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


1
Railways and the Raj The Economic Impact of
Transportation Infrastructure
  • Dave Donaldson
  • (d.j.donaldson_at_lse.ac.uk)

2
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?

3
Motivation
  • 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

4
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
    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)

5
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
    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

6
Related 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)

7
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
    railways
  • What economic mechanisms underpin this effect?

8
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

9
1870
65 districts had railway somewhere in district
10
1900
170 districts had railway somewhere in district
11
1930
220 districts had railway somewhere in district
12
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)

13
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

14
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
    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)

15
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
    classifications

16
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

17
The first stage
  • Run regressions of form
  • Where Z is a variable that predicts R, but has no
    direct effect on y

18
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?

C
RCdt d
d
A
B
RAdt 0
RBdt 0
19
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

20
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
    1877-78
  • B nearest point to A that is on an 1879 railway
    line
  • Control for rainfall variation (at C) throughout
    period

21
Lines suggested in 1880 Famine Commission report
22
Instrumental 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

23
What 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?

24
Conclusion
  • 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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