The Benefits of Bombing
Evidence from Italy
How important was the Marshall Plan for Europe’s economic recovery after the Second World War? The United States sent extraordinary quantities of resources to Europe, amounting to 5% of our GDP, but was it the resources which were responsible? This is not immediately obvious – a line of literature, best represented by De Long and Eichengreen 1991, argues that it was not the aid which directly mattered, but its influence on economic policy, as a carrot for adopting best practices. Some, such as Cowen 1985, go so far as to argue it, if anything, slowed recovery down, and was at best something merely coincidental to an already ongoing economic recovery. It is extremely difficult to identify what was responsible, either way. Aid was not given out at random, but rather with some view as to need and ability to use it.
Nichola Bianchi and Michela Giorcelli, in their new paper entitled “The Case of the Marshall Plan in Italy”, reject the arguments for the ineffectiveness of aid per se. They claim that the effects were quite large, and tied directly to the aid money. Their method of identification is ingenious. The targets of strategic bombing – that is, targeting industry far from the front – are clearly chosen in a way which is related to the level of industrialization, but tactical bombing is plausibly not. After Italy surrendered in 1943, the focus shifted from strategic bombing to tactical bombing, and so air raids were shaped by the exigencies of battle. Some places saw very little damage, while others saw more. Very economically similar provinces saw vastly different levels of damage. The places which were more damaged naturally got more aid money.
To that end, they document that a one standard deviation increase in bomb tonnage led to a 21% increase in bombing damage, and a 22% increase in reconstruction monies. Because most of the money was allocated to building new infrastructure, we should look for effects through this channel, and they find them. Three primary results.
The places with more reconstruction funds had large increases in agricultural production, which started only when the infrastructure was actually completed (ruling out direct stimulus). This increase was due to raising more perishable crops, like fruit, which need fast and efficient transportation to get to market.
Despite the fact that agricultural production increased by 10 to 20 percent, the number of agricultural workers fell by 21%, relative to other areas. They became more mechanized, using four times as many tractors as before. They argue this is due to the access to increased wealth from production (p. 29), not even due to the direct effect of grant money.
Workers displaced from agriculture went to work in industry. Again, this was not an immediate effect, but took some time, and so is likely due to the effects of the infrastructure investment too.
They check for robustness to alternate specifications. (That is, they show that the results hold up if they drop specific datapoints – it’s not being entirely driven by like, one province or town). Starting the difference in bombing from a different time also doesn’t affect it. The paper does not seem to have any obvious errors. I have not checked it for any suspicious p-values, however. It nevertheless seems like a good paper.
Something I appreciate about this paper is its clear relevance to policy today. Unfortunately, all too often in economic history, a paper doesn’t very well pass the “but why should we care” test. Sure, it’s all well and good to discover facts about the medieval German beer trade or whatever other topic you can think of, but it lacks any relevance to us today. This paper matters, though. Yes, resources for reconstruction do actually matter. You should be more skeptical of stories that foreign aid will just be frittered away, or even do more harm than good. Clearly, in this large scale example, rebuilding infrastructure had positive effects, and we should be willing to rebuild infrastructure in formerly war-torn countries today.
Something else which stands out: there are plausible scenarios where we can be stuck in a bad equilibrium due to past investments. We would be better off if we blew it up and redesigned it all, but there’s too many constraints on doing that. The London blitz for example, in the long run, made Britain better off because it allowed buildings to be built back much taller and denser, or the Great Boston Fire of 1872 allowed greater density as well. Invention becomes easier as you are building. Allen, in “Collective Invention”, gives the example of the development of blast furnaces in England during the Industrial Revolution. Perhaps building it slightly larger would improve efficiency. It is far easier to experiment when the industry is growing, than when it is not and you have to rebuild a factory. The world is kludgier than you think. We have enormous opportunities to change the constraints that people face, and improve lives. They are calculating an estimate of potential gains if we could blow it up and start again.
Giorcelli has other excellent work on the experience of Italy after World War II. Her dissertation, in chapter II, showed that firms which were quasi-randomly exposed to US management practices were less likely to die (a reasonable proxy for firm profitability, in the absence of payroll records). This survival of firms was long lasting, not merely a temporary blip. Companies which simply received machines also benefited, but importantly, for not as long – only good management practices could keep a company going for the long run. I am excited to see what she writes next – everything I’ve seen from her has been excellent.