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Corridors and Long-Distance Transport Improvements
The final type of intervention operates at the scale of a city. The success of cities in attracting investment and creating jobs—the hoped-for indirect effects of most policies—is closely tied to the way the city has been built: its infrastructure and connectivity, its housing stock, and its consequent amenity value to urban workers. However, as discussed in chapter 2, despite the rising concentration of workers and firms in developing country cities, the productivity-enhancing agglomeration economies experienced in the advanced economies appear to be largely absent. Meta-analysis by Grover, Lall, and Timmis (2021) and a careful estimation of agglomeration elasticity with respect to physical productivity by Grover and Maloney (2021) suggest that higher wages are reflecting higher prices and urban disamenities—not productivity. While this is partly due to a delinking of urbanization and structural transformation, thereby diminishing or eliminating the economic activity that might benefit from greater agglomeration, it is also due to high urban costs that arise from the way that poorly functioning cities limit scale and specialization, especially in internationally tradable manufacturing and services (Venables 2016). Congestion in land, housing, and transport exerts a serious drag on urban economies, raising the costs of doing business and limiting access to labor markets, while also curtailing the entry of new firms. Thus, this chapter investigates the interventions to lessen urban congestion.
Cost-benefit analysis is widely used to evaluate policy interventions. Early cost-benefit analysis for appraising investments in the road infrastructure sector was developed for roads in more urbanized, high-traffic, high-density areas, drawing on methods from a developed country literature. Traditionally, road investments in projects financed by the World Bank were based on ad hoc analysis of direct benefits derived from consumer surplus calculations of road user savings, in terms of both costs and time. However, this approach tends to bias investments toward higher-income areas because the demand for vehicle traffic—and hence, willingness-to-pay measures—are higher for the relatively better off (Van de Walle 2000).
To correct for this bias, rural infrastructure projects were dealt with using “costeffectiveness” analysis: certain projects were exempt from a conventional cost-benefit analysis. The success of these measures was based on socioeconomic indicators. An alternative cost-benefit analysis methodology was popularized by Shenngen Fan and colleagues (Fan, Zhang, and Zhang 2002; Fan and Chan-Kang 2005) to justify road investment in lagging regions. Fan’s methodology attempts to capture both direct and indirect effects through the estimation of a set of equations with multiple variables (also known as simultaneous equations). The approach, however, does not account for the reverse causality of the public investment itself (that is, the growth potential of a region may have stimulated investment in the first place) and hence invariably and unknowingly overestimates the benefits of rural road projects.
Traditional cost-benefit analysis methods are narrow in their approach, focusing on user time and cost savings as well as changes in traffic flows and congestion. While the expectation is that investment in transport infrastructure will act as a catalyst for private sector investment, creating jobs, boosting economic activity, and growing (or rebalancing) the local (or national) economy, these wider benefits are typically not spelled out. This creates a disconnect between the strategic arguments put forward in support of a project and the associated cost-benefit analysis. Even if the value of wider economic benefits turns out to be small, appraisal would be well served to engage with the arguments proposed by project developers to ascertain the range of effects at work and how they net out.
Another drawback is that the analysis entails many subjective elements. For example, cost projections may be understated, while benefits and projections of future ridership may be overstated. Costs and benefits evolve as countries develop their stock of infrastructure. In advanced economies such as the United States, the relatively low returns to many projects partly reflect the advanced level of infrastructure in these countries.3
Incorporating wider economic impacts in cost-benefit analysis is challenging and has its own risks. For instance, to rationalize interventions, arguments can be biased or exaggerated by focusing on areas where a transport improvement expands economic activity and by ignoring displacement effects. Venables (2016) argues that although a full economic modelling exercise may be appropriate for some large projects, it cannot be a general solution because it would be expensive to use for most projects.4 Because these models are typically expensive, one prototype tends to be mechanically applied to different situations. This defeats the purpose of contextualizing the analysis. More recently, the spatial general equilibrium models popularized by Redding and RossiHansberg (2017) have been used to understand the wider economic benefits of transport corridors (see annex 7A for examples).5 Spatial general equilibrium models embed three main building blocks—geography, economic activity, and workers—that are connected by goods prices, land rents, and wages that prevail in each location. A general equilibrium setting with multiple regions within countries allows the model to track down the indirect quantity effects of transport improvements.
Applying the Duranton-Venables Framework to Investments in Transport Infrastructure
The Duranton-Venables (2018) framework developed for this volume provides a heuristic to help policy makers and investors assess the direct and indirect effects from place-based policies, as well as place a value on associated quantity effects. The approach provides a structure with which to systematically document the channels through which wider benefits can take place. These channels are context specific, as informed by the strategic narrative that motivates the project. This section examines the task of identifying quantity changes and placing a valuation on them in the context of transport infrastructure.
The following issues are relevant to the application of the Duranton-Venables framework in assessing transport corridors.
■ First, indirect effects are project specific, uncertain, and observable only ex post, but are likely to be useful for justifying the project and for shaping the development plans at the appraisal or planning stage. ■ Second, indirect benefits generate an agglomeration effect. The entry of new firms generates a positive spillover because the entrant is unable to capture the entire benefit it creates. ■ Third, evaluation of benefits ought to be placed in the context of product market displacement effects: that is, would the activity take place somewhere else if the transport improvement were not undertaken? If so, would this alternative activity be subject to the same market failures? ■ Fourth, severe coordination failures limit the development of new clusters because it is not in the interest of any single investor to invest in the cluster, but each would invest if they knew that others would. Coordination failures lead to low-level traps and require some policy mechanism to coordinate individual actions and break out of the trap. Investment in transport corridors can be such a mechanism. ■ Fifth, studies of the role of transport infrastructure in generating wider benefits suggest that it is an important part of a package of measures but is unlikely to be transformative by itself (see chapter 4 for detailed evidence). More generally, there is considerable interdependency between transport and other public projects and policies (such as land use policy). Transport appraisal needs to recognize potential synergies arising from interaction among complementary policies.
The direct and indirect effects of investments in transport are outlined in figure 7.1. While direct-user effects (left column) are traditionally the core of transport appraisal, they may be smaller than the indirect economic effects (right column) that arise because of the impact on economic geography. Better transport increases proximity, which enhances agglomeration forces, and hence can make places more productive. It may trigger relocation of economic activity as firms and households respond to new opportunities, which may induce complementary investments, such as the development of residential housing, office centers, or retail parks. Finally, it may improve the labor market by facilitating the participation of workers because of better connectivity and by creating new job opportunities resulting from agglomeration and relocation of activity.
Appraisals of place-based policies can be viewed as a two-step process. The appraiser must first assess whether it makes sense to include these impacts in a transport appraisal, and then outline the considerations for including them, if at all. Three questions must be addressed in the context of this appraisal.
First, is there a reason why indirect effects create social value, over and above user benefits? This essentially requires identifying the market failures. In the absence of such
