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Pandemics and local economic growth: Italy during the Great Influenza

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Pandemics and local economic growth: Italy during the Great Influenza

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Many developing countries do not have adequate health infrastructure or the capacity to effectively implement lockdown policies to contain the spread of COVID-19. This column studies the historical experience of Italy during the 1918 Great Influenza in order to shed light on the consequences of pandemics in societies where it is difficult to implement lockdown policies or where healthcare systems are lacking. Using regional GDP and mortality data, it finds a strong negative effect of the pandemic on local economic growth. However, these adverse effects mostly dissipated three years after the pandemic.

The COVID-19 pandemic forced policymakers to take rapid decisions about policy interventions in order to contain the pandemic and its consequences. These decisions required weighting the effects of the pandemic and those of the interventions. To cast light on policy measures and their consequences during a pandemic, there is a renewed interest in the literature on the effects of historical pandemics such as the 1918-1921 Great Influenza, one of the largest pandemics in history.

Barro et al. (2020) analyse the effects of the Great Influenza on economic growth across countries and find that a death rate of 2% was associated with a drop in real per capita GDP of 6% for the typical country. The institutional and environmental differences across countries, and their differing responses to the pandemic motivate another growing literature on the within-country effects of the influenza. Correia et al. (2020) offer an analysis of U.S. cities and states, and Dahl et al. (2020) explore heterogeneity across Danish municipalities. These studies are useful in understanding the economic effects of pandemics in contexts were institutions have the capacity to implement, at least in part, non-pharmaceutical public-health interventions (NPIs), such as lockdowns. However, it is not clear to which extent these estimates are also informative for contexts in which NPIs are adopted too late to be effective or are not adopted at all.

The Great Influenza in Italy

We study the effects of the 1918 Great Influenza on regional economic growth in Italy. Similarly to the COVID-19 case, Italy was one of the most severely exposed European countries during the influenza, with an estimated death toll of 600,000 people, corresponding to about 1.2% of the total population (Johnson and Mueller 2002). The censorship due to the involvement of Italy in the war annihilated the possibility to use the media to implement NPIs at the time. Hence, Italy offers a setting to explore the effects of one of the largest pandemics in recent history on local economic growth in the absence of or under limited NPIs, a condition that several developing countries are facing these days.

Key Results

We digitize mortality data compiled by the Ministry of the National Economy, and find that mortality varied considerably across regions, exceeding 1.5% in regions such as Campania and Apulia whereas in others, such as Veneto, it was substantially less than 1% (see Figure 1). We find that these differences partly reflect initial conditions, such as human capital, between the North and the South of the country. Thus, our empirical analysis takes into account pre-existing differences in initial conditions.  Data from the Albo d’Oro archive of the Institute for History and Resistance and Contemporary Society (Istoreco) show that differences in military mortality due to WWI exhibit a negative, albeit not large, correlation with influenza mortality, which in turn minimizes concerns on the potentially confounding effects of WWI.

Figure 1 Flu Mortality by Region

Pandemics and local economic growth: Italy during the Great Influenza 2

We then use yearly data on regional real GDP per capita provided by Daniele and Malanima (2011), and show that the influenza contributed substantially to the differential performance of the Italian regions in the wake of the pandemic outbreak. Regions with the highest mortality rates experienced a 6.5% excess decline in GDP relative to regions that with the lowest mortality rates. Using a distributed lag specification, we find that the impact of the influenza on regional economic growth was highest immediately after the pandemic, and that the growth effect vanished after three years. Consistent with these findings, manufacturing employment data also suggest that the negative effect of the influenza on the process of industrialization was transitory.

Figure 2 plots the yearly differences in GDP growth between Italian regions due to the 1918 influenza mortality rate. The figure suggests that the negative link between flu mortality and economic growth emerges with a one-year lag (1919). Furthermore, the estimated coefficients converge towards zero four years after the pandemic, and disappear in 1922. This suggests that the negative growth effect of the influenza persisted for about three years, pointing to the potential transitory nature of the adverse effect of a pandemic on local economic growth.

Figure 2 Regional Differences in per capita GDP Growth by 1918 Influenza Mortality

Pandemics and local economic growth: Italy during the Great Influenza 3

The limited interventions implemented to contain the pandemic, combined with the inadequate health infrastructure that characterized many parts of Italy after WWI, make the Italian historical experience of the Great Influenza an important case to cast light on the economic consequences of pandemics in societies where it is difficult to implement lockdown policies or where healthcare systems are incapable of protecting citizens.

Using regional GDP and mortality data, we find  a strong and significant adverse effect of the pandemic. The sign and magnitude of our estimated coefficients are comparable with recent findings on the cross-country effect of the 1918 influenza pandemic on economic growth (Barro et al. 2020). Furthermore, we find that the link between flu mortality and growth dissipates three years after the shock, which is in line with recent studies of the influenza pandemic across localities in other countries (e.g. Correia et al. 2020, Dahl et al. 2020).

References

Barro, R J (2020), ”Non-Pharmaceutical Interventions and Mortality in US Cities during the Great Influenza Pandemic 1918-1919”, NBER Working Paper No. 27049.

Barro, R J, J F Ursúa and J Weng (2020), “The coronavirus and the great influenza pandemic: Lessons from the “Spanish Flu” for the coronavirus’s potential effects on mortality and economic activity”, NBER Working Paper No w26866.

Carillo, M and T Jappelli (2020), “Pandemics and Local Economic Growth: Evidence from the Great Influenza in Italy”, CEPR Discussion Paper No.14849.

Dahl, C M, C W Hansen and P S Jense (2020), “The 1918 epidemic and a V-shaped recession: Evidence from municipal income data”, Covid Economics, 6.

Daniele, V and P Malanima (2011), Il divario nord-sud in Italia, 1861-2011, (Vol. 273) Rubbettino Editore.

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