Trade, Internal Migration, and Human Capital

Investments in education and infrastructure are the two most important drivers of economic development: About a fifth of world GDP is spent on just these two categories. (Source: World Bank Indicators, 2017, McKinsey Global Institute Analysis. url{https://data.worldbank.org/indicator/se.xpd.totl.gb.zs} accessed 3/21/2019
url{https://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/bridging-infrastructure-gaps-has-the-world-made-progress}
) As the world is becoming increasingly global with the growth rate of exports exceeding that of GDP, studying the links between trade and investments in human and physical capital has become more important than ever.(Source: WTO, International Trade Statistics, 2015.
(url{https://www.wto.org/english/res_e/statis_e/its2015_e/its15_highlights_e.pdf} accessed 3/21/2019 ) The three chapters of my dissertation focus on understanding these links: The first two chapters analyze how trade affects investments in human capital and the consequent changes in welfare, and the third chapter studies the links between investments in infrastructure capital in the form of highway expansion, internal trade, and regional development.

In the first chapter, using an external demand shock in the Indian Information Technology (IT) sector, data on the IT sector that I assemble and confidential internal migration data from India, I document that both IT employment and engineering enrollment increased in response to the rise in IT exports across regions in the late 1990s, and this response was heterogeneous across regions.

In the second chapter, I develop a structural spatial model featuring two new channels compared to the existing spatial models: the option to choose education and the option to move for education. I estimate the model using the external IT demand shock and detailed internal migration data from India. Using this framework, I then quantify the aggregate and distributional effects, and perform counterfactuals. I find that without any of these channels, estimated aggregate welfare gains from the IT boom would be halved and estimated regional inequality would be a third higher. Shutting down the second channel alone (not allowing migration for education) reduces the estimated aggregate welfare gains marginally but increases regional inequality by 15%. Sector specific trade shocks, such as the Indian IT boom, change the relative returns to occupations across locations depending on two factors: the location’s comparative advantage in that sector and its connectivity to other locations. The changes in the relative returns to occupations affect an individual’s incentives to invest in different skill types. Skill investments are constrained by the local availability of higher education and the costs of moving to regions with colleges. The key ingredient of my model is that individuals make education and work decisions in two stages. In the first stage, they decide what and where to study taking access to higher education and job opportunities into account. In the second stage, individuals choose the sector and location of work.

The first two chapters of my dissertation make three contributions. First, I introduce human capital acquisition decisions in a general equilibrium economic geography model. The general equilibrium aspect is important, since human capital takes time to respond to employment opportunities, during which both people and goods can move. Second, in the model, people face differential migration costs when they move for education or for work. I develop a framework to estimate these two costs separately and find that the mobility costs for education are 7 percentage points higher than those for work. Individuals born in districts with greater access to education and jobs gained as much as 2.63%, while those in remote districts experienced gains as low as 0.67%. Third, the framework is well-suited for analyzing the effects of policy-induced spatial frictions to moving for higher education, such as in-state quotas at colleges. Reducing these barriers would increase aggregate welfare marginally but substantially decrease the impact of the export shock on regional inequality. The results underscore the potential for education policies to distribute the gains from globalization more equally.

In the third part of my dissertation, in joint work with Kerem Cosar, Banu Demir and Nate Young, we study how investments in infrastructure improvements, specifically, the expansion of highway networks, affect short-run and long-run distributions of welfare by improving internal trade between regions. In this paper, we examine the benefits that a major capacity upgrade to existing transport infrastructure can have in middle-income economies by looking at the case of Turkey, which expanded highways from divided two lanes to four lanes during the 2000s. We do this by measuring the impact of reduced travel times between Turkish provinces and then linking changes in travel times to changes in intranational trade as well as regional sales, employment, and productivity. Our results suggest that travel time reductions due to the ambitious investment program boosted intranational trade in Turkey, increased output, and generated employment. The results are robust to a number of robustness checks, including a falsification test that investigates whether changes in domestic interprovincial trade flows during the 2006-2011 period can be explained by travel time reductions over the 2010-2015 period.

But how large are gains in welfare from road development, especially when there are various types or stages of investments that are possible? Arguably, constructing a new road from scratch or paving a dirt road would have a different effect than constructing a highway or expanding the lane capacity of existing roads. In a quantitative exercise using a workhorse model of spatial equilibrium, we find a rate of return on investment around 70%. In the long run, when people can move across regions, this translates into a welfare gain of 2%. In the short run when people cannot move, the welfare gains are more unequal: Already well-connected cities like Istanbul do not gain substantially while more remote places gain a lot.