China Agricultural Economic Review

Transportation infrastructure and rural development in China

Zhiyang Wang Sizhong Sun
Article information:
To cite this document:
Zhiyang Wang Sizhong Sun , (2016),"Transportation infrastructure and rural development in China", China Agricultural
Economic Review, Vol. 8 Iss 3 pp. -
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http://dx.doi.org/10.1108/CAER-09-2015-0115
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1
Development in China
Transportation Infrastructure and Rural
 1. Introduction

Since the opening and reform, Chinese economy has been growing at a fast speed, with an average
real GDP growth rate being close to 10 per cent from 1978 to 20131. With a closer look into the
source of GDP growth, one can easily find that the fixed capital investment plays an important role in
driving the GDP growth. From 1978 to 2013, the share of gross fixed capital formation in GDP rises
from 29.5 per cent to 47.3 per cent. The law of diminishing return suggests that it is not sustainable
for such capital investment to drive the economic growth, which is in an apparent contradiction with
the China’s fast economic growth over the past three decades. One factor that reconciles such
apparent contradiction is the large amount of surplus labour released from the rural region, which
prevents the law of diminishing return to capital from kicking in.

Nevertheless, China does not have a supply of unlimited surplus labour. The growth rate of labour
supply is predicted to turn negative by around 2020 (Tyers et al., 2009). China is faced with a turning
point where the period of surplus labour has come to an end (Garnaut, 2010). This turning point has
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prompted a heated debate (see for example, among others, Garnaut and Song, 2006; Golley and
Song, 2010). Given the importance of surplus labour released from the rural region and the fact that
China is faced with the turning point, one would be interested to understand whether and how the
capital investment in transportation infrastructure affects the rural development. Knowledge of such
impact will help better understand China’s economic development process. In this paper, we
investigate such impacts, focusing on the investment in transportation infrastructure.

Previously, researchers have explored the impact of infrastructure on the economy from different
aspects2. Zheng and Kuroda (2013) explore the impact of the transportation and knowledge
infrastructure on industrial geography, regional income disparities, and growth across 286 cities in
China, and they find that an improvement in transportation infrastructure on the one hand increases
growth and decreases income gap, while on the other hand it also increases industrial agglomeration
between cities. Shi and Huang (2014) estimate the return to infrastructure investment, using
provincial data in China from 1995 to 2011, to find that most provinces under-invested in
infrastructure in 1997, while in contrast in 2008 most western provinces over-invested in
infrastructure. Deng et al. (2014) look at the optimal level of transport infrastructure accumulation
in order to maximize the economic growth. Using province-level panel data in China from 1987 to
2010, they find a non-monotonic relationship between the stock of transport infrastructure and the
long-run economic growth. Song et al. (2014) investigate the impact of transportation and iceberg
costs on industrial structure in China, to find that development of transportation services exerts
positive impacts on industrial development.

Zhang (2014) explores the private participation, through the public-private partnership, in China's
urban infrastructure sectors from 1992 to 2008. Similarly, Jiang and Zheng (2014) investigates the
private participation in the urban water sectors, where they find that firm profitability and liability
level and a host city’s road infrastructure in previous year significantly drives the entry and exit of
private in the sector. The private participation does not necessarily imply that the government
agencies are doing badly. Through surveying the rural road projects in 101 villages in rural China
from 2003 to 2007, Wong et al. (2013) find that the involvement of government agencies improves
road quality.

1
Data here and below are sourced from World Development Indicators, 2015.
2
One strand of the existing literature focuses on air transportation, see for example Zhang (2011, 2012).

2
 Fan and Chan-Kang (2005) evaluate the contribution that roads make to poverty reduction and
economic growth in China, and they find that it is more effective to invest in low-quality and rural
roads in the sense that such investment will generate bigger marginal returns, alleviate poverty
more effectively, and reduce regional development disparity to a larger extent. Bai and Qian (2010)
analyse the investment incentives in the development of the electricity, highway, and railway
sectors in China, where they observe that some practices are not optimal in the long run, but are still
useful in the transition. However, investment in the transport infrastructure does not necessarily
results in economic growth. In a panel co-integration and Granger causality framework, Yu et al.
(2011) test the causal linkages between transport infrastructure investment and economic growth in
China at both national and regional levels from 1978 to 2008. Their exercise suggests that boosting
transport infrastructure investment alone does not sufficiently leads to economic growth in the
underdeveloped areas in China.

Despite the fact that the infrastructure investment in China has been explored from different
aspects, there is one area that is less touched, namely its (particularly the investment in
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transportation infrastructure) impacts on rural development, including crop yields and rural
household income. It is of both academic interest and policy implication to understand such impacts,
particularly in the context where the release of large amount of surplus labour from the rural sector
helps prevent the law of diminishing return from binding. Implications from exercises to measure
such impacts can help policy makers, faced with the challenge of the Lewis turning point, to better
position their policies. Therefore, the contributions of this paper lies in two folds. First, this paper
fills in a gap in the existing literature. Second, it will also produce significant implications for policy
makers.

The rest of the paper is organized into four sections. In section two, we link the transportation
infrastructure to rural development conceptually, which provides a theoretical background to
subsequent empirical exercises. In section three, we proceed to empirically measure the impacts of
the transportation infrastructure on rural development from two aspects, namely the crop yields
and the per capita net income of rural households, in an autoregressive distributed lag (ARDL) model.
Following the exercises in section two, we discuss the findings and associated policy implications in
section four. Section five concludes the paper.

2. The role of transportation infrastructure in rural development

A modern transportation network is vital to the overall economy, and it can lay a good foundation
for future economic development. An efficient transportation infrastructure system reduces
transaction costs, and allows businesses to operate more cost-effectively. A well-connected
transportation network means faster shipment and more reliable travel times for people and goods.
Without such a network, shipping of goods takes longer time, and businesses must have longer
supply chains, hold more inventories, or rely more on distribution centers, which increases the
transaction costs. For workers/consumers, an efficient transportation infrastructure makes cheaper
goods available for them and also enables them to find a suitable job more easily. Since regional
economies of the rural, suburban, and urban areas are interdependent on each other in terms of
innovation and employment, transportation infrastructure is even more vital, and it benefits the
development of manufacturing, energy, tourism, technology and other industries. Previous empirical
studies also uncover a significant positive impact form investment in transportation infrastructure
on economic growth. For example, Aschauer’s (Aschauer, 1989) estimates suggest that every dollar
of investment in transportation infrastructure can bring a dollar increase in economic output. The
positive impact from transportation infrastructure on the economy can be transmitted to the rural

3
 region, either directly and indirectly. In summary, such impacts can occur through the following four
channels.

2.1. Reducing transportation time and alleviating traffic congestion

A well-functioning transportation infrastructure network can lead to more reliable shipments of

goods and reduce travel time. More reliable shipments of goods reduce operation costs for
businesses, for which the associated resources can be subsequently turned into alternative use for
production purpose. Save in travel time for personnel in businesses can similarly be diverted into the
productive activities. Traffic congestion is one of the issues in modern economy. Congestion means
that businesses and households must consider the uncertainty of travel time when making plans. In
cases where shipping takes longer time, businesses must re-adjust their supply chains, hold more
inventory and become more dependent on the distribution center, which will increase costs and
lower productivity. In a well functioning transportation infrastructure system, the high quality
highways and railways alleviate traffic congestion and hence positively affect businesses.
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2.2. Increasing land values and promoting regional economic development

Transportation infrastructure affects not only the level of economic output, but also affects the
geographic distribution of economic activities. Transportation infrastructure will increase the value
of real estate, especially when these transportation infrastructures shorten people's commuting
time and make public amenities more accessible, which in turn improves people's living standards. In
such case, the appreciation of the real estate is more substantial. Proximity to light rail, high-speed
rail system raises property values. In addition, the reduction in transportation costs also promotes
regional economic development, mainly through the promotion of mobility of labour and capital
factors, which subsequently increases the marginal benefit of labour and capital.

2.3. Increasing employment opportunities in related industries

In addition to the benefits that come from enhancing the long-term economic competitiveness,
promoting innovation, improving productivity, and lowering prices of goods and services, the
investment in transportation infrastructure also creates jobs directly in the short term that will not
be outsourced to foreign countries. These jobs are distributed among many different but related
industries. Highway construction, for example, requires construction workers, paving facilities,
gasoline and diesel to operate the machines, gravel and asphalt, engineers and site managers, and
cost accountants. Hence the jobs created in the highway construction are mainly located in the
construction sector, the manufacturing sector and the retail sector.

2.4. Lowering living costs and improving family health and safety

A well functioning transportation infrastructure network can help households save time and money
in travelling, which can be used for other purposes such as consumption. Specifically, the impact of
transportation infrastructure investment on the households is reflected on two aspects. First, it
lowers the living cost of family. The transportation costs are major items in living costs for families.
For example for an average American family, transportation costs rank second, after the housing
costs in household expenditure. A well-functioning transportation infrastructure network reduces
fuel consumption, decreases the costs of maintenance due to poor road conditions, and together
with cheaper and more accessible public transportation systems, can reduce the travelling
expenditures for the family. Hence it will improve family budget, and especially has a greater impact
on middle-class families.

4
 Second, it reduces operating and maintenance costs of transportation vehicles. Good transportation
systems save family transportation expenditures by reducing congestion costs and wear and tear
generated by poor road conditions which will inevitably increase repair, tire wear, fuel consumption
and other expenditures. Third, it enhances health and safety of the family. Good transportation
infrastructure can lower accident rates and improve travel safety. Traffic congestion will increase
emissions of harmful gases, and long commuting time also negatively affect people’s health. Hence
through alleviating the traffic congestion, a well functioning transportation infrastructure network
can positively affect people’s health.

3. Quantifying the impacts of transportation infrastructure

The discussion in section two suggests that the investment in transportation infrastructure
conceptually affects the rural development. In this section we proceed to evaluate the impacts of
the transportation infrastructure on rural development in China from two aspects, namely the crop
yields and the per capita net income of rural households. To this end, a simple ARDL model can be
utilized, as follows:
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 =  + ∑
 ,


+   + ∑
 ,
∆
+  (1)

where y ∈ {the crop yields, the per capita net income of rural households} in natural logarithm form;
I denotes the transportation infrastructure in natural logarithm form; ∆ denotes the difference
operator; p and qare the length of lags; and ε is an i.i.d. error term. In the above equation, β2
measures the short-run impact of the transportation infrastructure on rural development (yt), and

β2/ (1- ∑
 ,
) is the associated long-run impact. In equation (1), it is also possible that there exists
reverse causality from rural development to the transportation infrastructure, namely It is
endogenous. The inclusion of lagged differenced It helps to absorb the possible correlation between
It and the error term.

The data are sourced from both the World Development Indicators and China Bureau of Statistics,
and cover the period between 1980 and 2013. The cereal yield is measured as kilogram per hectare
of harvested land, which includes such crops as wheat, rice, maize, barley, oats, rye, millet, sorghum,
buckwheat, and mixed grains. The per capita net income of rural households is deflated using the
consumer price index with a base year being 1978. Due to data unavailability, we use the length of
roads to proxy for investment of transportation infrastructure3. Before we estimate equation (1), we
first test the stationarity of yt and It, using both the Dickey-Fuller and Phillips-Perron unit root tests.
It is found that some series are I(0) and the others are I(1), for example the road length is I(1). Hence
it is appropriate to employ the ARDL model.

We then select the lag length (p and q) by choosing the lag length such that AIC and BIC are
minimized. For the regression with dependent variable being cereal yield, p = 1 and q = 1; and for the
regression with dependent variable being the per capita net income of rural households, p =2 and q
= 1. After estimating equation (1) using the ordinary least square estimator, we test the stationarity
of residuals using the Dickey-Fuller unit root test, to find that the residuals are I(0), confirming the
appropriateness of the regressions. We also test for the heteroskedasticity using the Breusch-Pagan
test and for autocorrelation using both the Durbin's alternative test and Breusch-Godfrey LM test. In
both regressions, these tests fail to detect the presence of heteroskedasticity and autocorrelation.
Finally, we check for the stability of the regression relationships over time by using the cumulative

3
Later we also use the length of railways to proxy for transportation infrastructure investment as a robustness
check.

5
 sums test, where no evidence of instability is found. To save space, we do not report these test
results, which are available upon request.

Table 1 reports the regression results. In terms of cereal yield, the coefficient of the length of roads
(in natural logarithm form) is estimated to be 0.0503 in the short run, which is significant at the five
per cent level. Hence a one per cent increase in the road infrastructure leads to around 0.05 per cent
increase in cereal yield. In the long run, the impact is even bigger, and is estimated to be 0.1883. At
the aspect of the per capita net income of rural households, the point estimate of the coefficient of
length of roads is significantly positive (0.1393) in the short run, while in the long run the impact is
not statistically significant at the five per cent level. In addition to using the road length to proxy for
the transportation infrastructure investment, we also use an alternative proxy, namely the length of
railways. The regression results are similar in the sense that the positive impacts of transportation
infrastructure are preserved. Therefore, we conclude that the transportation infrastructure
investment indeed generates significantly positive impacts on rural development in terms of both
cereal yield and the per capita net income of rural households.
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Table 1 Regression Results

[1] [2]
Coef. Std. Err. Coef. Std. Err.
short run
yt-1 -0.2673*** 0.0676 0.2546 0.1819
yt-2 n.a. -0.3887** 0.1588
It 0.0503** 0.0188 0.1393** 0.0557
constant 2.0131*** 0.4925 0.1556 0.1285
long run
It 0.1883*** 0.0407 -0.2165 0.1699
constant 7.5314*** 0.2064 -0.6110 0.7762
Number of obs 31 31
F 3.91 3.22
Adjusted R2 0.33 0.31
Note: In [1], the dependent variable is cereal yield; In [2], the dependent
variable is the per capita net income of rural households; It is proxied by
the length of roads; ***, **, and * denote significance at the 10, 5, and
1 per cent levels respectively.

4. Policy implications
In section three, we find that the transportation infrastructure, measured by the length of either
roads or railways, generates significant positive impacts of rural development, namely the cereal
yield and per capita net income of rural households. Given the positive impacts, a straightforward
implication for policy makers who intend to promote rural development is to encourage investment
in the transportation infrastructure. In this section, we thus discuss approaches that can be utilized
to promote the transportation infrastructure investment.

Because of the non-rival and non-excludable features in consumption, and existence of free-rider
problem, public goods are under short supply in private market. Therefore it is considered public
goods should be provided by the government in order to achieve an optimal level of provision.
Nevertheless most of the transportation infrastructures are not pure public goods, and instead they
exhibit part of the characteristics of public goods. Transport infrastructure is usually excludable, for
example, road can set toll stations. Whether it is non-rival depends on the specific circumstances.

6
 The congested roads have relatively strong rivalry, and road with few users can be seen as non-rival
because the marginal cost of an additional consumer is almost zero. From the perspective of social
welfare, a non-rival transportation infrastructure should not exclude any other consumers. Before
the roads become congested, the marginal cost of consumption is very small, and hence increasing
the number of consumers will increase the social welfare. In addition, the transportation
infrastructure also displays a characteristic of natural monopoly. Therefore the transportation
infrastructure should in principle be provided by the government. When conditions permit, namely
the government has sufficient financial resources, investment on transportation infrastructure
directly comes from the expenditure arrangements of government budget, and the government
invests, produces, and operates the transportation infrastructure directly.

The ultimate goal of the government investment in transportation infrastructure is to provide

transportation services to the public, through production of transportation infrastructure. However
the provision and production of transportation infrastructure can be separated, and it can be
produced by private enterprises and paid for by the government. For those which are excludable in
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consumption, the government can transfer the charging rights of using the service to exchange for
private investment in the transportation infrastructure or private production.

Hence, in the absence of sufficient public funding, production of transportation infrastructure can be
financed by private investment, and its operation can be transferred from the government who own
the transportation infrastructure to private investors to improve operational efficiency. The
introduction of private investment in transportation infrastructure for the production and operation
are mainly done through two methods, namely the build-operate-transfer (BOT) and public private
partnership (PPP). Both methods involve transferring of charging right of accessing the
transportation infrastructure in case that the government do not have adequate financial resources
to invest. However the government is the ultimate owner of the transportation infrastructure. In
addition, to promote investment in transportation infrastructure, the government can also sponsor
to establish an infrastructure bank, through which the government and private investors can be
linked to each other to participate in the field of transportation infrastructure. Below, we briefly
discuss these methods of promoting private participation in the transportation infrastructure.

4.1. BOT and PPP

In the BOT, the government signs a franchising agreement with the private investors on a
transportation infrastructure project. The agreement binds private investors to bear the financing,
construction, operation and maintenance of the transportation infrastructure projects during the
agreement period. In the agreement period, the private investors can charge user fees for accessing
the transportation infrastructure, to recover costs and earn a reasonable return on investment.
When the agreement expires, the private investors transfer the transportation infrastructure back to
the government. In China, there are already a large number of successful practices of BOT, which
substantially increase the supply the public services of transportation infrastructure with the help of
private investment.

PPP refers to the public private partnership, where the government and private investors sign a long-
term agreement to establish an enterprise of public-private partnership for the targeted
transportation infrastructure. The enterprise invests to construct and operate the project. After the
expiration of a partnership charter, the enterprise hands over the transportation infrastructure back
to the government. Under the PPP mode, the government and private investors share investment
expenditure, and bear the investment risks together. PPP mode is widely used around the world. A
large number of private investors in China currently take part in the transportation infrastructure

7
 production and operation through the PPP mode, and as a supplement of government investment
help the government provide services of transportation infrastructure4.

4.2. Establishment of infrastructure bank

In addition to the BOT and PPP, establishment of infrastructure bank is another method to promote
private participation in the investment of transportation infrastructure. The establishment of such
financial entity can promote all sources of capitals to invest in the transportation infrastructure. The
infrastructure bank can obtain its registered capital from the government budget, and through the
bank private capital can be combined with the public capital to support both the country-level and
region-level transportation infrastructure projects. The infrastructure Bank supports transportation
infrastructure investment projects by providing either loans or loan guarantees, and can also be
used for other infrastructure investments, including water treatment projects and energy projects.
This approach is gaining popularity worldwide. The establishment of Asian Infrastructure Investment
Bank initiated by China is a typical example, which focuses on infrastructure construction support
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including transportation.

4.3. Operation outsourcing

As discussed earlier, a lot of infrastructures shall be provided by the government due to their
externalities and natural monopoly characteristics. The government plays a role of providing
infrastructures, but it can also introduce private investment into the production and construction of
infrastructure, particularly in case of insufficient financing. After the transportation infrastructure is
transferred back to the government, its daily management and maintenance can on the one hand be
operated by specialized public institutions affiliated to the government, or on the other hand be
outsourced to a private management company, which specializes in the related business, to reduce
costs and improve efficiency. Outsourcing enable utilization of the private sector's good professional
skills to provide low-cost, high-quality public transportation infrastructure services. An example is
the Israeli airport. The Israeli airport security service was outsourced to a professional private
company, and its quality of service and efficiency are better than when the security inspection was
managed directly by government institutions.

5. Concluding remarks
In this paper, we explore the impacts of transportation infrastructure, measured by both the length
of roads and railways, on the rural development, in terms of both cereal yield and per capita net
income of rural households, in China from 1980 to 2013, utilizing an ARDL model. Our estimations
find significantly positive impacts from the transportation infrastructure on the rural development.
For example, a one per cent increase in the length of roads leads to around 0.14 per cent increase in
the per capita net income of rural households. In addition, such impacts are robust to alternative
measures of transportation infrastructure, namely the length of railways.

The significantly positive impacts lend support to policy makers to promote investment in the
transportation infrastructure. In the case where the public funding is limited, private capital can also
be introduced to the transportation infrastructure projects, through such methods as the BOT and
PPP. Establishment of infrastructure investment bank is another approach to promote private

4
On the State Council executive meeting on October 24, 2014, Premier Li Ke Qiang proposed that China should
innovate the financing mechanisms and open up more investment field to the social capital, particularly
private capital. The meeting proposed to enhance new financing methods and promote the cooperation
between the government and social capital (namely PPP) to make the private investment and government
investment complementary to each other.

8
 participation in the transportation infrastructure projects. Upon finishing the construction of the
transportation infrastructure, the operation of the infrastructure, namely its management and
maintenance, can also be outsourced to private enterprises to better utilize the private sector's skills.
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