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Wider economic benefits of infrastructure projects – EP136

Jakarta Mass Rapid Transit system (under construction), an example of a public transport program which could deliver wider economic benefits.

Wider economic benefits are increasingly being estimated in the economic assessments of infrastructure projects. In Episode 136 of Economics Explored, show host Gene Tunny and his colleague Arturo Espinoza Bocangel chat about how some infrastructure projects, particularly transport projects, can stimulate new economic development, increasing the density of businesses and workers in an area. This can boost innovation and productivity through knowledge transfer and greater specialisation, among other mechanisms. The expected wider economic benefits of the Cross River Rail subway project in Brisbane, Australia are discussed.

You can listen to the conversation using the embedded player below or via Google PodcastsApple PodcastsSpotify, and Stitcher, among other podcast apps. A transcript and relevant links are also available below.

Transcript of EP136: Wider economic benefits of infrastructure projects

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:01

Coming up on Economics Explored. The more we engage with each other the more knowledge is shared, the more we learn from other people. And this actually helps us in an economic sense.

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia and I’m a former Australian Treasury official. This is Episode 136, on wider economic benefits. I’m joined this episode by my Adept Economics colleague, Arturo Espinoza Bocangel. Arturo and I chat about how some infrastructure projects can stimulate new economic development, increasing the density of businesses and workers in an area. We talk about how this can boost innovation and productivity, through knowledge transfer, and greater specialisation among other mechanisms. Please check out the show notes for relevant links, clarifications and details of how you can get in touch with any comments or suggestions. I’d love to hear from you. Also, check out our website economicsexplored.com. If you sign up as an email subscriber, you can download my e-book, Top 10 Insights from Economics. Righto, now for my conversation with Arturo on wider economic benefits. Thanks to my audio engineer, Josh Crotts, for his assistance in producing this episode. I hope you enjoy it. Arturo, good to be chatting with you again.

Arturo Espinoza Bocangel  01:33

How are you? It’s my pleasure to be here.

Gene Tunny  01:36

Excellent. Yes, keen to chat with you about wider economic benefits. So you helped me out regarding that presentation I gave last month in March to the Indonesian government officials. So as part of a short course, through University of Queensland international development, so you helped me get ready for that. And yeah, that was great. And you dug up some really interesting studies on wider economic benefits, and it helped me understand what they are and how you might measure them. So I thought that was really useful. I thought it could make a good conversation. And hence, I thought, well, let’s chat about it on the programme.

So yes, I guess where we should begin is just this. What is this idea of wider economic benefits? It’s benefits that are additional to the standard ones that you estimate in a cost-benefit analysis, isn’t it?

Arturo Espinoza Bocangel  02:41

Yes, that’s true.

Gene Tunny  02:42

It’s benefits that are in addition to the travel time savings, for example, or the reduction in greenhouse gas emissions that you might get, or the reduction in vehicle operating costs that you would get if you invest in public transport, for example, or if you make the roads more efficient, if you build a new road, you increase road… Actually, that’s probably going to… Yes, that would. That should reduce greenhouse gas emissions to an extent if people aren’t stuck in traffic as long. But yeah, it’s something additional to those normal benefits that are counted in a cost-benefit analysis. And it’s things like an improvement in productivity that comes from what they call agglomeration effects, that sort of thing, isn’t it, and having more people in a region, a thicker labour market? I think that’s how they refer to it. There are all these benefits that they try to estimate, in addition to the standard benefits, is that right?

Arturo Espinoza Bocangel  03:55

Yes, that’s right, Gene. And also, those wider economic benefits can involve some potential impacts on the market, the labour market. They can create more jobs in terms of supply and demand. So that is another WEB that we can consider too.

Gene Tunny  04:17

Right. So yeah, the idea is that there’s some sort of development or infrastructure investment, typically a transport infrastructure investment, and it opens up a new area, or it increases the access to a particular area. And we know that there’s been a bit of focus on what’s called transit-oriented developments, the TODs, whereby if you have a new railway station or subway stops, so you have a new subway system, then the idea is that this can activate new parts of the city. It can create little hubs, little clusters of activity and we see that with what is called the Cross River Rail project here in Brisbane. So this is a subway system.

Now, I’ve questioned in the past the economic viability of it, but they did manage to produce a cost-benefit analysis which had a positive benefit-cost ratio of over 1.4. And they also looked at, well, what could the wider economic benefits of this project be. And if you look at what the government says about the project, a lot of how it sells the project relates to what you might call wider economic benefits. So it talks about revitalised inner city precincts ready to connect, create and advance the region globally for generations, connect industry talent and major facilities, create communities employment and economic value, advance global competitiveness, livability and visitation.

So these are really sort of high level, or these are ambitious benefits, and not just your standard, oh we’re building a new subway system, and people will be able to get to work faster. And so they won’t be wasting time on a congested train network anymore. So that’s one of the ideas of Cross River Rail. Their concern was that there was a bottleneck at this railway bridge in Brisbane, the Merivale Street Bridge. Do you know that one? It connects South Brisbane and the city, so via Roma Street Station. I don’t know if you know that railway bridge.

Arturo Espinoza Bocangel  06:45

Probably yes, I pass by that bridge, but I’m not sure.

Gene Tunny  06:51

That’s okay. That’s okay. But apparently there’s some congestion issue there. And they needed to build this subway system to take pressure off of that. And there’s a bit of a debate to what extent that’s actually the case and whether that is such a serious issue. But anyway, let’s just take their word for it. Let’s just accept that that’s the case for now.

And it’s interesting that in selling this project, probably because perhaps they realise that the actual benefits in terms of travel time aren’t really that great. They have to make this bigger case for Cross River Rail. And it’s all about… Well, it seems to me a lot of it is about the wider economic benefits. And it’s about activating or revitalising some of these inner-city precincts, and they’ve got an interesting document, and I’ll put this in the show notes about Cross River Rail.

And they talk about their Boggo Road precinct. So that’s out near the… There’s an old jail that they’re no longer using, or an old prison at Annerley called Boggo Road. There’s no Boggo Road. Boggo Road was Annerley Road. And because once upon a time, it didn’t have any bitumen on it, it would just get muddy if it rained. And people would get bogged in the road, you know, in their horse and cart or their horse and buggy. And so they call the Boggo Road.

Arturo Espinoza Bocangel  08:30

That’s funny.

Gene Tunny  08:31

We’ve got this area of Brisbane now called Boggo Road, even though there actually is no such thing as an actual Boggo Road. But anyway, and what the government’s tried to do there is it’s tried to create, they call it a world class innovation precinct specialising in health science and education jobs of the future.

So I guess this is consistent with this idea of agglomeration effects, because if you make it easier to get to this Boggo Road precinct where you’ve got this cluster, this health sciences or biotech cluster, then that might encourage biotech firms to locate there or suppliers to biotech firms to locate there. And then you get these conglomeration benefits these efficiency benefits from colocation of businesses that can benefit from being near each other, the synergies so to speak. Economists talk about increasing returns to scale from having more economic activity and having the sum of the parts, sorry, the actual outcome being greater than the sum of the parts, so you get more than the components. Does that make sense? I probably didn’t explain that very well. You get more than the actual sum of the parts. That’s the idea, isn’t it? You get all these synergies.

Arturo Espinoza Bocangel  10:01

Under economic theory, when we talk about economies of scale, that mean a firm or an industry is operating under decreasing cost per unit. So as soon as you use more input, could be labour, capital, etc, that mean, as you increase in that proportion, let’s say a given proportion of those inputs, your return is going to be rather than that. So that is when we talk about when we are under economies of scale.

Gene Tunny  10:42

Yeah, yeah. Yep. So, there’s this idea that you get these benefits from greater density, this clustering. And I mean, we’ve got it to some extent in our cities. I mean, all cities have clusters of some kind, or many cities do, and they’re talking about this health sciences cluster at Boggo Road. They’ve got some other examples. Wooloongabba they want that to be a vibrant world class centre for community sport and health. So that’s centred around the Gabba Stadium, the Wooloongabba Stadium, which is a cricket ground. They play Australian rules football there, Aussie rules as well. And it’s going to be where the opening ceremony of the Olympics is going to be held in 2032. So there’s going to be a lot of investment there. I think they’re going to spend over a billion dollars upgrading that stadium. Yeah. Again, whether that’s economic or not, who knows? But let’s put that aside for now.

Yeah, so this idea that we sort of have all of these clusters, and we’re going to get similar firms locating with each other, and there are all these stories about what benefits this brings. And so as part of getting ready for this and getting ready for the short course presentation, I mean, we had a look at how do you explain these wider economic benefits, these agglomeration effects, these benefits from greater density? We know they exist. I mean, we know there are regions such as Silicon Valley, which specialises in tech, and you get the benefits from having firms and, you know, co-located near each other, you’ve got the workers from the firms talking to each other. They’re learning from each other informally. Yeah, there could be more formal learning between, say, a business and its suppliers. I mean, businesses could be learning from suppliers who are helping them out on something. But there’s informal learning, there’s the watercooler effect that they talk about. And so we had a look at what are some of these wider economic benefits, how do you explain them, and there are some really great articles out there.

There’s one I found by Gerald Carlino, Gerry Carlino. This is one of the best ones I’ve found. He was an economic adviser in the research department of the Philadelphia Fed, so the Philadelphia Federal Reserve Bank. He’s still got some emeritus professor there now, but I don’t think he’s active as he was when he wrote this article in 2001. Knowledge Spillovers: City’s Role in the New Economy. So this is terrific. I’ll put it in the show notes. And I mean, he gives some great examples, particularly from tech because a lot of the really good examples are from that technology industry.

And he refers to a book by AnnaLee Saxenian. In the 1994 book, I’ll have to look that up, she described her gathering places such as the Wagon Wheel bar, located only a block from Intel, Raytheon, and Fairchild Semiconductor. This is in Silicon Valley. She wrote about how they served as informal recruiting centres as well as listening posts. “Job information flowed freely along with shop talk.” So that’s what she wrote. And then other examples of high-tech hotspots include the Route 128 Corridor in Massachusetts, the Research Triangle in North Carolina, and suburban Philadelphia’s biotechnology research and medical technology industry.

And then Gerry Carlino goes into some other examples and he talks about Los Angeles he talks about Hollywood. “The geographic concentration of the motion picture industry in LA offers a network of specialists, directors, producers, script writers, set designers, each of whom focuses on a narrow aspect of moviemaking. The network allows easier collaboration, experimentation and shared learning among individuals and firms.” And then he gives some other examples. Talks about medical research, facilities and teaching institutions having concentrated along York Avenue on Manhattan’s Upper East Side. And so he goes into these different examples. So that’s a great article.

And that’s an example of where you’ve got benefits from firms and workers in the same industry clustering together. So that’s a particular type of agglomeration benefit or knowledge spillover. So there’s a knowledge spillover. The knowledge spillover is driving the benefit there, isn’t it? It’s the fact that there’s this knowledge being transferred from people who have the knowledge to people who don’t have it, obviously. And so what Carlino, how he describes this, he calls it an MAR spillover, and he names it after three famous economists, Alfred Marshall, Kenneth Arrow. Can you guess who R is, Arturo? It’s Paul Romer. Sorry, that was a…

Arturo Espinoza Bocangel  16:39

I am not sure.

Gene Tunny  16:40

It’s all right. I was just wondering if it was obvious, but it’s… You know Paul Romer, did all that work on endogenous growth theory?

Arturo Espinoza Bocangel  16:49

Oh Paul Romer.

Gene Tunny 16:50

Yeah, Paul Romer.

Arturo Espinoza Bocangel 16:51

Definitely, yeah, I know him.

Gene Tunny  16:53

Yeah.

Arturo Espinoza Bocangel  16:54

Thanks to him I learned about endogenous growth, economic growth.

Gene Tunny  17:00

Oh, right. Yeah, yeah. So he’s one of the big names in that literature. Love to cover that in another episode. I guess this is related to it. I mean, this is about increasing returns to scale. In part, so, I mean, that’s relevant to endogenous growth. So that’s what we’ve been talking about here. So Carlino, what he writes is in 1890, Alfred Marshall… So Alfred Marshall was one of the great British economists at Cambridge University at Trinity College at Cambridge. He was a teacher of John Maynard Keynes. So he developed a theory of knowledge spillovers that was later extended by Kenneth Arrow and Paul Romer, hence the name MAR spillovers. According to this view, the concentration of firms in the same industry in a city helps knowledge travel among firms and facilitates innovation and growth. Employees from different firms in an industry exchange ideas about new products and new ways to produce goods. The denser the concentration of employees in a common industry in a given location, the greater the opportunity to exchange ideas that lead to key innovations. And that’s what we were talking about just before. There were these common places that people would get together such as this Wagon Wheel bar in Silicon Valley, and that was a source of knowledge exchange, people learning from each other.

Arturo Espinoza Bocangel  18:31

That’s interesting.

Gene Tunny  18:34

Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  18:39

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Gene Tunny  19:08

Now back to the show. So we’ve talked about the MAR or MAR spillovers. There’s another concept of spillovers, which is called Jacobs spillovers, which is named after Jane Jacobs and this is the idea that you get benefits when people from different industries are different sectors clustered together or are co-located and you get synergies in that way. So that’s another concept. And just because you’ve got that flowing of ideas, so of things that people may not have thought about before. And one of the one of the points that Carlino makes in his article is that refers to some other authors here. As John MacDonald points out, both Jane Jacobs and John Jackson… So Jane Jacobs is the – I think she was a journalist, but she became famous for writing that book The Life and Death of American Cities. And she had a really interesting take on what made for a good city and she was very much into the medium density type of city you want to have. You don’t want to have tall towers, because they’re really lifeless. You want to have some intensity, some density. So it’s medium density. So similar to what you see in the apartment buildings in New York City, but not the really tall ones, not the Trump Tower. But you want people to have eyes on the street. So you want enough people that it’s vibrant, and exciting, but you don’t want too many that it just becomes lifeless and soulless. So she’s got a really interesting take on the life of cities.

But anyway, as John McDonald points out, “Both Jane Jacobs and John Jackson have noted that Detroit’s shipbuilding industry was the critical antecedent, leading to the development of the auto industry in Detroit. In the 1920s, Detroit exported mainly flour. So Detroit exported flour because of the industry was located north of Lake Erie along the Detroit River, small shipyards developed to build ships for the flour trade. The shipbuilding industry refined and adapted the internal combustion gasoline engine to power boats on Michigan’s rivers and lakes. As it turned out the gasoline engine rather than the steam engine was best suited for powering the automobile.” Okay, and so that’s interesting. And so because they had that sort of knowledge to begin with, and that sort of led on to the motor industry. So that’s an interesting example.

And there’s another great example in this book by Cal Newport, Deep Work. So Cal Newport’s got a great podcast, Deep Questions, which I thoroughly recommend to anyone is interested in productivity and working on the right things. So doing the things that matter. And he’s got this great example of building 20 at MIT, which was this temporary structure that they built during the Second World War. It was meant to house the overflow from the school’s bustling Radiation Laboratory. It wasn’t a very well made building. And they just put all of these different departments in it, people who couldn’t fit it in another building. And this is how Cal Newport describes it. “The result was a mismatch of different departments from nuclear science to linguistics to electronics. They shared the low-slung building alongside more esoteric tenants, such as machine shop and a piano repair facility. Because the building was cheaply constructed, these groups felt free to rearrange space as needed. Walls and floors could be shifted and equipment bolted to the beams.” And there was an article in The New Yorker where the author pointed out regarding the scientist Gerald Zacharias, his work on the first atomic clock, it was important that he was able to remove two floors from his building 20 lab, so he could install the three-storey cylinder needed for his experimental apparatus. So that’s pretty interesting.

But in MIT law, so in the stories they tell at MIT, it’s generally believed that this haphazard combination of different disciplines thrown together in a large reconfigurable building, so this is the important bit, that led to chance encounters in a spirit of inventiveness that generated breakthroughs at a fast pace, innovating topics, as diverse as Chomsky grammars, so that’s what Noam Chomsky contributed to linguistics, the Loran navigational radars. I think that’s how you pronounce it or Loran, and video games all within the same productive postwar decades. So he’s saying that this sort of odd mix of people from different disciplines led to these breakthroughs because people were talking to different people, perhaps that that encouraged them to think differently. Does that make sense? That sort of thing?

Arturo Espinoza Bocangel  24:35

Yeah, that makes sense? Yeah. That’s a very interesting point. I think the most popular example is all the technology developed in the military side was then, for example, in the case of microwave, that is a technology developed by the military side on military technology. And then that was applied for civil life. So I think that is the most popular example that we can use. But it’s true. You enrich your thoughts, your knowledge, when you have information from other fields, for example, in this case rather than economy.

Gene Tunny  25:28

So guess what all these stories are trying to show is that there are benefits from having people interact. I mean, it sounds obvious, doesn’t it when you think about it? Well, yeah, I guess that that makes sense, doesn’t it? I mean, the more we engage with each other, the more knowledge is shared, the more we learn from other people. And, you know, this actually helps us in an economic sense. And I mean, this is very difficult for… Well, you can’t really model this or predict this, but it’s something that occurs. And so hence, there can be benefits from getting people in the same place, making investments that can create these hubs, so improve the density, increase the density of particular areas. I mean, we know that density does matter to an extent because we know that cities develop central business districts and over the decades firms have found it advantageous to be in the CBD. I mean, it used to be more obvious that there was a benefit from being in a CBD, or a major activity centre somewhere in the city. It used to be more obvious than it is now. We can chat about that in a moment.

But I guess, if we’re talking 20 or 30 years ago, you could say, well, if you want to be in the CBD, or in an activity centre, say in Brisbane, Toowong or if you’re in Melbourne, it could be Box Hill or wherever, or if you’re in Sydney could be Parramatta. So you want to be in a place like that, because then you’re close to the bank, you’re close to the post office, you’re close to the stationery shop, you might be close to your clients. And so therefore, you’re going to get benefits that way, it’s going to make your life, your business easier to run.

Arturo Espinoza Bocangel  27:28

Exactly.

Gene Tunny  27:29

Yeah. And so that’ll make you more productive. Now, of course, now, we’ve discovered with COVID that, and this is one of the questions that one of the course participants asked, well, what do you think’s gonna happen with everyone’s working from home now? I mean, are these agglomeration benefits as big a deal now that we’ve discovered that we can work virtually and, you know, maybe there aren’t the same benefits to colocation as there once were? And I think that’s an interesting question. I mean, I think that’s something we probably do need to explore and look at what the evidence is over the next couple of decades or so. So I thought that was a good question. I mean, I don’t have the answer to that at the moment. All I know is that pre-COVID It did appear that regions which were denser, where there was a greater concentration of workers, and businesses seem to be more productive. And there were real benefits from this colocation. Do you have any thoughts on that, Arturo?

Arturo Espinoza Bocangel  28:37

Yeah, I remember that. I heard something about that, how it will be the impact of working from home in terms of productivity. I remember that. The results were positive, some cases, and the people now is more productive than before. So definitely, that topic is very interesting and it should be studied.

Gene Tunny  29:11

I think where we’ll end up is that it’ll turn out that that hybrid mix is probably optimal. I mean, you want the best of both worlds in a way. Now, I found this write-up of a study on the Vox EU website so Working From Home: Too Much of a Good Thing. So this is by Kristian Behrens and some of his coauthors. And this is on 13th February 2021. So Kristian Behrens, he’s a professor of economics at the University of Quebec in Montreal. And their abstract of this article, “Containing COVID 19 has required more people to work from home accelerating the trend towards telecommuting. This column uses a general equilibrium model to analyse the long-term effects of this trend, and finds that it may prove to be a mixed blessing.” I think that sounds right. So they go on. “Working from home saves time that would be spent commuting, but deprives firms of the benefits from information and knowledge spillovers. Firms use less office space, but workers require more space at home. Overall GDP will likely be maximised when working from home occurs one or two days per week.” Okay, so I think that sounds pretty much what I would expect. So I’ll put a link to that in the show notes. Do you have any reactions to that, Arturo?

Arturo Espinoza Bocangel  30:55

I need to check that papers in detail.

Gene Tunny  31:00

Yeah, of course. Yeah, it’d be worth having a look at. This one I just found preparing for this conversation today. But yeah, I’ll send that to you. And I’ll put a link in the show notes. So if you’re listening, and you want to check that out. But that sounds fairly sensible to me. So there will still be benefits of agglomeration, there are, but you may not need to be in the office five days a week. You’ll get a benefit if you come in three days a week or something and you’re mixing with your colleagues. You want some mixing with your colleagues. But you don’t need to be mixing with them all the time.

Arturo Espinoza Bocangel  31:45

That’s right.

Gene Tunny  31:47

And that’s what we’re finding, people are just, you know, they’re coming in for a few days a week. And it seems to be that the days people don’t come in… And I think this is replicated in cities across the world, or at least Australian cities. I’ve seen a study of this. People don’t come in Fridays. I mean, there are always fewer people coming in Fridays anyway. But that was because people tended not to… They wouldn’t have a part-time work day on a Friday. But now we’ve got a lot of people working from home on a Friday or Monday too.  People who want to have those days that adjacent to the weekend. So you can have a long weekend. Yeah. So that’s increasingly popular. But I guess there is still that recognition that you need to be working together for some time. There are these benefits from colocating. And so yeah, I don’t think the pandemic has wiped out the argument in favour of wider economic benefits. I think that’s still there. And this is what these authors, Kristian Behrens and his coauthors are arguing that you wouldn’t want people working from home all the time, because then you will lose these benefits. Yeah.

Okay. So, what I thought we should chat about… What else? Oh, what are actually these benefits from agglomeration? I mean, how substantial are they? And there was this great paper by Peter Abelson where he reported that the average elasticity of output to employment density, so this is the percentage by which output… So the value added, the percentage by which that changes for every percentage point increase in employment density. So he reported the average elasticity of output to employment density appears to be in the order of 0.02. Doubling employment would increase output per worker by 2%. So if you have twice as many people in an area, so, say a square kilometre, or say a pocket of the city, precinct of the city, you have twice as many people, then you can increase your output by worker by 2%. So that was the empirical finding.

And it appears that the most important mechanisms, so this is from our presentation, from our slides, the most important mechanism is that both scale and density created an environment where firms and workers can develop highly specialised products, services and skills, e.g. these typically are inputs to firms from specialised  suppliers. Okay, so more firms, more businesses, specialisation and you get efficiencies from that specialisation. So that’s the general idea, isn’t it?

Arturo Espinoza Bocangel  35:15

Yep, that’s the general idea.

Gene Tunny 35:17

Good one. Okay. And then we also note that a further mechanism arises as competition is likely to be intense in a large and dense cluster. So monopolistic pockets of inefficiency are less likely to survive. Okay, so there’s that idea that you get more people in an area, it’s a bit of a hothouse, isn’t it? There’s more competition. Everyone’s striving, everyone’s working harder to compete against the others. And then that benefits everyone through greater efficiency and productivity. So I think that’s a good point. What did you think of the whole agglomeration economies argument and these estimates such as what Abelson reported, that if you double the amount of people in an area, you’re going to increase output per worker by 2%? Do you think that sounds reasonable?

Arturo Espinoza Bocangel  36:08

Yeah, I think so. Isn’t that depend on which area you going to study? Right? Each country, each city has its own features. And you need to take into account that. Of course, you will have different electricity from each cities or areas.

Gene Tunny  36:33

You need to take into account the specific circumstances. But I think generally, it sounds reasonable. It’s not over the top. I mean, if he was saying that it increased productivity by 10%, maybe I’d be sceptical. But there certainly are some benefits from increasing density.

Cost-benefit analysis studies, one way they estimate a dollar value for wider economic benefits is through looking at how density and productivity for particular industries appear to be related across the city or across different cities. And that’s what they did in that cost benefit analysis of Cross River Rail. So I’ll put a link to that in the show notes. They’ve got a bit of a discussion, not as much detail as I would have liked on wider economic benefits, but they do mention that they’ve estimated these wider economic benefits by looking at how much Cross River Rail could increase the density, the effective employment density, or the business to business effective density, they call it, how it could increase that in those particular clusters. So places like Dutton Park, or the Boggo Road precinct there, or RNA or in other places, and it looks at well what could that… It makes some assumptions as to what that could do to productivity, and then estimates a dollar value based on that. So that’s an interesting approach.

They estimate that that if you take that into account, then that increases the benefit-cost ratio of Cross River Rail from something like 1.4 to 2.2. That’s one of the major benefits. And I think there are a couple of other types of benefits they estimate in their wider economic benefit analysis, but it’s something that’s on top of the standard cost-benefit analysis. They report the normal cost-benefit analysis. And then they say, well, okay, there are these other things you could take into account. They’re not standard. They’re additional lists. They’re a supplement to this. They bolster the case. They enhance the case. That’s the idea with wider economic benefits. They’re not your standard benefits you include in a cost-benefit analysis. But you can estimate them. Your estimates of your wider economic benefits are probably more… Would you say they’re more speculative, more of a guess? You could say they’re a guess. They probably aren’t as robust or reliable as your normal estimates of travel time savings, because what they’ll be doing with the travel time savings is they’ll have a detailed transportation model for the city. So they’ve probably got more confidence in our estimates of what it means for travel time savings. If you build a new road or you have a new subway system, they probably got more idea what that means for travel and how much time people save than they do of what is this actual benefit from creating this new activity centre.

Look, to some extent, what happens is you open up a new regional, you make it easy to travel to one particular part of the city. You’ll just have firms moving from another part of the city to that part of the city, right. So, you know, the benefit has to come from this increased density, so a greater density than you’d get otherwise, because these… I mean, how much benefit is that really? Like, it’s hard to know. I mean, you can tell stories about knowledge transfer, but I mean, does that always happen? I don’t know. I often wonder how much confidence we can place in these wider economic benefits. I would say you’d probably have a very wide confidence interval, a very wide gap between the lower and the upper bound of the estimates.

Arturo Espinoza Bocangel  41:05

Yeah. Those are estimates. You need to take into account some source of potential benefit that perhaps they’re not going to accrue.

Gene Tunny  41:18

Yeah. Yes. Right. So yeah, wider economic benefits. And the one other thing I wanted to mention was that you discovered this great paper from the World Bank on wider economic benefits of transport corridors. And this is something that the world, the World Bank, has been interested in these wider economic benefits, because the World Bank has a mandate to improve developing economies, emerging economies to promote economic development. And they’re looking at well, are there investments, we can finance transport projects that can increase economic growth opportunities. And one way you can possibly do that is building railroads or building ports or building roads.

And they’ve done this great study where they looked at a few dozen, or maybe it was over 40 transport corridor projects in developing economies. And they looked at the nightlight data from satellites, and they use that to assess how successful these different projects were. And then they determined Well, what are the markers of success, what actually contributes to the success of a project? And in a way, what they found was, I guess a little bit obvious. I mean, if there’s a project that connects with the sea, then that actually is more likely to lead to additional economic activity as measured by the nightlights, more nightlights. And that’s probably obvious, I guess, in a way because, well, if you’ve got that port, then what you produce, you can easily export. And that’s one way that we know that export led development. That’s been important for quite a few developing economies that ended up going into middle income or advanced economy status around the world.

And another thing that mattered a lot was the actual logic behind the investments. So did they have a real theory of how this would deliver benefits? And in a way, that’s just the rationale. Was this a sensible thing to invest in to begin with? And so I guess that shows that you got to do the thinking about, okay, do we actually have a legitimate reason for building this project? Does it make sense? It’s not just if we build it, they will come. You need to think about are we actually providing something that is delivering real value. This transport corridor is, say, connecting important city centres or it’s connecting a hinterland to an urban area to a port where the products can be exported. I mean, is it actually delivering some real benefit like that?

So I think this is a really great paper. And it begins by talking about how there’s a number of ongoing and proposed initiatives for transport corridors. One ambitious proposal is to revive the Grand Trunk Road from Kabul, Afghanistan to Chittagong, Bangladesh, connecting areas that are home to a significant share of the world’s poor. That’s probably on hold now that you know what’s happened in Afghanistan with the US pullout and Taliban taking over. An even more ambitious initiative is the Belt and Road Initiative proposed by China.

Okay, now, again, look, there are all these geopolitical issues related to these projects we can’t go into. But it’s interesting that the World Bank, they’re examining it, they’re thinking about these wider economic benefits. Can we develop new roads, new railways that open up regions, that encourage investment, foreign direct investment, for example, that create jobs, that lead to additional economic activity, and, you know, help these economies grow? So I thought that was a really great paper, and I’ll put a link to the show notes. So yeah. Well, that’s me having rabbeted on a little bit about wider economic benefits. Is there anything we should add before we wrap up, Arturo?

Arturo Espinoza Bocangel  45:54

Well, I think you have covered the most important WEBs, the wider economic benefits related to [unclear 46:02] and productivity. Also, you mentioned some positive impacts on labour markets. Also, you should have mentioned some important things related to land. In the case of, for example, when you improve on infrastructure, for example, this case, a corridor, the land use, for example of some bar or close to that in infrastructure improvement, possibly that will cause more investment. For example, new households, new unit can be built after improving that corridor, let’s say. So I think that is another thing that we need to take into account, some potential effects in terms of change of land.

Gene Tunny  47:04

Yeah, right. I think that matters a lot in developing economies in particular, so if you’ve got land that’s being used for agriculture, and maybe not used very productively, and then suddenly you open up this new… You’ve got this new road, or this new rail line, and then that encourages industrial development and urban development. And that’s a higher value use. And you mentioned the labour market. So this is this idea of a thicker labour market, or say, for example, Silicon Valley, if you’ve got Silicon Valley as a cluster, and then you’ve got, you know, all the specialised tech firms, all the people who are interested in tech or have got the qualifications in tech or experience, they move to Silicon Valley. And so it’s easier for the firms to find the people they need. That’s that sort of thing. That helps with the firm’s finding the people. You could have a transport investment that makes it easier to get to a particular area, or a particular cluster or an activity centre. And that increases the supply of labour. People might be more willing to work because it’s easier for them to get to work, to travel. So I think that’s an important benefit.

Okay, that was a bit of a whirlwind tour of wider economic benefits, agglomeration effects, increasing returns to scale. I think we’ll have to come back to this again, because there’s so many… There are a lot of different economic concepts here. And they’re important ones, and I think probably need to cover this again, to really do it justice and get that conceptual framework right. These are very important concepts, very important issues. And I think I might have to come back to really explore this again. So any final words, Arturo?

Arturo Espinoza Bocangel  49:14

No. Thank you again for having me here. Was a pleasure again. Thank you.

Gene Tunny  49:19

Very good. Thanks, Arturo. Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

Links relevant to the conversation

Cross River Rail business case

Cross River Rail project benefits

Knowledge Spillovers: – Cities’ Role in the New Economy – article by Jerry Carlino Gene quotes from in the episode

The wider economic benefits of transport infrastructure paper by Peter Abelson 

Working from home: Too much of a good thing – article by Kristian Behrens and others

Wider Economic Benefits of Transport Corridors : Evidence from International Development Organizations – World Bank paper using nighttime lights data

Clarification

In the episode Gene didn’t get the title of Jane Jacobs’s famous book on cities right. The correct title is The Death and Life of Great American Cities

Credits

Big thanks to EP136 guest Arturo Espinoza Bocangel and to the show’s audio engineer Josh Crotts for his assistance in producing the episode. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

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