Finweek readers have expressed a huge interest in the development of rail infrastructure in South Africa and we came across this recent blog post from economist Johan Fourie which we thought stimulates some interesting debate. With infrastructure spend - particularly on the transport front - being such an important aspect in terms of developing Africa, it is a must-read.
To check out more of Johan Fourie's thoughts please visit his blog.
Four lessons from railways in Ghana
By Johan Fourie
In times of economic crisis, transport infrastructure are often the first items slashed from the government’s budget. This is because 1) it’s easy to do so: there are few consumer, labour or other electoral groups that feel strong enough about the unbuilt railway or airport, and 2) like a frog in boiling water, we only notice the decline of the infrastructure over an extended period of time (and when it’s already too late): small potholes don’t attract the anguish of protesters, but wait a few years and those same potholes might double or tripple the time and cost of traveling. Any politician trying to cut government expenditure on education or health would face the (election) gallows, but cut transport infrastructure investment and few will notice.
One of the reasons economic historians investigate the past is because they believe that history has valuable lessons that can inform the tough decisions of policy makers face. Rémi Jedwab and Alexander Moradi, in a recent Working Paper, show just how important transport infrastructure can be to aid a country’s development. They investigate the construction of two railways in early twentieth-century Ghana. The railways were built for the extraction of minerals and for political and military reasons (to connect the main cities in the interior, to help in transporting troops in times of war). But, surprisingly to many of the colonial governors, the railroads had a much bigger economic impact: because of reduced transportation costs, many subsistence farmers switched production to cocoa, a rich cash-crop. Using detailed GIS census data of farm production, the authors show that those farms that were closest to the railroads benefited the most. The benefits were immediate, and within a decade most farmers were successful cocoa producers, making Ghana an example of the positive impact of colonial policies. But the railroads also had long-term benefits: using recent census data, the authors show how cities arose closer to the two railroads and how, later, once the boom in cocoa prices had ended, manufacturing and the service sector benefited from the lower transport costs of the railways.
It’s a great economic history paper: its lessons are applicable to all government policy makers faced with tough budgetary cuts or “planning commissioners” that are responsible for the long-term economic vision of a country.
The first lesson: transport infrastructure may have very different (positive) consequences than initially envisaged. The Ghanaian colonial governors had thought that mining would be the most important beneficiary of the project. Palm oil and even tourism were also touted as potential industries that could benefit, but few thought that cocoa would become the cash crop of choice. Even in the much less complex colonial economies, policy makers simply could not predict the sector with the most potential.
Lesson two: the type of transport infrastructure that was built (in this case, railways) cut the transport costs between local producers and the export market by more than 50%. Before the railways, only a few farmers had invested in cocoa production (it takes several years for a tree to produce) and these farmers had two ways to get their cocoa to market, either loading it on their heads and walking it to market (costing 30-60 pennies per kilometre), or rolling it in casks (23 pennies per kilometre). The railway reduced this price to 11.3 pennies per kilometre, suddenly generating not only huge profits for those closest to the export market, but also allowing many farmers in the interior of Ghana to shift to cocoa production profitably.
Lesson three: the public sector had to fund the initial cost of building the railway; there was no private sector to do this initially (and no bank would have been willing to fork out money for a project that had no definite returns). Even though modern transport infrastructure has become ‘excludable’ (see Calitz and Fourie (2009) and Fourie (2006) for an overview), because the beneficiaries are not always evident up front, it remains a public good that needs government support.
Lesson four: transport infrastructure results in long-run spatial changes that has important development consequences. As the authors show, agriculture next to the railroads has now been replaced by manufacturing and service industries. Most of the largest urban areas are along the railroads, and those people living closer to the railroads have a higher likelihood of access to better education, health, water and sanitation services.
I’m not advocating some Sachsian splurge in infrastructure spending. Building a railway through some of the poorest provinces in South Africa, like the former Transkei region or rural Limpopo, may yield few benefits. As many travellers in South Africa will also point out, railroads need accompanying services, such as timely, reliable and safe trains. (This is perhaps one topic which Jedwab and Moradi can expand on.) South Africa has a well-connected rail network, but the service is not what it should be.
But maybe railroads are not the transport infrastructure of the future. Let’s take broadband. What will the affect be of a high-speed broadband connection (and affordable services) to households living in the former Transkei? Unfortunately, these days it’s not simply about producing cocoa and loading it onto the railways destined for some international consumer. To access the digital highway requires a computer and the skills to use it. But that should not be a reason for not building broadband links, but rather a call to improve education and access to services in these rural areas.
It’s easier and cheaper to do this in cities: connecting the Khayelitshas, Grassy Parks, Durbanvilles and Constantias will benefit entrepreneurs and businesses in Cape Town by reducing internet costs for every industry that uses the web (lesson 2) although the beneficiaries are unknown, even invisible (lesson 1). The social benefits will outweigh the private ones, and no private firm will be able to recoup the social benefits, which is the reason government should foot the bill (lesson 3). Broadband in cities will make it a more appealing place to work and live, providing more people with a higher standard of living (lesson 4).
Siyakha: let’s build.