Market integration and structural transformation


A distinguishing characteristic of many developing countries is that the vast majority of production units are small and use technologies that are far from the technological frontier. Production is often self-consumed, or sold in small local markets and the supply chain is hardly vertically integrated. In rich countries on the other hand, firms are large, specialized, and utilize frontier production technologies, while serving integrated national and global markets. These observations beg the question: Can integration of poor peripheral locations into national and global markets spur economic development? What is the role of decreasing trade cost for productivity increases, firm dynamics, trade, and output?

The aim of this project is to study the role of market integration in economic development from both theoretical and empirical perspectives. Sweden’s growth acceleration provides a unique historical episode to understand the links between market integration and economic development. Our project will combine Swedish historical data on all manufacturing firms with geographical data on the establishment of railroads and trade data from railway stations. The other large contribution of the project is to develop new, and test existing, theories of economic development, and use empirical methods to shed new light on Sweden’s transformation from one of the poorest countries in Europe, to one of the richest countries in the world between 1860 and 1910. Notably, Sweden’s rise to riches prior to WWI took place during a period of a substantial international and interregional integration of markets. In particular, the spread of the railroads have been emphasized: influential scholars such as Eli Heckscher have argued that the coming of the railroad is a crucial factor in accounting for Sweden's industrial take-off.

It is also internationally widely believed that the key driver of market integration - both historically and today - are technological advances in the transportation sector. Over the past century, the diffusion of air freight, containers, and railroads have dramatically lowered trade costs both across and within countries, leading to a secular increase in globalization. Moreover, transport infrastructure remains a key policy lever to improve market integration in today’s poor countries: the World Bank spends more on transportation infrastructure than education, health, and social services combined (Donaldson, 2018). Even so, we have limited evidence from research on how transportation infrastructure affects market integration, and how the integration of markets may translate into economic development in poor societies.

To understand how the integration of markets affect growth, productivity, and the allocation of resources across firms, requires detailed data on the spatial distribution of economic activity, the full network of transport linkages, and information about bilateral trade flows. Sweden stands out in having such historical data, owing to the long tradition of collecting detailed statistics that started with the establishment of Tabellverket - the predecessor to Statistics Sweden - in the mid-18th century. By collecting this wealth of data, which we describe below, we can study the causal effect of a drop in transportation cost on economic activity during an episode of catch-up growth.