The 1930’s in Europe had seen not chronic bottlenecks but chronic deficiencies of aggregate demand. Production had fallen far below normal for the entire decade; market forces had failed to restore demand to normal levels. Circumstances during the Great Depression had been exceptional, but circumstances in the aftermath of World War II were exceptional as well. Many feared the return of the Depression.
In fact (aside from the possibility that fear of a renewed Great Depression would act as a self-fulfilling prophecy) the return of the Great Depression was a less likely possibility in the 1940’s than was generally feared. The memory of the Depression, and the greater strength and incorporation of social democratic political movements in government kept right-wing governments from adopting policies of out-and-out national deflation. The availability of the large United States market to European exports--especially with the coming of the Korean War Boom and NATO in the early 1950’s--prevented any large world aggregate demand shortfall as in the Great Depression. With the American locomotive under full steam, Western European economies were unlikely to suffer from prolonged Keynesian demand-shortfall depressions.
Nevertheless, a live possibility in the absence of the Marshall Plan was that governments would not stand aside and allow the market system to do its job. In the wake of the Great Depression, many still recalled the disastrous outcome of the laissez-faire policies then in effect. Politicians were predisposed toward intervention and regulation: no matter how damaging “government failure” might be to the economy, it had to be better than the “market failure” of the Depression. Had European political economy taken a different turn, post-World War II European recovery might have been stagnant. Governments
might have been slow to dismantle wartime allocation controls, and so have severely constrained the market mechanism. In fact the Marshall Plan era saw a rapid dismantling of controls over product and factor markets in Western Europe, and the restoration of price and exchange rate stability. An alternative scenario would have seen the maintenance and expansion of wartime controls in order to guard against substantial shifts in income distribution. The late 1940’s and early 1950’s might have seen the creation in Western Europe of allocative bureaucracies to ration scarce foreign exchange, and the imposition of price controls on exportables in order to protect the living standards of urban working classes.
The likely consequences of such alternative policies for post-World war II Europe can be seen in the Argentine mirror. In response to the social and economic upheavals of the Depression, Argentina adopted demand stimulation and income redistribution. These policies were coupled with a distrust of foreign trade and capital, and an attraction to the use of controls instead of prices as allocative mechanisms. Argentina’s growth performance in the post-World War II period was very poor. Even in the 1950’s, and even relative relative to Britain, Argentine growth was slow.
Díaz Alejandro (1970) provides a standard analysis of Argentina’s post-World War II economic stagnation. According to his interpretation, the collapse of world trade in the Great Depression was a disaster of the first magnitude for an Argentina tightly integrated into the world
division of labor. While Argentina continued to service its foreign debt,
its trade partners took unilateral steps to shut it out of markets. The
experience of the Depression justifiably undermined the nation’s
commitment to free trade.
In this environment Juan Domingo Perón gained mass political support.
Taxes were increased, agricultural marketing boards created, unions
supported, urban real wages boosted, international trade regulated. Perón
sought to generate rapid growth and to twist terms of trade against rural
agriculture and redistribute wealth to urban workers who did not receive
their fair share. The redistribution to urban workers and to firms that had
to pay their newly increased wages required a redistribution away from
exporters, agricultural oligarchs, foreigners, and entrepreneurs.
The Perónist program was not prima facie unreasonable given the
memory of the Great Depression, and it produced almost half a decade
of very rapid growth. Then exports fell sharply as a result of the
international business cycle as the consequences of the enforced
reduction in real prices of rural exportables made themselves felt.
Agricultural production fell because of low prices offered by
government marketing agencies. Domestic consumption rose. The rural
sector found itself short of fertilizer and tractors. Squeezed between
declining production and rising domestic consumption, Argentinian
exports fell. By the first half of the 1950’s the real value of Argentine
exports was only 60 percent of the depressed levels of the late 1930’s,
and only 40 percent of 1920’s levels. Due to the twisting of terms of
trade against agriculture and exportables, when the network of world
trade was put back together, Argentina was by and large excluded.
The consequent foreign exchange shortage presented Perón with
unattractive options. First, he could attempt to balance foreign payments
by devaluing to bring imports and exports back into balance in the long
run and in the short run by borrowing from abroad.29 But effective
devaluation would have entailed raising the real price of imported goods
and therefore cutting living standards of the urban workers who made up
his political base. Foreign borrowing would have meant a betrayal of his
strong nationalist position. Second, he could contract the economy,
raising unemployment and reducing consumption, and expand incentives
to produce for export by decontrolling agricultural prices.30 But once
again this would have required a reversal of the distributional shifts that
had been the central aim of his administration.
The remaining option was one of controlling and rationing imports.
Not surprisingly, Perón and his advisors chose the second alternative,
believing that a dash for growth and a reduction in dependence on the
world economy was good for Argentina. Díaz Alejandro writes:
First priority was given to raw materials and
intermediate goods imports needed to maintain
existing capacity in operation. Machinery and
equipment for new capacity could neither be
imported nor produced domestically. A sharp
decrease in the rate of real capital formation in
new machinery and equipment followed. Hostility
toward foreign capital, which could have provided
a way out of this difficulty, aggravated the
crisis...
Subsequent governments did not fully reverse these policies, for the
political forces that Perón had mobilized still had to be appeased. Thus
post-World War II Argentina saw foreign exchange allocated by the
central government in order to, first, keep existing factories running and,
second, keep home consumption high. Third and last priority under the
controlled exchange régime went to imports of capital goods for
investment and capacity expansion.
As a result, the early 1950’s saw a huge rise in the price of capital
goods. Each percentage point of total product saved led to less than half
a percentage point’s worth of investment. Díaz Alejandro found
“[r]emarkably, the capital... in electricity and communications increased
by a larger percentage during the depression years 1929-39 than… 1945-
55,” although the 1945–55 government boasted of encouraging
industrialization. Given low and fixed agriculture prices, hence low
exports, it was very expensive to sacrifice materials imports needed to
keep industry running in order to import capital goods. Unable to invest,
the Argentine economy stagnated.
In 1929 Argentina had appeared as rich as any large country in
continental Europe. It was still as rich in 1950, when Western Europe
had for the most part reattained pre-World War II levels of national
product. But by 1960 Argentina was poorer than Italy and had less than
two-thirds of the GDP per capita of France or West Germany. One way
to think about post-World War II Argentina is that its mixed economy
was poorly oriented: the government allocated goods, especially
imports, among alternative uses; the controlled market redistributed
income. Thus neither the private nor the public sector was used to its comparative advantage: in Western Europe market forces allocated
resources--even, to a large extent, for nationalized industries--the
government redistributed income, and the outcome was much more
favorable.
In the absence of the Marshall Plan, might have Western Europe
followed a similar trajectory? In Díaz Alejandro's estimation, four
factors set the stage for Argentina’s relative decline: a politically-active
and militant urban industrial working class, economic nationalism, sharp
divisions between traditional elites and poorer strata, and a government
used to exercising control over goods allocation that viewed the price
system as a tool for redistributing wealth rather than for determining the
pattern of economic activity.
From the perspective of 1947, the political economy of Western
Europe would lead one to think that it was at least as vulnerable as
Argentina to economic stagnation induced by populist overregulation.
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.
Yet post-World War II western Europe avoided this trap. After World War II Western
Europe’s mixed economies built substantial redistributional systems, but they were built on top of and not as replacements for market allocations
of goods and factors. Just as post-World War II Western Europe saw the
avoidance of the political-economic “wars of attrition” that had put a
brake on post-World War I European recovery, so post-World War II
Western Europe avoided the tight web of controls that kept post-World
War II Argentina from being able to adjust and grow...
