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The Role of the Marshall Plan in the Italian Post-WWII Recovery

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The Role of the Marshall Plan in the Italian Post-WWII Recovery Reconstruction Aid, Public Infrastructure, and Economic Development⇤ NicolaBianchi MichelaGiorcelli July 24, 2018 Abstract This paper studies how the modernization of transportation infrastructure a↵ects long-term economic outcomes. It exploits plausibly exogenous di↵erences between Ital- ian provinces in the share of modern infrastructure—mainly roads and railways—built with grants disbursed through the Marshall Plan. Provinces that could modernize a larger portion of their infrastructure stock experienced higher increases in agricultural production, especially for perishable crops that benefitted the most from an efficient transportation system. Agricultural firms in these areas also invested more in motorized machines that decreased the employment of manual labor. In the same provinces, we observe more entry of small firms in the industrial sector, as well as a larger expansion of the industrial and service workforce. JEL Classification: H84, N34, N44, O12, O33 Keywords: international aid, economic growth, reconstruction grants, Marshall Plan, innovation ⇤Contact information: Nicola Bianchi, Kellogg School of Management, Northwestern University, and NBER, [email protected]; Michela Giorcelli, University of California, Los Angeles, and NBER, [email protected]. We thank Ran Abramitzky, Thor Berger, Meghan Busse, Nicholas Bloom, Dora Costa, Pascaline Dupas, Fran¸cois Geerolf, Therese McGuire, Katherine Meckel, Melanie Morten, Tommaso Porzio, Nancy Qian, Melanie Wasserman, and seminar and conference participants at UCLA, Northwestern, UC-San Diego, IFN Stockholm Conference, Barcelona GSE Summer Forum, and the Cliometric Society Annual Conference for helpful comments. Antonio Coran, Zuhad Hai, Jingyi Huang, and Fernanda Rojas Ampuero provided excellent research assistance. We gratefully acknowledge financial support from the Economic History Association through the Arthur H. Cole Grant. 1 Introduction Transportation network is considered a key factor for economic development. Many high- income countries in Western Europe and North America, however, have aging transportation infrastructure that is becoming increasingly inefficient and more congested than ever.1 In the US, for example, 37 percent of roads are in poor or mediocre condition, 9 percent of bridges are structurally deficient, and 45 percent of urban Interstates are congested at peak hours (TRIP, 2018). In a survey by the European Investment Bank, the share of municipalities reporting underinvestment in urban transportation is equal to 50 percent in Italy, 43 percent in the UK, 37 percent in Germany, and 19 percent in France (European Investment Bank, 2017). The average car drives in congested traffic for 74 hours a year in London, 69 hours in Paris, 63 hours in Washington DC, 44 hours in Berlin, and 39 hours in Rome (INRIX, 2018). More investments for maintenance would not be sufficient to completely address these issues. These countries, in fact, built most of their infrastructure stock several decades ago with di↵erent economic needs and predicted usage in mind. In the near future, their transportation systems might undergo more radical changes than just standard repairs, such as rebuilding with state-of-the-art materials, expanding capacity, rerouting, and adopting modern road design (ASCE, 2017). What is the e↵ect of modernizing the transportation network on the economy? Answer- ing this question is obviously important to evaluate the returns to investments in public infrastructure. An efficient transportation system can spur economic activity by decreasing the costs of moving goods and individuals. Building large infrastructure, however, can also disrupt existing businesses and households, decrease property values in already low-income areas (Carter, 2018), and depress rural areas by favoring urban agglomerations (Glaeser and Gottlieb, 2009). The existing research in this literature studies the returns to the creation of new transportation networks (for example, Morten and Oliveira, 2017). Most high-income countries, however, are debating over the redesign of their suboptimal infrastructure stock, which can generate a di↵erent set of economic consequences. In an ideal experiment, we would randomize the rebuilding of transportation systems. Locations in the treatment group would redesign their infrastructure according to their current needs, while locations in the control group would keep their existing stock. Upon 1 Sources are the 2017 Infrastructure Report Card by the American Society of Civil Engineers (ASCE, 2017), the Global Traffic Scorecard by INRIX(INRIX, 2018), Key Facts About America’s Surface Transportation System and Federal Funding by TRIP (TRIP, 2018), the Municipality Infrastructure Survey by the European Investment Bank (European Investment Bank, 2017), the Global Infrastructure Dossier by Statista (Statista, 2017), the Global Infrastructure Outlook by Oxford Economics (Oxford Economics, 2017), and the 2018 Global Competitiveness Report by the World Economic Forum (World Economic Forum, 2018). 1 completion of the public projects, the analysis would compare how economic outcomes change between the two groups. This thought experiment, however, is clearly not feasible. In addition to being too expensive, it would require convincing several local governments to swiftly modernize their transportation system. Instead of relying on experimental data, we propose to address this research question in a historical context. This paper studies the most recent episode of large-scale reconstruction of public in- frastructure in European history. Specifically, it uses evidence from the Marshall Plan in Italy to estimate how updating the transportation network a↵ects a wide array of economic outcomes. The Marshall Plan was an economic and financial aid program sponsored by the US that transferred approximately $130 billion (2010 USD) to Western and Southern Europe between 1948 and 1952. Getting more than 10% of total aid, Italy was the third largest recipient (Fauri, 2006). We digitized data on all 14,912 di↵erent reconstruction projects funded through the Marshall Plan in Italy. We show that provinces that had experienced intense Allied bombings during WWII could build new infrastructure with US funds, instead of just restoring pre- existing roads and railways. The average province in the top quintile of Allied bombings used 80 percent of their funds from the Marshall Plan to build new projects, while the average province in the bottom quintile assigned 98 percent of its budget to repairing its old stock. These findings are consistent with the hypothesis that more widespread destruction during the war decreased the opportunity cost of radical changes to the transportation system after the arrival of international grants. This setting allows us to measure how economic outcomes changed after the Marshall Plan between provinces that could redesign their transportation infrastructure and provinces that simply restored their pre-existing network. Specifically, we estimate reduced-form regressions in which we compare how economic outputs varied before and after the Marshall Plan, and between provinces with di↵erent amount of Allied bombings (and therefore varying degree of modernization of their infrastructure). Moreover, we directly measure the economic e↵ects of public investments in new infrastructure by instrumenting reconstruction grants received by each province during the Marshall Plan with the province-level amount of Allied bombings. Our analysis shows that the intensity of Allied air strikes during WWII was a major driver of modernization of public infrastructure during the Marshall Plan. But are Allied bombings truly exogenous with respect to postwar economic development? We address this issue by identifying a subset of air strikes that are correlated with war events, but not with local prewar economic conditions. Specifically, we exploit a change in the Allied military strategy from strategic to tactical bombing. Italy surrendered on September 3, 1943 after signing the Armistice of Cassibile. Before the armistice, the Allies employed strategic bombing to hit 2 the major economic and industrial centers. The goal was to weaken morale and decrease support for the ruling Fascist regime. The geographic distribution of these air attacks is clearly correlated with prewar economic output. After the armistice, however, Italy became an active warfront between the German army from the North and the Allied army from the South. The Allied air forces switched to tactical bombing to help their ground troops breaking enemy lines. The distribution of these tactical air attacks was mostly driven by war-related events, such as land battles and intelligence on movement of troops and supplies, but does not appear to be correlated with other local factors.2 We find three key results. First, provinces that could redesign their transportation system during the Marshall Plan experienced larger increases in agricultural production (between 10 and 20 percent for major crops). This e↵ect starts only after the completion of the first public projects and lasts until the end of our sample in 1969. More efficient roads and railways might have allowed farmers to reach farer markets more quickly, essentially increasing demand for agricultural products. Consistent with this hypothesis, the estimated e↵ect of new infrastructure is positive and large for perishable crops (3-fold increase for fruit with short shelf-life), but not statistically di↵erent from zero for products with a very
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