Economic Development Impacts
Evaluating How TDM Impacts Productivity, Employment, Business Activity and Wealth
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Victoria Transport Policy Institute
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Updated
23 July 2008
This chapter examines the relationships between transport and economic development, and the effects of mobility management. TDM can help create a more efficient transport system that increases productivity and economic development. It reduces external costs borne by businesses, making them more competitive. TDM tends to shift consumer expenditures toward goods that increase overall employment and business activity.
Transportation Impacts on Economic Development
Impacts on Business Activity and Location
Impacts of Roadway Investments
Impacts of Automobile Expenditures
Impacts of Investments in Alternative Modes
Economic Impacts of Smart Growth
Decoupling Economic Growth and Transport Activity
Transportation policy decisions can affect travel options and activities in ways that have profound effects on economic activity. For example, if transport policies favor automobile travel, with subsidized fuel and road costs, wide roads designed for high speed travel, abundant parking facilities and dispersed, people will be forced to drive a lot, forcing consumers and businesses to devote a large portion of their budgets transport, and devote a large portion of import exchange to vehicles and fuel. If transport policies are more multi-modal, with more vehicle user charges, better travel options, and more accessible land use patterns, consumers and businesses will spend less on transport, and the country can devote less import exchange to vehicles and fuel. If the country is an oil producer, it will have more petroleum to sell abroad.
Economic Development refers to progress toward a community’s economic goals, including increases in economic productivity, employment, property values, business activity, investment and tax revenues. Economic development reflects qualitative factors such as human health, environmental quality and equity, and so can differ from economic growth, which reflects only the quantity of material wealth (Sustainability). For example, Gross Domestic Product (GDP), an indicator of economic growth, counts medical costs and environmental cleanup as positive economic activity and assigns no positive value to actions that prevent illness or environmental degradation. Economic development indicators attempt to take into account qualitative and non-market values (Cobb, Halstead and Rowe, 1998).
Various techniques can be used to measure the economic impacts of a particular transportation policy or project, including transportation-land use models, benefit-cost analysis, input-output models, economic forecasting models, econometric models, case studies, surveys, real estate market analysis and fiscal impact analysis (Cambridge Systematics, 1998; Weisbrod, 2000; REMI, 2005; Weisbrod, 2007).
Many people assume that since motor vehicle ownership and use tend to increase with economic development, motor vehicle travel must support economic development and TDM strategies that reduce vehicle travel must be economically harmful. Transport planning decisions are sometimes portrayed as a tradeoff between the economic development benefits of increased mobility, and social and environmental benefits from reduced demand. But, TDM can support economic, social and environmental objectives simultaneously, by increasing overall transport system efficiency.
Transportation affects economic development in three ways:
Transportation is a major factor in the production of most goods and services. Transportation delivers raw materials to factories and finished goods to markets. It delivers employees to worksites and meetings, and allows customers to reach markets. Even information-based businesses that distribute final products by Internet require physical mobility to obtain necessary resources including employees, equipment, office materials and espresso.
In general, policies and programs that reduce transport costs increase economic competitiveness and development. For example, if two farmers have equal production costs but different transportation costs, the farmer with cheaper transportation will earn greater profits. A major UK Treasury study estimates that a 5% reduction in travel time for all business travel on the road network would generate savings equivalent to approximately 0.2% of GDP (Eddington, 2006).
Transportation costs vary from one industry and producer to another. It represents a significant portion of total costs in many resource-based industries, and so a modest change in transportation costs can have a major impact on their profitability. However, transport represents a much smaller portion of costs in other industries, and this portion is declining, as indicated in Table 1.
Table 1 Transport
Inputs and Economic Output (BTS, 1999)
|
|
Farm Ing |
Min- Ing |
Const- Ruction |
Manuf. |
Utilities |
Retail |
FIRE |
Service |
Other |
Total |
|
Industry Output, 1992 |
238 |
157 |
679 |
2951 |
521 |
1092 |
1,655 |
2,228 |
914 |
10,434 |
|
Industry Output, 1996 |
290 |
173 |
868 |
3,666 |
661 |
1,454 |
2,148 |
2,962 |
1,085 |
13,306 |
|
Percent Change |
22% |
11% |
28% |
24% |
27% |
33% |
30% |
33% |
19% |
28% |
|
Transport Inputs 1992 |
19 |
6.7 |
53 |
102 |
10 |
52 |
11 |
64 |
5.2 |
322 |
|
Transport Inputs, 1996 |
22 |
6.5 |
65 |
117 |
12 |
68 |
13 |
81 |
8.6 |
392 |
|
Percent Change |
18% |
-3% |
24% |
14% |
19% |
31% |
18% |
27% |
65% |
22% |
|
1992 Transport as % of Output |
8.0% |
4.3% |
7.7% |
3.5% |
1.9% |
4.7% |
0.7% |
2.9% |
0.6% |
3.1% |
|
1996 Transport as % of Output |
7.6% |
3.8% |
7.4% |
3.2% |
1.8% |
4.7% |
0.6% |
2.7% |
0.8% |
2.9% |
Transport as a portion of output varies significantly from one industry to another, and is declining for the economy overall.
Transportation improvements that reduce transportation costs can increase industrial productivity, competitiveness and profits. For example, if a new road or rail line reduces shipping costs from an isolated region, farmers may expand their production, hire more workers and purchase more equipment at local stores, increasing economic development in that area. However, policies that reduce transportation costs by shifting them elsewhere in the economy are economic transfers rather than true efficiency gains. Unless justified on other grounds, such transfers are market distortions that reduce overall productivity (Market Principles). For example, a government may try to stimulate economic development in a particular region by subsidizing transportation for farmers there. Such subsidies require funding from other industries or regions, and the subsidy reduces the incentive to improve farming and transportation efficiency. As a result, although a certain type of farm production may increase, overall economic development declines.
Transportation is a major consumer good. A typical household spends 15-20% of net income directly on transportation, plus indirect costs, such as housing expenditures for residential parking, and taxes for transportation facilities. These expenditures support transportation-related industries, which have significant economic impacts.
Transportation activities impose external costs including traffic congestion, road and parking facility costs, land requirements, uncompensated crash damages, pollution, and delay to non-motorized travel (Transportation Costs). These external costs can reduce economic productivity and development. For example, traffic congestion and parking subsidies increase business overhead costs, roadway costs increase tax costs, and pollution can reduce farming and tourist industry productivity. Policies that reduce these external costs can increase economic development.
|
The Location Paradox Modern transportation
systems allow economic activity to be mobile. For example, automobile
transportation allows commuters to live anywhere in a region rather than near
worksites, and modern logistics allow factories to locate around the world
rather than near raw materials or customers. However, this tends to
increase rather than reduce the importance of location for many economic
activities, which is called the location
paradox (Porter, 2000). Because many economic activities are highly
mobile, location-based factors can become more important in determining
economic competitiveness and development. For example, if workers can locate
anywhere within a region, neighborhoods with more attractive social and
natural environments, better schools and public services will gain
competitive advantage. Similarly, if most production activities are mobile,
industries will tend to cluster in certain areas to maximize access to talent
(industrial experts and specialized support services will tend to locate
together). This explains, for example, why industries such as software
development, motion picture production and high level finance have become
more concentrated over time, despite the high degree of mobility of their
products. Many businesses are more
productive if they locate near an industrial cluster, a major commercial
center or a university, and they can pay employees less if they are located
in an attractive community or in areas where travel costs are minimized. Creating
the optimal balance between these factors is key to industrial competitive
advantage. A modern, knowledge-based economy will tend to be more rather than
less sensitive to transportation system efficiency and community livability.
As a result, transportation Demand Management can make important
contributions toward economic development. |
It is possible to have too much of a good thing. Many economic good exhibits diminishing marginal utility: unit benefits decline with increased consumption. For example, if you only eat one meal a day, a second daily meal provides significant benefits, and a third daily meal is also worthwhile, but a fourth meal may provide little additional benefit, and a fifth or sixth daily meal may be harmful overall.
Similarly, if increase your travel from five to ten automobile trips a week, each additional trip will probably provide significant benefits. But if you increase travel from twenty to twenty five automobile trips a week, the value of the additional trips will probably be small because they consist of increasingly less valuable trips. A certain amount of mobility provides significant economic benefits, but that does not mean that more mobility is always better. There is an economically optimal level of automobile use beyond which increased driving is overall harmful to society.
The best way to determine optimal consumption levels is to let consumers decide in an efficient market. Such a market must reflect certain principles, including consumer choice, competition, optimal pricing and economic neutrality (Market Principles). A transportation market that reflects these principles maximizes economic efficiency, productivity and development.
Current transportation markets violate market principles in several ways, as indicated in Table 2. Although individual distortions often appear modest and justified (for example, businesses consider it reasonable to provide unpriced parking to employees and customers, and public officials consider it reasonable to provide unpriced roads and subsidize public parking), their impacts are cumulative and synergistic. Underpriced roads not only cause excessive congestion and road wear, it also increases parking costs, crash costs and pollution emissions. Underpriced parking not only causes inefficient use of parking facilities, it also increases congestion, crashes and pollution. These distortions have large total impacts on the economy.
Table 2 Transportation
Market Distortions (Market Principles)
|
Market Requirements |
Common Transport Market Distortion |
|
Choice. Consumers need viable choices, and information about those choices. |
Consumers often have few viable alternatives to owning and driving an automobile, and living in automobile dependent communities. |
|
Competition. Producers must face competition to encourage innovation and efficient pricing. |
Most roads and public transit services are provided as public monopolies. There is often little competition or incentive for innovation. |
|
Cost-based pricing. Consumer prices reflect marginal costs. There should be no significant external costs unless specifically justified. |
Automobiles use is underpriced: most costs are either fixed or external. Lower-density, automobile dependent land use patterns are also underpriced. |
|
Economic neutrality. Public policies (laws, taxes, subsidies, and investment policies) must not favor one economic activity over others, unless specifically justified. |
Many public policies favor automobile use including dedicated road funding, automobile-oriented planning and investment practices, and zoning laws that require generous parking. |
A fair and efficient market must reflect the principles in the left column. Transportation and land use markets often violate these principles, as described in the right column.
These market distortions result in excessive vehicle ownership and use (“excessive” meaning more than would occur in a more efficient market), which increases total transport costs and creates more automobile-oriented land use patterns. These additional costs are equivalent to a tax on businesses and consumers that reduces productivity.
This is not to suggest that automobile use is bad or would stop altogether in a more optimal market. Automobile travel is the most efficient option for many trips. But market distortions cause automobiles to be used in inefficient ways. For example, if the full cost of an urban-peak automobile trip (including vehicle, roadway, parking and external costs) is $10, and vanpooling or transit would only cost $5, automobile travel would be inefficient, at least unless consumers are willing to pay the extra $5 for the pleasure of driving rather than using alternatives. Put another way, current transport markets fail to provide consumers with the full savings that result when they reduce their vehicle use, because many costs are fixed or external. Although reduced driving reduces traffic congestion, road and parking costs, crash risk, insurance claims and pollution, these benefits are widely dispersed, rather than returned to the individual motorist who reduces mileage.
In more efficient transport and land use markets, consumers would reduce their automobile use and be better off overall as a result. Transport policies that correct market distortions tend to increase economic efficiency and productivity. Many TDM strategies do this by improving consumer choice and competition, more efficient pricing, or creating more neutral planning and management practices, as indicated in Table 3. Virtually all market-based transportation reforms are considered TDM strategies. Some TDM strategies require subsidies, but these are sometimes justified on equity grounds (to benefit people who are transportation disadvantaged), and on “second-best” grounds to offset existing automobile subsidies (Transit Evaluation).
Table 3 TDM
and Market Principles (Market Principles)
|
More Consumer Choice |
More Efficient Pricing |
More Neutral Planning |