Parliament House CanberraParliament House Canberra18 & 19 May 200518 & 19 May 2005

BTRE introduction - William Lu

Transport infrastructure Transport infrastructure and growthand growth

Infrastructure and growthInfrastructure and growth

the issue is highly contentiousthe issue is highly contentious

focus of the debate is focus of the debate is how how and toand to what degree what degree transport infrastructure affects growthtransport infrastructure affects growth

keys to understandingkeys to understanding::

– macroeconomic perspectivemacroeconomic perspective– microeconomic perspectivemicroeconomic perspective– general equilibrium perspectivegeneral equilibrium perspective

Macroeconomic perspectiveMacroeconomic perspective

treat transport infrastructure as an additional variable treat transport infrastructure as an additional variable in the aggregate growth function (or cost function)in the aggregate growth function (or cost function)

test test whether whether and toand to what extent what extent infrastructure affects infrastructure affects outputoutput

empirical results have been so far highly variable, empirical results have been so far highly variable, depending on spatial and temporal conditionsdepending on spatial and temporal conditions

an emerging consensus is that, for a mature economy an emerging consensus is that, for a mature economy with well developed transport systems, the contribution with well developed transport systems, the contribution of transport infrastructure investment to output growth of transport infrastructure investment to output growth is likely to be modestis likely to be modest

Macro perspective (cont’d)Macro perspective (cont’d)

useful in revealing the full effects of infrastructure useful in revealing the full effects of infrastructure investments, but it has limitations:investments, but it has limitations:

– lack of transparency (black box) lack of transparency (black box) – specification problems (causality, functional forms & specification problems (causality, functional forms &

dynamics)dynamics)– sensitive to data selected for estimationsensitive to data selected for estimation– an ex-post estimatean ex-post estimate– an aggregate measurean aggregate measure

caution should be adopted when using macro results to caution should be adopted when using macro results to infer future transport infrastructure investment needsinfer future transport infrastructure investment needs

Microeconomic perspectiveMicroeconomic perspective

measures the benefits of infrastructure measures the benefits of infrastructure improvements from savings in both transport and improvements from savings in both transport and non-transport inputs at thenon-transport inputs at the firm level firm level

both of these areas of savings will enhance both of these areas of savings will enhance economic performanceeconomic performance

traditional tool is benefit-cost analysis (BCA)traditional tool is benefit-cost analysis (BCA)

Micro perspective (cont’d)Micro perspective (cont’d) direct direct (1st-order)(1st-order) benefits benefits

– savings in time, VOCs and savings in time, VOCs and accident costsaccident costs

indirect indirect (2nd-order)(2nd-order) benefitsbenefits– savings from logistical savings from logistical

reorganisation (inventory, reorganisation (inventory, warehouse and firm warehouse and firm relocation)relocation)

– economies of scale/scope economies of scale/scope are key drivers behind these are key drivers behind these indirect benefitsindirect benefits

– often omitted in practical often omitted in practical BCA at the project level BCA at the project level

Source: Lakshmanan, et al. 2002Source: Lakshmanan, et al. 2002

Transport infrastructure improvement

Reduced distances Reduced congestion Other externalities

Cheaper, more reliable transport services

Logistical improvements

Facilities consolidation

Location effects Value added effects

General equilibrium perspectiveGeneral equilibrium perspective

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

General equilibrium (cont’d)General equilibrium (cont’d)

New insights from the recent literature: New insights from the recent literature: gains from tradegains from trade

– comparative advantage (comparative advantage (Neo-classicalNeo-classical))– scale economies and imperfect competition (scale economies and imperfect competition (New New

Economic GeographyEconomic Geography) ) gains from innovation and technology gains from innovation and technology ((The Endogenous The Endogenous Growth Theory)Growth Theory)

However, most GE models currently in use However, most GE models currently in use do notdo not have have these sorts of sophistication and are these sorts of sophistication and are expensiveexpensive to run to run

SummarySummary

macroeconomicmacroeconomic: full effects but a black box: full effects but a black box microeconomicmicroeconomic: transparent, but indirect effects : transparent, but indirect effects

may be overlookedmay be overlooked general equilibriumgeneral equilibrium: economies of scale/scope : economies of scale/scope

and imperfect competition as possible sources of and imperfect competition as possible sources of further gains further gains

the three perspectives, if considered in a the three perspectives, if considered in a ccomplementaryomplementary fashion, would enrich our fashion, would enrich our understanding of the critical relationship between understanding of the critical relationship between transport infrastructure investment and economic transport infrastructure investment and economic growth. growth.

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