Research 350 - NZ Transport Agency

3. Role of transport investment in national/regional economic development
3. Role of transport investment in
national/regional economic
development
3.1 Scope of chapter
Issues regarding the role of transport in stimulating national and regional economies have been
touched on above. This chapter seeks to address the following key question:
• Question 3.1: Are there particular features of transport investment (in general) that make
it especially effective (such effects maybe not fully reflected in SCBA or alternative
methods of assessment) in promoting/increasing national (and regional) economic
growth?
3.2 Effectiveness of transport investment in
promoting economic development
In considering the impact that transport has on national development, it is first necessary to
clarify the ‘transmission mechanism’ through which transport contributes to national economic
growth.
In traditional macroeconomic models of growth, output is a function of capital and labour inputs
and the efficiency with which these inputs are used (SACTRA 1999, para 4.07). Growth is
dependent on increases in the factor inputs and on total factor productivity (TFP). Transport may
therefore have a role in growth through increases in the capital stock and through more efficient
transport, which, in turn, increases the efficiency of other sectors (SACTRA 1999, para. 4.07).
Neo-classical theorists such as Solow argue the case for diminishing returns to capital
accumulation. Long term growth in incomes per capita would therefore rely on TFP growth.
However, some theorists have argued that taking a broader view of capital (including human
capital as well as infrastructure and directly productive physical capital) would effectively imply
that boosts to growth would take longer to work their way through the economy. Public
investment could therefore be seen as an antidote to diminishing returns experienced by the
private sector (SACTRA 1999, paras. 4.08-4.10).
However, SACTRA quotes Oulton and Young’s (1996) extensive investigation, which indicates
that the ‘broad capital’ model is still subject to decreasing returns (para. 4.11). This has led to a
focus on TFP growth. From this viewpoint additions to the capital stock are seen as encouraging
innovative effort to reduce costs. In SACTRA’s words:
For transport, the key question is whether improvements in transport provision are
likely to generate more TFP growth by improving incentives to innovative activity.
This is more likely to be important at the level of the mega project or when a series
of schemes has a large cumulative effect on the transport network than for the
individual road scheme. For example, this might work through increasing the size of
markets, thereby allowing higher expected sales to cover fixed costs in the event of
successful innovation or through encouraging the formation of clusters of firms
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