Economics Road Infrastructure and Economic Development – The relationship between the Haves and Have not’s Essay

Economics Road Infrastructure and Economic Development – The relationship between the Haves and Have not’s Essay

Introduction

Traditional evidence based on macro economic data draws an inflated positive relationship between investment in road transport infrastructure and economic development (Aschauer, 1989). Recent studies based on the developed world moderate this impact by exemplifying that a rise in infrastructure investments by 3-4% percentage points of GDP reduces poverty by 0.6-1% annually (Asian Development Bank, 2007). In the following paragraphs, I will start by discussing the theoretical and empirical groundings of the above phenomena, followed by a case study evaluating the impact of various road infrastructure projects funded by the World Bank and Asian Development Bank in The Peoples Republic of China. Finally, I have proposed some policy directives in line with the discussion.

Theoretical and Empirical discussion

Theoretically speaking, an improved connection between the core and periphery regions, driven by investment in physical infrastructure should make it easier for the periphery producers to supply the goods to the large market (core + periphery). In addition it should increase their access to better education, health and social services. This was the wisdom behind the projects implemented by the Asian Development Bank in Thailand and India. However, evidence does not support this hypothesis at least in the short run. This is because it can be argued that infrastructure alone, without a major institutional change in the developing world would rarely contribute much to the positive long term prospects of the poor as noted by the Asian Development Bank. On the other hand, it would expose the region to competition from much more advanced products and markets, driving the local periphery producers out of businesses, subsequently deterring their livelihood. The following is reiterated by evidence from the European Union, where the institutional framework within which the regions work is better relative to the developing world, however the results are similar. Evidence on Trans-European high-speed rail network (Vicker, Pierkermann, Wegner, 1997) and road network showed that the periphery gained more in absolute terms in comparison to the core mainly due to their low starting point, but the relative gap between the core and the periphery increased, hence greater inequality (Gutierrez and Urbano, 1996). This contradicts the reasoning for the projects, primarily based on reducing regional disparities and increasing efficiency. The above phenomena can be explained in light of new economic geography, which claims that firms gain from clustering together as long as the agglomeration forces (market access hence transportation cost) out-weight the dispersion forces (labour cost/mobility and congestion cost).

Generally speaking, in a location where there are many firms, each firm will earn a normal profit due to high competitiveness in the region. Hence there will be an incentive for firms to disperse and locate in different regions. On the other hand, they may cluster together to benefit from increasing returns to scale in the presence of imperfect competition and falling transportation cost. However, mobility of labour plays an important role in the above, if labour is mobile coupled with low transport cost this will reinforce benefits of agglomeration. Hence, clustering in the core and reinforcing the existing disparity. On the other hand, if labour is immobile or relatively immobile, accompanied with low transport cost, firms may relocate to gain from wage differentials (Puga, 2000). However, this may not be the case in the real world, due to the presence of wage rigidities, minimum and maximum wage schemes, therefore the differences may not be reflected through wages. Hence, in the presence of relatively immobile labour, low transport cost (enhanced by investment in infrastructure) and mobile capital, the benefits in favour of agglomeration may outweigh the cost leading to increased polarization and disparity between the core and the periphery (Midelfart and Overman, 2002). This sheds light on the economic reality present in Pakistan, where low labour mobility can be a factor exemplifying the concentration of industrial activity in a few regions of Punjab and namely Karachi in Sindh, relative to the country as a whole. Similar is the case in Europe relative to the United States, where economic activity is concentrated in some parts of the continent explained through low inter/intra national mobility (Puga, 2000).

Furthermore, not only will economic activity influence the amount of transport investment required, the latter will subsequently rebound and influence economic activity through changing travel duration and frequency, hence both would evolve by feeding on each other (Holl, 2006). At this point, a pertinent question is whether investment in transport infrastructure is actually reducing the true cost of transportation and enhancing economic activity. In other words, is it a good proxy? This is an important question as oil and gas prices have hit an unprecedented high without a sustainable long term reverse insight, and other sources of energy are failing to keep pace with the rising demand. Figures from the US cross national freight activity exemplify this reality, through falling transportation of goods by road, within national boundaries as noted by the Economist earlier this year (Economist, 2008).

Furthermore, what is the role of road and rail transport in an age where technology is exponentially multiplying and new modes of communication and contact are continuously evolving. In the post modern age, quality rather than the cost of transport is the most important factor in international freight, especially high value goods, therefore infrastructure investment targeted at reducing transport cost may not be fruitful. On the other hand, although enhancements and the rising scope of telecommunication may have reduced the need for personal travel, it has also served to create new markets. In addition, globalisation and integration of world markets into regional blocks has further instigated the need to divulge into transportation services (Puga 2000).

Case study: Republic of China

Here we will consider the case of the Peoples Republic of China presented by the Asian Development Bank (2007) based on evaluating the impact of the various road projects implemented during the last 2 decades in the country to interconnect different core and periphery regions. As a generalization, low transport cost helped the poor in absolute terms in the form of lower input cost for farm and non-farm products, in addition they benefited from access to health, safety, security, education and information services. However, the poorest of the poor such as the handicapped, illiterate, chronic disease did not benefit much, not at least in the short run, as their poverty was depended on other factors. In addition, the less productive may further suffer due to increased competition from the core market. In effect, better transport helped the individuals who were best or most able to mobilize their assets. Therefore, although all benefited in some direct or indirect way, there remained a feeling of inequity. Improved transport services seem to have increased the productivity of the poor, specifically in the regions where they are not captive and indebted through a middleman or a monopolised transport system. Transport alone does not help the poor, there needs to be a focus on enhancing the investment climate of the region which will further increase the benefits to the local community.

It was further found, that the impact of poverty varied between different regions, as it was correlated to the local conditions in the particular area. In regions where there is exhaustive agriculture opportunity, poverty reduction is independent of transport services and is dependent upon the ability of the locals to migrate to richer regions and reap the benefits of Chinas economic growth and send remittances back home. However, if indirectly better transport can facilitate this process, it will have a positive impact on reducing poverty. On the other hand, this further boosted the economy of the elite regions as they were complemented by cheap labour and the increase in the share of the informal economy supporting the mainstream market. In other rural areas of Yunnan Province with high potential for developing commercial crops, improved rural-road access enabled poor households to rise from poverty by growing and marketing such crops, attaining contracts from the main land etc. When comparing the provision and economic benefit of express ways and construction of local roads, the difference in the cost of construction compared with the economic return shows much higher returns from local roads in terms of poverty reduction. On the other hand, the gross increase in activity nationwide is higher through expressway (S. Fan, 2005). However, evidence from the United States shows that although highways increase activity in regions they cut through, they deter activity in regions in close proximity. Therefore, the overall level of economic activity in the area is unchanged (Chancre and Thompson, 2000). An important point to note is that the amount of road infrastructure investment may be set against current industrial activity, however not only will economic activity influence transport investment, the latter will subsequently rebound and influence economic activity as well, through changing travel duration and frequency. On the whole, both would evolve by feeding on one-another (Holl, 2006).

Policy Recommendations and Conclusion

After a comprehensive coverage of the issue concerning transportation investment and its impact on inequality it should be noted that policy makers need to effectively balance their priorities by keeping a broader comprehensive outlook towards the issue of development, as transport infrastructure in isolation may not reap the intended benefit of social cohesion. Therefore, the predominant focus on efficiency (increasing the size of the income pie) needs to be countered with an equating priority to equity (equal distribution of the income pie), in the European context, a redistribution mechanism such as the EU structural fund which specifically focuses on investment in human capital and enhancing the flexibility of the target population (Pose and Fratesi, 2004).

To maximise the intended gains:

  1. Firstly, a balanced strategy focussed on related pillars of local development namely human capital; local firm competitiveness; and foreign direct investment should also be given appropriate priority (Rodriguez and Tomaney, 2006).
  2. Secondly, prices and wages should be market driven hence differences in wages should represent the respective market condition of each locality rather than artificially created equations (Midelfart and Overman, 2002).
  3. Thirdly, there should be priority given to rural development plans, which energize the incentives of the local population rather than a pure move towards a first best mindset which deters from context (Rodrik, 2008).
  4. Fourthly, with respect to the third world and given their low starting point, incentives to enhance investment of existing industries in the area should be encouraged, in order to increase the opportunities as well as the quality of jobs, therefore applying the true focus of economic development for the local and immobile in the region. However the appropriate recommendation can only be made in context of the geography of discussion (Sohail, 2008).
  5. Finally, it is important for policy makers to package these reforms with a set of complementing policies focussed on institutional capacity in order to maximize, sustain and disperse dividends (Asian Development Bank, 2007).

Therefore, having considered the above case and the existing literature at the regional level, it can be concluded that investment in infrastructure (as undertaken today), would in absolute terms have a positive impact on the have-nots, which supplemented by complementing policies may trigger further long term economic development benefits for the region. However, economic gains attained by infrastructure alone in the periphery would always be overshadowed by the much larger gains in the core. But then again the multiple social trickle down effects maybe far more valuable for the periphery than any economic quantification can forecast in the short or long run, as exposure and access leads to rising awareness and the proposition of a better life.

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