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A study of the Corporación Andina de Fomento highlights the relationship between transport and economic engine

There is no development without infrastructure

Drafting Interempresas22/11/2010

November 22, 2010

Spain, by his experience in the past 20 years, has become one of the countries of reference in construction and efficient transport, energy and telecommunications systems management, and has taken advantage of the concurrence of the public and private sectors to modernize their infrastructures. While it is true that investments in transport infrastructure do not by themselves guarantee economic and regional development, it is not true that they are necessary for that to take place. A study published this year by the Corporación Andina de Fomento -CAF- brings these issues to the table.

Under the heading ' public infrastructure and private equity: concepts and experiences in America and Spain ', the work of José Manuel Vassallo Magro and Rafael Izquierdo of Bartholomew is based on the idea that the infrastructure is an important element of economic and social cohesion. On the other hand, it is necessary to be able to absorb not only the current traffic of people and goods, but also the strong growth in traffic, as a result of the processes of liberalization of markets and the globalization of the economy. According to the study of the CAF, in a scenario in which the infrastructure is playing a leading role and which, moreover, the budgetary problems of the public administrations are patents, it is not surprising that the old debate about the effects of public investment in the economy has revivedframing it in the context of sustainable economic growth, competitiveness and employment.

The infrastructure is needed to absorb the traffic generated by globalization. Foto:Ministerio for development.

The trans-European network

In this sense, it is interesting to make reference to the experience and results achieved in the European Union in this regard, with the impetus being given to the development of the trans-European transport network as a necessary element for the integration of the States members and the full functioning of the internal market. Since 1999, after the entry into force of Monetary Union, the policy of infrastructure has become one of the few structural policies that are implementing the Governments of the Member States of the European Union to achieve its objectives of sustainable economic growth and full employment.

Although the results of the studies carried out to determine the effects of public expenditure, in general, and public investment, in particular, they can cause the economy differ, all support the existence of a relationship between transport and economic development infrastructure.

Many studies support the relationship between transport and economic development infrastructure

According to the CAF to study the relationship between infrastructure and economic activity is convenient to distinguish economic impacts caused in the construction phase of which arise during the use of the infrastructure.

The construction phase: short-term macroeconomic effects

An increase in public investment produces an expansionary effect of aggregate demand and leads to increased production, employment and income, as well as tax revenue from the taxes generated revenues. With this policy, Keynes was trying to get out of the situation of economic crisis, although not provided for the consequences of inflation, for example the loss of competitiveness by the rise in prices. On the other hand, when the investment involves a rise in the deficit, the increase in interest rates causes an effect of crowding out or expulsion of private investment to stimulate private consumption.

Analysis on Spain model

In Spain, the Ministry of finance, in 1990, produced the first model of research and simulation of the Spanish economy (Moisees), which was implemented in 1993 to analyse the potential impacts of the Director infrastructure Plan 1993-2007 (PDI), as well as to anticipate the effects of the Plan for Regional Development (PDR) for the period 2000-2006.

It's a model macroeconométrico, that allows to analyze the influence that may take the form of financing public spending on outcomes, either through issuance of public debt against budgetary grants with a high degree of aggregation, or decrease in recurrent costs.

The application of simulation Moisees model to the PDR 2000-2006 allowed to estimate potential effects: an average annual GDP growth higher by 0.5 points in relation to the base scenario; an average annual employment growth than 0.28 points obtained without PDR; and a significant positive effect in terms of cohesion and regional development, and that 63% of the value added created by the PDR, is distributed among the regions which benefit from Community aid.

Sectoral effects

The analysis of cross-cutting relationships - production, consumption and Foreign Affairs - is a very useful tool to assess the effects of an increase in public investment on the different sectors of economic activity. It also allows to calculate the multiplier effect that such investment has on the economy in general. This multiplier effect, in the case of the construction in Spain sector may be understood between 1.8 and 2.0, would lead to an investment in infrastructure origine in the productive sector incomes by an equivalent amount, approximately, to double the investment and a similar increase in the production of the country. At the same time, a detailed analysis of the tables input-output would make it possible to determine the economic impact of the construction of new infrastructure may have on other regions. On the other hand, it would also allow estimating the creation of new jobs during the construction of new infrastructure.

The application of the model to the case of Spain allowed to obtain their results as a investment 600 million euros in railways or roads could generate approximately 21,000 or 24,000 new jobs nationwide. However, this methodology has the problem that the tables input-output are published with a delay of up to five years, by which the information of which is to analyze the effects of new investments is not existingwhich remains reliability to the results of this analysis.

Economic impacts are different in the phase of construction and the use of infrastructure. Photo: Ministry of public works.

Effects during the phase of use of the infrastructure

Effects in the short term, associated with aggregate demand and that it is a consequence of decisions of the public sector, infrastructure is another series of macro-economic effects in the medium and long term, during the stage of exploitation and utilization. These effects are related to aggregate supply and, despite having more important than the previous ones, have not been so studied, although recently are being discussed. The new models are intended to verify and establish the potential effects of transport infrastructure on the productivity of the private sector, as well as those that it can exercise on the territory. Both impacts, which unlike the previous ones are the result of decisions and actions of the private sector, to a large extent, determine the degree of competitiveness of the economy.

600 million euros of investment in railways or roads could generate up to 24,000 new jobs

The first analysis of the possible relationship between infrastructure and economic growth were the Decade of the 1990s, based on the models of endogenous growth of Aschauer. While at first it was thought that the growth of public spending had a negative effect on productivity and economic growth, the results of the studies have shown that investments in infrastructure have a dramatically positive effect.

The empirical analysis based on econometric models based on functions of aggregate production Cobb-Douglas type for the private sector of the economy, which joins the stock of public capital as a factor of production add to the classics of private capital and work. The results obtained by applying these models seem to confirm that the evolution of public capital explains, in part, the growth of production in the private sector.

You can admit as 0.30 average value, which means that a public investment equivalent to 100% of the stock of public capital would lead to a growth of 30% private production. This effect of attracting private investment for public investment is the so-called effect crowding in, which is at odds to the crowding out effect of expulsion.

The new models are intended to verify and establish the potential effects of transport infrastructure on the productivity of the private sector

Numerous studies worldwide have shown the close correlation that exists between public investment and the productivity of the private sector. In the case of Spain, according to the PDI, the elasticity of the productivity/investment or public capital stock is of the order of 0.23 and if it's investment in transport infrastructure is of 0.18 (0.16 for the roads). This means that an increase in investment in infrastructure of 100% would lead to an increase in the production of the private sector of 18%.

It is worth mentioning that the uniecuacional production model has been criticized by a static analysis from elasticities, treat the public capital as an exogenous variable and does not consider its possible relationships with private production.

The effects of the 2000-2010 PDI

Numerous studies emphasize the correlation between public investment and private productivity.

To estimate the effects of public investment in the infrastructure Plan 2000-2010, transport infrastructure development Ministry, Spain developed a new econometric model consisting of the estimation of dynamic models multivariantes of reduced form - Autoregresivos vectors (VAR) models. This model allows the effects of investment in infrastructure to short, medium and long term under different scenarios and in the presence of dynamic relations between all the variables considered - all of which are endogenous.

The first results indicated that, provided that it had kept economic starting conditions - i.e. in the case there has not been the global financial crisis of 2008-by the year 2010, the national added value (the production of the private sector) would have grown by 6.95 %, employment a 5.18% and 2% private capital ('crowding in' effect). All of this, as a result not only of the initial impact arising from the implementation of the infrastructure public, but mainly as a result of the important dynamic effects that such infrastructure would have generated.

Investment in infrastructure, mainly transport, is that contributes most to the growth of productivity and, consequently, to the competitiveness of the economy

Production models only evaluated the impact of transport on economic development infrastructure, but not the transport in general. It is therefore appropriate to add to the traditional analysis the effects that may come from the reorganisation and improvement of the transport sector, of the implementation of the technological advances of the vehicles or the development of intermodality, among other issues.

Some conclusions from the study of the CAF

Investment in infrastructure is one of the principal means available to the public sector to promote the increase of income, employment and productivity in a given region, especially in times of crisis. One could argue that, in the stock of public capital, investment in infrastructure, mainly in transport infrastructure, is that contributes most to the growth of productivity and, consequently, to the competitiveness of the economy.