The case for investing in roads and railroads - evidence from China

There has been some debate in recent times disputing the value of investing in rural roads and rural electrification. The discussion is summarised here.

This goes contrary to the mainstream literature on the value of transportation infrastructure. It has been held that roads and railways "lowers trade costs, thereby allowing cities to specialise in the production activities for which they have comparative advantages". Further returns from such investments are large in poor countries but are smaller for more developed countries with larger transport networks. 

The research work of Nathaniel Baum-Snow, Vernon Henderson, and others shine light on the impact of the Chinese road and railways building program of recent decades. China undertook a massive highway network construction program, which has seen the freight ton-miles share of roads increase from under 5% in 1990 to well over 30% in 2010. In fact, the country had almost no limited access highways in 1990 and inner-city roads had just two lanes and sometimes not even paved. In the corresponding period about 127 million people are estimated to have migrated into core central cities.

One study examines the effects of road infrastructure within a given radius (450km) of prefecture (or a metropolitan area with one core city and some smaller cities/towns) cities and access to international ports on GDP, population and GDP per capita in Chinese prefectures. They estimate the relative gains or losses to one city that result from a marginal change in its regional highway allocation, relative to other locations. They find two things,

The first is that expanding the regional highway networks drives economic activity towards regionally important ‘primate’ cities (largest city in the region). A 10% expansion in road length (within 450km of a prefecture city) reduces the population in an average non-primate city by an estimated 1.6% and increases the population in an average primate city by 2.5%... Better transport connections facilitate greater centralisation of production activities, shifting activity from hinterlands into regional centres. While primate prefectures are larger than average, many are not among the biggest cities in China. We show that the primacy effects are not due to city size, nor to potentially being a provincial capital or a nodal point in the highway system.

Our second striking result is that highways’ facilitation of easier access to international ports promotes growth in GDP, population and GDP per capita for all prefectures. A 10% reduction in travel time to an international port results in a 1.6% increase in GDP, a 1% increase in population and a 0.5% increase in GDP per capita. This suggests that better access to international markets has had a high return in China, where the policy environment has emphasised export-driven investments and growth.

Another paper describes the state of infrastructure and cities in China and how infrastructure affected the development of its cities. At an aggregate level, as a description of the trends from China, the authors see three trends over the 1990-2010 period

First, we see a large increase in GDP. Second, we see a huge migration of people from the countryside to the major cities. Third, we see a dramatic decentralization of manufacturing (away from the urban core to the suburbs). That the decentralization of manufacturing GDP is so much larger than of total GDP suggests a countervailing centralization of services.

Examining city development in terms of population and economic activity, they find,

Our analysis suggests that transportation infrastructure networks had profound and long-lasting impacts on urban form in China. Both radial highways and ring roads promoted substantial population decentralization out of central cities. On the other hand, radial railroads and ring roads both promoted the decentralization of industrial production and its workforce... Each radial highway displaces about 4 percent of central city population to surrounding regions and ring roads displace about an additional 20 percent, with stronger effects in the richer coastal and central regions. Each radial railroad reduces central city industrial GDP by about 20 percent, with ring roads displacing an additional 50 percent. Similar estimates for the locations of manufacturing jobs and residential location of manufacturing workers is evidence that radial highways decentralize service sector activity, radial railroads decentralize industrial activity and ring roads decentralize both... However, radial railroads did not influence the allocation of population between central cities and suburban regions... we find no effect of radial highways on the location of industrial production.

These trends are representative of the mainstream literature on the trajectory of urban development,

Economists have recognized that denser cities provide richer information environments, which in turn improve productivity and increase innovation. However, central city environments have much higher land and somewhat higher labor costs than suburban and hinterland locations. As a result, in developed market economies, central cities typically specialize in business and financial services which benefit sufficiently from richer information environments to justify these higher factor costs. Standardized manufacturing is typically found on the lower cost urban periphery and in small cities and towns. The situation in developing countries more resembles the U.S. in the early 20th century when industry was concentrated in central cities, as in Chinese cities circa 1990. Manufacturing facilities in developing countries often start in central cities, perhaps in part because of localized externalities in learning and adaptation of technologies from abroad. However, as transferred technologies mature, central cities become expensive locations for standardized manufacturing; in a version of the product cycle, industrial firms decentralize to find lower land and labor costs.

A third paper examines the effects of construction national highways on the economic geography of China,

We investigate the effects of the recently constructed Chinese national highway system on local economic outcomes. On average, roads that improve access to local markets have small or negative effects on prefecture economic activity and population. However, these averages mask a distinct pattern of winners and losers. With better regional highways, economic output and population increase in regional primates at the expense of hinterland prefectures. Highways also affect patterns of specialization. With better regional highways, regional primates specialize more in manufacturing and services, while peripheral areas lose manufacturing but gain in agriculture. Better access to international ports promotes greater population, GDP, and private sector wages on average, effects that are probably larger in hinterland than primate prefectures. An important policy implication is that investing in local transport infrastructure to promote growth of hinterland prefectures has the opposite effect, causing them to specialize more in agriculture and lose economic activity... our findings suggest Chinese highways do allow regions to specialize and pursue their comparative advantages. In particular, prefectures where land is abundant, i.e., hinterland prefectures, become more specialized in agriculture, while more centrally located prefectures specialize in manufactured goods for regional consumption.

The Chinese experience carries relevance for India as it tries to draw policy inferences from its own transportation projects. For a start, the limited growth of railway networks in India, even in the upgradation of existing lines, may have had some effect in constraining the geographic diffusion of manufacturing. How much of this is responsible for India's failure to increase manufacturing's share of output?

If the same Chinese trends hold for India, the effects of the national highways would have been to centralise manufacturing activity in major regional cities to the exclusion of the smaller cities and towns. This coupled with the rural roads programs would have facilitated population shifts towards the major regional cities, though given the housing affordability and internal city transport constraints, the population shifts likely revolves around the suburbs of these cities. Further, in the absence of adequate investments in agriculture - irrigation, storage, etc - the rural areas are unlikely to have realised the gains similar to those experienced by such areas in China.