Sunday, October 19, 2008

Roads, growth, and development

After reading my latest op-ed, some readers emailed me interesting (and positive) remarks. The piece was about Krugman and application of his New Economic Geography theory in the context of Nepal. Towards the end of the op-ed, I tried to draw in some policy implications and said that for development and poverty reduction, the government should try to induce spread of industries from "core" to "periphery". And, one important step in this direction would be to build, build, and build roads (I mean transportation services). It means high public expenditure and an activist policy. I also suggested the way in which the private sector can be engaged in this effort. Okay!

Today, Shailee Pradhan published an op-ed arguing that "the creation of roads does not always lead to development and prosperity". To be frank, this was the subtitle. The main title was: Road to development. It is up to the readers to judge how contradictory the main title and the subtitle of the op-ed is!

High transportation costs have led to industries clustering in select few locations, creating an uneven development process. The difference between the urbanised "core" and the lesser developed "periphery" is troubling. While the question of how to ensure the formation of such cores in the villages is an important one, it is first necessary to ask where to encourage such cores and what sectors to specialise in.

...However, it is critical to plan where to build roads by identifying and prioritising key areas based on the population and their needs. How important was it to build the road to Jomsom? With a population of less than 10,000, Mustang district (Jomsom is the district-headquarters) is sparsely populated. Mustang is not a high food-producing area either, except for apples of which only about 20,000 tons are produced annually.

Furthermore, the ecosystem around the Annapurna Circuit is very fragile as these are young mountains made of sedimentary rocks. The road construction process involving heavy blasting as well as the additional traffic flowing in now have put serious pressure on the ecosystem and the biodiversity here.

...It is necessary to diversify "cores" for a more even development, but building roads and creating industries is not the only way to diversify such cores. Where the costs of building roads, monetary and environmental, are extremely high, alternative modes of transportation such as cable cars and airplanes should be considered.

Let me take on some of the issues. I agree that there is some form of trade-off between building roads and environment. Also, there is no doubt that health of ecosystem and negative externalities should be kept in mind before building roads. Period.

Regarding this op-ed, I have two points to say: (i) the concept of "core" and "periphery" is primarily related to the nature of location or clustering of industries in one location, (ii) industries tend to cluster around locations where there is relatively easy availability of backward and forward linkages, where there is potential consumer, and where there is low transportation costs. With this, this process is self-sustaining (some form of endogenity will come into play).

To induce spread of industries in other places except in few industrial hubs only, I argued for government intervention to create necessary conditions (one of them to build roads) to decrease transportation costs. This was in context of explaining the theory I was discussing about. It is not possible to have "cores" in an area like Jomsom, where per capita purchasing power is very low and the population itself is not considered to be worthy of generating enough effective demand to fend off associated costs of establishing new industries. By arguing for activist policies to induce spread of industries, I meant to focus on building roads in places where the two conditions discussed above are satisfied.

Yes, there are places like Syangja, Palpa, Butwal, Baglung, etc. where the two conditions are fairly fulfilled. Obviously, this also means that Mustang is out of consideration. Moreover, I not only argued for building roads. Where it is not feasible, it is fruitful to build other means of transportation like cable car, airports, and railways. In places like Jomsom, these means of transportation can only link the outlier districts with the urban places. Except for railways (which is not feasible due to budget constraints and topographical issues), the other two modes of transportation will not decrease transportation costs. It will, in fact, increase the cost of production. Furthermore, road construction project should not be carried out if the marginal cost of making it is higher than the private cost.

Roads are one of the most effective means to link production site to markets  and vice versa. This is actually one of the necessary conditions for long term economic growth. This is essential both for economic growth and long term development. And yes, it can be done in a sustainable fashion.