Broadband Infrastructure and Economic Growth in Rural Areas

https://doi.org/10.1016/j.infoecopol.2021.100936Get rights and content

Highlights

  • Broadband positively affects the retail sector in rural areas

  • No effect of broadband on manufacturing; mixed effect on agriculture

  • The biggest effect of broadband is for connection speeds below 10 Mbps

  • Domestic sellers use social media for marketing purposes which translates into higher sales

Abstract

Using unique data from a systematic roll-out of broadband infrastructure in rural areas, we provide evidence on the impact of high-speed internet via broadband on three main sectors of economy: retail, agriculture, and manufacturing. Our instrumental variable model, which relies upon the timing of the roll-out at the first stage, shows that in general broadband access does not foster economic growth, but positively affects the retail sector, with no effect on the manufacturing and agricultural sectors. We also find that the biggest effects are found for speeds below 10 Mbps. We supplement our findings by exploring potential mechanisms that could drive the results.

Introduction

Several studies have identified ageing telecommunications infrastructure based on analogue technology as being an impediment to productivity and competitiveness in transition economies (e.g., Madden and Savage, 1998). As such, access to high speed internet via broadband infrastructure, which has been rapidly deployed throughout the world in the last thirty years, is seen as a significant contributor to economic growth.

Previous literature highlighted that broadband infrastructure might be distinct from other forms of infrastructural investment which fosters economic growth, as high speed internet via broadband may further facilitate economy-wide growth by accelerating the distribution of information, reduction of transport and transaction costs, and fostering productivity and competition. Broadband may also affect the economy through development of new products, processes and adoption of new business models.

Because of its high cost, previous studies documented a gap in broadband usage between urban and rural areas. Prieger (2003), for instance, finds evidence of redlining, where broadband carriers avoid areas with high concentrations of poor and minority households. The so-called “digital divide” has received much attention from policymakers in both developed and developing countries. In our paper, we try to answer one simple question, that is whether rural areas that lack broadband access are economically deprived because broadband services are not available there.

A World Bank study (see, Qiang and Rossotto, 2009) reports that 10 percent increase in broadband penetration boosts GDP growth by 1.21 percentage points in developed countries. More importantly, the effects of broadband are even stronger for low- and middle-income countries – about 1.38 percentage points. Albeit, there are studies showing the positive impact of broadband on growth, further research is still needed especially for developing countries. On the one hand, broadband may not necessarily produce the desired effect without investment in complementary sectors, such as education or health. (see, Kelly and Rossotto, 2012). On the other hand, sometimes low-tech low-cost solutions may have a bigger effect (see, for example, Kenny, 2011).

Most of existing studies are based on cross-country variation and are conducted in context of developed countries, such as members of the OECD (e.g., Whitacre et al., 2014). The lack of access and difficulty of gathering information, especially in rural parts of the developing countries, might have contributed to this gap in the literature. In addition, the impact of broadband is hard to disentangle from other factors, as roll-out of broadband is usually driven by endogenous economic or social factors.

There is in fact scant systematic evidence relating broadband infrastructure to economic growth in developing countries, and more importantly, none examining its effect in rural areas. Yet, broadband can potentially be a bigger source of productivity in rural areas for several reasons. First of all, broadband may contribute to human capital formation. Access to information and various training courses online may help individuals in remote areas far from formal schools or training centers acquire new skills. Secondly, if broadband adoption can be characterized by diminishing returns to scale, as some authors point out (for example, Datta and Agarwal, 2004), broadband infrastructure might have a bigger effect in rural areas given relatively low levels of penetration. But at the same time, the benefits of this technology might not be fully utilized due to a host of other issues prevalent in developing regions, such as poor governance, lack of capital, low skill levels, and so on.

Moreover, given that allocation of investment funds to sector-specific infrastructure is an important policy issue for any country, in this paper, we try to analyze the relation between roll-out of broadband infrastructure and the regional product in rural areas of Kazakhstan by focusing on three major sectors of the economy: agriculture, retail, and manufacturing.

We exploit a unique dataset on program roll-out across the villages in Kazakhstan over a ten-year period from 2006 to 2016, combined with the data from the Kazakh Statistical Agency, to show the impact of broadband access on three major sectors of the economy. In our baseline results, we find a positive effect on the retail sector, with no effect on manufacturing output and mixed effects regarding the agricultural sector.

Given that the definitions of broadband differ across the studies, we also use different speed thresholds to define broadband. The evidence suggests that the biggest effect comes for speeds less than 10 Mbps. The effect of high speed of 10 Mbps and above is small and statistically insignificant.

Notwithstanding these baseline results, the uncovered relationships may be driven by omitted time-varying factors or be subject to reverse causality. Previous literature highlighted several such instances and addressed these issues, for instance, by utilizing the information on the availability of DSL broadband (e.g., Bertschek et al., 2013), or structure of the pre-existing voice-telephony network (e.g., Czernich, 2014) in an instrumental variable framework. Similarly, in order to address these concerns, we rely upon the time varying distance variable to the nearest district with broadband as an instrument. The IV results are qualitatively similar to our baseline results showing only a positive effect on retail, with no effect on manufacturing and agricultural sectors.

To better understand potential mechanisms at play, we also analyze both household and firm level data and show that in regions with higher broadband penetration rates households search more for products online, more actively use social networks, and tend to purchase more products from local sellers. The evidence from a supplementary survey of 643 local firms in rural areas show that in the retail sector, a substantial share of firms use broadband for advertising on social media platforms. Thus, the retail sector seems to benefit most from broadband roll-out through wider possibilities of marketing in social networks and easier access to potential clients.

Section snippets

Literature Review

This paper contributes to several strands of the economics literature.

First, our study contributes to the literature on infrastructure and economic growth. Beginning with Aschauer (1989), several studies documented the importance of public infrastructure for economic growth. Munnell (1992) found support for this evidence in his earlier work and argued that public infrastructure may have large positive payoffs on several measures of economic activity despite the criticism that emerged in the

Program Background

The big push model of industrialization (i.e., Rosenstein-Rodan, 1943), emphasizes that underdeveloped countries require large amounts of investments to embark on the path of economic development. According to it, the various sectors of the economy can make industrialization profitable if they adopt increasing returns technologies simultaneously. This idea was further extended by subsequent studies (e.g., Murphy et al., 1989), including the case of economies with small domestic markets such as

Data and Empirical Strategy

From the theoretical perspective, information and communication technology in general, and broadband in particular, may be treated as the component of the total factor productivity in the production function. This approach is followed by Czernich et al. (2011) and Qiang and Rossotto (2009), among others.

Empirically, the baseline model is given by the following equation:grt=β0+β1PRrt+β2Xrt+μr+λt+urt, where grt is the growth rate of output for district r in year t, PRrt is the broadband

Baseline Results

The regression results of several specifications are presented in Table 2a. We do find some marginally significant effect of broadband penetration on the overall growth rate. Further breakdown by industry shows that the broadband affects different sectors of the economy not uniformly. The effect on the manufacturing sector is very small and statistically insignificant. This is in contrast with the general perception that industry should benefit from information technology. The effect on

Potential Mechanisms: Households and Firms

It is not entirely surprising that the retail sector benefits from broadband. Online shopping, online marketing opportunities, all these enable reaching more consumers, and thus, expand the retail sector. To check whether retailers could reach more consumers with the help of broadband, we considered the effect of broadband penetration on the share of households who purchased goods from local sellers. These data come from a household survey conducted by the Statistical Agency and is available at

Conclusion

Internet access and broadband, in particular, represent a vast opportunity for growth in rural areas. Yet, in the most conservative setting, we only observe the growth of the retail sector with broadband penetration. The direction and significance of the effect on the retail sector are also robust to the various definitions of broadband.

The mechanisms, from both demand- and supply-side, partially seem to explain the positive result on retail. On the one hand, the expansion of broadband to rural

Declaration of Competing Interest

Alisher Aldashev was part of the consultancy team on the project for the telecommunication company JSC “Kazakhtelecom” during 03.01.2018-01.02.2018. The authors are not employed by Kazakhtelecom, nor in any other way affiliated with the company.

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