Undercover Economist

How the humble train helps countries get on track

Railways are back in fashion. Globally, the industry has been booming, thanks less to high oil prices than to a growing emphasis on the environmental benefits of trains over planes. The UK now has its first high-speed railway line (a few decades after everyone else), Barack Obama is promising similar links in the US, Japanese-built bullet trains are making a splash in Taiwan, and the French seem never to have lost their love of fast trains. Then, of course, there are the rather slower trains operated by the state-owned Indian Railways, the world’s largest commercial employer, with 1.4 million staff.

But it is the rail system of a bygone India that has attracted my attention recently. Colonial India – which comprised present-day India, Pakistan and Bangladesh – had no railways in 1850 but more than 60,000km of track by 1930. What difference did that expansion make to the country’s economy?

Dave Donaldson is a young economist who now knows more about the details of colonial railways than anyone alive. For his PhD research on the subject at the LSE, Donaldson had to build a massive database based on paper records of the railway building programme, gathered in painstaking detail by colonial officials.

It seems obvious that the railways should have had a large impact – they did not compete with cars or planes, but with bullocks on dirt roads that a train could outpace by a factor of 20. But not everyone was convinced. Romesh Dutt, an Indian historian and politician, argued over a century ago that the railways did not help rural areas, while Mahatma Gandhi saw them as promoters of the bubonic plague and accessories to famine. (If they can ship food in, he reasoned, they can also ship food out.) And it is certainly true that the British had military aims uppermost in their minds when they built the network.

But, according to Donaldson’s research, the sceptics are wrong. The railways profoundly improved the rural economies through which they passed. Thanks to a data-hungry colonial administration, which collected information on local crop prices and rainfall, Donaldson was able to calculate the improvements with some precision.

He discovered that whenever two regions were linked by rail, prices of transportable products converged; local droughts no longer affected food prices, but widespread droughts elsewhere suddenly did; local income became less volatile; and income levels rose by almost 20 per cent, although they fell slightly in areas bypassed by the railways. Donaldson tracks all of these (largely beneficial) effects to the fact that the railways increased trade with other regions of India and the world beyond. It is one of those periodic reminders, which economists need to put out to the rest of the world, that allowing people to trade with those outside their immediate community is not an entirely pernicious act.

Since the alternatives to the train are somewhat better in modern western nations than they were in the India of 1860, I doubt that spiffy high-speed rail links will have quite the same effect. Still, Donaldson’s research is a reminder of the huge importance of quality transport links. It will come as encouragement to the World Bank, an enthusiastic supporter of transport infrastructure projects, which have recently made up one fifth of all new lending.

The Bank has also started to target unnecessary barriers to internal and external trade, from age-old standbys such as tariffs, to corruption and red tape at border crossings. It should be cheaper to deal with them than build a new road or railway, and just as important.

Also published at ft.com.