Adapting transport infrastructure to changes in the economic environment can bring substantial benefits in terms of domestic output, according to research by Marta Santamaria, to be presented at the Royal Economic Society's annual conference at the University of Warwick in April 2018.
The new study focuses on the unexpected division of Germany into East Germany and West Germany in 1949 to examine whether it affected investments in the highway network in West Germany. The West German government reshaped the national highway network in the decades after the division in response to the new geography. The reshaping of the highway network created a permanent real GDP gain of up to 2%.
This research examines the development of transport infrastructure, a key public policy decision. First, infrastructure is essential to move goods and people across space. Second, it is expensive: governments in the European Union spend around 2% of GDP on transport infrastructure (while spending 1.3% of GDP on defence).
Previous research has exploited ‘as-good-as-random’ variation in access to a road or railway to estimate the effects of infrastructure. This allows researchers to compare the relative performance of connected regions to not-connected regions. But this approach cannot tell us what is the best way to invest in infrastructure across regions.
This study takes a new approach by developing a model of infrastructure choice. In the model, the government chooses how to allocate infrastructure across regions to maximise the benefits.
Why study the division of Germany?
This historical episode is crucial for two reasons. First, the division of Germany changed the borders and altered the geographical shape of the country. After the division, the orientation of Germany changed from east-west to north-south (especially for West Germany). Given this change in geography, the model predicts that infrastructure should be invested in a north-south orientation and far from the border with East Germany given that migration and trade in goods were no longer allowed across the border.
Second, this episode allows us to observe the response of the government to the division. In the early 1930s, the German government designed a highway plan to connect the whole country. But the country was divided 15 years later. Comparing the original plan with the actual highway construction makes it possible to measure the government’s response to the division.
The study follows the evolution of the Germany highway network over time with newly digitised historical maps. It documents that, indeed, highway construction after the division largely deviated from the original highway plan in the direction predicted by the model.
How did highway construction affect economic outcomes after the division?
The construction of the observed network in West Germany increased real GDP by 0.6% to 2% compared with the development of the original pre-war 1930s highway plan. The mechanism for these gains is a larger improvement of infrastructure in north-south connections that became more relevant after the division.
However, the highways built before the division acted as a constraint since they could not be adapted to the appearance of the new border. The inability to modify these initial investments (about one third of the network) reduced real GDP by 1.5%.
These results suggest that changes in the economic geography of a country will create incentives to reshape the transport network. As an example, a no-deal Brexit would reduce the incentives for the UK and the EU to trade with each other and increase the incentives to find new trade partners. A failure to adapt domestic transport infrastructure to the new trade patterns could create important GDP losses.
The Gains from Reshaping Infrastructure: Evidence from the Division of Germany by Marta Santamaria PhD Candidate at Pompeu Fabra University and due to join the University of Warwick as an Assistant Professor in the summer of 2019.
