The Routledge Handbook of Modern Economic History by Whaples Robert M.; Parker Randall E.;

Author:Whaples, Robert M.; Parker, Randall E.;
Language: eng
Format: epub
Publisher: Routledge

The Impact of Transport on Economic Development

It has long been argued that transport improvements generate development. But the size of these developmental effects is still in debate. This final section reviews the literature studying the impact of transport improvements. It also discusses the channels by which transport influences development.

Nineteenth-century boosters often argued that railroads were crucial to economic development, but they did not have a clear method to test their argument. Economic historians of the 1960s approached this issue using a novel approach known as the “social savings” methodology. The goal is to measure how much consumer surplus was gained from railways at some benchmark date, say 1860 or 1890. The reasoning is that railway customers would have relied on alternative transport modes, like wagons and boats, in the absence of railways. A simple approximation for the gain in consumer surplus is the difference between freight rates for wagons and railroads multiplied by quantity of rail traffic in 1860 or 1890. Prices are meant to capture the marginal costs of each technology under perfect competition and the quantity of traffic proxies for consumer demand.

Early research showed that the social savings of railways were surprisingly small in the U.S. According to two prominent studies, U.S. GDP would have been lowered by only a few percentage points in 1860 or 1890 had railways never existed (Fishlow 1965; Fogel 1970). Similar conclusions were reached for railways in European countries (O’Brien 1983). The view that railways were indispensible for nineteenth-century development was largely debunked for more developed economies. For less developed countries, like Mexico and Brazil, railways had much larger social savings and could be considered “crucial” if not indispensable (Summerhill 2005; Coatsworth 1979).

The social savings methodology is controversial, however. Critics point to a number of problems. First, it is not clear what the price of road or water transport would have been in the absence of railways. Congestion would have increased on roads and rivers with the increased traffic volume. The cost of using alternative transport modes is arguably underestimated as a result (McClelland, 1968: 114). Second, the social savings calculation omits spillovers. Railways increased demand for iron and steel and increased competition in manufacturing. The size of these backward and forward linkages is unclear. There are also changes in economic geography to consider. In theory, lower transport costs can lead to agglomeration of economic activity, like the emergence of cities. The standard social savings methodology has no way of measuring the effects on urbanization.

Yet, the social savings methodology has yielded a number of insights that are worth mentioning. First, railways offered time savings as well as monetary savings. One study quantifies the value of time saved on British railways and shows it was equal to approximately 10 per cent of GDP in 1913. Railways were important in this regard because walking was the alternative for many low-income passengers (Leunig 2006). Second, the social savings methodology shows how different transport modes can serve as substitutes. Countries without effective road and water transport often had higher social savings from railways.

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