The Unassuming Economist

From a new IMF working paper:

“This paper examines the impact of highway expansion on aggregate productivity growth and sectoral reallocation between cities in China. To do so, I construct a unique dataset of bilateral transportation costs between Chinese cities, digitized highway network maps, and firm-level census. I first derive and estimate a market access measure that summarizes all direct and indirect impact of trade costs on city productivity. I then construct an instrumental variable to examine the causal impact of highways on economic outcomes and the underlying channels. The results suggest that highways promoted aggregate productivity growth by facilitating firm entry, exit and reallocation. I also find evidence that the national highway system led to a sectoral reallocation between cities in China.”

“The findings presented in this paper have important policy implications. Facing the threat of secular stagnation, policymakers are searching for tools to boost aggregate demand in the short run and promote economic growth in the long run. After the global recession, there has been a growing interest among policymakers worldwide in using infrastructure investments both as a short-term fiscal policy instrument and as a long-term growth generator. For example, the World Bank has consistently dedicated itself to investing in infrastructure in low-income countries to fight poverty. The International Monetary Fund is also actively advocating for more infrastructure investments in Latin America and Africa to meet the infrastructure needs and boost economic growth in these regions. The two recently-founded development banks–the Asian Infrastructure Investment Bank and the New Development Bank, were established under the leadership of China to address the increasing infrastructure needs in Asia. The US President Donald Trump envisions a trillion-dollar infrastructure plan. The increasing use of infrastructure projects by policymakers begs the question of whether the huge amount of tax dollars spent on infrastructure is well justified by their potential benefits.”