Transport infrastructure
and growth
BTRE introduction - William Lu
Parliament House Canberra
18 & 19 May 2005
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
Transport infrastructure improvement
Reduced distances
Reduced congestion
Other externalities
Cheaper, more reliable transport services
Logistical
improvements
Facilities
consolidation
Location effects
Source: Lakshmanan, et al. 2002
Value 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