Essays on Infrastructure, Trade, and Politics in Developing Countries by John S. Firth B.A., University of Notre Dame (2010) Submitted to the Department of Economics in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Economics at the MASSACHUSETTS INSTITUTE OF TECHNOLOGY June 2018 ○c John S. Firth, MMXVIII. All rights reserved. The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part in any medium now known or hereafter created. Author................................................................ Department of Economics May 15, 2018 Certified by. Daron Acemoglu Elizabeth and James Killian Professor of Economics Thesis Supervisor Certified by. Benjamin Olken Professor of Economics Thesis Supervisor Accepted by . Ricardo Caballero Ford International Professor of Economics Chairman, Departmental Committee on Graduate Theses 2 Essays on Infrastructure, Trade, and Politics in Developing Countries by John S. Firth Submitted to the Department of Economics on May 15, 2018, in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Economics Abstract This thesis comprises three essays in empirical development economics. Broadly, the essays provide causal evidence on the effects of various barriers to trade, associated with infrastructure, law, and politics. Chapter 1 begins from the observation that transportation networks worldwide suffer from heavy congestion. To measure this congestion’s effect on the production side of the economy, I combine firm survey data with traffic data from Indian Rail- ways. Geographic variation in congestion comes from a recent wave of passenger trains which were planned according to certain rigid rules, making it possible to iden- tify the costs the additional traffic imposes on firms using the railways to ship goods. In estimating this “congestion externality”, the empirical strategy accounts for both direct and spillover effects of congestion. It also draws on a traffic model fromoper- ations research to disentangle a mean effect (congestion makes the average shipment slower) from a variance effect (congestion makes shipping times less predictable). In response especially to the unpredictability, firms simplify operations in several ways, leading to lower productivity and substantial revenue loss. While affected firms suffer, however, I draw on a general equilibrium model of competition to identify gains to their competitors. Policy implications of these results concern both the management of traffic on existing infrastructure, and the construction of new infrastructure. Chapter 2 (coauthored with Ernest Liu) provides a long-run perspective on the effects of trade costs on the geography of production. We consider India’s Freight Equalization Scheme (FES), which aimed to promote even industrial development by subsidizing long-distance transport of key inputs such as iron and steel. Many observers speculate that FES actually exacerbated inequality by allowing rich man- ufacturing centers on the coast to cheaply source raw materials from poor eastern regions. We exploit state-by-industry variation in the effects of FES on input costs, in order to show how it affected the geography of production. We find, first, that over the long-run FES contributed to the decline of industry in eastern India, pushing iron and steel using industries toward more prosperous states. This effect sinks in gradually, however, with the time needed to construct new plants serving as a friction 3 to industry relocation. Finally, we test for the stickiness of these effects, by studying the repeal of FES. Contrary to popular opinions of the policy and to agglomeration- based reasons for hypothesizing stickiness, we find that the effects of repealing FES are equal and opposite to those of its implementation. Still, due to changing locations of the processing of basic iron and steel materials, the resource-rich states suffering under FES never fully recover. Chapter 3 contributes to the debate on laws against foreign bribery. When gov- ernments pass laws to prevent their businesspeople from bribing foreign officials, how does this affect patterns of trade and foreign investment? A literature focusing on the OECD Anti-Bribery Convention claims that these laws direct international busi- ness toward less corrupt destination countries, with the effect of diverting business away from developing countries. I rebut this claim, using three empirical tests: (i) a baseline test building on previous work but accounting for the omitted role of OECD- level cooperation trends, (ii) an analysis of an initiative intensifying the Convention’s enforcement, and (iii) a test exploiting product-by-destination level variation in pre- Convention exposure to OECD exports. Together, these tests show that the redirec- tion of trade and investment following the passage of the foreign bribery laws was due not to the laws themselves, but to an underlying trend of increased political cooper- ation among OECD countries, as indicated by patterns in UN voting affinity. This cooperation is what simultaneously led OECD countries to pass measures such as the Convention, and to do more business with other OECD countries, which happen to be less corrupt on average than non-OECD countries. Thesis Supervisor: Daron Acemoglu Title: Elizabeth and James Killian Professor of Economics Thesis Supervisor: Benjamin Olken Title: Professor of Economics 4 Acknowledgments I am deeply grateful to those who helped me through the long and sometimes difficult journey which led to this thesis. First and foremost, I thank my advisors, Daron Acemoglu, Ben Olken, and Abhijit Banerjee, for their incredible advice, encouragement, and mentorship. I feel very fortunate that they have invested so much in my development as an economist. Apart from my official advisors, several other professors at MIT provided in- valuable guidance, especially Esther Duflo, Rob Townsend, David Atkin, and Dave Donaldson. It has been a privilege to be part of such a vibrant and supportive group. My peers also played an integral role in my graduate school experience. For their help and friendship, I thank Sid George, Nick Hagerty, Greg Howard, Peter Hull, Donghee Jo, Gabriel Kreindler, Matt Lowe, Ernest Liu, Ben Marx, Rachael Meager, Yuhei Miyauchi, Scott Nelson, Arianna Ornaghi, Brendan Price, Otis Reid, Ben Roth, Ludwig Straub, Marco Tabellini, and Tite Yokossi. My inspiration to pursue a PhD and become an academic came during my under- graduate studies, and for this I especially thank Bill Evans, John Roos, Jim Sullivan, and Paul Weithman. I also thank Dan Keniston, Clément Imbert, and everyone at J-PAL South Asia who supported me in my first experiences with fieldwork. For help with the chapters on Indian Railways, I thank Arvind Subramanian, Rangeet Ghosh, and their colleagues at the Ministry of Finance. I am also grateful for the help and insights of many dedicated people working with the Indian Railways, including Shri Prakash, GK Mohanty, NM Rao, Vishy Shanker, Beji George, Ashwani Kumar, and Rajnish Kumar. Finally, I thank my parents, my siblings, and Anushka Shah, for the love and support which not only carried me through this thesis, but also kept it in perspective and made it all meaningful. 5 6 Contents 1 I’ve Been Waiting on the Railroad: The Effects of Congestion on Firm Production 15 1.1 Introduction . 15 1.2 Context and data . 26 1.2.1 Indian Railways . 26 1.2.2 Data sources . 28 1.3 Reduced form effects of congestion on firm revenue . 31 1.3.1 Basic empirical strategy . 31 1.3.2 Spillovers from diversion of traffic onto alternate routes . 34 1.3.3 Reduced form results . 36 1.4 The effect of shipping times: mean versus variance . 43 1.4.1 Model and empirical strategy . 43 1.4.2 Results of the shipping times IV . 47 1.5 Explaining the revenue loss: costs versus competition . 47 1.5.1 Model and empirical strategy . 48 1.5.2 Empirical application of the model . 54 1.6 Policy . 57 1.6.1 Traffic management on existing infrastructure . 57 1.6.2 New infrastructure . 60 1.7 Conclusion . 66 1.8 Tables and Figures . 68 1.9 Appendix . 90 7 2 Manufacturing Underdevelopment: India’s Freight Equalization Scheme, and the Long-run Effects of Distortions on the Geography ofPro- duction 117 2.1 Introduction . 117 2.2 Background . 121 2.3 Empirical analysis . 125 2.3.1 Long-run effect . 125 2.3.2 Transition path . 130 2.3.3 Stickiness . 134 2.4 Conclusion . 136 2.5 Tables and Figures . 138 2.6 Appendix . 153 3 Do Anti-Bribery Laws Affect International Trade and Investment? 159 3.1 Introduction . 159 3.2 Background . 160 3.3 Data and methodology . 162 3.4 Results . 164 3.4.1 Strategy 1: Baseline model, accounting for international coop- eration . 164 3.4.2 Strategy 2: Increased enforcement in Phase 3 of the OECD Working Group on Bribery . 169 3.4.3 Strategy 3: Product-level trade . 170 3.5 Conclusion . 172 3.6 Tables and Figures . 174 4 Bibliography 186 8 List of Figures 1-1 Histogram of line capacity utilization . 68 1-2 Route-wise average freight shipment times . 69 1-3 Sample from scraped website with data on train routes . 70 1-4 Goods shipped by rail in India . 71 1-5 Reduced form empirical strategy, accounting for spillover effects . 72 1-6 District-wise exposure to Duronto routes . 73 1-7 District-wise exposure to spillover routes . 74 1-8 Event study for effect of Durontos . 75 1-9 Mean and variance response to Durontos, as a function of pre-existing congestion . 76 1-10 Event study for the effect of Ddy × Td;y=y0 on revenue . 77 1-11 Effects of two hypothetical construction projects . 78 1-12 Effects of congestion on travel times . 115 2-1 The economic geography of India at the time of FES implementation 138 2-2 Historical trends in state manufacturing output .