How to understand the economic impact of transport networks

Infrastructure is an essential ingredient for economic development and growth. Transport infrastructure, for example, facilitates cheaper and more efficient movement of goods, people and ideas across places. It also impacts the distribution of economic activity and development across regions to the extent that agglomeration economies and efficient sorting can be realized, the levels of competition among industries and concomitant reallocation of inputs towards more productive enterprises are achieved, and much more. Many business leaders, policy makers, and academics report inadequate infrastructure as a critical obstacle to sustained growth that must be resolved.

Unfortunately, the literature on the economic impacts of transportation networks in developing countries is still small relative to its policy importance, but rapidly emerging. Henderson finds that industrial decentralization in the Republic of Korea is attributable to massive transport and communications infrastructure investments. Baum-Snow et al. show that transport infrastructure aided the decentralization of industrial production and population in Chinese cities. Duranton and Turner show that transportation investments increased city population in the United States.

We examined the impact of the Golden Quadrilateral (GQ) Highway Project in India. The GQ project improved the connection of four major cities in India: Delhi, Mumbai, Chennai, and Kolkata. The GQ system comprised 5,846 km (3,633 miles) of roads connecting many of the major industrial, agricultural, and cultural centers. The GQ project began in 2001, was two-thirds complete by 2005, and mostly finished in 2007.

So what was our finding? Using plant level data, we find that the GQ upgrades facilitated a more natural sorting of land- and building-intensive industries from the nodal districts into periphery locations. This general urban-rural or core-periphery pattern is evident in many countries and is associated with efficient sorting of industry placement. Transport connectivity encouraged decentralization by making intermediate cities more attractive to manufacturing entrants. For instance, moderate-density districts— like Surat in Gujarat or Srikakulam in Andhra Pradesh—that border the GQ highway registered a more than 100 percent increase in new output and new establishment counts after the GQ upgrades. These results suggest that the improved transport connectivity enabled manufacturing establishments to efficiently locate in intermediate cities, but that localization economies prevalent for the sector continue to preclude entry in low density places. More importantly, the upgrades were associated with better allocative efficiency as measured by the extent to which the employment of an industry is contained in the industry’s most productive plants. Industries that were initially positioned along the GQ showed improved allocative efficiency compared to industries initially positioned on the North South-East West Highway that was never built.

Transport has particular importance in India because of government control over land and building rights, leading some observers to state that India has transitioned from its “license Raj” to a “rents Raj.” Given India’s distorted land markets, the heightened connectivity brought about by the GQ upgrades was particularly important for efficient sorting of industry across spatial locations. It also aided efficient sorting of industries and plants within districts.

Understanding the impacts of infrastructure projects on how it impacts factor allocation, economic growth and the pattern of development are important for policy makers and regional analysis because these impacts identify how infrastructure investments shape the growth of regions and the distribution of industrialization and income.

This post first appeared on The World Bank Let’s Talk Dvelopment Blog.

Publication does not imply endorsement of views by the World Economic Forum.

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Author: Ejaz Ghani taught Economics at Oxford University and Delhi University. He studied Economics in Delhi University, Jawahar Lal Nehru University, and Oxford University. 

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