International Transport Forum

Transport infrastructure and economic growth

Dr Tim Leunig

Back to basics…

• Y=f(K,L)

• Diminishing marginal returns

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Violation 1

• A new technology that is so big, it saves a colossal amount of time

• Harry Potter’s flu powder

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Invention of the railway

• c. 25mph (40kmph) in the nineteenth century

• Compares with 2.5 mph (4kmph) walking or by cart

• London to Brighton was 3 days before, became 2 hours afterwards

• Used by lots of people

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Railways were usedJournal of Economic History, 2007

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Modern equivalent

• Low cost airlines replacing coaches?

• See Golson and Leunig on benefits of point to point service (just started!)

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The steamship for goods

• The British cotton industry – biggest in the world, 500k employed in cotton processing, 1.2m in textiles

• All raw cotton is imported, 80% of cotton cloth exported

• Nineteenth century English population growth outstrips Ireland’s. Ireland starves, and England gets rich…

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Violations 2

• Completing a network • Aschauer and American highways

• Digging the last metre of the channel tunnel was very worth while

• Repairing landslipped roads in China, Borneo, etc

• NOT Beeching – most journeys are point to point

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LatAm railways

• Complete the “LatAm farm – European table” chain

• Brazilian & Mexican railways have social savings of c. 33% 1913 (Summerhill, 2005, Coatsworth, 1979).

• The figure for Germany is <5% (Gremdling 1983)

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Prediction

• A transformational infrastructure project will usually transform a factor price

• Prior to the railways and the steam ship, land in Argentina’s interior was worthless.

• Ditto the American midwest with canals and railways

• Obvious parallels with international trade literature – factor price equalisation

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Suggestion

• If you claim a project will be transformational, state the factor price you predict will change.

• Will a new area of settlement open up, raising land prices?

• Will a new group of people “get connected”, raising wages?

• Will prices fall as new supplies come on stream?

• What quantity of the item is sold? Is it a lot?

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Modern day example 1

• Docklands

• The land was worth very little c. 1980.

• Now it is worth a lot (although not as much as the City)

• Prior to the DLR & JLE, land in Docklands was a poor substitute for land in the City.

• Afterwards it was a better substitute, and prices converged

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Why did it work?

• Because the City was bursting at the seams

• Finance was growing, rents were VERY high, wages were high

• It was a good bet as an industry to expand

• Up or out – we choose out, although since then have supplemented out with up

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Comparison with Sheffield

• Supertram is the same length as Docklands

• Built at the same time

• Passenger miles = 1/6 of Docklands

• Sheffield is not “land constrained” like the City

• No need to go up or out!

• Therefore transformed nothing

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Modern day example 2

• Prior to A8 accession, UK and Polish wages were very different.

• Lots of Poles came to work in London, and presumably wages converged a bit

• Ryanair helped, but the coach would have been sufficient

• It was deregulation of labour markets that caused price convergence, not transport

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Modern day 3 Øresund Bridge

• 5.3km

• $8bn

• 36m pas/year

• 40 Euros

• Only 1.25m people live in Skåne

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Violations 2

• Agglomeration economies• The post, telephone, fax, email, skype,

videoconferencing etc are poor substitutes for proper face to face interaction.

• 1 + 1 = 3

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Historically

• The railways were revolutionary

• Did they radically change the location of industry?

• No

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Journal of Economic History, 2007

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To think about

• The UK & French economies are > $2tr

• NOTHING can transform a $2tr economy

• (well, not upwards!)

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For govt to think about 1

• High prices

• If the price of something is very high, can you expand it, or allow it to expand?

• Silicon Valley vs Oxford and Cambridge

• O & C land values suggest that they should grow (£4m/ha with residential planning permission)

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For govt to think about 2

• Low prices

• If people in one place within the country are paid less than in another, can you connect them? Or allow them to move?

• If your people with skill level X are paid less than elsewhere, investigate why. It may be transport and lack of agglomeration (but not likely)

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For govt to think about 3

• Go to NY, London and LA

• Transport is pretty rubbish

• Yet they are successful

• Don’t overemphasise transport

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Is it transport that:

• Makes Reading richer than Rochdale? (no)

• Makes Switzerland richer than Swaziland (no)

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Questions?Comments?