Optimal Investments in Africa’s Road Network

Optimal Investments in Africa’s Road Network Sebastian Krantz Africa RegionOffice of the Chief EconomistSeptember 2024 Policy Research Working Paper10893 Abstract This paper characterizes economically optimal investmentsin Africa’s road network in partial and general equilibrium—based on a detailed topography of the network, roadcon-struction costs, frictions in cross-border trading, andeconomic geography. Drawing from data on 144 milliontrans-continental routes, it first assesses local and globalnetwork efficiency and market access. It then derives alarge network connecting 447 cities and 52 ports alongthe fastest routes, devises an algorithm to propose newlinks, analyzes the quality of existing links, and estimateslink-level construction/upgrading costs. Subsequently, itcomputes market-access-maximizing investments in partial equilibrium and conducts cost-benefit analysis for individ-ual links and several investment packages. Using a spatialeconomic model and global optimization over the space ofnetworks, it finally elicits welfare-maximizing investmentsin spatial equilibrium. Findings imply that cross-borderfrictions and trade elasticities signifi-cantly shape optimalroad investments. Reducing frictions yields the greatestbenefits, followed by road upgrades and new construction.Sequencing matters, as reduced frictions generally increaseinvestment returns. Returns to upgrading key links are large,even under frictions. The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about developmentissues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry thenames of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely thoseof the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank andits affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. OptimalInvestmentsinAfrica’sRoadNetwork SebastianKrantz* Keywords:Africanroads,spatiallyoptimalinvestments,bigdata,PEandGEanalysisJELClassification:O18;R42;R10;O10 1Introduction For several decades, development economists and policymakers have highlighted insufficient orinefficient transport infrastructure, coupled with border frictions and high trading costs, as amajor obstacle to African economic development and regional integration. A World Bank reportfrom 2010 states that Sub-Saharan Africa (SSA) has 31 paved roadskmper 100km2of land,compared to 134kmin other low-income countries, estimates the annual infrastructure gap atUS$93 billion and urges SSA countries to spend 1 percent of GDP on roads (Foster & Brice˜no-Garmendia, 2010). This is echoed by the African Development Report 2010, attesting a financinggap at 5 percent of GDP to overhaul the infrastructure sector (ADB, 2010). More extensive anddetailed work by Teravaninthorn & Raballand (2009) and Lamarque & Nugent (2022) unveils thenature of transportation and trucking in Africa, the determinants of transport costs and frictions,and discusses potentials and policy options for development along specific transport corridors. Yet,still little is known about the economic optimality of such (large-scale) transport investments. This paper thus presents a comprehensive, data-driven, and quantitatively rigorous assessmentof Africa’s road network and optimal investments into it at the trans-African scale. It (1) conductsa detailed empirical stocktake of Africa’s present road network; (2) characterizes global economicoptimality in network investments from a market access and welfare perspective; (3) investigatesthe effects of cross-border frictions on optimal spatial allocations; and (4) presents cost-benefitanalyses and evidence on the macroeconomic feasibility of large scale (optimal) investments. Thisagenda mirrors questions of international policymakers who, in theory, can invest in roads anywhereon the continent and may ask: (1) is it still important to invest in African roads?; (2) where exactlyshould we invest in African roads?; (3) are investments sensible with/without trade facilitation?;and (4) are they macroeconomically feasible? The paper engages this ambitious agenda by buildingrealistic economic topographies informed by routing engines, geospatial big data, and surveys andanalyzing investments on them using tools from graph theory and spatial economic modeling. Several significant contributions have already been made in economic literature.Atkin &Donaldson (2015) show that the effect of log distance on trade costs within Ethiopia or Nigeriais 4-5 times larger than in the US, and≤30% of this effect is explained by the availability andquality of roads. Using 10 years of disaggregated monthly price data, Porteous (2019) estimatesa dynamic model of ag