Research 350 - NZ Transport Agency

3. Role of transport investment in national/regional economic development
elasticity as the shadow price of public investment is underestimated (SACTRA 1999,
para. 4.24).
• Studies which have attempted to overcome the above problem using cost functions
suggest that public capital investment does make a positive contribution to growth. These
suggest that efficient public infrastructure can lower costs to the private sector and thus
enhance rates of return – but at far lower rates than suggested by Aschauer. US research
also indicates that investment in infrastructure may have had more impact on US
manufacturing productivity, per dollar spent, than publicly financed R&D (SACTRA 1999,
para. 4.24).
• However, investment in transport infrastructure by itself would not appear to yield
‘special benefits’ or be particularly cost effective in terms of increasing national economic
growth. Kinhill Economics makes the point that statistical models will likewise produce
high rates of growth from expenditure on education/human capital and health.
Assumptions which reduce the contribution of some of these factors automatically
increase that of others (Kinhill Economics 1994, p. 9). O’Fallon cites similar research
conducted by the ECMT (2002) which claims that, once opportunity costs are fully allowed
for, investment in human capital will produce greater rates of return than investment in
transport (O’Fallon 2004, p. 14).
• Likewise Banister and Berechman note that ‘other public inputs, such as education, have a
substantially higher impact on growth than transportation capital’ (Banister and
Berechman 2000a, p. 149). Likewise a 1997 review of infrastructure investment by the US
Transportation Research Board (TRB) concluded that ‘when the opportunity costs of
infrastructure investment are taken into account, it is likely that other forms of capital
accumulation by the private sector or putting more resources into education and training
are likely to lead to better returns’ (SACTRA 1999, para. 4.25).
• Banister and Berechman also cite the results of a number of US state ‘production function’
studies which compared the impact of highway investment and other investments such as
water and sewerage infrastructure and ‘other’ public capital on gross state product (GSP)
(pp. 148-149). These have mixed results and are reproduced below, along with Deno’s
1988 study using a profit function approach and Aschauer’s original results 20 . (Note that
the use of State-level data within production function models may introduce some biases
into the estimation of output elasticities for transport. (Banister and Berechman 2000,
pp. 148-149)).
20 Note that the use of State-level data within production function models may introduce some biases into
the estimation of output elasticites for transport. This is because the major effect of transport investment is
to change the relative accessibility and attractiveness of specific regions. This, in turn, causes the relocation
of firms, labour and households across jurisdictions. Failing to account for this will produce biased elasticity
estimates. McGuire’s (1992) results attempt to control for such state effects. In addition, Deno’s approach
uses a profit function model (rather than a production function model). Profits of the private sector are
specified as a function of the prices and quantities of private capital, of labour and of the stock of public
capital (Banister and Berechman 2000, pp. 148-149).
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