The Marshall Plan, sponsored by the United States between 1948 and 1952 to help Europe recover from World War II, is the largest economic and financial aid program ever experienced in the world. It transferred to European countries $130 billion (in 2010 USD), around 5 percent of US GDP in 1948, which was mainly used to provide immediate relief and to fund the reconstruction. Economic historians have long recognized the importance of the Marshall Plan in developing pro-market institutions in Western Europe. However, little is known yet about its causal effect on the recovery and development of local economies within European countries.

In the paper “Reconstruction Aid, Public Infrastructure, and Economic Development”, Professor Michela Giorcelli (UCLA) and Nicola Bianchi (Kellogg School of Management) study how the Marshall Plan affected the postwar local economic development of Italian provinces. Italy was the third largest recipient of Marshall Plan aid. It received $12 billion between 1948 and 1952, on average, 2.3 percent of its GDP for five years. Professor Giorcelli collected and digitized data on all 14,912 Marshall Plan reconstruction projects in Italy, as well as data on war damage documented by US authorities between 1947 and 1949, matched with provincial economic outcomes from the Italian Bureau of Statistics, as well as detailed data on Allied bombing during WWII, compiled by the US Air Force.

Professor Giorcelli documents that the Marshall Plan had a positive effect on local economic development. Provinces with more reconstruction funds experienced larger increases in agricultural production—between 10 percent and 20 percent for major crops. This effect started only after the completion of the first public infrastructure funded through the Marshall Plan. The fact that provinces with more bombings and greater damage were able to redesign their transportation system out of necessity might have played an important role. More efficient roads and railways might have allowed farmers to reach more distant markets more quickly, essentially increasing demand for their agricultural products. Consistent with this hypothesis, the estimated effect of reconstruction grants is positive and large for perishable crops (a threefold increase for fruit with a short shelf-life), but not statistically different from zero for products with a very long post-harvest life (8 percent decrease for tree nuts).

In addition to increased production, structural changes to the labor markets happened. In provinces with more reconstruction money, the number of agricultural workers decreased disproportionately by 21 percent. Manual labor was replaced with mechanical tools, thanks to a fourfold increase in the use of tractors. Workers who did not find postwar employment in agriculture were absorbed by the booming industrial and service sectors. In provinces with more reconstruction money, there was a larger increase in the number of active firms, especially those with fewer than ten employees. More efficient roads and railways might have decreased the barriers to entering the industrial sector.

Finally, Professor Giorcelli estimates the contribution of the Marshall Plan to Italian economic growth in the 1950s and 1960s: for every $1 additional reconstruction funds per capita that a province received (compared to others), its GDP per capita increased by $1.9 to $2. A back-of-the- envelope calculation shows that the Marshall Plan contributed 1.3 percentage points to Italy’s 5.9 percent average annual GDP growth rate during the 1950s, showing the transformational consequences of the Marshall Plan.