IS SMALL BEAUTIFUL?65
But perhaps the very idea of comparative advantage is overrated, and even small countries can live in autarky. Or to push the logic even further, perhaps every community can learn to produce what it needs.
This idea has a long and somewhat infamous pedigree. During the Great Leap Forward in China, Chairman Mao argued, among other things, that industrialization could be willed to happen in every village, and that steel could be produced in backyard steel furnaces. The project failed miserably, but not before peasants melted down their pots and pans and plowshares to comply with the chairman’s wishes, and busied themselves producing steel while fields remained fallow and crops rotted on the ground. Many China observers think this might have contributed to the Great Chinese Famine of 1958–1960, when upward of thirty million people died.
The idea of self-sufficient village communities was also the centerpiece of Gandhi’s economic philosophy. His vision of a society clothed in homespun and living mainly off the land had a durable effect on Indian economic policy in the post-independence era. Until the WTO forced India to do away with the policy in 2002, 799 goods, from pickles to fountain pens, dyes, and many items of clothing, were reserved for tiny firms that could be set up in villages.
The problem of course is that small is not beautiful. A minimum scale is required to allow firms to employ specialized workers or to use high-productivity machines. In the early 1980s, Abhijit’s mother, Nirmala Banerjee, an economist with quite left-wing views, surveyed small firms in and around Kolkata, and was astounded by just how unproductive they were.66 Later evidence confirmed her insight. In India, small firms are much less productive than larger ones.67
But firms can only be large if the market is large. As Adam Smith wrote in 1776: “The division of labour is limited by the extent of the market.”68 This is why trade is valuable.
Isolated communities cannot have productive firms.Indeed, national integration via railroad has had transformative impacts in many economies. In India, between 1853 and 1930, the British colonial administration oversaw the building of nearly forty-two thousand miles of railroad in India. Before the railways, commodities were transported by bullocks on dirt roads, and could travel at most twenty miles per day. Railroads could transport these same commodities almost four hundred miles in a day, at a much lower cost, and with less risk of spoilage. Inland regions all but cut off from the rest of the country got connected.69 The railroad network dramatically reduced trade costs. The transportation cost per mile traveled was nearly two and a half times higher for roads than for railroads. And places brought together by railways started to trade more and became richer; the value of agricultural production increased 16 percent faster in districts that got a train line, relative to those that did not.
The United States was another large country integrated through a vast network of railroads at about the same time. Although the role of railroads in the development of the US economy has been controversial, recent research suggests agricultural land value would have been 64 percent lower in the absence of railroad construction.70 These land prices embody all the gains farmers expected from better connections with other counties. And the gains came in large part from the ability to specialize in what each region was good at. Between 1890 and 1997, agriculture became more and more locally specialized. Farmers increasingly chose the crop that each field (due to its climate, soil, etc.) was ideally suited for, which led to large gains in overall agricultural productivity and income.71
Poor internal integration also makes economies sticky, eliminating the gains from international trade for the common men and women, or even turning them into losses. Bad roads discourage people from taking new jobs in cities. In India, the unpaved roads connecting villages to main roads have been shown to be a deterrent for rural dwellers to get nonagricultural jobs outside their villages.72 Bumpy rides add so much to the final price of goods that consumers in remote villages enjoy almost no benefits from international trade. In Nigeria and Ethiopia, by the time imported goods arrive at those villages, if they make it at all, they are unaffordable.73 Poor transportation, both for inputs and for the final products, erode the cost advantages of a cheap labor force. Internal connections must improve for international integration to be beneficial.