Transportation infrastructure and economic growth in China

This study investigates the role of access to transportation infrastructure in promoting economic growth. Do areas that benefit from access to better transportation infrastructure grow faster as a consequence? Despite the existing evidence that increased access to infrastructure reduces the cost of trade and labor migration, which in turn, should increase economic efficiency, there is no obvious answer. On the one hand, on can argue that agglomeration externalities could help making cities the key to economic progress – i.e., the “engines” of growth – and transportation infrastructure could play a role in helping cities to grow. On the other hand, increased access to infrastructure could reduce growth in certain regions. For example, in the United States, highway construction facilitated part of the wholesale suburbanization and left many cities without a viable economic model. To assess the average effect of access to transportation infrastructure on development and growth, this study uses county level economic data from China, which provides several advantages. The first one is that major infrastructure routes were laid down over a hundred years ago for reasons that were plausibly exogenous to economic factors in regions near these routes. In the late 19th and early 20th century, the Chinese government and a set of Colonial powers built railroads connecting the historical cities of China to each other and to the newly constructed Treaty Ports. Therefore, we identify a set of straight lines connecting a set of historical cities and treaty ports as transportation and communication networks and compare economic outcomes in regions that are closer to the line to those in regions that are further away. We exclude regions near the termini of the line, as they will be affected by their proximity to the termini cities. This strategy provides us with a source of plausibly exogenous variation in access to transportation networks. Because this variation has existed for approximately a century, it allows us to examine the long run effects of being close to the line (and hence infrastructure). Second, the rapid economic growth experienced by China in the post-1978 market reform era means that it is a good context to investigate the effect of access to infrastructure on growth. The results show that being close to the line does appear to have a positive level effect for GDP per capita. Surprisingly, however, this effect is quite small. Moreover, there is no effect on growth. These results are, of course, consistent with the view that transportation infrastructure does not significantly reduce transportation costs. In light of the evidence on this subject from existing works, this seems unlikely to be the case. Therefore, the study uses a simple theoretical model to show that these results are consistent with infrastructure leading to significant transportation cost reductions if there is limited mobility of capital and skills (e.g., labor). In other words, better transportation may lead to substantial cost savings, but the impact of these effects on output and growth are limited by the lack of factor mobility within China. Thus, the result that access to infrastructure during a period of rapid economic growth does not cause differential growth rates in China, where institutional factors indeed limit the movement of capital, may provide a stark example of the importance of factor mobility.