2. Studies on Economic Growth/Productivity and Social Impacts

2.1 Introduction

None will dispute that transportation investment (particularly in highways) affects both economic and non-economic factors in the areas proximate to new facilities and even in those more distant. The ways in which new and improved highways, for instance, influence society are complex and often indirect. In the short run, investment in transportation increases employment directly and, in turn, stimulates other industries as workers spend their income on other goods and services. Long-term impacts flow from more extensive, improved, and inter-connected roadways.

The ultimate goal of transportation investment is social—an improved quality of life for a region's or country's inhabitants. However, the ultimate benefits of investments are accrued from a combination of generative and distributive impacts.

• Distributive effects are those that lead to a redistribution of income, population, and employment; these may or may not be associated with a net gain in output.[3]
• Generative effects are those that increase income by using resources more effectively and/or by using resources previously underutilized.

2.1.1 Impact Types

A great deal of literature relating to transportation investment impacts focuses on generative and distributive effects rather than ultimate outcomes. In essence, these effects trigger fundamental changes in economic and social structure, which are often described in the literature as the productivity and national income impacts of infrastructure investments.

• Productivity and National Output—Transportation improvements affect both economic development and productivity. Economic development may be regional in nature and the result of improved access to labor pools, investment in new or expanded enterprises in a given area, or access to larger markets—without a concomitant increase in productivity.[4]
  
  Productivity improvements, which directly generate increased output or development without countervailing offsets elsewhere, are more difficult to isolate since the changes occur within the production process. Yet productivity is key to development—particularly if labor is already nearly fully employed—and investment in capital is key to productivity. New transportation systems are a form of capital investment that can stimulate productivity of labor and private capital.
  
  For example, reduced transportation costs and/or easier access to materials or markets affect business location decisions. That is, decisions on location for new investments may be altered. Changes in transportation costs and ease may even induce existing enterprises to relocate and take advantage of new conditions; such shifts may be intra-regional and thus have no net effect on regional output. Or, such shifts may affect the competitiveness and scale of operations of the affected enterprises, which then achieve higher productivity and make a net positive contribution to national output.

The manner in which generative and distributive effects drive ultimate outcomes and affect the economy is complex. Consequently, it is important to understand the types of economic impacts that may be generated by transportation investments.

• Costs of Production and Competitiveness—Improved highway systems reduce costs for delivery of goods and services; they also support faster, more reliable transportation from one place to another. These, in turn, reduce the costs of collecting inputs and delivering products to markets in several ways:
  • less driver time on the road thus lower labor costs;
  • increased trip miles per time period per vehicle and thus smaller vehicle fleet needed for the same amount of work ("freight efficiency");
  • lower vehicle repair and operating costs; and
  • improved transportation reliability.

  The first three work directly to reduce total product costs. Improved transportation reliability works to reduce production costs via reductions in inventories of inputs, spare parts, and/or finished goods.
  
  Cost reductions that are realized will enhance the competitive position of enterprises with access to the improved highway network. In turn, this can stimulate increased trade domestically and/or internationally, resulting in improved trade balances. Moreover, expanded demand can generate economies of scale and improved productivity as enterprises take advantage of these market opportunities—thus inducing another round of cost reduction. The relative impact of these effects vary among sectors (i.e., the type of economic activity or industry) and vary according to the level of pre-highway urbanization and development.

• Labor Pool—Because labor can more readily reach employment locations from farther away (assuming there are vehicles to transport them over the highway system), enterprises have a larger employment pool from which to draw. Competition could reduce wages, but an expanded labor pool should also encourage a more efficient match between skills and jobs. In some circumstances, improved connections between hometown and employment opportunities prompts workers to move closer to employment opportunities since they do not need to sever their ties to family when they migrate. Thus improved access can affect demographic patterns as well as production costs of individual enterprises.

• Economic Structure—Transportation costs and improved physical access may change the mix of economic activities. That is, major investments can alter the mix of economic activities where transportation cost (or access) was an inhibiting factor. For example, previously self-sufficient areas may specialize in those activities that earn the greatest income and use that income to "import" products that used to be produced locally. The lure of reduced transportation costs can lead to shifts in geographic distribution of economic activity to take advantage of these changes. To the degree that such structural changes improve productivity, national output (per capita) is increased.

• Geographic Impacts—New highway systems can trigger geographic shifts in population and economic activity. These effects are of interest in and of themselves because they affect income distribution and personal lifestyle. Investments in major highways can benefit some sectors or geographic areas without affecting others. Although the effects are uneven, there are no "losers." On the other hand, a new highway can shift the focus of new investment from one area to another within the region (e.g., to secondary urban areas away from primary urban centers), thus generating an internal shift in activity but no net short-term gains. Even without net income gain, these re-distributive effects can be positive because they can reduce inter-regional disparities. It is also possible for distributive effects to exacerbate regional disparities if, for example, highway investment stimulates out-migration of industry from more remote areas.

• Trade Balance—In addition, reductions in input costs (transportation), increased transport reliability and access to markets, and enhanced productivity improve international or inter-state competitiveness, thus improving balance of trade. Balance of payments could be further strengthened by increased foreign investment and/or reduced capital outflows as domestic investment returns and exchange stability improve.

Highway investments can also affect changes in personal welfare that are important in their own right. These changes may also contribute to productivity and output. But their most immediate impact is on quality of life. A review of the types of welfare impacts that stem from highway investments is provided below.

• Safety—Foremost among the welfare effects of improved highways is travel safety. Wider roads, more lanes, better alignment, and improved road surfaces all help to reduce vehicular accidents—and thus reduce morbidity and mortality. Although vehicles travel at higher speeds on limited access highways (in good condition), drivers face fewer dangerous surprises. (e.g., curves that are too sharp, potholes not identified in advance, etc.). Drivers also can overtake slower vehicles without crossing into lanes of opposing direction.
• Life Style—Improved access and mobility contribute to quality of life in other ways as well. First, improved transportation expands the choice of leisure activities within reach and/or saves time for those making such trips. For example, visiting friends and family in other areas takes less time. By expanding the labor shed for individual establishments, improved highway transportation also allows those who lived within the original, smaller labor drawing area to move further away from work without having to change jobs. In this case, businesses remain in place but labor disperses within the expanded drawing area to achieve a preferred life style.
• Human Capital—Transportation improvements can also improve access to health care and education. Individuals can travel more easily to established health care and education sites that used to be beyond reach. Similarly, specific "extension" personnel are more able to make regular visits to individuals, homes, schools, and local clinics.

2.2 Literature Review and Summary of Results

Investments in freight transportation systems can be expected to affect the economy via:

• changes in productivity and national income,
• changes in the structure of the economy,
• impacts on international trade and competitiveness, and/or
• quality of life improvements as dictated by safety, health, and other social impacts.

The purpose of this sub-section is to summarize the results of the literature review on the economic impacts of transportation infrastructure investments (particularly of highway investments in the US), and in this manner to provide evidence of the linkages between transportation investments and economic and quality of life parameters.[5]

2.2.1 Productivity and National Income

A number of studies document the relationship between investment in infrastructure (public capital) and either output or productivity, which is one of output's immediate antecedents. Researchers generally employ "macro" analytical techniques—broad statistical studies that link highway or other public infrastructure directly to output itself or to productivity.[6] This sub-section reviews research on both productivity and output, which are often treated together in the same study and which are explored by similar techniques.

David Aschauer and Alicia Munnell are credited with focusing attention on the role of infrastructure in national income or economic growth. Using econometric analysis of data on national output, labor, private capital investment (in plant and equipment), and capital stock of specific public works, these economists estimated the separate contribution to productivity associated with improvements in infrastructure such as roads, water and wastewater treatment. They showed that increases in productivity and national income in the US could not be explained by labor inputs and private capital alone. That is, that investment in public works is positively correlated with increases in national productivity—which increases total output from the same pool of labor and private capital. Nadiri and others have carried on the exploration of the connection between public works and national income. Nadiri's research focuses on the role of public investment in reducing costs of production.

Many other studies have followed in the wake of the initial recognition of a connection between transportation and economic development. Studies of the relationship between highway capital and national output, or other factors contributing to output and social welfare, are of several types:

• Cost-benefit analyses: which estimate the costs and benefits to society or groups of people from transportation investments;
• Macro-economic approaches: that explore the relationship between a defined variable (e.g., output per capita) and causative factors using national (or regional) level data in a statistical model;
• Regional methods: which use a variety of models that measure region-specific economic (or demographic) impacts from transportation investments; and
• Case studies: that describe the administrative, operational, or financial decisions made by an individual firm or agency to affect economic development or economic productivity in response to transportation initiatives.

Review of the Literature—Virtually all of the studies reviewed in this sub-section employ macro-economic approaches or regional methods to explore linkages between transportation and its impacts on society. A synopsis of the most compelling evidence of the linkages between highway investments and economic performance is provided below.

1. Nadiri (1996) uses a cost function approach to estimate the relationship between highway capital investment and productivity in the US. His key findings suggest:
   • The net social rate of return[7] on total highway capital investment averaged approximately 28 percent over 1950 to 1989, generated mainly through savings in labor, private capital, and intermediary inputs. For non-local highways alone, the social rate of return was estimated to be 34 percent over the same period.
   • When the US was building the Interstate Highway System, initiated in 1956, these returns were at their highest, showing a 35 percent social rate of return across the entire road network in the years prior to 1970.
   • In more recent years, however, social rates of return declined to 16 percent in the 1970s and to about 10 percent in the 1980s.
2. Munnell (1990b) uses an aggregate production function model for the 48 contiguous US states and found that a one-percent increase in public capital investment would raise national output by 0.15 percent. In addition, the study also reported that, on average, $1 of additional public capital investment appears to increase private investment by $0.45.
   
   Using cross-section data, Munnell (1990a) postulates that a one-percent increase in public capital stock would increase output by 0.34 percent. Given the size of public capital stock and total output, these figures imply that the marginal productivity of public capital stock is roughly double that of private capital.[8]
3. Aschauer (1989) examined the role of infrastructure in the US using the concept of an aggregate production function. His study found that the elasticity between output and public investment ranges between 0.31 to 0.39. These results imply a 50 to 60 percent annual return to public investment.
4. Attaran and Auclair (1988) found that for every 10 percent increase in the stock of highway infrastructure in the US, an increase of 2.2 to 2.4 percent in real private sector output occurs. In addition, their findings suggest that although highways represent only a third of all infrastructure in the US, it has been responsible for 57 to 60 percent of the gain in private sector output.
5. Findings by Wilson and Mohamed (1985) from a study of several Canadian provinces on the importance of highway investment suggest that if no money was spent on highways, the residents of the Fredericton region (in Canada) would incur a relative loss in earnings of approximately $51 per year per person.
6. Shah (1992) using a cost function approach estimates that total returns to public infrastructure investment range from approximately 5.4 percent to 7.3 percent.
7. Remy (1996) uses a production function model for France to estimate a 12 percent rate of return to public infrastructure investment. The elasticity of output to infrastructure investment is estimated to be about 0.08.
8. Nadiri and Mamuneus (1991) found infrastructure investment to be a significant factor in reducing the cost of production for 12 US manufacturing industries for the years 1956 to 1986. Specifically, the social rate of return for infrastructure investments for use in these 12 industries was found to range from 4.6 percent to 6.8 percent.
9. In its Plan Directora de Infrastructuras (1994), Spain's Ministerio de Obras Publicas dedicates an entire chapter to the economic impacts of infrastructure investment.
   
   Using a Cobb-Douglas production function approach, the Ministerio finds that a 100 percent increase in the public capital stock will increase Spain's productivity by 23 percent (i.e., the model reports a public capital stock elasticity of 0.23). Further analysis that disaggregates public capital into its various sectors (e.g., transport, sewers, water systems, utilities, etc.) shows that the stock of transportation infrastructure is the most important contributor to productivity increases and Spain's competitiveness as a nation—the transportation infrastructure stock elasticity is reported to be 0.18.
10. Results from the US Department of Transportation's (DOT) 1995 Highway Economic Requirement System (HERS)—a national level benefit-cost model to evaluate highway improvements—suggests that highway investment leads to a benefit-cost ratio of approximately 4.1:1.
11. According to Winston (1990) benefit to cost ratios of new highway investment may reach 10:1.
12. Keeler and Ying (1988) focus on the impact of the investment in the US Interstate Highway System on intercity trucking industry costs. Their study finds that public investment had significantly improved the productivity of the trucking industry. For example, the savings to the trucking industry are calculated at approximately 2 cents (in 1973 dollars) per ton-mile. They also calculated benefit-cost ratios for different elasticities of demand. The ratios ranged from 0.34 with a demand elasticity of -2 and a discount rate of 12 percent, to 0.81 with an inelastic demand for trucking services and discount rate of 6 percent. This implies the savings from trucking costs alone cover almost one-third of the capital costs of the Federal-aid highway system between 1950-73!
13. Queiroz and Gautam (1992), in a study of 98 countries, indicate a very close correlation between per capita GNP and investment in paved roads—$4.60 in per capita income per $1.00 investment in roads, although causality was not explored. The authors address this issue when they related per capita income to physical road density in the US. They investigate several different formulations and find that the strongest relationship (statistically) was between per capita GNP and road density four years prior, thus indicating that highway density contributed to, rather than resulted from, growth in income.

Other studies focus less on the monetary value of public capital stock or investment and work directly with measures of physical infrastructure itself. These studies also testify to the relationship between transportation infrastructure and output. Three studies stand out.

1. Queiroz, Haas and Cai (1993) explore the relationship between paved road density and per capita income and, because increases in income can cause (rather than result from) road improvements, they also investigate the direction of causality by lagging income behind road density in a time series analysis. Results support the hypothesis that road density leads rather than follows changes in income.
2. Lombard (1991) shows that multilane highways (such as interstates) may have an even more significant role in development—a 5 to 10 times stronger association with regional development than the highway system as a whole (which also includes local, arterial, and collector roadway types).
3. Categorizing roads even more finely by type, Kuehn and West (1971) focus on an underdeveloped part of the US (the Ozarks area which includes 125 underdeveloped counties in the states of Arkansas, Missouri, and Oklahoma). Their analysis indicates that highway investment geared to development should focus first on state highways that interconnect with existing federal highways (i.e., the interstate system) and second on local roads that offer rural access to urban centers.

Discrepancies in Studies—In general, statistical studies linking highway stock (or investment) and output (or productivity) have established a positive relationship. Moreover, although increases in output can generate increases in infrastructure investment, there is statistically significant evidence that highway investments generate increases in productivity and output (i.e., causality runs in both directions). Findings, however, vary with respect to the strength of the linkage between highway investment and economic output (or productivity).

Aschauer, Munnell, and Nadiri have been in the forefront of analyses that show strong and significant impacts of highway infrastructure on total output, evidenced directly or through its effect on productivity and input costs. Others, however, find a weaker statistical relationship between highway investment and regional development (Wilson, Graham, and Aboul-Ela, 1985; Harmatuck, 1996)—or that, on average, an increase in highway stocks is associated with only modest reductions in manufacturing costs (Holleyman, 1996).[9]

Some contend that output growth is due more to increases in factors of production, that is, private capital and/or labor inputs, than to increases in public infrastructure. More specifically, they explain inter-regional variations in output growth rates by different rates in growth of private capital and labor, not to changes in rates of growth in productivity or public infrastructure (Hulten and Schwab, 1984).

The question, then, is how does one explain this variation in empirical results and the resulting range of opinions on the strength of the highway-output and highway-productivity linkages?

Researchers offer a number of plausible explanations. Some believe that highway investment might be a substitute for private capital, labor, and purchased services (Holleyman, 1996; Shah, 1992). Aschauer himself admits that his estimated effect of public infrastructure on productivity may be too large, and that studies do not agree on magnitudes (Aschauer, 1993). He attributes the range of results and opinions to the following factors:

• definition of public capital stock may differ across studies,
• geographic scope of studies may differ, and
• studies may involve different or combined sectors of the private economy.

Clearly, the linkages between a region's transportation infrastructure investment and economic production are more complex than implied by the structure of many basic statistical studies. This might suggest that estimates from these models are subject to specification-error bias and simultaneous-equation bias (Tally, 1996).[10]

Moreover, variation in opinions about infrastructure's impact on productivity and output may be due to failure to differentiate among industries and other factors that distinguish one case from another. That is, if regional differences in growth in public capital do not adequately explain inter-regional differences in productivity, it may be necessary to disaggregate the analysis by industry since impacts may not show up at an aggregated output level (Hulten and Schwab, 1991) and the impact on output levels of specific industries is likely to be quite diverse (Transportation Systems Center, 1983).

In addition, a weak observed relationship between highway investment and output or productivity may be due to the fact that the primary impact of transportation investment changes over time as societies develop. For example, one study describes three phases of highway development in New Brunswick (Canada):

• the network is not developed to a stage at which it is capable of encouraging regional development,
• the network acts as an agent for regional development, and
• highways become agents for personal mobility.

Thus, as an area becomes saturated, the highway network contributes relatively less to economic development (Wilson, Graham, and Aboul-Ela, 1985). As discussed in earlier parts of this report, data on US highway investment indicates noticeable differences in returns for different time periods. Although Nadiri derives an overall social rate of return on US highway investment of approximately 28 percent over the period 1950-1989, he estimates returns to investment to reach 35 percent in the earlier 1950-70 period. Rates then declined to 16 percent in the 1970s and even further to 10 percent in the 1980s.

Finally, studies on the relationship between public infrastructure investment and economic output suggest that the elasticity (or the degree of responsiveness of output to public investment at each level of government) tend to be very similar across studies (Munnell, 1992). The variation between estimates occurs as the unit of observation moves from the national level to state and city levels. Researchers have found that, in general, as the geographic focus narrows, the estimated impact of public capital becomes smaller. The most obvious explanation is that, because of leakage, focusing on a small geographic area cannot capture the entire payoff to an infrastructure investment.

In any event, variation among studies does not disprove the positive effect of highway investment on the economy. Rather, it suggests that productivity of transportation investment varies among regions and sectors (depending on complementary factors) and with the state of the highway system and perhaps development itself. Thus failure to disaggregate or to include all causative factors can mask strong highway-productivity and highway-development relationships.

2.2.2 Structure of the Economy

No economy remains constant for long periods of time, and an observed increase in output could be due to more efficient use of the inputs of production. When output increases, while the level of labor and capital inputs remain the same, a productivity increase has occurred. In other words, productivity arises when there is a more efficient use of inputs to production.

As discussed above, transportation infrastructure improvements can affect both economic development and productivity. Economic development effects are usually regional in nature and result from improved access to labor pools or to larger markets. Productivity improvements, on the other hand, are more difficult to isolate since the changes occur within the production process (e.g., inventory savings plus production gains resulting from better transport networks allow for "just-in-time" production methods).

The change in production methods resulting from transportation investment will create structural changes to the local, regional, and national economy. Improved transportation can accomplish more than enabling firms to engage existing physical plants and business processes at lower cost. Transportation improvements can create a cascade of productivity and organizational benefits that influence activities well beyond transportation and logistics.

Review of the Literature—The bulk of the literature on the impacts of highway investment on the structure of an economy focuses on the following types of structural issues:

• infrastructure and sector output,
• economic diversification, and
• technological innovation.[11]

Although the literature on the linkages between highway investment and changes in an economy's structure does not provide a significant amount of quantitative evidence, it does reiterate the importance of such investments to economic development.

• Infrastructure and Sector Output—Infrastructure investment has perhaps the most dramatic effects on production costs and profitability in the agricultural sector, which creates profound structural changes in a rural economy. Various studies recognize and accept the relationship between agricultural development and infrastructure development including the affect on income levels, specialization, and relocation. For example, Antle (1982) focuses on the effects of transportation infrastructure on aggregate agricultural productivity. He documents that infrastructure investments do contribute to agricultural productivity in developing countries His report estimates a production function for agriculture in 47 less developed countries (including Argentina) and 19 developed countries. He finds that infrastructure contributes to the explanation of aggregate agricultural productivity in each case. Furthermore, the report sets forth the idea that economic impact is not necessarily determined by the level of resource endowment, but rather by the utilization of infrastructure resources.
  
  Binswagger, Khandker, and Rosenzweig (1989) use cross-district data in India to control for infrastructure differences in explaining agricultural output. When climatic effects are taken into account, roads are found to have a significant positive impact on aggregate agricultural output. This is not merely because of their impact on private investment, but because of induced marketing opportunities and lower overall transaction costs. Highway investment is shown to enhance agricultural output during the period; directly contributing 7 percent to output growth.
• Economic Diversification—Improving the stock of highways and roads, for example, not only increases total production, but also can have an effect on income levels, on the availability of alternative sources of income, and on regional economic growth. As an economy develops, the agricultural sector of the economy (as a percentage of total employment) begins to shrink. This, inevitably, produces shifts between sectors of the economy and population movements between regions.
  
  While better-developed areas may reap greater benefit from rural infrastructure investment, this investment will determine the location of many firms, further developing business and commerce in certain regions. A system-wide improvement to the road network may create (or enhance) economic centers of activity based on economies of scale, factor utilization, and geographic location.
  
  Stephanedes (1989) finds that for the State of Minnesota, regional centers can demonstrate long-term, sizable, employment improvements following an increase in transportation investment. This researcher's results agree with US census data, which indicate that 66 percent of the state's population works in regional center counties although only 47 percent live there. This implies that about 19 percent of the state's population commutes on highways to their jobs. Outside these areas the report shows evidence of favorable effects in the wholesale sector of rural counties due to firms gaining increased access to markets. Thus, the analysis finds improvements in certain rural areas that have a strong natural resource base or that can benefit from improved access to markets.
• Technological Innovation—In today's modern society, infrastructure enables modern technology in almost all sectors. Kessides (1996) mentions the "information revolution" of recent decades and its potential to dwarf all previous advances in productivity. Transportation networks are benefiting from technologies such as information processing, communications, and electronics. These benefits will enhance the efficient use of infrastructure resources, effectively making significant improvements in safety, mobility, accessibility, and productivity.

2.2.3 Geographic Distribution

Transportation investments often have direct effects on the spatial distribution of a region's or country's population and economic activity. Improved access to employment centers, decreases in the travel time of trips, and changes in the distribution of economic centers affect the location decisions of people and businesses.

Review of the Literature—Factors such as regional availability of raw materials and proximity to markets play a role in how highways affect the distribution and redistribution of economic activity. Wilson, Stevens, and Holyoke (1982) use survey data and factor preference indices to determine the relative importance of 13 factors on location decisions. They conclude that proximity to highways was the third most important factor in the location decisions of Canadian enterprises in the post World War II era (to 1960). Highway access was preceded by proximity of raw materials, owner-manager residence, and closely followed by proximity to markets—all of which can be influenced by efficiency in the transport system.

For the full sample time period (1945-69), proximity to highways ranked sixth in importance for secondary manufacturing industries; it was preceded by labor availability, proximity to prospective markets, government financial incentives, owner-manager residence, and accessibility to railways. Consequently, highways most definitely influence location decisions, but they are not the sole determinant.

Logically, investment in transportation will affect some economic sectors more than others, although the evidence is mixed. Stephanedes and Eagle (1986) document immediate employment gains in manufacturing and retail trade from highway investment. Data used in their analysis indicate that a 10 percent increase in highway expenditure generates a 0.3 percent increase in manufacturing employment in the following year. However, the intermediate and longer-term effects are smaller. They also find that the same 10 percent increase in highway expenditures generates a 0.17 percent increase in retail trade in the same year. The effects are more dramatic in counties near large cities, attesting to the drawing power of metropolitan areas when access is improved.[12] Some evidence indicates that tertiary industries (including government as well as services) have been more affected than other sectors (Rephann, 1993).

Will development in a particular area be a net gain for the region or country (generative)? Or is this development at the expense of another area (distributive only)? In part, the answer depends on the unit of analysis—small state or city, or whole country. Something that is generative in a state or limited region may be only distributive in a national context because one region benefits at the expense of another.

Redistribution seems to be the case in selected US examples. One econometric study, which compared counties in the state of Minnesota (Stephanedes and Eagle, 1987), concluded that increases in highway expenditure promote intra-state shifts in employment favoring economic centers in the state and away from adjacent counties and rural areas. Stephanedes (1989) also notes that economic development is a cause as well as an effect of highway funding, that is, transportation planners respond to economic growth by providing funding for transportation needs, thus reinforcing geographic differences.

2.2.4 International Trade

Transportation-induced changes in balance of trade can be triggered by several intermediate effects, including reduced costs of production, lower c.i.f. costs and/or improved delivery times and reliability (i.e., improved access to markets). Consequently, changes in balance of trade are a corollary of productivity, geographic redistribution, and structural change impacts. That is, improvements in balance of trade occur when transportation improves productivity and a region's competitiveness (i.e., comparative advantage). Such improvements affect market demand, and any countervailing contractions or disbenefits (if they occur) are outside the designated boundaries. Furthermore, balance of trade, particularly for a nation as a whole, is of interest in its own right because of the repercussions for national welfare (i.e., the effect on welfare of stable exchange rate, availability of imports, attractive environment for foreign and domestic investment, appropriate government budget and stable financing conditions, etc.).

Unfortunately, few studies have been conducted that quantify the impact of transportation investments on international trade. Of the studies that address this linkage, only indirect effects are cited.

Review of the Literature—Evidence supports the logical contention that sophisticated transportation systems support an improved trade position. The US Interstate Highway System not only improved safety and defense readiness but, by improving national productivity, also positioned the US for improved international competitiveness (Cox and Love, 1996). Of course, highway and other infrastructure can only raise productivity and improve competitiveness when complementary factors are present as well (Kessides, 1996).

Both faster/more reliable transport to markets and reduced transport costs have a role in improved competitiveness. One estimate indicates that the US Interstate Highway System generated cost savings to trucking firms ranging from 0.73 percent per year in 1950 (in the early years of the system build-out) to 19.32 percent per year in 1973—a savings of about 2 cents per ton-mile (Keeler and Ying, 1988). The importance of truck transport in interregional and international trade logistics is echoed in other nations. For example, most shippers in the Indian market would state that they prefer truck transport to rail because of its greater operational flexibility and door-to-door deliveries (Peters, 1990).

2.2.5 Safety and other Social Impacts

Investments in transportation infrastructure influence the personal welfare of people across all economic groups. Improvements in highway transport may not only yield economic benefits by lowering transportation costs and in turn the prices of goods and services, but can also provide users with safer and more convenient access to a range of those services. Adequate highway infrastructure can directly contribute to quality of life by:

• enhancing safety,
• increasing accessibility to goods and services,
• and expanding social and economic opportunities.
• This sub-section focuses on the safety benefits of transportation improvements (in particular highway investments) by drawing on the experience of the US.

Review of the Literature—Foremost among the social impacts of improved highways is travel safety. Travel on highways, particularly interstate highways, is often safer than travel on other roads because of the high design standards imposed during construction and maintenance phases. In countries with low highway performance standards and insufficient traffic capacity, the accident rate is far higher than that of countries with more stringent highway standards. The fatality rate in China, for example, is 20 to 30 times that of developed countries with high quality highways (Ning 1993). Wider roads, more lanes, better alignment, and improved road surfaces associated with highway travel all contribute to reduced vehicular accidents and thus reduce morbidity and mortality.

A study by Forkenbrock, Foster, and Pogue on the safety benefits from highway improvement investments used two semi-log regression models to determine the factors contributing to the number of highway accidents. The findings suggested that attributes affecting accident rates most are the number of curves on a broad segment of road and average daily traffic per lane (Forkenbrock, Foster, and Pogue, 1994). By upgrading a road to four lanes, improving its pavement quality, and widening the right shoulder, the accident rate per million vehicle miles traveled (VMT) is predicted to drop from 1.28 to 0.56.

In the US, the fatality rate for interstate highways is nearly 60 percent lower than the rest of the system, and the injury rate is 70 per cent lower on interstate highways than on the rest of the system (Cox and Love, 1996). An estimated 6,100 fatalities and 440,000 injuries were avoided in 1994 through the use of interstate highways (Cox and Love, 1996). Compared to other transport modes, such as rail, interstate highway travel is often one of the safest. Urban areas, in particular, benefit from highway usage, as urban interstate fatality rates are over 50 percent lower than that of other roads and 65 percent lower than that of urban rail. Rural areas also realize safety benefits from highway use. Fatality accident rates on rural sections of the interstate system are 40 percent of that of non-interstate highways in rural areas (US DOT, FHWA).

A variety of studies have been conducted that estimate the economic benefits from improved highway safety. To estimate the benefits from highway safety, the costs of traffic accidents are applied to number of accidents avoided, and in this manner cost savings can be estimated from improvements in highway safety. These accident costs savings estimates are often used in benefit-cost studies of potential highway investments. The US National Safety Council provides such estimates of accident costs. Using these cost figures, Cox and Love estimated that in 1994, lower interstate accident rates produced $17.2 billion in direct economic savings (1996). The authors further estimated that from 1957 to 1996, the safety related direct economic losses avoided due to the use of the interstate system are $368 billion.[13]

In addition to effects on value of time, improvements that result with savings also provide non-quantifiable benefits that contribute to standard of living. Improved roads, for instance, can expand the choice of leisure activities within reach and/or save time for those making such trips. Likewise, expanded mobility and accessibility expands the range of opportunities and activities. Rural areas can benefit because transportation improvements create access to goods and services between major population and production centers. Access to job opportunities in both urban and rural areas are a benefit of a highway network, as users are thus able to seek a broader range of employment or other opportunities.

Some studies undertaken to assess the role of highway investment as a regional economic development tool have also noted the importance of a highway network as an agent for personal mobility. A study on New Brunswick, Canada by Wilson, Graham, and Aboul-Ela (1985) found that the initial benefits of investment in a highway system impacts society in a macro sense, with regional development encouraged and accessibility heightened. However, even after the initial accessibility improvements, increased mobility, and development of new or improved production centers, users will continue to benefit from the highway investment by way of the increase in personal mobility (Wilson, Graham, Aboul-Ela, 1985).

2.3 Relevance of this Body of Literature to the Freight BCA Study

The work reviewed in this section is largely concerned with impacts of highway investment on productivity (at a national or regional level), safety, and geographic distribution of economic activity. The Freight BCA Study is primarily aimed at developing estimates of the benefits of improved freight transportation using micro-economic analysis in the specific context of benefit-cost analysis. With the possible exception of the work by Keeler and Ying, the literature considered here does not focus on freight as such, and the work on productivity and geographic distribution does not use micro-economic principles. Much of the work on safety is done in the same way that safety improvements are valued in standard benefit-cost analysis—average dollar values for crashes avoided or lives saved are estimated and multiplied by estimated numbers of crashes avoided, lives saved, and so forth. But the connection between safety gains and freight improvements, as such, is not a close one. What, then, is the relevance of this body of work for the study at hand?

The principal relevance of this work lies in the macroeconomic analysis of the effects of highway investment on productivity and firms' costs. The preponderance of the statistical studies finds a clear link between better roads and a more productive economy. This is especially true for Nadiri's 1996 work, widely regarded as the most robust of these analyses. While his study is not focused on freight movement as such, freight carriage is clearly one of the effects that it captures, albeit not the only one. (Passenger transportation is also important for businesses.) What it tells us, though, is that impacts of freight improvements are definitely significant, and our search for these effects with microeconomic analysis is a sensible undertaking. Put another way, we can be confident that the effects we seek to measure are real; we are not looking for something that does not exist. This support from the macroeconomic analyses is also reinforced by the results of the work on geographical distribution of activity; these studies demonstrate the economic force of transportation improvements.

What the work reviewed in this section does not do is give any guidance as to how to measure benefits of freight improvements in a benefit-cost analytical process. The analytical techniques used for statistical analysis on a national or regional scale are quite different from those used for analysis of the benefits and costs of a project or a set of projects. Guidance for the Freight BCA Study is to be found in the microeconomic and benefit-cost analyses reviewed in Section 3 following.

2.4 Concluding Remarks

The literature reviewed in this section of the compilation focuses on the productivity and national income impacts, the safety benefits, and the geographic distribution impacts of highway investments—particularly as experienced in the US. Although consensus has not been reached on the magnitude of impacts, there is sufficient evidence that demonstrates the strong, positive linkage between highway investments and economic prosperity. With respect to safety, few can argue against the beneficial impacts of interstate highways. Finally, although less evident from the literature, highway investments play an important role in the decentralization of economic activity and population, and on the inter-regional and international competitiveness of regions and countries.

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