Canal and trade: Transportation infrastructure and market integration in China, 1780–1911

Abstract

This paper explores the role of transportation infrastructure in pre-modern economic development by investigating the historical canal's closure. We quantify the effects of closing China's Grand Canal in 1826 by disastrous flooding, the world's largest and oldest manmade waterway, on market integration. We use archived grain prices from 1780 to 1911 and find that the canal's closure led to a 30% decline in market integration; this impact lasted for more than 70 years. Our results are robust while addressing the alternative measures of market integration, potential spillovers from treated groups to control groups, influences of forced openness, and potential measurement errors and standard error adjustments. We find evidence consistent with increasing transportation costs and information friction as the main potential mechanisms. Our findings highlight the importance of transportation infrastructure in reducing arbitrage costs and provide new evidence which is important to explain the process of the Great Divergence between China and Europe.