Conceptualising the Relationship between Transport Infrastructure Investment and Economic Development in Kochi
By Sarah Reeves*
Kochi is defined by rapidly increasing economic growth and a public transport sector currently undergoing massive changes, primarily in the form of infrastructure rejuvenation and development. Transport infrastructure is considered to be of utmost importance to policy makers because transport cost is crucial in deciding the choice of location for firms and, therefore, economic development of a region (Maparu & Mazumder, 2017). This is evident in the construction of the Kochi Metro, with the first phase of the project inaugurated in 2017 and the second phase underway. The city has also commissioned the Kochi Water Metro to be operational by 2019. Investment for the Kochi Water Metro is ₹747 crore and the estimated completion cost of the Kochi Metro is ₹5181.79 crore.
Transport infrastructure and economic development are inextricably linked, and the fact that transportation is a key facilitator to sustainable economic growth is widely accepted (Pradhan & Bagchi, 2013). However, a significant debate arises as to the direction of causality of transport infrastructure investment and economic development. Does transport infrastructure investment promote economic development or does economic development create demand, leading to increased public investment in transport infrastructure (Maparu & Mazumder, 2017)? Many authors contend that investment in transport infrastructure such as road widening and flyovers will lead to economic growth, but empirical evidence suggests otherwise, particularly in developing countries like India. This article will make the argument that economic development is the crucial step and should come before extensive public investment into transport infrastructure. The debate is significant because of the widespread and far-reaching policy implications of transport infrastructure investment for a city like Kochi.
The Debate in Context
The two conflicting views presented in this article are supported by extensive theory, namely ‘Endogenous Growth Theory’ and ‘Wagner’s Law’. In order to make distinctions regarding infrastructure investment and economic growth, empirical evidence is needed to support the theory. This evidence is acquired using the Granger Causality Test (Maparu & Mazumder, 2017; Keho & Echui, 2011). The Granger Causality Test, first proposed in 1969 by Clive Granger, is a statistical hypothesis test for determining whether one time series is useful in forecasting another. The test is based on two key principles – first, the cause happens prior to its effect and second, the cause has unique information about the future values of its effect (Granger, 2004). There has been extensive research on the relationship between transport infrastructure and economic growth, and the argument received much attention from economists, policy makers and politicians, particularly in the 1990s. However, it remains essentially unclear whether the direction of causality is from transport infrastructure to economic growth or vice versa (Keho & Echui, 2011). Therefore, an argument is constructed using Kochi as a specific case study.
Endogenous Growth Theory
The first case is that in order for economies to develop, expansive transport infrastructure should be commissioned (Sahoo & Dash, 2009; Aschauer, 1989). In this view, investment into Kochi Metro and Kochi Water Metro will lead to economic growth in the future, which justifies major investment into the projects.
“The macro-level school of thought that has dominated the mainstream discourse in economics has argued that increased public-sector investment in infrastructure (particularly in transport) increases the efficiency and profitability of the business sector; [and] this increase stimulates business investment in private capital.” (Ansar et al. 2016)
The Endogenous Growth Theory (Maparu & Mazumder, 2017) supports the view that investment in transport infrastructure promotes economic development. This view states that investment in transport infrastructure will strengthen a city’s economy. At first glance, there seems to be extensive evidence for this theory in the literature. First, transport infrastructure forms an integral part of the production process, good roads speed up the production process, promoting economic growth. Second, transport infrastructure can act as a magnet for regional economic growth by attracting resources in a process of agglomeration. Third, transport infrastructure can change aggregate demand in a city (Pradhan & Bagchi, 2013). Figure 1 indicates the multiple and complex pathways in which transport infrastructure investment leads to economic growth, following the Endogenous Growth Theory.
Figure 1: Flow Diagram Supporting Endogenous Growth Theory
Source: Pradhan & Bagchi, 2013
Aschauer (1989) carried out an empirical study in the US from 1949 to 1985 and found strong evidence suggesting a positive relationship between public investment in infrastructure and economic growth. The World Bank’s World Development Report (1994) later confirmed these results.
However, the positive link between transport infrastructure investment and economic growth appears to be relatively weak in a country like India (Pradhan & Bagchi, 2013). Investing in unproductive projects may initially result in a boom, as long as construction lasts, which is followed by a bust, when forecasted benefits fail to materialise (Ansar et al. 2016). The failure of the Endogenous Growth Theory is explored using a case study from China, a country with booming infrastructure investment and ongoing, large-scale construction. Ansar et al. (2016) puncture the myth that infrastructure creates economic value. Therefore, it is clear that developing countries like India have to move away from the Endogenous Growth Model, because empirical evidence indicates that the direction of causality is not from transport infrastructure to economic development. Even in China, the purported infrastructure prodigy, the actual costs of building infrastructure are systematically underestimated (Ansar, 2014).
Wagner’s Law
A far stronger argument is that the direction of causality is rather from increased economic development to public investment in transport infrastructure. The Wagner’s Law as well as extensive empirical evidence support the statement theoretically. The Wagner’s Law states that economic development and an increase in GDP leads to investment in public infrastructure (Keho & Echui, 2011). The Law gives three reasons for the increase in government spending in infrastructure as the economy develops. First, economic growth leads to industrialisation and modernisation, which diminishes the role of the public sector, resulting in more government expenditure in order to regulate the private sector. Second, a rise in income leads to a greater demand for infrastructure, and third, government expenditure increases as an act to remove monopolistic tendencies by the private sector (Verma & Arora, 2010). Maparu & Mazumder (2017) provide empirical evidence stating that in India between 1990 and 2011, there is a direction of causality from economic development to transport infrastructure, considering roads and total transport expenditure, thus supporting the Wagner’s Law and aligning with much of the other literature on developing countries. This paper also confirms the findings of Verma & Arora (2010). The implications of this empirical evidence backed up by theoretical concepts state that investing in transport infrastructure would not lead to economic growth.
In the case of Cote d’Ivoire, a developing country, Keho and Echui (2011) find a unidirectional causality running from GDP to public investment in both short- and long-terms, which is in line with the Wagner’s Law. A policy outcome outlined by the author is increased private sector investment in the transport infrastructure sector. Therefore, transport infrastructure should not be a tool for economic development in Kochi.
Policy Implications for Kochi’s Public Transport System
Understanding the interdependence between public investment in infrastructure and economic development is relevant because it can provide guidance for policy actions in developing cities (Keho & Echui, 2011). It is significant to address the fact that economic theory is developed in the western world and often does not apply to developing cities. The authors advocating the Wagner’s Law make a stronger argument, stating that economic development should come before transport infrastructure development. However, one must consider other factors such as demography, government structure and historic infrastructure development.
The impact of increased investment in transport infrastructure is widespread but policy makers should not presume that these infrastructural investments would directly or inherently lead to economic development in a city like Kochi. In alignment with the literature, policy recommendations would be to increase private sector investment in transport infrastructure. Then public investment will naturally increase as the city’s economy grows and GDP increases.
In conclusion, policy makers should not make the presumption that heavy public investment into transport infrastructure will lead to economic growth, but rather that public investment should follow trends of increasing GDP in a country or state. When working with theoretical conceptualisations, it is imperative to acknowledge the uniqueness and complexity of cities, and that the relationship between transport infrastructure and economic growth differs from city to city and may change as social, political and environmental landscapes change.
*Sarah Reeves is Reearch Intern at CPPR
References
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