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Will China’s Belt and Road Initiative outdo the Marshall Plan?


How China’s infrastructure projects around the world stack up against America’s plan to rebuild post-war Europe

 Print edition | Finance and economics

Mar 8th 2018

SEVENTY years ago America passed the Economic Co-operation Act, better known as the Marshall Plan. Drawing inspiration from a speech at Harvard University by George Marshall, America’s secretary of state, it aimed to revive Europe’s war-ravaged economies. Almost five years ago, at a more obscure institution of higher learning, Nazarbayev University in Kazakhstan, China’s president, Xi Jinping, outlined his own vision of economic beneficence. The Belt and Road Initiative (BRI), as it has become known, aims to sprinkle infrastructure, trade and fellow-feeling on more than 70 countries, from the Baltic to the Pacific.

Mr Xi’s initiative, which also has geopolitical goals (see Banyan), has invited comparison with America’s mid-century development endeavour. Some even suggest it will be far bigger. But is that credible? The Marshall Plan, after all, is synonymous with statesmanlike vision and vigour. According to Marshall’s successor, Dean Acheson, America’s provision of food, raw materials and equipment was described by Winston Churchill as the “most unsordid act in history”. At the time of the Harvard speech Europe was on the brink of economic chaos. By the time the plan was completed, the continent was on the verge of an economic miracle. Surely China could not match such a feat?

But in fact, as opposed to folklore, the Marshall Plan was surprisingly modest, as economic historians such as Alan Milward, Brad DeLong and Barry Eichengreen have pointed out. It amounted to about $13bn between April 1948 and the summer of 1951. That is equivalent to $130bn today, based on American consumer-price inflation, or less than $110bn, based on a broader measure of rising prices. Divided between 16 countries, it averaged less than 2.5% of the recipients’ GDP.

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By permitting higher investment and imports, the money certainly helped Europe’s recovery. But not by much. Mr Eichengreen calculates the direct impact as an increase in growth of only 0.3 percentage points over the plan’s life. Nor was it actually the “most unsordid act” of its time. Churchill in fact bestowed that praise not on the Marshall Plan but on America’s earlier “lend-lease” policy, which aided the Allies from 1941 to 1945.

How does the demystified plan stack up against China’s? Comparisons are tricky, because no one knows how big the BRI will be. According to official figures, China’s direct investment in BRI countries (excluding in the financial sector) amounted to just $56bn from 2014 to 2017. A tot-up of announced investments by Derek Scissors of the American Enterprise Institute reaches $118bn. But neither number includes loans from China’s banks, including state-directed “policy banks” such as China Development Bank (which claims to have lent $180bn by the end of 2017) and Export-Import Bank of China ($110bn by the end of 2016).

These past commitments already surpass Marshall’s billions. And the BRI is just getting started. A government-sponsored forum in May 2017 estimated that China would invest up to $150bn over the next five years. The total over the life of the initiative is anyone’s guess, although Chinese officials seem comfortable with a number in excess of $1trn. (The origin of the figure of $8trn that pops up in some reports is untraceable, but may owe something to the Asian Development Bank’s estimate in 2009 of Asia’s infrastructure needs in the coming decade.)

Such an amount would dwarf the Marshall Plan in size, but not necessarily in generosity. Over 90% of the Marshall money was a handout, not a loan. And the money all came from America’s government. BRI investments, on the other hand, are from a variety of sources, including private entities, and are supposed to earn a return for their financial backers. The most attractive projects might have been financed even without Mr Xi’s vision.

A better measure of China’s munificence is the gap between the return it earns on BRI projects and the higher rate the market would demand. Some of this reflects a genuine financial sacrifice on China’s part. But some reflects a lower default risk, because for many borrowers defaulting on loans from state-backed Chinese entities is a scarier prospect than bilking a commercial lender.

The most unsordid structural-adjustment programme

Just as raw dollar figures overstate the BRI’s contribution, they also understate the Marshall Plan’s impact. According to Mr DeLong and Mr Eichengreen, the American plan’s true significance lay not in the cash it provided but in the market-friendly policies it encouraged. To receive aid, European governments had to commit to restore financial stability and to remove trade barriers. They also had to match the Marshall dollars with money of their own, which could be spent only with America’s approval.

The Americans did not always get their way. But the Marshall aid nonetheless encouraged the Europeans to quash inflation and to narrow their deficits while eventually dismantling price controls and import barriers. These reforms had enormous benefits. Before 1948 fear of inflation and taxation prompted German farmers to feed their harvests to their cattle, rather than sell it to the cities for money that might be diluted by inflation or seized by the government. According to Henry Wallich, an economist, factories paid workers in kind, with light bulbs or shoes from their assembly lines, or coal intended for their furnaces. Once faith in the currency was restored, farmers and factory-hands could once again work for money, reviving production and exchange.

The BRI will have no comparable influence. China is still wary of meddling in the internal economic affairs of other countries (unless its core interests are threatened). And most of the BRI economies already enjoy more economic freedom than China. The Marshall Plan worked by giving markets a decisive role in allocating resources. The BRI will not even try to export that principle abroad. After all, its sponsor has yet to adopt it at home.

This article appeared in the Finance and economicssection of the print edition under the headline "Xi v Marshall"


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