Roads, Trade and Urbanization in the Tropics: Theory and Evidence from the Brazilian Amazon

The Brazilian Amazon has undergone a great transformation of its economy since the end of the 1990s, when the price of its export-oriented commodities increased in more than 200% in a few years. However, counties in the region experienced the effects of this soaring price differently according to their access to a federal road system constructed in the early 1970s. I take advantage of this institutional setting, and a rich dataset with annual information on agriculture production and labor market employment, to study how trade affects urbanization in developing countries. I find that counties with access to roads expanded more their export of capital intensive commodities and their employment in urban activities after the price shock. Furthermore, structural estimates of a model indicate that an urbanization process would not have occurred in the absence of a capital intensive activity. This article provides evidence that the lack of good trade opportunities in terms of price and products may undermine the benefits of transportation projects in developing countries.