Economic Research Forum (ERF)

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

232
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).

 

Most read

Why the West got rich and the Middle East did not

Today’s rulers of the three largest Middle Eastern economies all look to religious authorities as a key source of legitimacy. Drawing on a broad sweep of historical analysis, this column explores what this might mean for the region’s economic future. One notable danger is that the types of people who would push for policies that promote long-run growth are excluded from the political bargaining table.

Why Turkish growth ended

Following a period of rapid economic growth, the Turkish economy has slowed significantly since 2007. This column argues that these economic ups and downs reflect institutional improvements in the aftermath of the country’s 2001 financial crisis, followed by an ominous slide in the quality of these economic and political institutions.

Implications of the current low oil prices for MENA countries

The current low oil price environment, in part driven by the US shale oil revolution, has important macroeconomic implications for the Middle East and North Africa (MENA). This column reports research evidence on its likely impact on both oil-exporting and oil-importing countries in the region.

Prospects for development with democracy in the Arab world

What are the prospects for democracy in the Arab world? This column expresses the hope that as conflict-afflicted countries embark on their programmes of economic reconstruction, autocratic institutions will not be re-established under the pretext of the need for a speedy and steady recovery. The optimal path of development necessarily includes robust growth, equity as well as democracy.

An agenda for reducing income inequality in the Arab countries

What can be done to reduce income inequality in Arab countries? This column explores issues of measurement as well as potential policy measures. It concludes by calling for a new multipurpose pan-Arab survey that would allow for an evidence-based decision-making process on the impact of proposed policies on poverty and inequality.

The United Arab Emirates’ dilemma

As energy-producing economies strive to reduce their reliance on oil revenues, they must strike a balance between the competing demands of fiscal sustainability and steady growth of the non-energy sector. This column outlines how the United Arab Emirates is addressing this challenge.

Freedom for women is crucial for economic progress in MENA

The Middle East was once the cradle of civilisation: can it prosper once again? Looking back at lessons from the European Enlightenment, this column argues that if the region wants to advance economically, it needs to advance in terms of its treatment of women. Female agency is central to understanding the West’s technological leadership of the past two centuries.

Inequality in higher education: Egypt, Jordan and Tunisia

Attainment of higher education is strikingly unequal in Egypt and Tunisia, and a little less so in Jordan. This column reports research showing that in all three countries, family background is the primary driver of inequality. Particularly in Egypt and Tunisia, public spending on higher education is regressive, with the result that what purports to be a meritocratic and equitable system in reality perpetuates inequality.

Oil exporters’ responses to the US fracking boom

What are the implications of low oil prices for the economic and political stability of Arab oil-exporting countries such as Saudi Arabia? This column explores the impact of the US fracking boom on Arab oil revenues – and how policy-makers in these countries should respond.

Pension reform that avoids harming MENA labour markets

To tackle the deficits in their pension systems, should governments in Arab countries raise social security contributions, reduce pension levels or increase the statutory retirement age? This column summarises the results of research assessing the costs and benefits of different pension reforms in terms of their impact on different generations and on the labour market.