Better roads increase internal trade and improve regional economies

High transport costs can lead to spatial disparities in economic activity by hampering market access in remote areas, both in terms of the ability of firms to sell goods and in terms of the ability to purchase necessary inputs. . Investing in transport infrastructure can impact regional inequalities and improve growth prospects by facilitating trade. But how big are these gains, especially when there are different types or stages of possible investments? The question is more difficult to answer than one might expect. Infrastructure projects tend to be expensive and sustainable, so governments can prioritize investments in regions already ripe for growth. This tends to generate a positive association between infrastructure and income levels, not because the former causes the latter, but because of strategic selection.

Previous work has addressed the issue of road investments through cross-sectional analyzes (Limao and Venables 2001, Yeaple and Golub 2007), or has focused on new construction in the context of developed countries (Duranton et al. 2014, Allen et al. 2014, Allen et al. Arkolakis 2014, Jaworski and Kitchens 2019) and developing countries (Faber 2014 on the highway network in China; Asturias et al. 2018 on the Golden Quadrilateral highway in India; Kebede 2019 on the improved village roads in Ethiopia). Jaworski et al. (2020) demonstrate the substantial role of the US interstate highway system in promoting international trade links. In a similar context, Gibbons et al. (2017, 2019), find that the construction of new roads in the UK has stimulated the creation of new businesses nearby and boosted the productivity of existing businesses. We complement the existing literature by offering new empirical and quantitative evidence on the benefits of a major capacity upgrade of existing transport infrastructure in middle-income economies using rich spatially disaggregated data.

In our recent working paper (CoÅŸar et al. 2021), we study the impact of road capacity improvements on overall and regional outcomes in Turkey. Turkey implemented an extensive program in the 2000s to expand the lane capacity of existing roads. The aim was to improve the safety and reliability of travel times on the national transport network through investments across the country. Specifically, a substantial part of the existing two-lane carriageways with two-way traffic has been transformed into two-lane carriageways separated by a small earth support, with two-lane one-way traffic on each carriageway. The share of national roads represented by improved two-lane roads reached 35% in 2015, compared to only 10% in 2002. During this time, the total length of roads has remained relatively flat. The maps below, scanned from those published by the General Directorate of Highways of Turkey, show the extent of improvements between 2005 and 2015.

Figure 1 Turkish neighborhoods and roads

What has been the impact of this significant improvement in the quality and capacity of the existing asphalt road network lanes on intra-national trade and regional economic performance? We start by examining the ten-year evolution of bilateral trade (2006 to 2016) versus reduced travel times (2005 to 2015).

Build the data to analyze

We construct measures of domestic trade from administrative data on business-to-business transactions provided by the Turkish Ministry of Industry and Technology. We use the annual bilateral trade flows of goods between the 913 districts of Turkey, generated by the domestic sales of companies operating in the manufacturing and wholesale sectors. Average travel speeds differ between improved and unimproved road segments, which has an impact on travel times. Using geographic information systems (GIS) software and digitized maps for 2005, 2010 and 2015 (Figure 1), we calculate the fastest routes and total travel times between all districts for the networks road vehicles as they existed each year. There is a dramatic decrease in travel time reductions at the district pair level over time: from 2005 to 2015, the average travel time between two districts was reduced by 1.4 hours, compared to the average initial 9.8 hours. The time savings are all the more important the further apart the districts are, reaching three hours on average for districts 1,500 km away.

Reduced travel time and exchanges

For the analysis, we use trade flows between highly disaggregated geographic units, which are small and unlikely to have been targeted for investment. Through fixed effects, we control for bilateral pairs of larger geographic administrative units at the level that may be affected by the selection.

We find that a reduction of one hour in travel time between two districts with positive trade in 2005 increases two-way trade between these districts by about 8.2%. This effect is statistically significant and translates into an increase of almost US $ 1 million in trade flows for a typical supplier district over ten years. Examining the effect on establishing new trade relationships in the extensive margin, we find that a pair of districts that experienced a one-hour drop in travel time had an 11% probability of starting to trade in 2016. In short, the positive effect was economically significant in both the intensive and extensive margin.

Road capacity and regional results

To study how the reduction in travel times affects regional results, we construct a measure of the improvement of the access to the domestic market for each district to all the other districts, weighted by the populations of 2005. We estimate that the improvements access to the domestic market have a positive effect on overall employment at the district level. This is particularly advantageous for use in manufacturing and wholesale trade. For a district with average connectivity in 2005, we find that an increase of one standard deviation in connectivity increases employment in goods trade industries by 10.2 log points, which corresponds to a little more than 15% of the average employment growth at the district level in these industries. between 2006 and 2016.

What is the impact on well-being?

Based on our reduced form results, we calibrate a spatial equilibrium model with trade à la Allen and Arkolakis (2014) to quantify the impact of road improvements on well-being using data at the level of the district. We estimate the short-term population-weighted overall welfare gains from road upgrades to be around 2.69%. Long-term welfare gains are only slightly higher, indicating that changes in market access rather than labor reallocations are the main driver of the overall impact. Most of the gains appear to be in the short term.

Increase in employment but not in population

A key finding from our reduced-form survey concerns the responses of local employment and people to road investments. We find that improving access to the domestic market greatly increases the ratio of local employment to the population of a district while having a zero effect on its population. To discuss this result, we extend Allen and Arkolakis (2014) to the endogenous local labor supply.

The extended model has labor consumption and supply decisions that can be additively separated. This allows an endogenously determined local labor supply to differ from the size of the population and respond to changes in trade costs, even when the population is stationary in the short run. Another new element in the model is the disutility of location-specific labor, which is required to accommodate the variation in employment rates between locations. We interpret the latter measure as a scaled-down way to capture persistent local factors that affect formal labor force participation, including preferences for female labor force participation, which we show. that it is positively affected by better market access.

After establishing sufficient conditions for the existence and uniqueness of the equilibrium in the extended model, and calibrating its additional parameters, we compare the results generated by the model with the relevant empirical results as well as with the basic model. . We estimate the model on data from the 81 provinces of Turkey, which provides an appropriate level to capture geographic labor markets. The elasticity that the employment ratio at the province level changes with reductions in commuting time is estimated to be -0.083. To compare this number with its empirical equivalent, we re-estimate the reduced form specification at the province level and find an elasticity of -0.288. Thus, the implicit elasticity of the model (-0.083) captures about 30% of the empirical elasticity (-0.288). The extended model is both able to rationalize its motivating evidence and produce quantitatively relevant results.

The references

Allen, T and C Arkolakis (2014), “Trade and the topography of the space economy”, Quarterly Journal of Economics.

Asturias, J, R Ramos and MG Santana (2018), “Competition and welfare gains from transport infrastructure: evidence from the golden quadrilateral in India”, Journal of the European Economic Association.

Coşar, AK, B Demir, D Ghose and N Young (2021), “Road Capacity, Domestic Trade and Regional Outcomes”, NBER Working Paper No. 29228.

Duranton, G, P Morrow and MA Turner (2014), “Roads and Trade: Evidence from the US”, The Revue des Etudes Economiques.

Faber, B (2014), “Trade Integration, Market Size, and Industrialization: Evidence from China’s National Highway System”, The Revue des Etudes Economiques.

Gibbons, S, T Lyytikäinen HG Overman and R Sanchis-Guarner (2019), “New road infrastructure: the effects on businesses”, Urban economics journal 110: 35-50.

Gibbons, S, T Lyytikäinen, HG Overmanand R Sanchis-Guarner (2017), “New road infrastructure: the effects on businesses”, VoxEU.org, July 27.

Jaworski, T, C Kitchens and S Nigai (2020), “Highways and Globalization”, NBER Working Paper No. 27938.

Jaworski, T, C Kitchens and S Nigai (2020), “Globalization and the Value of National Road Infrastructure,” VoxEU.org, November 01.

Kebede, H (2019): “Gains from Market Integration: The Welfare Effects of Rural Roads in Ethiopia”, Mimeograph, University of Virginia.

Limao, N and AJ Venables (2001): “Infrastructure, geographic disadvantage, transport costs and trade”, The World Bank Economic Review 15 (3): 451-479.

Yeaple, S and S Golub (2007), “Differences in international productivity, infrastructure and comparative advantage”, Journal of international economics 15 (2): 223–242.