Title: Railways and the Raj: The Economic Impact of Transportation Infrastructure
1Railways and the Raj The Economic Impact of
Transportation Infrastructure
- Dave Donaldson
- (d.j.donaldson_at_lse.ac.uk)
2Research Questions
- What is the effect on economic outcomes of
opening up to external (ie. international) trade? - What is the effect on economic outcomes of
enabling internal (ie. inter-regional) trade? - What are the economic gains from improving
transportation infrastructure? - Why economic change underpins these effects?
3Motivation
- Our understanding of the effects of openness to
trade is still incomplete - External trade usually all of country
liberalises trade at same time, so finding
counterfactuals is difficult - Internal trade virtually unexplored, for lack of
data - Transportation infrastructure is a dominant
important policy issue in LDCs (eg WDR 1994), yet
evidence base is lacking - very hard to evaluate, due to endogenous
placement
4This paper
- Collect new dataset on prices, wages, production
(agricultural), and trade at the district-level
(N300) in India, from 1870-1925 - Use features of colonial construction of railways
(1850-1900) in India as a set of natural
experiments in openness - Military motive (responding to domestic and
foreign aggression) - Famine-prevention motive
- Study impact of railways on agricultural output
- Interpret this impact in context of a simple
trade model - Predicts specialisation in comparative advantage
crops - Use data on internal and external trade flows to
examine this mechanism - Where data permits, examine other possible
mechanisms (capital and labour reallocations,
technological change)
5Why Colonial India?
- This region and period of history offer a number
of institutional and methodological advantages - Railway system was dramatic shock (in most of
India at this time, road and river transport was
poor/non-existent) - Railway line placement motives were non-economic
in many instances - Availability of unique internal trade data
- Allows external trade to be studied using
within-country variation - Allows internal trade to be studied
6Related Literature
- Effect of openness, using natural experiment
approach - Bernhofen-Brown (JPE 03, AER 04) use Japans
1851 (forced) openness to test comparative
advantage mechanisms behind opening - Michaels (2006) uses US Interstate highway
expansion to study effect of openness on skill
premium - Quantifying the gains from railways
- Fogel (1967) on USA uses social savings
technique, ignores endogenous placement - Hurd (1998) on India same method finds large
effect (9 of GDP in 1900)
7This presentation
- Background
- Railways
- Economic environment
- Elements of a simple theoretical framework for
thinking about these issues - Data
- Empirical method
- Identification strategy for estimating effect of
railways - What economic mechanisms underpin this effect?
8Background Railways
- Principal public investment in colonial India
(over half of government spending) - Mixtures of pure public and public-private
provision, but Indian Government always
determined route selection - 95 of current lines built in 1853-1930
- 1870-1920 was highest growth period
91870
65 districts had railway somewhere in district
101900
170 districts had railway somewhere in district
111930
220 districts had railway somewhere in district
12Background Economic Environment (1)
- Structure of economy in 1870
- Agriculture 68 of GDP, (73 of labour)
- Small-scale manuf. and services 26, (26)
- Large-scale manufacturing 0.5, (0.2)
- Structure of economy in 1930
- Agriculture 59, (75)
- Small-scale manuf. and services 34, (23)
- Large-scale manufacturing 4, (2)
13Background Economic Environment (2)
- Effect of railways on transport costs
- Standard estimates suggest that the pure freight
costs of railways were 5-10 times lower than on
alternative method (bullock carts) - However, this ignores other savings
- Bullocks/roads seasonal (bullocks need
food/water, roads unpassable for
14Data (1870-1930)
- Agricultural production (annual, 300
districts/native states) - Yields, by crop (15 crops)
- Land area allocations, by crop
- Capital stocks (livestock, carts)
- Irrigated areas, by crop
- Prices and wages (annual, 200 districts/native
states) - Prices by 30 commodities
- Wages by 5 occupations (skilled and unskilled)
- Trade (annual, 70 trade blocks)
- Internal trade full block-to-block matrix of
trade flows (but intra-block diagonals empty) - External trade trade by port, by foreign country
- All in physical units, by commodity (100 goods),
by mode of transportation (rail, river, coast)
15Limitations of the Data
- Agricultural Yields
- Subject of much controversy among econ historians
- Created by multiplying normal yields (factual) by
subjective conditioning factor - But largely corroborated by quinquennial
crop-cutting surveys (and no obvious signs that
this is not just classical ME) - Trade data
- External trade flows by block not collected
- have to make assumptions of constant port
consumption, and no port transformation - Roads data very limited in coverage
- Lack of unit values may obscure
quality-differentiation within observed commodity
classifications
16The second stage
y real agricultural output R shortest
distance from (population-weighted geographic)
centre of district to railway X other controls
d district t year
- Can then think of modifying how R is included, to
allow for heterogeneous treatment - Distance to port (and which port)
- Distance to internal cities, or other markets
17The first stage
- Where Z is a variable that predicts R, but has no
direct effect on y
18General IV set-up (1)
- Railways are lines designed to connect two
points, A and B - For any points (A,B), and the observed railway
between them, can ask - What is the effect of the railway on A or B?
- What is the effect of the railway on intervening
point C?
C
RCdt d
d
A
B
RAdt 0
RBdt 0
19General IV set-up (2)
- Challenge is to find A-B pairs, such that
- (1) the decision to put a railway between A and B
had nothing to do with unobservable
characteristics of C - (2) there is nothing unobservably different about
locations C along the line from A-B - It is very unlikely that A or B can be used in
the analysis, for fear that exclusion restriction
violated there - So ideally want 2 or more IVs, with very
different types of A-B pairs
20Instrumental Variables (Option 1)
Famine-prevention in 1880
- 1880 Famine Commission recommended a number of
railways to be built - This was idiosyncratic feature of that
Commission earlier and later Famine Commissions
did not recommend any railways - Translation into instrument
- A locations of abnormally low rainfall in
1877-78 - B nearest point to A that is on an 1879 railway
line - Control for rainfall variation (at C) throughout
period
21Lines suggested in 1880 Famine Commission report
22Instrumental Variables (Option 2) Military
Transportation
- Macpherson (1955) estimates that over half of
track placement decisions were militarily-driven - British government was motivated by internal
control, and external border defence (esp.
Afghanistan border) - Translation to IV
- A sites of suspected military action, not
already on a railway at time t - B nearest military cantonment (base) to A, or
nearest point on existing railways to A
23What mechanisms drive the result?
- Obtain a 2SLS estimate , but what is driving
this change? - Specialisation?
- Specialisation according to comparative
advantage? - Capital accumulation
- returns to capital higher?
- railways affected banks ability to monitor
borrowers? - Labour supplied to agriculture changes?
- Higher wage draws in labour from other sectors?
- Railways enable migration?
- Land used in agriculture increases?
- Extension of land cultivation margin
(deforestation etc.)? - More double-cropping?
- Technological progress?
- Returns to innovation higher (size of market
larger)? - Technology transfer on the railways?
24Conclusion
- Have presented plans for future research designed
to help address important gaps in our
understanding of external and internal openness - What is the effect of openness?
- What is driving this effect?