How much does infrastructure boost an economy?

April 27, 2018 by Peter Dizikes, Massachusetts Institute of Technology
The Darjeeling Himalayan Railway in India. Credit: Massachusetts Institute of Technology

Before 1870, India barely had railroads. It didn't have many canals either, and only a small percentage of the population lived along the three main rivers. So when goods needed to be transported, people used steer, which could pull freight about 20 miles per day.

But the British, India's colonial rulers, started building rail lines, and then built some more. By 1930, there were more than 40,000 miles of railroads in India, and goods could be shipped about 400 miles a day.

The result? As MIT economist David Donaldson shows in a newly published study on the economic impact of building infrastructure, railroads fostered commerce that raised real agricultural income by 16 percent.

"It shows that in the places where the arrived in India, living standards improved," says Donaldson, a professor in MIT's Department of Economics.

Donaldson's paper on the subject, "Railroads of the Raj: Estimating the Impact of Transportation Infrastructure," just published in the American Economic Review, may also speak to the importance of infrastructure more broadly. After all, as he notes in the paper, about 20 percent of World Bank lending in the developing world goes to infrastructure projects. And in the United States, debate rolls on about the value of building and refurbishing America's roads, bridges, railroads, ports, and airports.

And while every country is different, and circumstances change over time, Donaldson's research suggests that the growth India experienced as its railroads grew was specifically the result of increased trade, a general finding that could be applied to other countries and other eras.

"Phantom lines" and the failure of growth

The introduction of railroads to India—then consisting of modern-day India, Pakistan, and Bangladesh—started in 1853, but 98 percent of India's existing rail lines were built from 1870 to 1930. Using archival records never before quantified in a single study—including information on trade, prices, and output—Donaldson first charted the growth of tracks in 235 geographic districts. He then tallied the growth in trade among those districts, as well as the growth of international trade originating in those areas.

Looking at 17 different crops that accounted for 93 percent of the farmed area in India in 1900, Donaldson analyzed annual income-per-acre statistics for all the agricultural goods, while accounting for factors such as rainfall data when estimating agricultural productivity.

In all, the growing presence of railroads reduced the cost of trade, lowered price gaps among regions, and increased the amount of goods being traded.

In his study, Donaldson anticipates multiple caveats to his conclusion. For instance: What if the railroads were built in areas that would have grown anyway? To address this, he studied what happened in regions where the British planned but did not build about 40,000 miles of rail lines—"phantom lines," as he calls them.

"It could have been that planners were just good at forecasting growth, and they just put railroads in places that were going to take off anyway," Donaldson says. "In that case, these correlations would not indicate causation. But it is reassuring to see that in the places that they chose but then decided not to build in, for a range of pretty idiosyncratic reasons, you don't see systematic changes in economic activity around the time those railroad lines would have been built."

In those cases, the lack of rails apparently constrained growth; even in areas where railroads were constructed for military reasons, trade grew.

Another question is whether growth stemmed from the increased capacity to exchange goods, or whether it was, say, the spread of technical knowledge enabled by improved transport that made the difference. Donaldson's data show that across India, changes in openness to trade closely track the arrival of the railroads, while other kinds of technological changes do not, and do not link to growth in a discernible way.

"There are other effects railroads could have had," Donaldson says. "But when you parse it, it looks like enhanced trade openness played an important part in the way that railroads affected living standards."

India's past, our present?

Even before its formal publication, "Railroads of the Raj" has had a significant impact in its field. Donaldson was awarded the 2017 John Bates Clark Medal in economics—granted by the American Economic Association (AEA) to the best scholar under the age of 40—partly on the basis of the paper's research.

"This paper is widely viewed as both a methodological breakthrough and substantively important paper in the field," the AEA noted in its 2017 citation of Donaldson's work.

Still, as Donaldson readily acknowledges, it is an open question how broadly one can apply such findings. Do changes in India's infrastructure many decades ago bear on the world today? He points out that every episode of growth we can study is historical, so studying the matter can shed light on economic mechanisms that might apply today.

"There is some debate about the difference between economics and economic history," Donaldson says. "But I don't really see much of a distinction. History is full of interesting episodes that we can learn from, and if you want to look at data, as I think we should, then you're always going to be looking at the past."

Moreover, as Donaldson notes, because his study identifies a particular role for trade as a driver of , we can try to evaluate analogous projects today—roads, ports, and more—in terms of potential trade impact, even if those forms of transport are different.

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16 comments

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Jeffhans1
5 / 5 (2) Apr 27, 2018
I would like to see how universal highspeed internet boosts their economy.
Da Schneib
not rated yet Apr 27, 2018
Here's an interesting parallel: the growth of the Internet.
MaheshBharat
3 / 5 (2) Apr 28, 2018
Highly biased and inaccurate article. British created railroads in India to ship their own goods into the hinterlands and carry raw materials out. It was never intended for the benefit of the Indians. In fact, the railways were built using Indian labor and using Indian tax payers' money as collateral. The return on investment for the British was the highest compared to anywhere else in the world.
The claim that railroads improved living standards is all nonsense. Just to remind the author: before the British rule, India's contribution to world GDP was a staggering 23%. At the time of India's independence, it was reduced to less than 1%. At the same time, more than 93% of the country was reeling under poverty because the British had drained and looted India of its wealth.
This article is a typical western lens on how the western civilization uplifted the eastern ones without actually understanding the ground realities of colonization.
katesisco
1 / 5 (1) Apr 28, 2018
Succinct and accurate MB. The British went after the hugely successful cloth patterning and dyeing industry intentionally to destroy it as to enable the British product to gain dominance.
ab3a
not rated yet Apr 28, 2018
It is true. Building infrastructure pays big dividends. However, I wonder if the same thing is true about rebuilding infrastructure?
ddaye
not rated yet Apr 28, 2018
I live in the one time Rubber Capital of the World, Akron OH USA. It earned that designation even before the automobile tire business arose in part because it was connected to the 19th century Information Superhighway, the Ohio & Erie Canal system which let us ship north to the Great Lakes and south to the Gulf and world. Quite a few other major industrial cities in the US prospered because of human built infrastructure including harbors, canals, railroads and highways.
humy
5 / 5 (2) Apr 29, 2018
British created railroads in India to ship their own goods into the hinterlands and carry raw materials out. It was never intended for the benefit of the Indians.

Just because it wasn't originally built for the benefit of the Indians doesn't mean it would never do so.
What about now? Aren't any Indians benefiting from the railways now? I would say it does benefit them now.
Much of our technology that now greatly benefits people including medical technology & medicines wasn't initially made by the inventors deliberately and specifically to benefit other people but rather the initial motive was often just profit and even greed; a case of doing the right thing but not necessarily the morally commendable and honorable reasons and often for questionable and completely selfish reasons.
That's capitalism for you. If there was no capitalism then I guess there wouldn't have been an industrial revolution.
humy
not rated yet Apr 29, 2018
my misedit in my above post;

"...but not necessarily the morally commendable.."

should have been;

"...but not necessarily for the morally commendable..."
Thorium Boy
2.3 / 5 (3) Apr 30, 2018
If it wasn't for oil, Arabs would still be living in tents and herding camels, if it weren't for the British, Indian would be like it was 200 years ago. The price of colonization was well worth it for those places.
maholmes1
not rated yet Apr 30, 2018
Highly biased and inaccurate article. British created railroads in India to ship their own goods into the hinterlands and carry raw materials out. It was never intended for the benefit of the Indians. In fact, the railways were built using Indian labor and using Indian tax payers' money as collateral. ...
The claim that railroads improved living standards is all nonsense. Just to remind the author: before the British rule, India's contribution to world GDP was a staggering 23%. At the time of India's independence, it was reduced to less than 1%. At the same time, more than 93% of the country was reeling under poverty because the British had drained and looted India of its wealth.
This article is a typical western lens on how the western civilization uplifted the eastern ones without actually understanding the ground realities of colonization.


Maybe it can be taken as an unintended benefit or silver lining.
maholmes1
not rated yet Apr 30, 2018
I live in the one time Rubber Capital of the World, Akron OH USA. It earned that designation even before the automobile tire business arose in part because it was connected to the 19th century Information Superhighway, the Ohio & Erie Canal system which let us ship north to the Great Lakes and south to the Gulf and world. Quite a few other major industrial cities in the US prospered because of human built infrastructure including harbors, canals, railroads and highways.


True, and the Mississippian Native Americans who built Cahokia had this far-flung well-developed trade network that they built (as far as I know) using only what they'd been given by nature, the rivers, no wheeled vehicles or even pack animals. Artificial improvement like railroads and canals just made it better.
maholmes1
not rated yet Apr 30, 2018
If it wasn't for oil, Arabs would still be living in tents and herding camels, if it weren't for the British, Indian would be like it was 200 years ago. The price of colonization was well worth it for those places.


These people who had to deal with The White Man's Burden and eventually kick the colonialists out likely wouldn't agree with you, for one thing, and for another, Europeans benefited from Chinese, Indian and Arab scientific and technological knowledge as their former colonial subjects benefited from what they had, but I'm pretty sure that nothing would have made the benefits of being under foreign hegemony worth it to the Europeans, either. Also, having made a conscious effort to reject ethnocentrism and other forms of--I'm sure that these nations that were colonized would have done well left to their own devices.
Da Schneib
not rated yet Apr 30, 2018
@Mahesh, do you have sources for your economic claims? Links perhaps so we can see evidence ourselves?
Da Schneib
not rated yet Apr 30, 2018
The paper is available on line. https://dave-dona..._AER.pdf

The data and methodologies look pretty good from over here. Perhaps someone can critique them.
MaheshBharat
not rated yet May 03, 2018
Just because it wasn't originally built for the benefit of the Indians doesn't mean it would never do so.
What about now? Aren't any Indians benefiting from the railways now? I would say it does benefit them now.

Well, the whole world is benefiting from air transport not because of colonization by the US, but because of fair trade agreements that exist. Similarly India would have imported railways even if the British had not colonized it.
Let's take a minute and try to understand what the article is trying to establish. It is indicating that India's economy (meaning Indian people) progressed DURING the British rule because of the railways that they introduced. This is false. Despite the railways, much of the Indian population were reeling under abject poverty during the British rule.
So not everything can be seen from a capitalistic point of view. For e.g African-Americans are benefiting from the modern US society, but this does not justify slavery that occured.
MaheshBharat
not rated yet May 03, 2018
@Mahesh, do you have sources for your economic claims? Links perhaps so we can see evidence ourselves?

Sure.

1. Here is a book that I recommend:
Inglorious Empire: what the British did to India

2. Here is another one:
An Era of Darkness: The British Empire in India

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