We return to two questions concerning the 19th century U.S. transportation revolution. First, to what extent were transportation improvements responsible for the large changes in the regional distribution of population in the United States and, within regions, for the changes in industry structure? Second, how important were transportation improvements for welfare gains? We find that transport improvements were the key factor driving where people lived and what industry they worked in. We also find that transport improvements were important for welfare gains: Gains over 1840-1860 would have been only half as large if there had been no transportation improvements.
From a new International Economic Review article by Berthold Herrendorf, James A. Schmitz, Jr., and Arilton Teixeira.
The emphasis is mine and, quite frankly, I’m surprised that the effect of transportation improvements on welfare is not larger. Better transportation decreases transaction costs, which means that for many goods and services, buyers pay a lower effective price (i.e., market price plus transaction costs) and sellers receive a higher effective price (i.e., market price minus transaction costs).
Decreased transaction costs also stimulate market activity because more would-be buyers and would-be sellers participate on the market rather than opt not to participate, which expands their choice sets, which in turn cannot decrease welfare. This is what development economists mean when we talk “market access.”
Chris Barrett and I empirically explored the effects of fixed and variable transaction costs on the market participation decisions of buyers and sellers of livestock in the region straddling the Kenya–Ethiopia border in our 2006 American Journal of Agricultural Economics article. Among other things, we found that high transaction costs impede market participation.
Especially when compared to the initial, pre-globalization study you cite, I was reminded of a study on rural roads and transportation in Nepal (which I can’t seem to find at the moment…). In addition to some benefits, what also became obvious was that road access had some social cost attached to it. Truck drivers and HIV/AIDS, increase in prostitution and drinking-related incidences (again, mostly truck drivers and ‘outsiders’), but also cheap outside products that distorted local markets. The improved access also encouraged young men to leave the area, seeking employment elsewhere (+ remittances, – social fabric and rural agriculture suffered); I do see the benefits of road schemes and improved transportation, but there is an impact and I wonder whether some (development) economist tend to overlook detrimental effects of connectivity to global markets and ideas.
Thanks for your comment, Tobias. There are also environmental impacts to roads, whether it’s deforestation or increased pollution because of the fossil fuels used. That said, like any other policy interventions, roads involve trade-offs. You are right, however, that the research deck has mostly been stacked in favor of showing the positives. It would be very interesting to see studies looking at a host of “welfare” impacts, e.g., health, social capital, incomes, etc.
I have an interesting data point to illustrate. Take the busiest passenger rail tracks — NYC to PHL — and look at all of the old industry and side rails connected to it. There are dozens of old factories, warehouses, and cheap housing along the trackage, archaeological evidence waiting to prove or disprove either side of the discussion.
Thanks for your comment, Christopher. In that spirit, I think you might also be interested in my colleague Liz Ananat’s paper in AEJ: Applied, in which she uses the presence of railroads to exogenize the degree of segregation in a city in order to study the causal impact of segregation on poverty. You can find it here: http://www.npc.umich.edu/news/events/econshocks/Ananat_Railroads_and_Segregation_21_Sept_2008.pdf
So, someone really did do a study on “born on the wrong side of the tracks”?
Living — not born — on the wrong side of the tracks.
Right, thank you for clarifying my flippant remark. Halfway through it, chilling coldblooded analysis of fallback planning and containment strategies. Explains a few things.