After two months of war, experts in Ukraine are starting to consider what plan could work to restore the local infrastructure and economy, looking at the experience of Germany, Japan and Italy — countries that went down in history for their economic miracles after being destroyed by war.
KYIV — World history has many examples of post-war reconstruction. Since the end of World War II, there have been more than 30 major wars and more than 250 military conflicts in the world, involving at least 60 countries.
But even with such a seemingly large sample, successful examples of recovery can be counted on the fingers of one hand. Each is unique and depends on many factors — from the banal availability of natural resources to the coincidence of circumstances in the region.
The case of Ukraine is unique. Our level of economic development, the presence of established state institutions and legitimate authorities, well-established production processes, and the stability of the financial system make the prospects for Ukraine's recovery significantly different from those of Afghanistan, Iraq, and Angola. Our country is closer to the examples of Europe, as well as some Asian countries after 1945.
To develop a plan for Ukraine, it makes perfect sense to analyze the Marshall Plan and the recovery scenarios of West Germany, Italy, and Japan: Each faced enormous destruction and each of them was able not just to recover but to make an economic breakthrough.
The Marshall Plan to rebuild Europe
Post-war condition: Infrastructure and industry were damaged, economic ties between countries were broken. Agricultural production was down to 83% compared to the pre-war level, industrial production was 88%, and exports were only 59%.
The Marshall Plan
The plan began in 1948 to address economic and social challenges in Europe, including five million destroyed houses and famine. One of the instruments was financial assistance from the United States, which amounted to more than $17 billion over four years (the equivalent of today's $210 billion) — 80% was free financial aid and 20% were cheap loans.
The Marshall Plan was primarily aimed at restoring industry, with the money allocated for the targeted purchase of industrial and agricultural products.
How it worked: The U.S. government supplied the recipient countries with goods and services. The governments of these countries sold the goods to businesses and individuals who paid the dollar value of the goods in local currency. This money was then invested in reconstruction, as was done in France and Germany, or covered the government's war debts, as in the UK. Most of the money was spent on U.S. goods.
Although the recovery plan was provided for 16 European countries, the main recipients were the UK, France, Italy, West Germany and the Netherlands.
The Marshall Plan also had political goals. Firstly, it obliged countries to have no presence of communists in the government. Italy, for example, was able to get help after the Communist Party lost the elections. Secondly, it was aimed at integrating the economies of European countries. Actually, the cooperation between the production of coal in Germany's Ruhr province and iron ore in France's Lorraine gave way to the European Coal and Steel Community, which was a precursor of the European Union.
Result: In general, the plan worked. It prompted 30% growth in the economy of the recipient countries compared to the pre-war period. The recovery of West Germany (although it only received 9% of the total fund) and Italy were the most successful.
West Germany's economic miracle
German refugees in Berlin in 1945
Post-war condition: Defeated Germany was completely destroyed. Production was seven times lower than pre-war levels; 25% of houses, 20% of industrial facilities and 40% of transport infrastructure were left in ruins. Every fifth child lay in his own bed, while every third German lay in his own coffin. Every second German was unemployed. The financial system collapsed due to huge inflation and public debt.
German economic miracle
The country's prosperity began on June 20, 1948, when Ludwig Erhard, the father of the miracle, abolished state control over commodity prices and lifted 90% of regulatory restrictions on business.
The German example involved the following factors of success:
• abolition of state monopolies and launch of privatization mechanisms;
• replacement of the depreciated Reichsmark with the Deutsche Mark;
• reorientation of military industries towards food and textile, the production of household appliances and automobiles;
• 81% increase in foreign investment, mostly from the U.S., from 1950 to 1957;
• issuing government bonds, the profits from which were used to support business;
• the tax reform: replacement of a high differentiated corporate tax rate (about 65%) with a flat rate of 50% created tax incentives for low-income citizens;
• the German “big construction”, a residential and commercial real estate development program to address the devastation and 12 million refugees from the East.
It is noteworthy that enterprises received funds to pay only the first salaries. They then had to rely on their own revenues.
Result: In 1962, the level of industrial production in West Germany exceeded the pre-war figures by three times. Germany ranked second in terms of gold and foreign exchange reserves, third after the U.S. and England in terms of industrial production. Average annual economic growth rates in 1950–1966 were about 9.2%.
"Italy had fully recovered from the war by the early 1950s"
Post-war condition: Italy was among the most affected and devastated European countries. GDP was only at the level of poor countries, and the military-oriented industry was in decline.
The Italian economic miracle was notable for such features:
• restored monopoly: monopoly companies (Fiat, Edison, Montecatini etc.) had priority in receiving loans and financial aid under the Marshall plan, which led to the capture of foreign markets by Italian monopolies and an increase in industrial production;
• the agrarian reform of 1950-1955: the redemption of land allotments with an area of more than 100 hectares by the state and their further sale to citizens in installments;
• Italian supply of materials for the production of U.S. military equipment during the Korean War (1950–1953).
Result: Italy had fully recovered from the war by the early 1950s, and industrial production tripled between 1953 and 1962. However, in the late 1960s, the monopolization of the economy led to corruption and inequalities in the development of individual regions of Italy.
Japan's economic expansion
Archive photo of the opening of the Tokaido Shinkansen high-speed passenger express in 1964
Post-war condition: Japan not only lost the war — it was destroyed. The level of industrial production was 20% compared to 1939, with 70% of all industrial facilities in ruins. The country lost all the occupied territories indispensable for the supply of raw materials, fuel and food depended.
It is impossible to completely repeat the experience of Japan because of the specificities of the Japanese culture and way of life. There was a mix of liberal, planned and original economy.
Japan's economic miracle can be roughly divided into two stages: demilitarization and liberalization under the United States before 1951, and the Japanese model after the Americans left.
The United States allocated more than $3 billion to create a strong successful partner in Asia — most European countries received much less. The U.S. influence also consisted in the following:
• antimonopoly control established in 1945;
• the tax reform of 1949 implied a reduction in corporate taxes, but an increase in taxes for the population;
• the agrarian reform involved the confiscation of agricultural land from pre-war landowners and their sale to farmers at very favorable prices;
• the budget reform of 1950 prompted the Japanese to build industry from scratch, as it was unprofitable to restore it;
• limiting the import of foreign cars to Japan as a protectionist move;
• industrial development during the Korean War (1950-1953) driven by large orders from the United States.
Since 1952, the Japanese began to freely rule the country again and brought the Japanese culture into management processes. The key features involved:
• new priority industries backed by the state (electronics and automotive);
• country-wide adherence to state planning and minimal abuses of power;
• efficiency and self-sacrifice of the Japanese for the prosperity of the corporation;
• focus on high-tech production.
Realizing their limited natural resources, the Japanese invested in "brains" and bought up patents around the world, quickly capturing the global consumer electronics market. Between 1950 and 1960 alone, Japanese companies acquired more than 30,000 patents worth about $1 billion. As a result, they produced technological products, focusing only on goods that could be exported to large markets.
Result: In 1956, GDP per capita exceeded the pre-war level. Twelve years later, in 1969, Japan took second place in the world in terms of GDP and industrial production.
Common denominators of success (and failure)
There are of course many other examples in history, both recent and ancient, where countries are reborn after conflict. Sadly, of course, there have also been wars that break the fate of a people and entire nations.
The recipe for renewal of each country is different, but the common tools for success are: economic liberalization, job creation the export-oriented economy and external financial resources.
But even having those, it is important to use them effectively. It determines whether a country succeeds or joins a long list of failures like Afghanistan or Iraq.