Working Paper: NBER ID: w30402
Authors: Sebastian Galiani; Luis F. Jaramillo; Mateo Uribe-Castro
Abstract: We study the impact of the Panama Canal on the development of Canada’s manufacturing sector in the years from 1900 to 1939. Using newly digitized county-level data from the Census of Manufactures and a market-access approach, we exploit the plausibly exogenous nature of this historical episode to study how changes in transportation costs influence the location of economic activity and productivity dynamics. Our reduced-form estimates show that lowered shipping costs led to greater market integration of marginally productive Canadian counties with key markets both inside and outside of Canada. This development permitted the reallocation of production activity to places whose production levels had been inefficiently low before the Canal opened. A shift from the 25th to the 75th percentile in terms of gains in market access brought about by the opening of the Canal led to a 9% increase in manufacturing revenues and input expenditures. Productivity rose by 13%. These effects persist when general equilibrium effects are considered: the closure of the Canal in 1939 would have resulted in economic losses equivalent to 1.86% of GDP, chiefly as a result of the restriction of the country’s access to international markets. Altogether, these results suggest that the Canal substantially altered the economic geography of the Western Hemisphere in the first half of the twentieth century.
Keywords: Panama Canal; Canada; manufacturing sector; market access; transportation costs
JEL Codes: O1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Opening of the Panama Canal (N72) | Increase in market access for Canadian counties (O51) |
| Increase in market access for Canadian counties (O51) | Increase in manufacturing revenues (L60) |
| Increase in market access for Canadian counties (O51) | Increase in productivity (O49) |
| Lowered shipping costs (L87) | Greater market integration (F15) |
| Closure of the canal in 1939 (N94) | Economic losses equivalent to 186% of GDP (F69) |
| Opening of the Panama Canal (N72) | Reallocation of production activity (L23) |
| Increase in market access for Canadian counties (O51) | Allocative efficiency improvements (D61) |
| Increase in market access for Canadian counties (O51) | Total factor productivity increases (O49) |