Railways and the Raj: The Economic Impact of Transportation Infrastructure

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Railways and the Raj The Economic Impact of
Transportation Infrastructure

• Dave Donaldson
• (d.j.donaldson_at_lse.ac.uk)

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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?

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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

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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)

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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

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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)

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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?

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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

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

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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

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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)

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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

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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

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The first stage

• Run regressions of form

• Where Z is a variable that predicts R, but has no
  direct effect on y

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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
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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

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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

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Lines suggested in 1880 Famine Commission report
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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

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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?

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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?