economic Recovery in dollar millions

Abbildung in dieser Leseprobe nicht enthalten

Source: Tarnoff, 2018

Implementation of the Plan was overseen by the US-run Economic Cooperation Administration (ECA) and the European-managed Organization for European Economic Cooperation. The role of the latter was to ensure that all the participating countries to fulfill their joint obligations to implement policies, which encouraged trade and increased production (Stein, 2018). ECA availed the dollar assistance to Europe to assist it in purchasing commodities, such as food, fuel, and machinery while leveraging funds for specific projects. The money was also used to develop and rehabilitate the country’s infrastructure. The U.S. also provided technical assistance to the European countries so that to enhance their productivity and offered guarantees to promote U.S. private investment and use of local currency matching funds. While in many cases, scholars have drawn the success of Europe to American assistance, in most cases, the Marshall Plan is viewed as a stimulus that set off a chain of events leading to a range of accomplishments (Giersch et al., 1994). At the end of the Marshall Plan period, the European agricultural and industrial output was markedly higher with the balance of trade in relation to the “dollar gap” vastly improved. At the same time, several European nations had taken massive steps towards trade liberalization and economic integration. The Plan also helped to diminish the strength of communist parties in Europe.


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Differences between Marshall Plan in Germany after Second World War and Iraq's reconstruction aid after the Gulf War
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differences, marshall, plan, germany, second, world, iraq, gulf
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Difrine Madara (Author), 2019, Differences between Marshall Plan in Germany after Second World War and Iraq's reconstruction aid after the Gulf War, Munich, GRIN Verlag, https://www.grin.com/document/961648


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