By REUVEN BRENNER
Rags-to-riches stories of poor societies suddenly leapfrogging others typically provoke admiration, envy and intense discussions about why the outdone stumbled and the once-humble rose. This has become particularly relevant in light of today's 50th anniversary of the Marshall Plan, which is presumed to have been the catalyst for the economic renaissance of a region devastated by World War II.
The lessons of the Marshall Plan, however, have serious limitations if we are looking for a grand scheme to spur economic revival in Russia, Eastern Europe, Latin America and other regions recovering from economic ruin. These countries have been casualties not of war, but of self-destructive socialist and mercantilist economic models. Even Russia's vast natural resources are apparently insufficient to revive an economy that has been thoroughly unaccustomed to market economics for most of the past century.
So how do societies turn their markets into modern, efficient economies? Many nations have done so even without having significant natural resources and in some cases after the devastation of war. What are the models to which we can turn for transforming today's economic basket cases?
Three Models
Consider three such models: First, the economic miracle of 17th-century Europe, an era that calls to mind the ostentatious displays of plundered wealth in Spain and Portugal. But the real miracle was taking place below sea level, in Holland, where wealth was created despite natural obstacles. Second, the Asian miracles, such as Hong Kong and Singapore. Third, the West German miracle, rising quickly from the ashes of World War II. What did all these success stories have in common?
The Dutch formed the first European republic. It was tolerant toward all religions, at a time when the rest of Europe was severely discriminating against many. The Dutch also established solid property rights, opening opportunities for relatively unhindered trade and financial innovation. The openness of the new republic attracted to Amsterdam well-connected and educated immigrants, merchants and money men, Jews and Huguenots. Having suffered discrimination elsewhere in Europe, they thrived in Amsterdam. And Amsterdam thrived too, soon becoming the world's financial and trading center, site of the world's first stock market. Frenchmen, Venetians, Florentines and Genoese, as well as Germans, Poles, Hungarians, Spaniards, Russians, Turks, Armenians and Hindus traded not only in stocks but also in sophisticated derivatives. Much of the capital active in Amsterdam was owned by foreigners or immigrants.
Max Weber never bothered to look at migratory patterns when he came up with his speculation that Amsterdam owed its success to the Protestant ethic. Although Weber's idea has been quoted frequently enough to pass for fact, it wasn't true in Amsterdam or in any other prosperous trading cities or states. Educated and ambitious trading immigrants, tied in to ethnic networks around the world--brains and trust, that is--turned 17th-century Amsterdam into a miracle.
Other miracles follow the same pattern: The state provides an umbrella of law and order, levies relatively low taxes and gives people a stake in what the business sector is doing, thereby attracting immigrants and entrepreneurs from around the world. Sir Stamford Raffles designed Singapore as a port at the beginning of the 19th century, backed it with a reliable administrative and legal system and made education available to its multiracial population. Singapore rose from a small settlement as it attracted Chinese, Malays and Europeans. Trade and security brought prosperity to immigrants who had arrived penniless from China and Indonesia.
Taiwan and Hong Kong, like Singapore, offered Chinese immigrants opportunities unavailable in the Chinese hinterland, which was dominated by warlords and status-conscious bureaucrats and later by an even more suffocating communist bureaucracy. Hong Kong benefited from waves of immigration from China, in particular from the inflow of Shanghai merchants and financiers after Mao Tse-tung "liberated" China in 1949. These Chinese immigrants also established the network of merchants, traders, money men and manufacturers--as Jewish, Italian, Armenian, Indian and other immigrant groups have done throughout history in various parts of the world.
The postwar West German miracle fits this pattern too. In popular memory its success is associated with the Marshall Plan, but the impact of that aid has been greatly exaggerated. It's been estimated that from 1948 to 1950, Marshall Plan aid amounted to between 5% and 10% of European economic activity. But data from those years probably underestimate national incomes, because of price regulation and extensive black markets. Thus the effect of the Marshall Plan is probably much overstated. And in 1919, following World War I, aid and loans to Europe were also estimated to amount to about 5% of its economy--yet no miracles happened then. How could an equivalent aid package make such a difference three decades later? Part of the answer is that the world moved toward lower tariffs after World War II, which it had not done after World War I. In short, miracles are linked with lower tariffs, not with foreign aid.
The West German economic miracle also owed a great deal to immigration. In the decade and a half following the war, West Germany accepted 12 million mostly well-trained young immigrants expelled from territory lost to Poland or fleeing the communist "paradise" of East Germany. Although official statistics don't directly measure movements of human capital, its importance can be inferred by comparing the labor-market participation rate in West Germany with that of other Western nations in the 1950s and '60s: 50% in Germany vs. 45% in France, 40% in Britain, 42% in the U.S. and 36% in Canada. And when the Berlin Wall went up in 1961, virtually ending immigration from the east, the mass inflow of hardworking foreign workers from Mediterranean lands brought new waves of young ready-made employees.
At the same time, the Bonn government significantly reduced taxes. Until 1948 West Germany's marginal income tax rate stood at 50% for a $600 income and 95% for $15,000. But that year the code was drastically revised. The 50% bracket didn't kick in until income reached $2,250, and numerous deductions were available for savings and investments. By 1955 the top rate had been lowered to 63%, for incomes over $250,000; the 50% bracket didn't become effective until income reached $42,000 (a salary worth perhaps 10 times as much today). Hong Kong, of course, went further, with close to a flat tax and a top rate of just 18%.
Hodgepodge of Schedules?
So what brings about economic miracles? A hodgepodge of monetary and tax schedules imposed by the wise men who make up an IMF economic team? Massive funding from well-meaning donors? An impossibly unpredictable mixture of kismet and good timing? In truth, the answer is simple: the free migration of people with intelligence, determination and ethnic networks, who are allowed to make economic choices in a market unfettered by complex and stifling regulations and taxes. When a country's neighbors are following disastrous policies that tax people's hopes, aspirations and ambitions, the economic miracle stands out all the more--as do the migration patterns of those priceless units of talented human capital.
Economists in the future may estimate exactly how much of the spectacular U.S. performance since World War II can be directly attributed to its ability and willingness to attract skilled and hardworking people from around the world--a world that until 10 years ago was generally hostile to initiative and hope. What should be clear from history is that if the rest of the world gets smart and creates economic environments attractive enough to retain their talents, the U.S. will no longer be able to count on covering its own costly mistakes by attracting talented foreigners.
Mr. Brenner is a professor at McGill University's School of Management in Montreal and Duxx, a business school in Monterrey, Mexico.