Transport infrastructure and growth

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Transport infrastructure and growth
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Infrastructure and growth

• the issue is highly contentious
• focus of the debate is how and to what degree
  transport infrastructure affects growth
• keys to understanding
• macroeconomic perspective
• microeconomic perspective
• general equilibrium perspective

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Macroeconomic perspective

• treat transport infrastructure as an additional
  variable in the aggregate growth function (or
  cost function)
• test whether and to what extent infrastructure
  affects output
• empirical results have been so far highly
  variable, depending on spatial and temporal
  conditions
• an emerging consensus is that, for a mature
  economy with well developed transport systems,
  the contribution of transport infrastructure
  investment to output growth is likely to be modest

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Macro perspective (contd)

• useful in revealing the full effects of
  infrastructure investments, but it has
  limitations
• lack of transparency (black box)
• specification problems (causality, functional
  forms dynamics)
• sensitive to data selected for estimation
• an ex-post estimate
• an aggregate measure
• caution should be adopted when using macro
  results to infer future transport infrastructure
  investment needs

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Microeconomic perspective

• measures the benefits of infrastructure
  improvements from savings in both transport and
  non-transport inputs at the firm level
• both of these areas of savings will enhance
  economic performance
• traditional tool is benefit-cost analysis (BCA)

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Micro perspective (contd)

• direct (1st-order) benefits
• savings in time, VOCs and accident costs
• indirect (2nd-order) benefits
• savings from logistical reorganisation
  (inventory, warehouse and firm relocation)
• economies of scale/scope are key drivers behind
  these indirect benefits
• often omitted in practical BCA at the project
  level

Source Lakshmanan, et al. 2002
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General equilibrium perspective

• General equilibrium effects occur when cost
  reductions or improvements in transport services
  result in economy-wide adjustments in such a way
  to increase aggregate productivity

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General equilibrium (contd)

• New insights from the recent literature
• gains from trade
• comparative advantage (Neo-classical)
• scale economies and imperfect competition (New
  Economic Geography)
• gains from innovation and technology (The
  Endogenous Growth Theory)
• However, most GE models currently in use do not
  have these sorts of sophistication and are
  expensive to run

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Summary

• macroeconomic full effects but a black box
• microeconomic transparent, but indirect effects
  may be overlooked
• general equilibrium economies of scale/scope
  and imperfect competition as possible sources of
  further gains
• the three perspectives, if considered in a
  complementary fashion, would enrich our
  understanding of the critical relationship
  between transport infrastructure investment and
  economic growth.

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• END