Research 350 - NZ Transport Agency

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ECONOMIC DEVELOPMENT BENEFITS OF TRANSPORT INVESTMENT use of I-O analysis in combination with SCBA may allow policymakers to choose between conflicting goals (without indicating whether one methodology should be preferred as a decision-making tool). Preference for I-O results over SCBA would seem questionable in the long term, since it is not clear why the focus should not simply be on the development of efficient projects and thereby on efficient growth. A more useful approach would therefore be to base decision-making on the results of SCBA and then employ I-O if impacts analysis is required, taking account of the fact that I-O analysis is likely to provide upper bound macroeconomic results. Note that these outputs are quite different to those estimated by SCBA (i.e. project NPV and BCR). The comparison between I-O analysis and SCBA issue is further discussed below. 2.6.2 General Equilibrium Analysis CGE modelling has often been suggested as an alternative to more traditional, project focussed, SCBA for two major reasons: • CGE models typically present the impacts of a given investment in transport (or other defined change in inputs) in terms of its effects on GDP, employment, investment, trade, consumption, wages and tax. As such, they are of particular interest to policymakers, who cannot obtain such economic impact data from SCBA. They are therefore said to allow for a ‘wider test’ of the public benefit then is obtainable through SCBA alone (Docwra & West 1999, pp. 933-934). • The use of a general rather than a partial equilibrium approach gives CGE modelling potential to capture the ‘missing benefits’, related to suggested ‘flow-on’ effects 12 (Kinhill Economics 1999, pp. 10-11). This is particularly true for large projects which have major impacts on other sectors of the economy. Docwra & West argue that, in principle, a CGE model would be needed to measure the efficiency effects on such sectors (Docwra & West 1999, pp. 933-934). ACG has been particularly supportive of the use of CGE modelling in assessing the impacts of New Zealand and Australian transport investments (ACG 1993, 1996, 2003, 2004). As is the case with SCBA and I-O analysis, CGE has its drawbacks, including the following: • CGE models tend to be something of a ‘black box’ with key linkages and assumptions left undocumented. ACG (2004) provides some indications of the assumptions underlying the ESSAM model, though by their very nature, the operation of such models is arcane. Potential therefore exists for the incorporation of naïve or seriously misleading assumptions into model structures. • An often-cited advantage of CGE models, that they provide an insight into employment effects arising from transport investment, may be illusory. The BTE provides an extensive critique of past (Australian and international) attempts to analyse national employment outcomes from infrastructure projects using CGE modelling. Invariably the models are handicapped by a lack of knowledge regarding the labour supply and demand markets and the nature of wage adjustments. The BTE concludes that it is 12 As noted above the distinction between the terms ‘partial’ and ‘general’ equilibrium can be somewhat blurred. 48
2. APPROACHES TO ASSESSING NATIONAL ECONOMIC BENEFITS unlikely that CGE modelling can provide credible estimates of national employment effects. (BTE 1999, pp. 51-53). • While some studies focus on increases in consumption expenditure as a measure of project benefit, others focus on outputs such as GDP and employment. A focus on measures such as GDP or employment can be seriously misleading, since as suggested above, estimating employment effects are unlikely to be credible and there is a distinction between economic impacts, such as increased GDP, and the economic efficiency measures assessed by SCBA. • The time, cost and complexity involved in constructing CGE models can be considerable. The increase in accuracy promised by such models must be traded off against the degree of increased model accuracy. It is notable that the UK Government response to SACTRA (DfT 1999) rejected SACTRA’s proposal for the development of a CGE model, essentially on these grounds (SACTRA 1999). • The extent to which CGE models can truly be distinguished from ‘partial equilibrium’ approach of SCBA is less then sometimes claimed. CGE models incorporate their own (varying) assumptions regarding exogenous inputs and typically operate at a broad (rather than geographically specific) level. For example, the ESSAM model used by ACG to model New Zealand road projects (ACG 2004) assumes stocks and government consumption are set exogenously (ACG 2004, p. 64). Australian models such as MMRF and ORANI assume perfect competition in product markets (as does SCBA). Apart from these assumptions, such models typically cannot allow for the ‘feedback effects’ of specific issues, such as the strategic pricing behaviour by transport competitors within particular geographical regions, any more than can SCBA (BTE 1999, pp.109-110). Given the need to use exogenous variables in any case, and the necessarily broad nature of the approach, the reasoning in adding on the additional complexity entailed in CGE modelling is debatable. • A corresponding point is that many CGE models are comparative static, rather than dynamic. That is, they omit inter-temporal relationships between endogenous variables. For example, a dynamic model might link changes in capital stock in one period with past levels of investment and savings (using specified elasticity measures) where all of these are defined as endogenous variables. Models commonly used in Australian transport appraisals, such as MMRF and ORANI are comparative static. The ESSAM model used by ACG to model New Zealand road projects would also appear to lack some dynamics. For example, government consumption is either a fixed percentage of GDP or determined exogenously. A practical implication of the lack of dynamic structure in CGE models is that the results may be distorted when compared to the outputs of SCBA, as discussed below. In addition, Docwra and West note that CGE models may be particularly poorly suited to analysing the impacts of transport investments such as road developments due to their lack of inter-temporal relationships. This is because road investments (and, by extension, most other transport investments) typically have a ‘long tail’ with respect to construction expenditures and flow-on impacts within the local area. Thus, a new arterial road to a port will affect local and global economies for many years, as local development gradually takes advantage of the new facilities. As CGE models often lack 49
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Research 350 - NZ Transport Agency

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