Parliament House Canberra 18 & 19 May 2005 BTRE introduction - William Lu Transport infrastructure and growth

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

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

Macro perspective (cont’d)  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

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)

Micro perspective (cont’d)  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 Source: Lakshmanan, et al Transport infrastructure improvement Reduced distancesReduced congestionOther externalities Cheaper, more reliable transport services Logistical improvements Facilities consolidation Location effectsValue added effects

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

General equilibrium (cont’d) 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

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.

– END