Transport can have a positive impact on the local economy, although the role of transport in stimulating growth is not as clear-cut as assumed by many decision makers.

Why transport?

Transport infrastructure and services are fundamental public goods that affect the way societies and economies function. Local decision makers will want to take many factors into account when deciding local transport policy, but our focus is on the narrower issue of understanding the economic impact.

There are two main economic aims of transport spending. First, to reduce transport costs to businesses and commuters (for example by reducing congestion – and thus saving time – or by reducing fares). Second, and related, to stimulate the UK and local economies, for example, by raising the productivity of existing firms and workers or by attracting new firms and private sector investment. To meet these policy aims requires an understanding of whether we are spending enough and on the right things.

To help answer this question, our review summarises some of the key theories and evidence regarding the impact of transport on the economy – with a particular focus on the lessons that we can draw from the limited number of available impact evaluations.

The basic message that emerges from our review is that the economic benefits of transport infrastructure spending – particularly as a mechanism for generating local economic growth – are not as clear-cut as they might seem on face value. In turn, this raises fundamental questions about scheme appraisal and prioritisation and about the role of impact evaluation in improving decision making around transport investment. For more on this, click through to the section of  filling the evidence gaps.

The economic aims of transport spending

For a country like the UK with a well-developed transport network, we can identify two key policy aims (Gibbons, 2015). The first is to respond to growing demand so that increased congestion, longer travel times and higher costs to producers and consumers, do not constrain growth. On the basis of this kind of “ameliorative” argument, we should invest more in places where the economy and transport demand is growing.

One concern with this approach is that making travel easier in this way simply encourages more travel. If this happens, it may divert resources from other places and sectors, with little economic gain and big environmental costs. Another concern is that this kind of policy may exacerbate spatial inequalities by targeting resources at places which are already prosperous and growing.

A second aim of transport spending is to stimulate local economies. That is, to drive growth in the local economy, rather than just respond to it. Arguments for greater investment to meet this objective are based on the idea that lower transport costs allow for the more efficient allocation of existing resources. For example, a considerable body of evidence suggests that connecting people, firms and places more closely generates “agglomeration economies”, which increase productivity. Lowering transport costs also increases private sector returns and this may stimulate investment.

Building on these ideas, a number of recent reports have argued for greater investment to stimulate national growth, and also to tackle spatial disparities within the UK (e.g. City Growth Commission 2014). To meet the latter objective, such reports argue that we should target more resources to places where economic performance is lagging, in order to stimulate growth.

The high profile Eddington Review of the UK’s transport network focused more on the first of these issues. It highlighted the problems of congestion and the potential economic benefits of an improved system estimating that a 5% reduction in travel times nationally would be worth around 0.2% of GDP annually (Eddington 2006). The report argued that the UK was already well interconnected, and recommended that improvements should focus on increasing the performance of the existing network through management and pricing.

The key policy priorities the Eddington Review identified were growing and congested areas, urban areas, and major congested inter-city links. According to this analysis, transport infrastructure investment should aim to relax the constraints that a congested system imposes on travel and business costs. Investment should be targeted to places where there is growing demand for transport, implying that investment should flow to the fastest growing cities and regions.

The LSE Growth Commission (Aghion et al 2013) echoed many of these conclusions, and proposed a set of new independent institutions to unblock major transport infrastructure planning decisions – including a Strategy Board to determine long-term infrastructure plans (then ratified by Parliament), a Commission to deliver this plan (including generous compensation for losers to deflect Nimbyism) and an Infrastructure Bank to help with both finance and private expertise.

As the LSE Growth Commission report demonstrates, little has changed about our understanding of the interactions between transport and the economy since the Eddington report was written. However, since 2007 the Great Recession has led to a renewed focus on disparities between major cities (London in particular) and the rest of the country. In turn, this has raised questions about the extent to which transport investment could help narrow these disparities. For example, a recent report by IPPR (Cox and Davies 2013) on regional infrastructure issues highlighted stark differences in planned spending per person in different regions, and argued for greater spending in lagging areas in the North of England. Recent reports such as these have once again raised the question of whether we can stimulate economic activity – locally, regionally or nationally – through infrastructure investment, rather than simply targeting it to meet underlying demand. This question is central to our understanding of the role of transport investment in improving local economic growth and is the main focus of our review.

The effect of transport investment on local economic growth

There are two ways of structuring our thinking about the likely economic impact of infrastructure investments. The first views public sector infrastructure investment as providing a capital stock that is complementary to private sector physical capital (i.e. machines and buildings) and to human capital (i.e. skills). The second thinks of infrastructure as providing a network that connects different places so that public sector investment reduces the transport costs between places.

The first way of thinking suggests that providing more infrastructure will always improve area level productivity (Jones, 2013). Of course, infrastructure can be very expensive so these productivity benefits might be outweighed by the costs of provision. This disparity between productivity benefits and costs may be particularly acute when infrastructure is used to try to turn around struggling local economies. Because infrastructure is durable, places that have seen slow growth will tend to have relatively large amounts of infrastructure per person. The concrete manifestation of this are relatively low congestion levels in poorly performing cities. Economic theory – supported by empirical evidence - suggests that adding further transport investment in those places may not do much to improve productivity. In contrast, investing in congested places will tend to deliver higher returns because the congestion reflects the fact that these places have low infrastructure per person. Of course, these are general tendencies which don’t rule out the possibility that specific projects may have larger impacts in poorly performing cities (and vice-versa).

The second way of thinking about infrastructure – as a network that connects different places – provides more mixed messages; particularly when it comes to better connecting rich and poor regions regions (Baldwin, et al; 2005). One way to think about these types of transport investment is to view enhanced integration as a way of increasing the effective size of the local economies. As a larger local economy means higher agglomeration economies this should help firms be more productive.

There are two important caveats concerning this line of reasoning. First, the available empirical evidence suggests that agglomeration economies may attenuate quite quickly with distance. It is not clear, therefore, whether connecting different cities will always generate significant agglomeration benefits.

Second, lowering transport costs may encourage firms to move into the richer market and serve their customers from there. This ‘two way roads problem’ is poorly understood, leading some policymakers to focus solely on the benefits to the poorer market – rather than thinking through the ‘threats’ from greater competition.

As is clear from the evidence we've reviewed, much more empirical work remains to be done on understanding the impact of infrastructure improvements on local economic growth. Theoretical analysis certainly urges caution in assuming that infrastructure investment can stimulate growth in poorly performing areas. In short, while infrastructure investment may be vitally important for growing cities, its role in stimulating growth is not as clear-cut as assumed by many decision makers.

Definition of Transport

Transport improvement projects are broad in scope, not only in terms of the transport mode (see below), but also in terms of the type of interventions. Three broad types of interventions were considered as part of this review:

  • Physical intervention – i.e. the expansion and improvement of transport infrastructure. This could either include the building of new routes and facilities, or through making capital improvements to existing ones (e.g. increasing highway capacity through junction upgrades or extra lanes).
  • Service enhancement – i.e. where the physical layout of the transport infrastructure remains unchanged but where its quality is increased (e.g. improvements to reliability, increasing service frequency).
  • Revenue projects – i.e. changes to the way existing transport infrastructure is supplied and consumed. This can be split into two further groups:
    • Pricing interventions / subsidies – e.g. fare subsidies, car-pool lanes, congestion charges etc.
    • Sectoral service change – changing the ownership or operation of transport services, e.g. privatisation or nationalisation.

Whilst evaluations from all three groups were included during the search phase of the review, ultimately the majority of the articles meeting the Centre’s standards focus on physical interventions to expand / improve infrastructure.

To help order the large amount of literature (around 2,300 policy evaluations and evidence reviews), studies were split by mode as follows:

  • Road.
  • Rail – covering a range of types, including high speed, regional, urban, and light (e.g. subway) rail infrastructure.
  • Non-rail public transport – e.g. trams and buses.
  • Walking and cycling.
  • Ports.
  • Airports.
  • Multi-modal.

Our transport report covers evidence on roads, rail (including light rail and subways), trams, buses, cycling and walking – areas of expenditure which account for the majority of transport spending that will be considered by local decision makers. 

Related Content

Register for WWG Updates