Title: Transport, Economic Growth and Poverty Reduction
1 Transport, Economic Growth and Poverty Reduction
A World Bank Seminar
February 26th, 2004
2 Four parts of the seminar
Introduction showing why we are more interested in the broader economic impacts of transport projects than we used to be
Presentation by Profs. Bennathan and Hulten on their study of the impact of infrastructure investment on the productivity of Indias manufacturing industry
A summary of the findings and recommendations of the SACTRA review of the relationship between transport, transport intensity and economic growth
Discussion on what more we could and should be doing, if anything, in respect to the broader impacts of transport projects.
3 Incompatibility between objectives and evaluation
Many transport projects have stimulation of economic growth or poverty reduction as an objective
The measure of benefit is based on vehicle operating cost and time savings
There is no obvious or proven link between these benefits and economic growth or poverty reduction
Many attempts to demonstrate these links have been inconclusive
4 Project Objectives
Cambodia Rural Infrastructure
to enhance the livelihoodby providing sustainable access to markets and essential services.
Vietnam Rural Transport III
to reduce rural poverty by.improving access to markets, off-farm economic opportunities and social services supporting small scale contractors and transport service operators.
China Hubei Shiman Highway Project
to support the socioeconomic development of Hubei province, ...thereby fostering intra-and inter-provincial trade.
Equatorial Guinea Transport Infrastructure
to contribute to the countrys Poverty Reduction Program by assuring more efficient movement of goods and services.
5 Assessment of project impacts
Typically reduction in vehicle operating costs and savings in travel time for vehicle occupants
BUT rarely any assessment of how the benefits are distributed not even between the infrastructure agency, transport operators or their clients. And almost never any geographical or social analysis to see how the poor will be impacted, either by reduced consequences of poverty (better access to social services) or better access to markets or employment.
6 Nothing new !
Estimating Highway Benefits in Developing Countries
Robert Brown and Clell Harral 1969
Present methods of CBA are unsound because they are based on a misunderstanding of the nature of the demand curve for transport. Transport cost reductions are not an adequate measure of the increase in production that can occur
A preferable method of evaluation would be to estimate directly the likely increases in production
The Economic Benefits of Road Transport Projects
Herman van der Tak, 1971
How to take account of imperfect competition, price distortions and benefits to other economic regions
7 Internal criticism of economic evaluation methods
Economic analysis of sector investment programs (PRWP 1973, 1998)
- should include a clear rationale for the expenditure, motivated by a desire to correct market failure or alleviate poverty, otherwise public spending simply crowds out private supply, resulting in few net benefits to the economy
8 Other criticisms of current evaluation methods
Evaluation of individual projects can miss network benefits
Governments can use Bank funding of good projects to release own funds for less good projects particularly important for SWAp projects
High discount rate leads to focus on marginal improvement projects rather than major projects with longer term objectives
Seen by Task Managers as an obstacle to be overcome rather than a tool to define a better project.
9 Handbook on Economic Analysis of Investment Operations (WB, 1998)
What is the objective of the project?
What will happen if it implemented, and what if it is not?
Is the project the best alternative?
Are there any separable components and how good are they separately?
Who are the gainers and losers?
Is the project financially sustainable?
What are the fiscal and environmental impacts?
Is the project worthwhile?
What is the risk of the project not achieving its objectives?
Present methods of economic evaluation evolved over last thirty years or so. Many technical improvements but few conceptual changes.
Increasing unease that these methods might not be consistent with current project objectives.
Also unease of lack of demonstration that investment in transport infrastructure really stimulates economic growth or results in reduction in poverty, however defined
Some reassessments by EU, Australia, UK, some other governments and some academics
11 Recent relevant studies (i)
World Development Report, 1994
The Direct and Indirect Economic Effects of Transportation Infrastructure
- Marlon Broadnet, 1996
Transport investment and economic development
- David Banister and Joseph Berechman, 2000
Integrating transport with socio-economic activity
- John Preston, 2001
Benefits and Costs of Transport
- Lakshmanan, Kijkamp, Ritveld and Verhoef, 2001
12 Recent relevant studies (ii)
Assessing the Benefits of Transport
- European Conference of Ministers of Transport, 2001
Transport and Economic Growth The Myths and the Facts
- European Federation for Transport and the Environment, 2001
Facts and Furphies in Cost Benefit Analysis Transport
- Bureau of Transport Economics, Australia, 1999,
Transport Investment, Transport Intensity and Economic Growth
- Department of Transport, UK, 1999
13 World Development Report, 1994
Although there is no consensus on the nature of the impact of infrastructure on growth, many studies have indicated that the role is substantial and frequent, and often greater than that of investment in other forms of capital.
BUT there is need to explain why the findings vary so much from study to study. Until this problem is resolved, results are neither specific or solid enough to serve as a basis for designing policies for infrastructure investment.
Box 1.1, page 15
14 The Direct and Indirect Economic Effects of Transportation Infrastructure
- Martin Boarnet, ITS Irvine (1996)
Some of the direct effects (within the jurisdiction of investment in the road) would have occurred elsewhere if the investment had not been made.
So there is a negative indirect effect (outside the jurisdiction of investment) that needs to offset the usual assumed economic benefit.
The main impact of highway investment in California was a transfer of growth from counties distant from the investment to those closer to it. The overall growth impact was positive but small
15 Transport investment and economic development
- David Banister and Joseph Berechman, 2000
It has always been assumed that adequate transport infrastructure is a prerequisite for economic development, yet this assumption has never been investigated in depth.
Conventional cost benefit analysis of individual projects should be complemented by a broader economic impact analysis of the transport network as a whole.
Assessment of the value of an individual project should include its potential for increases in productivity and its spatial impacts in terms of regional and local distribution of production and services
16 Integrating transport with socio-economic activity
John Preston, Transport Studies Unit, Oxford
Although transport economists say that transport is an intermediate good, in economic evaluation they treat it as a any other consumption good. As it is an intermediate good to almost all other activities, their prices should be included in the transport demand function. Since it is impossible to include them all, we omit them all.
This is problematic and there should be a reconsideration of the links between transport and socio-economic activity.
17 Benefits and Costs of Transport
Lakshmanan, Kijkamp, Ritveld and Verhoef
(Papers in Regional Science, 80, 139-164, 2001)
Changes in transport bring about a large number of changes in the economy, many having welfare improving effects. BUT
There is no clear evidence of positive externalities that are not taken account of in the measurement of consumer surplus.
The major problem is the specification of demand functions, that should reflect the indirect effects (trade growth, spatial distribution of activities, productivity, housing and labor markets, monopolistic prices).
18 Some myths of transport and growthEuropean Federation for Transport and the Environment
Transport drives the economy
More transport infrastructure is always worthwhile
Traffic growth is inevitable
Road pricing is inequitable and will frustrate economic growth
19 European Conference of Ministers of Transport
The main benefits of transport Accessibility and cost savings
Different approaches to measuring the benefits Engineering, political, geographic, macro-economic, planning, CBA
Socio-economic cost-benefit assessment Always needed and useful
Adding effects to CBA Depends on circumstances. Distribution effects always important and often surprising
What part of external benefits is included in CBA? Not only impacts on GDP
Theoretical treatment of transport and the economy Not well understood, more research urgently needed
20 Conclusions of ECMT
CBAs main deficiency is that network effects are difficult to include and some important impacts cannot be measured in monetary terms
Macroeconomic measures based on GDP are deficient in that many costs and benefits (eg on air quality and leisure time) are not included. Finding causal linkages between transport and GDP is marred with uncertainties
CBA includes useful information for project assessment concerning users willingness to pay for non-marketed services
Macroeconomic analyses of productivity growth can provide useful background information for policy decisions on transport investments, and contribute to knowledge about network effects
Multi-criteria assessments can be a useful as complimentary to CBA
21 Australian Government
Are indirect benefits measured in BCA? Yes, mostly
Are transmitted benefits included? Yes, mostly
Imperfect competition How relevant to BCA? Could be significant
Can regional development impacts be believed? Usually exaggerated
Are there any unquantified externalities of transport? Yes, positive and negative
Is multi-criteria analysis an advance on BCA? Can be, if used with caution
22 UK Government
Do transport improvements lead to economic growth?
Is it possible to de-link traffic growth from economic growth?
Are economic impacts fully captured in conventional cost benefit analysis?
23 Summary of these reports
Although there is a strong belief in the links between the quantity of transport infrastructure and economic growth, there is no conclusive evidence to support it
Under conditions of perfect competition throughout the economy, a fully specified conventional CBA could incorporate all the supposed additional social and economic impacts of investments
Despite market imperfections and the difficulties of specifying transport demand functions, current CBA methods can give a reasonable approximation to the total project benefits. However, they tell us little or nothing about how the benefits are distributed or how they contribute to economic growth or poverty reduction.