How large are the benefits of transportation infrastructure projects, and what explains these benefits? Dave Donaldson investigates the impact of the railway network in colonial India and finds it improved the trading environment and generated considerable welfare gains

Donaldson, Dave

LSE Research Online

blogs.lse.ac.ukhttp://blogs.lse.ac.uk/southasia/2014/08/06/railroads-of-the-raj-estimating-the-impact-of-transportation-infrastructure/Railroads of the Raj: Estimating the impact of transportationinfrastructureHow large are the benefits of transportation infrastructure projects, and what explains thesebenefits? Dave Donaldson investigates the impact of the railway network in colonial India andfinds it improved the trading environment and generated considerable welfare gains.In 2007, almost twenty percent of World Bank lending was allocated to transportationinfrastructure projects, a larger share than that of education, health and social servicescombined. These projects aim to reduce the costs of trading, yet despite this emphasis we lacka rigorous empirical understanding of the extent to which transportation infrastructure projectsimpact costs of trading, and how the resulting reductions in trade costs affect welfare.In my paper Railroads of the Raj: Estimating the Impact of Transportation Infrastructure I exploited one ofhistory’s great transportation infrastructure projects – thevast network of railroads built in colonial India (India,Pakistan and Bangladesh; henceforth,simply “India”) – to extend our understanding of transportationinfrastructure improvements.Image credit: flickr/Vintage LuluThe railroad network designed and built by the British government in India brought dramatic change to thetechnology of trading on the subcontinent. Prior to the railroad age, bullocks carried most of India’s commoditytrade on their backs, traveling no more than 30 km per day. By contrast, railroads could transport these samecommodities 600 km in a day, and at much lower per unit distance freight rates. As the 67,247 km long railroadnetwork expanded from 1853 to 1930, it penetrated inland districts (local administrative regions), connectingthem with the rest of India and the world.The British government collected detailed records of economic activity throughout India in this time period –remarkably, however, these records have never been systematically digitised and organised by researchers. Itwas these records that I used to construct a new, district-level dataset on prices, output, daily rainfall andinterregional and international trade, as well as a digital map of India’s railroad network in which each 20 kmsegment is coded with its year of opening. This dataset allowed me to track the evolution of India’s districteconomies before, during, and after the expansion of the railroad network.The availability of records on interregional trade is particularly unique and important. Information on trade flows1/2within a country is rarely available to researchers, yet the response of these trade flows to a transportationinfrastructure improvement says a great deal about the potential for gains from trade. I utilised a Ricardian trademodel (following the influential work of Eaton and Kortum, 2002) to assess empirically the importance of oneparticular mechanism linking railroads to welfare improvements – that railroads reduced trade costs and therebyallowed regions to gain from trade. The model serves to demonstrate that India’s railroad network improved thetrading environment and generated welfare gains, and also suggests that these welfare gains arosepredominantly because railroads allowed regions to exploit gains from trade.Railroads of the Raj therefore made three specific contributions to our understanding of the effects of largetransportation infrastructure projects in the context of an enormous expansion:1. By estimating the effect of India’s railroads on the national trading environment and demonstrating thatrailroads reduced the cost of trading, reduced interregional price gaps and increased trade volumes.2. By estimating the effect of India’s railroads on a proxy for economic welfare in colonial India. When therailroad network was extended to the average district, real agricultural income in that district rose byapproximately 16 percent. While it is possible that railroads were deliberately allocated to districts on thebasis of time-varying characteristics unobservable to researchers today, I found little evidence for thispotential source of bias to my results. In particular, railroad line projects that were scheduled to be built butwere then cancelled for plausibly idiosyncratic reasons display no spurious ‘effects’ on economic growth.3. By shedding light on the mechanisms at work by relating the observed railroad-driven reduction in tradecosts to the observed railroad-driven increase in welfare.As in much of the developing world today, colonial India’s precarious monsoon rains and its rain-fed agriculturaltechnologies made real income volatility extremely high. Famines were a perennial concern. While the findings inRailroads of the Raj argue that railroads caused an increase in the level of real incomes in India, a component ofeconomic welfare that it has been silent on concerns this volatility of real incomes over time. An importantquestion for future research concerns the extent to which transportation infrastructure systems like India’srailroad network can help regions to smooth away the effects of local weather extremes on local well-being. Robin Burgess and I have conducted a preliminary analysis of these effects here.This blog is based on Dave Donaldson’s paper Railroads of the Raj: Estimating the Impact of TransportationInfrastructure. The full paper can be viewed here.About the AuthorDave Donaldson is Associate Professor of Economics at Stanford University. He completedboth his Masters and PhD at the LSE.Copyright © 2016 London School of Economics2/2

Railroads of the Raj: estimating the impact of transportation infrastructure

Abstract

Similar works

Full text

Available Versions

LSE Research Online