Post-earthquake Colombia needs no Marshall Plan

Last week’s earthquake felt rather mild from my breakfast table in Bogota, so I initially thought we had experienced a run-of-the-mill tremor. I was wrong. Soon the news broke out of major damage in the areas closer to the Pacific coast epicentre; Cali and the “coffee-zone” cities of Manizales and Pereira were especially hard hit, with dozens of buildings crumbling and victims stuck for days beneath the rubble.

But, once the scale of the disaster was clear, I suspected the local political class would seize the moment and demand new government programmes for a centrally-planned, dirigiste reconstruction. I did not err on that account. It took a matter of days for a former conservative finance minister to call for a Colombian version of the Marshall Plan to deal with the emergency.

The plea has become recurring. Back in 2020, the left-wing mayor of Bogota at the time assured that the city needed—what else?— its own Marshall Plan to bounce back from the covid shock, which she was exacerbating with one of the world’s longest and most absurd lockdowns. Nor, of course, was the idea original.

As Doug Bandow wrote in 1997:

“whenever people propose a new government program, whether for the former Soviet bloc or urban America, they call for a ‘Marshall Plan.’ There is apparently no problem that could not be solved by a new Marshall Plan.”

Indeed. The senseless Marshall Plan rhetoric has now reached the pinnacle of Colombian political power. On August 14, the newly installed president, Abelardo De la Espriella, visited the coastal department of Chocó, the worst hit of all in the earthquake, and announced a Marshall Plan for its people to overcome the crisis. The question is whether these politicians know what the Marshall Plan truly achieved or, rather, what it conspicuously failed to do.

Juan Camilo Restrepo, the former finance minister, claimed in an interview that the Marshall Plan “helped Europe recover from the ravages of World War II.” The problem is that the evidence to back that assertion is not as strong as he assumes. Britain, of course, was the largest recipient of Marshall Plan aid between 1948 and 1951, receiving over 25 per cent of the programme’s total funds. But, in the words of Niall Ferguson, “no European economy performed more dismally in the postwar period than Britain.”

Greece and Austria also received high amounts of Marshall Plan subsidies on a per capita basis. As economist Tyler Cowen wrote in 1986, they “did not recover economically until US assistance was winding down.”

Then there is the emblematic case of West Germany, whose Wirtschaftswunder unfolded despite the Marshall Plan rather than because of it. As Cowen notes, the amount the country received in postwar foreign aid paled in comparison to what it paid in reparations and occupation costs (around 5 per cent of Gross National Income versus as much as 15 per cent, respectively).

What propelled the West German economy was not Marshall Plan funds, which were largely conditioned on the purchase of American goods and services anyway. Instead, it was the American-led currency reform of 1948—i.e., the introduction of the Deutsche Mark—combined with a series of free market policies, particularly those of future Chancellor Ludwig Erhard.

The Allied monetary reform decimated the money supply and ended the overhang that had made the Reichsmark, printed en masse to pay for war costs, largely useless as a currency. A new, sound money was fundamental but, ipso facto, it could not have overcome the folly of Allied officers, bureaucrats, and German social democrats. They had prolonged the population’s misery since 1945 by extending National Socialist economic policies. These included price-and-rent controls, a ban on foreign trade (between 1945 and 1946), punitive marginal income taxes, strict restrictions on industrial production, and food rationing (which caused widescale barter and scavenging).

When the Allied authorities introduced the currency reform, Erhard, the economics director of the Bizonal (U.S. and British) Economic Council, got rid of a series of price controls, even—reportedly— against the wishes of General Lucius Clay’s advisors. Overnight—on June 20, 1948—the combination of sound money and market prices filled store shelves for the first time in years. A more complete liberalisation would follow in the coming months, but the signs of the coming prosperity arose almost immediately. In Cowen’s words:

“Erhard’s free market philosophy worked well. Monthly production indices rose at rates that exceeded many later yearly increases. The West German economic miracle was underway. Several months later, Marshall Plan aid began to arrive.”

So, if Colombia’s new president wants to help the earthquake-stricken areas, he should stop alluding to the Marshall Plan fantasy. To begin with, there is no remotely comparable foreign aid package coming in, which is a good thing given the perverse and counterproductive effects of the foreign aid industry. Rather, the president should take a page from Erhard’s book and liberate the Colombian economy, which ranks at a lowly 94^th place out of 165 countries in the Fraser Institute’s Economic Freedom Index.

De la Espriella even has a model of success to emulate that is much closer to home. Right across the border from Chocó, one of the country’s poorest departments, neighboring Panama has left Colombia as a whole far behind in terms of per capita GDP. Mostly, this is due to Panama’s model of monetary freedom (there is no central bank and no legal tender in the constitution), its territorial tax system, and its full integration into the global financial system. This took place with the 1970 banking liberalization reform of Nicolás Barletta, Panama’s own Ludwig Erhard-type figure.

The Panamanian model contrasts starkly with Colombia’s ill-advised imposition of a weak currency monopoly, its protectionist banking sector, and its high-tax regime. The country charges a higher corporate tax rate than all the Scandinavian nations, imposes a nefarious wealth tax, holds a higher VAT rate than the global average, and unnecessarily taxes global income and assets.

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If any lesson from post-war Europe applies to Colombia, it is that only high and sustained growth can help a nation overcome an economic calamity. The president also should remember his mandate to lower taxes, liberalise the currency regime, and balance the budget with large public spending cuts. Only free-market reforms can lead to high rates of growth after decades of dirigiste stagnation.