Rural Roads and Development: Evidence from Ethiopia

Previous empirical studies on Ethiopia identified adequate access to rural roads as one of the key determinants of rural income. However, most of these studies ignored the effect of spatial dimension of road infrastructure on rural income. As a result, the productivity of road reported by these studies is likely to be underestimated by the extent that local equilibrium prices adjust to the stock of local road infrastructure. This paper attempts to partially address the problem by specifying the link between rural roads and household income in the context of a spatial equilibrium framework. The results show that road-induced rural income growth is substantially higher than what was reported by previous studies that used the same dataset. Road-induced factor productivity and returns to land and labour are also found to be the main channels by which better road access enhances rural income.