International Investment Pushes Past and Present: Synthesizing and Concluding the Blog Series

By Tim Hirschel-Burns

This blog is part of a blog series on past large-scale international investment programs and the lessons they provide for the investment push needed for development and climate action today. You can read the introduction to the blog series here, part 1 on the Marshall Plan here, part 2 on South Korea here, part 3 on Jubilee-era debt relief here and part 4 on the European Union here.

As the first sentence of the introduction to this blog series put it, “Political winds may have shifted in some major powers, but reality has not: a global investment push is needed.” Achieving development and climate goals will require a stepwise increase in external finance to capital-scarce developing countries. The same is true for post-conflict reconstruction, generating new export markets and various other objectives that could prove politically salient.

The feasibility of such an investment push raises two primary sets of questions: is it feasible to expect financier countries to scale up finance to much higher levels? And if they did, would developing countries be able to successfully utilize it?

To help analyze these questions, the blog series revisited four cases of international investment pushes that both rivaled the scale of finance needed today and were relatively successful at meeting their goals: the Marshall Plan, US aid to South Korea in the aftermath of the Korean War, Jubilee 2000-era debt relief through the Highly-Indebted Poor Countries (HIPC) and the Multilateral Debt Relief Initiative (MDRI) and European Union (EU) support to lower-income members. As shown in Table 1 below, they exhibit significant diversity in multiple dimensions.

Table 1: Past international investment pushes compared to requirements of a Sustainable Development Goal and Paris Agreement-aligned investment push

1. The scale of external finance needed to meet development and climate goals today has parallels in past international investment pushes, but it is on the upper bound of precedent, especially from the perspective of financier countries. It also requires investment in an unusually large number of countries.
2. Across these case studies, external finance has served as a key enabler of investment while maintaining debt sustainability. The significant reliance on grants and low-cost public finance lessened debt risks, while the focus on investment—especially in infrastructure—proved important for growth and structural transformation.
3. Historically, effective investment pushes needed a compelling rationale for the financier country to take action, but they needed to align with national development strategies in destination countries to successfully meet their goals. Those rationales for financier countries varied, and they carry similarities to present circumstances.

Precedent for large-scale international investment pushes

Estimates of external financing needs for developing countries to achieve the Sustainable Development Goals (SDGs) and Paris Agreement coalesce around $1-2 trillion.

For financier countries, $1 – 2 trillion in external finance flows to developing countries would amount to 1.3 – 2.6 percent of high-income countries’ GDP (though some middle-income countries could also serve as significant financiers). The Marshall Plan is the closest historical parallel to this scale of external investment, representing 1.1 percent of US GDP and 13 percent of its budget during the program period. In some respects, the Marshall Plan required greater fiscal effort than these figures suggest. They do not count contemporaneous US aid outside of Europe. Also, Marshall Plan aid was almost entirely grant-based, while development and climate investment needs estimates assume most external finance would be provided as loans. However, the Marshall Plan only lasted for a relatively short four-year period.

For the developing countries that would be absorbing this external finance, $1 – 2 trillion amounts to 2.4 – 4.8 percent of their collective GDP, though investment needs would represent a much higher percentage of GDP in certain countries. Even so, these levels are not unprecedented. South Korea received 21 percent of its 1957 GDP in American economic aid. Marshall Plan aid to countries like Greece and the Netherlands hit around 4 percent of their respective GDPs, as did EU cohesion funding to countries like Hungary.

One potential challenge the present investment push will face—especially the SDGs—is that significant amounts of financing need to go to low-income countries. Not only is there less historical precedent for low-income countries being deemed sufficiently strategically important to merit large-scale financing, history provides reason to think that countries with lower institutional capacity (which are often though certainly not always low-income) are more likely to struggle to absorb large-scale external finance. For example, for some Eastern European countries new to the EU, significant shares of Cohesion Policy allocations went unspent. Likewise, the $100 billion the US spent on Afghanistan reconstruction produced some human development progress but limited durability. Still, these challenges are not insurmountable. While South Korea may have had relatively high state capacity for its income level, in the 1950s and 60s it was a low-income country that would fit few modern metrics of good governance. And while HIPC and MDRI debt relief did not always produce durable outcomes, they did meaningfully expand access to health and education.

Another unique aspect of the investment push needed today is the number of countries that must be involved. In terms of the countries needing financing, no past investment push has cast a global net, instead focusing on a smaller subset of countries. Likewise, the number of financiers needed today is unusually large. Outside of Jubilee-era debt relief that was relatively inexpensive for creditor nations, past large-scale international finance has been bilaterally financed or agreed through smaller multilateral entities. Truly global alignment, at sufficient depth to mobilize large-scale financing towards collective global goals, does not have direct precedent. A more diffuse constellation of efforts could go a long way towards development and climate goals, but it would likely leave meaningful gaps, underlining the necessity of multilateral coordination.

External finance as an enabler of investment

A central challenge for developing countries is that their investment needs outstrip their domestic financing capacity and ability to borrow sustainably from international capital markets, particularly when developing countries tend to face high risk premia. Throughout the historical cases, the large-scale external finance enabled investment that would have likely otherwise led to debt crises. More than 90 percent of the Marshall Plan and all EU cohesion funding came as grants, while HIPC and MDRI provided debt relief to countries whose unsustainable debt burdens were stifling public spending. US aid to South Korea initially came almost entirely as grants, while in the 1960s and 70s about half came as loans.

These case studies also point to the importance of affordable external finance for capital investments, enabling growth and structural transformation that pushes countries towards becoming advanced economies. Marshall Plan spending focused on raw materials and machinery, South Korea focused US aid money on agricultural productivity before shifting towards transport infrastructure and heavy industry and EU cohesion funding has amounted to a majority of government capital investments in some countries. While HIPC and MDRI’s prioritization of social expenditures improved human development, the lack of new and affordable financial inflows for capital investments contributed to countries’ limited economic development and the reemergence of debt distress.

Aligning external finance with developing country strategies

In the case studies, it is notable that countries received significant power to shape the direction of external finance (though less so in HIPC and MDRI). European authorities formulated initial requests for Marshall Plan financing, and South Korea repeatedly bucked American policy advice and channeled financing towards its strategy for state-coordinated export-oriented industrialization. EU Cohesion Policy financing must align with EU requirements, but national and local authorities are central to the formulation of projects. Structural transformation requires coordination that non-state actors lack, and the government buy-in and country ownership in these case studies ensured coherence across external financial flows.

In addition, in each case, financier countries found a rationale sufficiently compelling to provide large-scale external finance. Buy-in for large-scale international financing required both elite and general population support, but the sequencing varied. The Marshall Plan and EU Cohesion Policy began with leadership that saw the initiatives as necessary for their goals of transatlantic prosperity and European integration, respectively, and leaders then actively persuaded the public. In contrast, Jubilee-era debt relief depended on an organized social movement to push public creditors towards accepting major haircuts.

In each of the initiatives’ rationales, one can find parallels to the present. The Marshall Plan’s determination to build external demand resonates with a low-growth present where many major economies are seeking to expand exports. South Korea leveraged its status as a strategically important client state, and smaller economies may seek to learn from its example in today’s geopolitically contested era. Even if not identical, the present debt servicing crisis bears significant similarities with the crisis that precipitated HIPC and MDRI. The EU’s recognition of the instability produced by cross-country inequalities applies to a wide range of politically and economically integrated countries.

While Global North countries may be the most likely to find similar rationales compelling in the future, the motivations that drove past international investment pushes could well appeal to countries outside the Global North. China faces a need for consumers of its extensive technological and industrial capacity not entirely unlike the post-war US. Some Gulf countries have significant deployable capital and political and economic incentives to invest in the Global South. The Association of Southeast Asian Nations (ASEAN) is reasonably integrated while spanning a variety of levels of development, and it could scale up efforts to reduce intra-ASEAN disparities under a similar logic to the EU cohesion model.

Fortunately, worries that large historic outlays required rosier political and economic environments than the present do not hold up. The Marshall Plan came in the immediate aftermath of enormous US expense on World War II. While governments now cite rising defense spending targets as justification for cuts to development and climate spending, military spending accounted for 10 percent of US GDP at the height of aid to South Korea and only in 1978 did it dip down to 5 percent, the level of NATO’s aspirational 2035 goal. EU cohesion funding persisted even as members dealt with the Great Financial Crisis.

A few years before their beginnings, no observer would have seen such initiatives as inevitable, and yet they happened. The world may be well behind in its efforts to accelerate development and respond to climate change, but the ability to reverse course remains.