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How the Second World War changed London’s economy

28 August 2023
Following the Second World War, London built back bigger, bringing unexpected benefits. This surprising result follows from the study of Hans Koster, Professor of Urban Economics and Real Estate at Vrije Universiteit Amsterdam, and his co-author Gerard Dericks from Hawaii Pacific University. Their study was recently covered in The Economist.

The negative impact of bombings on cities is quite evident: tragic human loss, displaced inhabitants and damaged infrastructure. Nevertheless, little was known about the long term economic impact of bombings during the second World War. It turns out that after the Blitz in 1940, the city of London built back bigger, with long term positive effects on the economy.

The Blitz bombings wiped out many of London’s historic sites. More than 30,000 bombs were dropped on the city, damaging or destroying 577,000 homes. Nothing else has impacted modern-day London’s built environment more, as the article in The Economist explains. Before the war London had strict zoning laws. Getting permission to build was both costly and slow. But redevelopment after the war was often subject to less stringent rules. With many historic sites destroyed, fewer places needed to be preserved. As a result buildings constructed on bomb sites were taller.

Bigger buildings brought workers together and spurred more economic activity, a phenomenon known as agglomeration. Sharing office space increased employees’ productivity and competitors moved in next door to each other to save on resources and get closer to both suppliers and customers. The clusters that emerged—finance in the City, law in Midtown and private equity in the West End, to name a few—saw huge returns. Koster and Dericks estimate that travelling just three minutes outside the cluster reduces the agglomeration effect by 86%. 

Were it not for the Blitz, London’s urban centres would still be subject to planning restrictions that stifled their growth. The total effect on London’s gross domestic product is estimated at 10%, equivalent to $50bn today.  

More generally, this shows that density restrictions are likely to cause bigger effects than urban growth boundaries, such as greenbelts.

Read the full article in The Economist.

In another recent edition of The Economist, another paper by Hans Koster (accepted in the Economic Journal) was discussed. This paper highlights that greenbelts (green areas around a city) do not cause a major welfare loss and may even generate a positive effect for England’s economy.