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Railways and the Raj: The Economic Impact of Transportation Infrastructure


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Title: Railways and the Raj: The Economic Impact of Transportation Infrastructure

Railways and the Raj The Economic Impact of
Transportation Infrastructure
  • Dave Donaldson
  • (d.j.donaldson_at_lse.ac.uk)

Research 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?

  • 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
  • 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

This 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
  • 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)

Why 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
  • 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

Related Literature
  • Effect of openness, using natural experiment
  • 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
  • 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)

This 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
  • What economic mechanisms underpin this effect?

Background 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

65 districts had railway somewhere in district
170 districts had railway somewhere in district
220 districts had railway somewhere in district
Background 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)

Background 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

Data (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
  • 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)

Limitations 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

The second stage
  • Run regressions of form

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

The first stage
  • Run regressions of form
  • Where Z is a variable that predicts R, but has no
    direct effect on y

General 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?

RCdt d
RAdt 0
RBdt 0
General 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

Instrumental 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
  • B nearest point to A that is on an 1879 railway
  • Control for rainfall variation (at C) throughout

Lines suggested in 1880 Famine Commission report
Instrumental Variables (Option 2) Military
  • 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

What mechanisms drive the result?
  • Obtain a 2SLS estimate , but what is driving
    this change?
  • Specialisation?
  • Specialisation according to comparative
  • Capital accumulation
  • returns to capital higher?
  • railways affected banks ability to monitor
  • 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
  • Technology transfer on the railways?

  • 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?
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