Essays on the Economic Impacts of Upgraded Highways in Zambia

This thesis aims to contribute to the literature on the economic impacts of upgraded highways in developing economies by using firm-level panel data and global nighttime light data from remote sensing technology. The thesis consists of three self-contained essays as follows. The first essay, entitled "Improved Roads and Firm Performance: Evidence from Zambia," investigates the impact of improving a section of the Nacala Road Corridor in Zambia on the performance of firms across 64 sectors. The analysis in this essay is twofold. First, I investigate the impact of a fall in transport costs due to the improved highway on firms located in bands at different distances from the highway. Second, I investigate the impact on firms of a change in accessibility to Port Nacala resulting from the improved highway. In both cases, a number of firm outcomes are analysed, including sales, labour costs, assets and transportation costs. A difference-in-differences estimation technique is applied to compare outcomes in firms close to the improved road or in close proximity to the seaport with those of firms far away. I use a new district-referenced firm panel dataset for the period 2013 to 2017 and show that after the road is improved, compared to firms far away, firms in the peripheral area and close to the road experience positive growth in fuel and lubricant costs. These firms also experience negative growth in assets. However, effects on firm output, labour costs, freight transport costs and raw material inventory costs are inconclusive. Results on the effect on firms of a change in accessibility to Port Nacala yields inconclusive results. This essay contributes to the literature by using a new district-referenced, disaggregated firm panel dataset from a country in Southern Africa to study the effects of improved highways. The impact on a number of firm outcomes of the improved highway is inconclusive, suggesting that it is not easy to observe spatial effects of improved highways on firm economic activity across many sectors. The second essay, entitled "Improved Highways, Transportation Costs and Trade: Firm Panel Data Evidence from Zambia," examines the effects on the performance of firms engaged in international trade in a landlocked country of educed transport costs arising from improving an international highway leading to a seaport. This essay considers whether the spatial proximity to an improved highway may have distinct differential impacts on firms in the tradable sector compared to firms in the non-tradable sector over time. Motivating this essay is the debate that Africa trades very little with itself and the rest of the world because of poor transport infrastructure among other factors. This chapter explores how the removal of a trade obstacle of poor-quality transport infrastructure impacts firms engaged in international trade. Relying on a triple difference strategy and using firm panel data for 2013 to 2017, I estimatethe effect of the upgraded highway on the output, cost of sales, labour costs and transportation costs of firms in the tradable sector compared to those in the non-tradable sector. Results show that the improved international highway brings gains in trade of increased exportable output and reduced inventory costs. Relative to firms in the non-tradable sector, firms in the tradable sector in the peripheral area close to the road experience a large positive growth in gross profits, sales, fuel costs and labour costs after the highway is improved. The upgraded highway has insignificant effects in the centre which, before the intervention, is already star connected to other efficient transport links. Results in this essay contribute by providing a better understanding of how reduced transport costs to a seaport impact international trade activities in a landlocked country. Results also suggest that investing in international highways can be an effective policy to promote increased economic activity in the tradable sector outside metropolitan cities. The last essay entitled "Estimating the Impact of Upgraded Highways Using Global Nighttime Light Data in Zambia," aims at measuring the impact of transport cost reductions arising from upgraded highways on economic activity measured at a local level of grid cells of 0.1 decimal degrees (approximately 11 km squared). In the existing literature, nighttime light data reflect real economic activity and are correlated with the true GDP. Based on this, I use the harmonised nighttime light remote sensing data to proxy economic growth in the absence of economic data at the grid cell level. Relying on a difference-in-differences strategy, I compare outcomes in grid cells close to the upgraded highway with grid cells equidistant to highways not upgraded over time. The event study method is also used to estimate the temporal effects of the treatment during and after construction. Results from both the difference-in-differences methodology and the event study indicate that grid cells surrounding the upgraded highway experience positive growth in nighttime lights after the highway is upgraded. I translate the growth in nighttime lights associated with the upgrade of the highway to infer growth of approximately 21 per cent in GDP at the local grid cell level after the highway is upgraded. This essay provides evidence of the impact of reduced transport costs on GDP measured at a local level using harmonised nighttime lights data in a landlocked developing country.