Road Development, Economic Growth, And Poverty Reduction In China

Since 1978, China has adopted a series of economic reforms leading to rapid economic growth and poverty reduction. National Gross Domestic Product (GDP) grew at about 9 percent per annum from 1978 to 2002, while per capita income increased by 8 percent per annum. The post-reform period was also characterized by an unprecedented decline in poverty. However, income inequality has worsened between coastal and interior provinces as well as between rural and urban areas. A number of factors contributed to this widening disparity in regional development in China, including differences in natural resources endowments, and infrastructure and human capital development. When the policy reforms began in 1978, China was poorly endowed with transportation infrastructure. With rapid economic growth, the demand for road transport soared and consequently transportation shortages and congestion problems surfaced. Since 1985, the government has given high priority to road development, particularly development of high-quality roads such as highways connecting major industrial centers in coastal areas. In the 1990s, investment in infrastructure became a national priority and various policies were implemented to promote the rapid construction of highways. The development of expressways has been particularly remarkable, increasing from 147 kilometers in 1988 to 25,130 kilometers in 2002, equivalent to an average annual growth rate of 44%. In contrast, the length of low quality, mostly rural roads increased very little, by only 3% per year over the same period. The objective of this study is to assess the impact of public infrastructure on growth and poverty reduction in China, paying a particular attention to the contribution of roads. The beneficial impacts of roads on production and productivity, as well as on poverty alleviation, are well recognized in the literature but some important gaps remain. First, the impact of roads of different quality has received little attention. While the total length or density of roads is a useful indicator of the road infrastructure available in a country, it is important to account for quality differences because different types of roads (e.g. rural vs. urban) can have very different economic returns and poverty impacts. Second, most studies have only focused on rural poverty in China as urban poverty has only recently emerged as an important and growing problem. To address these limitations, this study disaggregates road infrastructure into different classes of roads to account for quality. The study also estimates the impact of road investments on overall economic growth, urban growth, and urban poverty reduction, in addition to agricultural growth and rural poverty. To achieve these goals, an econometric model that captures the different channels through which road investments impact on growth and poverty is developed and estimated using provincial-level data for 1982-1999. The most significant finding of this study is that low quality (mostly rural) roads have benefit/cost ratios for national GDP that are about four times larger than the benefit/cost ratios for high quality roads. Even in terms of urban GDP, the benefit/cost ratios for low quality roads are much greater than those for high quality roads. As far as agricultural GDP is concerned, high quality roads do not have a statistically significant impact while low quality roads are not only significant but generate 1.57 yuan of agricultural GDP for every yuan invested. Investment in low quality roads also generates high returns in rural nonfarm GDP. Every yuan invested in low quality roads yields more than 5 yuan of rural nonfarm GDP. In terms of poverty reduction, low quality roads raise far more rural and urban poor above the poverty line per yuan invested than do high quality roads. Another significant finding of the study is the trade-off between growth and poverty reduction when investing in different parts of China. Road investments yield their highest economic returns in the eastern and central regions of China while their contributions to poverty reduction are greatest in western China (especially the southwest region). This implies different regional priorities depending on whether economic growth or poverty reductions are the most important goals for the country. The results of this study have important implications for future road project investments. China has invested heavily in the past in building expressways and inter city highways. These investments were a major force in China's economic transformation during the 1980s and 1990s. However, as more and more investments are being poured into these projects, the marginal returns are beginning to decline, although they are still positive and economically sound. At the same time, low quality roads or rural roads have received less attention than high quality roads and as a result their marginal returns are much larger today than the returns to high quality roads. Low quality roads also raise more poor people out of poverty per yuan invested than high quality roads, making them a win-win strategy for growth and poverty alleviation. The government should now consider giving greater priority to low quality and rural roads in its future investment strategy.