I study the role of transportation for development by introducing regional trade and a transportation sector into the standard two-sector model of agriculture-nonagriculture. Low transport productivity can distort the allocation of resources across geographically dispersed production units within sectors and between agriculture and nonagriculture. I infer cross-country transport productivity disparities from observed domestic transport costs and transport infrastructure stocks. Endowing- rich countries with the transport productivity of poor countries would reduce their income by 10%. Combining transport productivity disparities with disparities in nonagricultural productivity and arable land the model yields a 50% higher rich-poor income ratio than the two-sector model.
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