• On the road: understanding the benefits from infrastructure investment

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    Abhijit Banerjee, Esther Duflo and Nancy Qian have a new improved version of their paper on access to transportation infrastructure and economic growth in China. In essence, they use straight lines between historical cities to address the problem of the endogenous placement of networks. In my view, the main contribution is pretty well summarized in these paragraphs:

    Our finding that better access to transportation networks does not have a large impact on the (relative) economic performance of those areas is consistent with the Fogelian view that transportation infrastructure by itself does not really do very much, excepting perhaps where there was already a demand for it. Based on similar logic, China scholars have criticized public investment in transportation infrastructure in China after 1990 (Huang, 2008).
    However, in the interest of understanding the potential benefits and limitations of infrastructural investment in developing countries more fully, we also consider an alternative and complimentary interpretation. We ask whether there are any obvious characteristics of China (or developing countries in general) that could cause the measured benefits of infrastructure to be small even if better transportation causes substantial gains to GDP. In particular, our model emphasizes the role of factor mobility – i.e., labor is assumed to be completely immobile, while capital is assumed to move at a cost. Using a simple model, we argue that the empirical evidence is consistent with a version of the model where capital is less mobile than goods such that even distant places retain high levels of capital. The result is that the level differences in productivity will tend to be relatively small and both near and far places will be involved in the production of exports. This, in turn, means (in the world of our model) that both locations will gain equally in proportional terms from China’s integration into world markets. Therefore, even though better transportation does help China as a whole to gain more from trade, GDP level differences between well- and poorly connected areas can be small and there may be no differences in growth rates between the two areas.

    This discussion around local versus global gains from infrastructure is a very exciting research agenda, which is clearly not settled. As for the global gains from road investments in China, this other paper by Mark Roberts, Uwe Deichmann, Bernard Fingleton and Tuo Shib in Regional Science and Urban Economics (see a working paper version here) uses an economic geography approach to estimate relatively small gains, with conclusions in terms of disparities across prefectural level regions that are compatible with the ones above.

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