Estimating the Long-Term Impacts of Rural Roads: A Dynamic Panel Approach
Shahidur R. Khandker, B. Gayatri Koolwal
Policy Research Working Papers
Infrastructure investments are typically long-term. As a result, observed benefits to households and communities may vary considerably over time as short-term outcomes generate or are subsumed by longer-term impacts. This paper uses a new round of household survey as part of a local government engineering department's rural road improvement project financed by the World Bank in Bangladesh to compare the short-term and longterm effects of rural roads over eight years. A dynamic panel model,
... ated by generalized method of moments, is applied to estimate the varying returns to public road investment accounting for time-varying unobserved characteristics. The results show that the substantial effects of roads on such outcomes as per This paper is a product of the Agriculture and Rural Development Team, Development Research Group. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at firstname.lastname@example.org. capita expenditure, schooling, and prices as observed in the short run attenuate over time. But the declining returns are not common for all outcomes of interest or all households. Employment in the rural non-farm sector, for example, has risen more rapidly over time, indicating increasing returns to investment. The very poor have failed to sustain the short-term benefits of roads, and yet the gains accrued to the middle-income groups are strengthened over time because of changing sectors of employment, away from agriculture toward non-farm activity. The results also show that initial state dependence-or initial community and household characteristics as well as road quality-matters in estimating the trajectory of road impacts. Introduction A rationale for public investment in rural roads is that poor households can better exploit agricultural and non-agricultural opportunities to employ labor and capital more efficiently. However, roads are long term investments and may take several years to complete. As a result, the immediate and longer-term policy implications of rural road improvements may differ substantially. For example, time may be required for markets to develop around new roads, and thus the benefits to employment and consumption may not appear until several years after the project. On the other hand, initial spikes in earnings opportunities may occur in areas with better access to markets and other public facilities, but may fall back over time as increased migration and labor supply catch up with demand. Price fluctuations and changes in transport costs that emerge in the short run may also revert after a few years. Few studies, however, have examined how impacts of these types of public infrastructure programs evolve over several years. Even with well-designed, long-term panel data, unobserved community characteristics such as political influence and local norms can influence project placement and evolution in a locality. One may assume these unobserved factors are fixed only over a short period of time, but as different outcomes evolve and interact with one another over the lifetime of the project this assumption is less likely to hold. Infrastructure investments like roads in particular are also typically widespread and subject to spillovers and migration; even where project and control areas are separated in the short run, it may be difficult to maintain this separation over the longer term. 3 Our paper addresses these issues in evaluating a rural roads program in Bangladesh, applying a dynamic panel data approach to household data collected under the program (Arellano and Bond , 1991 , Jalan and Ravallion, 2002, 1998). The dynamic model also allows us to compare short-term with longer-term outcomes from the program, accounting for time-varying unobserved heterogeneity. We use new data collected by the Bangladesh Institute of Development Studies (BIDS) of project and control households under the Rural Roads and Markets Improvement and Maintenance Project (RRMIMP), spanning three rounds (pre-program and post-program) between 1997 and 2005. The RRMIMP project was a part of an LGED project financed by the World Bank. We examine whether rural roads generate increasing returns over time in poor areas, accounting for factors as pre-program community characteristics affecting road placement, presence of such complementary investments as electricity, institutional and market development, and other factors associated with road construction (e.g., quality and access). 1 Completed in 2005-06, RRMIMP is a road-paving project that targeted several villages across various districts of Bangladesh; control villages were also selected in separate districts. BIDS conducted the panel survey of households in project and control villages in three rounds: (i) prior to start-up of the RRMIMP in 1996-97, (ii) immediately following project completion in 2000-01, and (iii) in 2005 via a project follow-up survey. Khandker, Bakht, and Koolwal (2009) used the first two survey rounds to study the short-term effects of rural road development, finding positive effects on a range of household outcomes including higher per capita expenditure and lower transport costs. 2 The study used household fixed-effects estimation, controlling for a range of pre-program village 1 Our study closely follows Jalan and Ravallion (1998), who examine the impact of a poor-area development program on growth in household consumption using panel data collected from targeted and non-targeted areas across four provinces in China. Using county yearbooks over 1980-87 and 1982 census data, they employ a Generalized Method of Moments estimation procedure on an AD(1,1) model for household consumption growth, including initial area conditions on the right-hand side, and using second and higher lags of consumption as instruments for lagged consumption to obtain consistent estimates of a dynamic growth model with panel data. 2 In addition to the RRMIMP, the 2009 study examined the effects of the Rural Development Project (RDP), another road-paving project, using a similar household panel survey of project and control villages; however the third survey round was limited to the RRMIMP project and control areas. 4 characteristics. However, the household fixed-effects approach may be more appropriate for a panel spanning only a few years-where unobserved community and household characteristics are likely to vary less between project start-up and completion. The third round, which became available recently, follows the same project and control households from the earlier survey rounds, allowing for a comparison of shorter-and longer-term impacts. In this paper, we use the third survey round from 2005 to examine whether improvements in household outcomes have continued since 1997 or whether certain impacts have diminished over time. An added complexity in our analysis is that some villages designated as control in 1997 ultimately received the project after the second survey round (between 2001 and 2005). With the third survey round, we address these identification issues by instrumenting project status in the dynamic panel model with second-order lagged outcome variables from the first round, and estimating the model via Generalized Method of Moments (GMM) (Arellano and Bond, 1991, Jalan and Ravallion 2002, 1998). The third round of data allows us to examine the effects of rural road development in the context of long-term changes in community-level outcomes, including expansion of local markets and other institutions. We can also examine the long-term distributional impacts of rural road improvement, given the potential for increased migration between targeted and non-targeted areas several years after road development. The third-round survey also has new data revealing heterogeneity in program implementation that can refine our understanding of the impacts from road development, including differences in the length of road paved to bitumen standard (as a measure of road quality) across project areas. The paper is organized as follows. Section 2 reviews the research to date that has compared shorter-versus longer-term impacts of rural road investments. Section 3 discusses the dynamics of impacts of rural road investments on rural households, while Section 4 outlines the estimation 5 approach. Section 5 presents more detail on the household panel survey and the RRMIMP. Section 6 presents the results on the average short-and long-term effects of road investment, and Section 7 presents the distributional impacts. Section 8 concludes. 2. Short-term versus long-term welfare impacts of rural roads: What do we know? The mechanisms tying road development to income gains and poverty reduction are highly complex and necessarily country-and context-specific. Improved roads and infrastructure can help reduce poverty by lowering transport and other input costs (Jacoby 2000; BIDS 2004) and expand earnings opportunities through easier access to markets and technology (BIDS 2004(BIDS , 2009 Lokshin and Yemtsov 2005; Fan, Hazell, and Thorat 2000) . The poor may benefit from these changes; for example, Khandker, Bakht, and Koolwal (2009) find positive short-term impacts on poorer households' consumption from the RRMIMP project. But greater commercialization, rising land values, and shifts in growth across local farm and non-farm sectors may hamper economic opportunities for very poor households, particularly where the initial level of community development is low (see e.g., Narayana, Parikh, and Srinivasan 1988). Overall, initial area characteristics are likely to condition the nature of impacts, including distributional outcomes (Binswanger, Khandker, and Rosenzweig 1993; Jalan and Ravallion 1998). The timing of road impacts, which can also depend on initial area characteristics, has not been closely examined in the literature. A number of studies have examined the short-term impacts of rural road development, controlling for potential selection bias due to unobserved heterogeneity within project and control areas, and/or differences in pre-program local-area endowments across project and control areas (see, e.g., Jacoby and Minten 2008; Khandker, Bakht, and Koolwal 2009; Lokshin and Yemtsov 2005; Jalan and Ravallion 1998). One recent exception that compares shortterm and long-term impacts is a study of a rural road rehabilitation project in Vietnam by van de 6 Walle and Mu (2011). Their study controls for time-invariant unobserved heterogeneity, as well as potential time-varying selection bias due to differences in initial observable characteristics by combining double-difference and propensity score matching using data from project and control communes over three periods: a baseline in 1997, as well as 2001 and 2003. Highlighting the importance of comparing short-and long-term impacts, their study finds that most outcomes are realized at different stages over the period. Short-term effects included number of secondary schools and availability of food-related goods. Primary school completion reflected sustained growth between 1997 and 2003, while such outcomes as expansion of markets and availability of non-food related goods took a longer time to emerge. Dynamics of roads and household welfare Estimating short-term versus long-term effects of a rural road development project requires an understanding of the underlying relationships between providing an improved road in a community and household-level outcomes (e.g., farm and non-farm production, marketing and transport costs, and income and non-income gains). Households in communities without a connection to a road network are likely to depend entirely on subsistence farming, in which case the hurdles and cost of marketing farm production are enormous.