Pandemics, capital allocation and structural change

Sergi Basco and Joan R. Roses

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: The economic impact of pandemics is commonly studied using theoretical models that assume constant returns to scale and no factor movements. This article argues that a new economic geography model with increasing returns to scale and capital mobility better explains the effects of pandemics in modern economies. Our model predicts that pandemics shape where investments are made, leading to long-term impacts on economic development. To test this, we examine the consequences of the Great Influenza Pandemic on credit allocation and structural transformation in Spain from 1915 to 1929. Our research shows that credit growth was lower in regions with high mortality. Quantitatively, a one standard deviation increase in flu-driven mortality decreases credit (per capita) by 13.6%. We also document that this flu-driven reallocation of credit resulted in an increase in relative urban GDP in low mortality rate regions. A one standard deviation increase in flu-driven credit raises relative urban GDP by 9.5%.

Keywords: pandemics; capital mobility; economic geography; structural change (search for similar items in EconPapers)
JEL-codes: E32 N10 N30 N90 O11 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2025-05
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:128853

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