Economic Research Forum (ERF)

Highways to growth: the impact of road upgrades on Turkish trade

2188
Investment in transport infrastructure can improve a country’s growth prospects by facilitating trade. This column reports the findings of research on the impact of a major programme of road upgrades in Turkey from the early 2000s, which converted many two-lane undivided roads into dual carriageways. Trade both within the country and with other countries has benefited significantly from these improvements.

In a nutshell

Upgrading congested arteries of two-lane paved roads into four-lane carriageways is a cost-effective investment with a high rate of return for middle-income countries.

The cost of an average shipment over a high-capacity expressway is 70% lower than over single-lane roads: lower freight costs imply higher exports.

Reduced travel times from better roads have a positive effect on trade between domestic regions – and the impact is as important for the service sector as for manufacturing industries.

Transport plays a vital role in modern market economies by enabling domestic and international trade. High transport costs impede market access in isolated regions, in terms of firms’ ability both to sell goods and to buy the inputs they require. Thus, investment in transport infrastructure can improve growth prospects by facilitating trade.

This is an area in which the Middle Eastern and North African (MENA) region has substantial investment needs. According to the 2013 EBRD and World Bank Enterprise Surveys, the percentage of firms that identify transport as a major constraint in the region is 21%, several percentage points higher than the worldwide average (EBRD, 2017).

How should authorities in the region go about prioritising various projects in order to improve the connectivity of their firms and people? The experience of Turkey from a major programme of road upgrades since the early 2000s offers useful insights.

As in many MENA countries, Turkey had an extensive network of paved inter-provincial roads prior to the 2000s (the red lines in Figure 1). But since divided multi-lane highways made up only a small percentage of that network (the black lines in Figure 1), the capacity of these roads had long been considered inadequate.

In order to relieve congestion and reduce the high rate of road accidents, the authorities launched a large-scale programme of public investment in 2002. Subsequent construction converted a sizable fraction of existing single carriageways (two-lane undivided roads) into dual carriageways (divided four-lane expressways – see Figure 2).

As a result, the length of dual carriageways increased by more than threefold during the period from 2003 to 2015, while total road stock remained essentially unchanged (see Figures 3 and 4). The increase in capacity has allowed vehicles to travel more reliably at higher speeds, reducing accident rates and making arrival times more predictable.

A key policy-relevant aspect of this investment is the choice of expanding the lane capacity of existing roads rather than constructing highways. According to cost studies from Turkey, 1km of a new highway costs between $4 million and $8 million whereas expanding an existing two-lane road into a divided four-lane dual carriageway costs around $1 million (Gerçek, 2001).

Evidence from the United States shows that adding new lanes to an existing freeway can range between $2 million and $10 million per lane-mile while the cost of constructing a new freeway can range between $5 million and $20 million per lane-mile (Texas A&M Transportation Institute). For countries that have a decent network of paved roads to begin with, upgrading them to a dual carriageway is thus a cost-effective intermediate step.

Besides its cost efficiency, what has been the quantitative impact of this investment on international and domestic trade? We address this question in two empirical studies: in Coşar and Demir (2016) and Coşar et al (2018), we use data on sectoral inter-national trade of Turkish provinces and intra-national trade across Turkish provinces, respectively, to estimate the response to improved road connectivity within the country.

Our first result shows that the cost of an average shipment over a high-capacity expressway is about 70% lower than it is over single-lane roads. Lower freight costs imply higher exports.

Taking the average increase, and the cost of building a kilometre of dual carriageway at the reported $1.1 million, each dollar spent on quality-improving investment in transport infrastructure generates a 10-year discounted stream of export flows of between $0.7 and $2, depending on the discount factor used of between 5% and 15%. This is a substantial boost to exports.

Moreover, the increase is more pronounced in time-sensitive industries such as machinery, chemicals and electronics. This highlights the importance of domestic transport infrastructure in moving goods from factories to ports in a timely and predictable fashion.

Our findings have important implications for growth: efficient logistics in time-sensitive goods enable countries to take part in global supply chains and exploit their comparative advantages. Due to its geographically advantageous position between Europe and the fast-growing East and South East Asian economies, the MENA region stands to gain from this mechanism.

Our results on domestic trade reveal further interesting patterns. The quantitative impact of road improvements on domestic trade is economically and statistically significant. In particular, a one-hour reduction in travel times between two provinces increases inter-industry bilateral trade by about 5%.

But this figure masks important qualitative patterns. Before the roads were upgraded, 43% of all potential province-to-province links in Turkey were unexploited, with zero trade. After the investment, most links were realised with just 3% left without any trade.

The result is increased integration of markets within the country. Among all provinces, those that were previously most isolated show the largest gains. This also manifests itself as increased employment and sales in these regions.

We also find positive effects for the service sector. This implies that the effects of reduced travel times between domestic regions on industries involving the movement of people are as important as their effects on those producing goods. To the extent that this translates into higher frequency of economic interactions as well as social interactions, it may prove to be a unifying force that contributes to cohesion within countries.

Note that our analysis leaves out several important benefits such as the value of time and fuel savings, as well as the value of decreased accident and mortality rates. Even without taking these into account, upgrading congested arteries of two-lane paved roads into four-lane carriageways seems to be a cost-effective investment with a high rate of return for middle-income countries.

Further reading

Coşar, AK, and B Demir (2016) ‘Domestic Road Infrastructure and International Trade: Evidence from Turkey’, Journal of Development Economics 118.

Coşar, AK, B Demir and N Young (2018) ‘Road Capacity, Domestic Trade and Regional Outcomes’, Working Paper.

EBRD (2017) Transition Report 2017/2018: Infrastructure and Growth, Chapter 3, European Bank for Reconstruction and Development.

Gerçek, H (2001. ‘Otoyolların mali ve ekonomik değerlendirilmesi’, 06/2001, s. 89-100, 5. Ulaştırma Kongresi, TMMOB, İstanbul Şubesi, İstanbul, 30.05.2001 – 01.06.2001 (accessed on 14 January 2018).

Texas A&M Transportation Institute (2018) ‘Adding New Lanes or Roads’ (accessed on 14 January 2018).

 

Tags: , , , ,

Most read

Trust in Lebanon’s public institutions: a challenge for the new leadership

Lebanon’s new leadership confronts daunting economic challenges amid geopolitical tensions across the wider region. As this column explains, understanding what has happened over the past decade to citizens’ trust in key public institutions – parliament, the government and the armed forces – will be a crucial part of the policy response.

Qatarisation: playing the long game on workforce nationalisation

As national populations across the Gulf have grown and hydrocarbon reserves declined, most Gulf countries have sought to move to a more sustainable economic model underpinned by raising the share of citizens in the productive private sector. But, as this column explains, Qatar differs from its neighbours in several important ways that could render aggressive workforce nationalization policies counterproductive. In terms of such policies, the country should chart its own path.

Small businesses in the Great Lockdown: lessons for crisis management

Understanding big economic shocks like Covid-19 and how firms respond to them is crucial for mitigating their negative effects and accelerating the post-crisis recovery. This column reports evidence on how small and medium-sized enterprises in Tunisia’s formal business sector adapted to the pandemic and the lockdown – and draws policy lessons for when the next crisis hits.

Economic consequences of the 2003 Bam earthquake in Iran

Over the decades, Iran has faced numerous devastating natural disasters, including the deadly 2003 Bam earthquake. This column reports evidence on the unexpected economic boost in Bam County and its neighbours after the disaster – the result of a variety of factors, including national and international aid, political mobilisation and the region’s cultural significance. Using data on the intensity of night-time lights in a geographical area, the research reveals how disaster recovery may lead to a surprising economic rebound.

Qatar’s pursuit of government excellence: promises and pitfalls

As Qatar seeks to make the transition from a hydrocarbon-based economy to a diversified, knowledge-based economy, ‘government excellence’ has been identified as a key strategic objective. This column reports what government effectiveness means in terms of delivery of public services, digitalisation of services, and control of corruption – and outlines the progress made to date on these development priorities and what the country needs to do to meet its targets.

The impact of climate change and resource scarcity on conflict in MENA

The interrelationships between climate change, food production, economic instability and violent conflict have become increasingly relevant in recent decades, with climate-induced economic shocks intensifying social and political tensions, particularly in resource-constrained regions like MENA. This column reports new evidence on the impact of climate change on economic and food production outcomes – and how economic stability, agricultural productivity and shared water resources affect conflict. While international aid, economic growth and food security reduce the likelihood of conflict, resource scarcity and shared water basins contribute to high risks of conflict.

A Macroeconomic Accounting of Unemployment in Jordan:  Unemployment is mainly an issue for adults and men

Since unemployment rates in Jordan are higher among young people and women than other groups, unemployment is commonly characterised as a youth and gender issue. However, the majority of the country’s unemployed are adults and men. This suggests that unemployment is primarily a macroeconomic issue challenge for the entire labour market. The appropriate response therefore is coordinated fiscal, monetary, structural and institutional policies, while more targeted measures can still benefit specific groups.

The green energy transition: employment pathways for MENA

The potential employment impacts of green and renewable energy in the Middle East and North Africa are multifaceted and promising. As this column explains, embracing renewable energy technologies presents an opportunity for the region to diversify its economy, mitigate the possible negative impacts of digitalisation on existing jobs, reduce its carbon footprint and create significant levels of employment across a variety of sectors. Green energy is not just an environmental imperative but an economic necessity.

Tunisia’s energy transition: the key role of small businesses

Micro, small and medium-sized enterprises (MSMEs) play a critical role in Tunisia’s economy, contributing significantly to GDP and employment. As this column explains, they are also essential for advancing the country’s ambitions to make a successful transition from reliance on fossil fuels to more widespread use of renewable energy sources. A fair distribution of the transition’s benefits across all regions and communities will secure a future where MSMEs thrive as leaders in a prosperous, inclusive and sustainable Tunisia.

Global value chains, wages and skills in MENA countries

The involvement of firms in production across different countries or regions via global value chains (GVCs) can make a significant contribution to economic development, including improved labour market outcomes. This column highlights the gains from GVC participation in terms of employment quality in Egypt, Jordan and Tunisia. Given the high unemployment, sticky wages and wide skill divides that are common in the MENA region, encouraging firms to participate in GVCs is a valuable channel for raising living standards.