1) A study in Ethiopia examined how transport costs affect rural poverty by surveying over 1800 households along a gradient of varying transport costs. 2) The study found that living standards decline substantially with increased remoteness, as reflected by lower land values and calorie consumption further from towns. 3) Remoteness influences economic activity through von Thünen and agglomeration effects - transport intensive crops are grown closer to towns, while non-agricultural labor opportunities increase near towns.

1. ETHIOPIAN DEVELOPMENT RESEARCH INSTITUTE The benefits of lower transport costs Hanan Jacoby, World Bank Bart Minten, IFPRI-ESSP II Ethiopian Economic Association Conference July 21, 2011 Addis Ababa 1

2. 2 Objectives of Study What is long-run cost of ‘remoteness’?  What are the benefits of rural roads? What are the mechanisms by which lowering transport costs could reduce rural poverty? von Thünen effects, agglomeration externalities (labor market/enterprises)? What are the important margins for rural economic growth? Agricultural intensification vs. diversification both within and outside agriculture.

3. 3 Correlation vs. Causation - Does remoteness cause poverty or are remoteness and poverty both the consequences of poor endowments? - Story (1): Low productivity areas, having less output to sell, attract little road investment  poorer areas remain relatively remote. - Story (2): Low productivity areas have cheap/plentiful land, which attracts poorer households  Migration selectivity makes remoteness seem more costly than it really is.

4. 4 Methodology - Find a small geographic area where (1) land productivity and (2) population characteristics are relatively uniform but over which transport costs vary a lot due to, e.g., natural barriers. - Survey a large number of households (~1800) all along this transport cost ‘gradient’. - Obtain detail on crop/livestock production, marketing, transport, as well as on household consumption, taking into account seasonality (using a two-round survey).

7. 7 Title Body

10. 10 Remoteness and the Value of Land - Market value of land captures discounted stream of net revenue from agricultural uses, which is decreasing in the cost of transport. - Land values may also reflect variation in the price of imported consumption goods (including social services), which are increasing in the cost of transport. - How accurate are reported land values? Ricefields and upland plots show similar patterns.

12. 12 Remoteness and Household Welfare - Income/expenditures at constant prices are standard measures of welfare but do not fully account for variation in transport costs. Most staple purchases are done locally, however, so expenditures should be OK. - Calorie consumption is independent of prices and is a useful welfare measure given a food share > 80%. Rice consumption in the Malagasy context.

16. Crop diversification: Transport intensive fruits & veg. are only important near town, whereas transport efficient rice becomes increasingly dominant in more remote areas- Consumption diversification: Diet gradually shifts to rice-cassava as remoteness increases; potato disappears altogether.

21. 20 Remoteness and Access to Services - Social services: Education and health - Extension: ~30% government - Formal credit: negligible

25. 24 Conclusions - Living standards decline substantially with increased remoteness, reflected most strikingly in land values (b/c it’s an asset?). - Sources of variation: von Thünen: transport intensive commodities (dairy, fruits/veg.) produced near town. Agglomeration: labor specialization increases near town  non-agric labor. Rice intensification near town  higher productivity, but the impact on income is blunted by the shift out of rice production.

26. 25 Conclusions – cont’d - Another potential benefits of rural roads is access to schooling. Supply constraints are an issue at secondary level. Most communities have primary schools. Perhaps lack of access to non-agric labor mkt. limits the demand for education.