Texas Toll Roads: The Flawed Benefits and Costs

by Alexander Simmons

As Texas is faced with a burgeoning population and further economic development, its poor transportation infrastructure becomes a greater issue. In the past decade, the state has chosen to address this problem through toll roads financed by public-private partnerships. Currently, Texas lawmakers are debating building new toll roads or converting already existing highways into tolls. In theory, tolls help improve the mobility of the local population, prevent congestion, ameliorate road quality, decrease the amount of time needed to construct roads, increase development, boost productivity from time saved, and avoid tax increases. Many of these benefits are indeed factual and have little tradeoff; however, others are flawed. Moreover, there are costs associated with toll ways that policymakers seem unaware of. With its already widespread usage and possible expansion, it is important that policymakers consider the tradeoffs associated with toll roads.

Flawed Benefits

Congestion

Theory states that new toll roads decrease congestion by providing new road alternatives. However, toll roads often only solve congestion problems for a small portion of the population. Residents within a mile from the toll road usually get the highest amount of usage, while those further away are relegated to other more congested routes. Additionally, many citizens cannot financially afford to drive tolls regularly. Thus, there ends up being a lopsided share of traffic between the two road networks and lifestyle inequality. The toll ways are usually uncongested and sometimes receive sparse usage, while the free roads face heavy traffic that result in travel times that are twice that of the tolls.

Development

Theory urges that toll ways improve consumer access to local business and thus, further economic development along the road. However, there is little evidence to support this in the short run. According to Sukumar Kalmanje’s research, Texas toll ways attract additional trips to local business by a negligent 1% and thus, have almost no effect on short-term development. Although, in the long run, it is likely that economic development will follow the route of the toll way and lead to agglomeration. Unfortunately, there is not enough evidence from Texas toll ways to support this argument.

Tax Increases

Due to Texas’s balance budget requirement, road funding cannot be done without either cutting another government program or increasing taxes. In theory, toll ways opt as a method of building roads without increasing taxes. Yet, tolls are essentially a consumption tax on driving. Instead of paying a road tax in a lump sum, residents contribute on a daily basis.

Costs

Toll Price Increases

Currently, all toll contracts in Texas grant private contractors the right to raise toll prices on an annual basis. These increases are often tied to an inflation based index or revenue maximization formula. Proponents insist that road prices should increase proportionally with the prices of other goods. However, this argument ignores importance of roads. Consumers have the option to remove other goods from their consumption basket, but cannot do the same with driving. Additionally, price increases are allowed during recessions or oil shocks and successfully worsen downturns.

Politically Unpopular

There is widespread distain for tolls in Texas. Despite their many benefits, Texans view them as a form of double taxation and resent the constant increase in prices. At some point, the general consensus of the population must be considered by representatives.

Unwanted Foreign Influence

Since most toll roads in the United States have been built by public agencies, there is virtually no private sector toll industry. Therefore, large toll contracts are frequently given to foreign companies. In the midst of an economic downturn and growing concerns of globalization, many critics cite this as a poor economic practice and claim it exposes the United States to security risks. In reality, the foreign firms originate from strong ally countries and employ almost entirely Americans on the projects. Thus, the foreign influence has no measurable negative effect. However, while this argument is not realistic, policymakers still must consider the general perception of the public.

Opportunity Costs

As with any government sponsored project, there are opportunity costs policymakers should consider. In this case, it its best to look at the opportunity costs within transportation infrastructure improvement. For instance, funding could be directed to public transportation options, which are severely lacking in Texas. If the general stigma attached to public transportation in Texas could be overcome, the economic gains and those that benefit could be much greater than in any road project. However, large scale public transportation projects require a substantial investment and at this point, there is little political support for such spending.

Conclusion

As policymakers debate about how to solve Texas’ infrastructure issues, it is important that they properly measure the often cited benefits of toll ways with the costs mentioned above. If purely publicly funded roads without tolls are no longer an option due to budget constraints and public transportation projects are off the table, toll roads built via public-private partnerships may indeed be the best option for Texans. However, this does not mean that policymakers can accept toll projects naively and ignore taxpayers’ opinions. 

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Crossing the Scandinavian Waters: Oresund Bridge

by Katalin Molnarfi

Copenhagen is a fairly small, but rather cool and well-run city, dressed with posters advertising green energy. Though nothing characterises it more than its delicate Oresund Bridge, the longest of its type in Europe, and winner of the IABSE Outstanding Structure Award. Board a train in Copenhagen and in a comfortable twenty minutes you will find yourself in Malmo, Sweden's third-largest city. The Copenhagen international airport is also a mere fifteen minutes far away, connecting the bridge with the rest of the world. This year marks the 11th anniversary that Sweden and Denmark opened their much-talked-about bridge-and-tunnel across the Oresund strait, four months ahead of the original schedule and under budget . Yes, ahead. These Nordic people are an exceptionally professional bunch.

Denmark with its more than 400 islands is understandably ideal for bridge-lovers and already boasts two of the world's most impressive: the Great Belt Fixed Link between East- and West Denmark, and the Oresund bridge. And how about linking eastern Denmark more directly with Germany’s Baltic Sea coastline, a three-hour direct journey to, say, Hamburg? The government has already announced an even grander project for the country's biggest large scale fixed-link: a 19-kilometre road and rail bridge across the Fehmarn strait between Denmark and Germany in order to create a new growth area, similar to the development that has taken place in the Oresund region .

Birth of a new region

The Oresund brigde undeniably folstered growth, giving boost  to both Malmo and Copenhagen. It was designed to serve an explicit dual purpose: cross-border integration, with a particular emphasis on regional productivity, and competitive vitality, as well as the concentration of the North-European pattern of traffic flows. It should function as a backbone of the Oresund Region in order to abolish economic, administrative, institutional, cultural and other barriers, in one common urban system - the integration of Greater Copenhagen and the Malmö-Lund agglomeration, while encouraging citizens to cross the shared border more easily, and give incentives to foreign investors to use the area as a hub of development. Today's Oresund region  with a population of over 3 M produces 26-27 % of Sweden and Denmark's joint GDP, being of  the the most buoyant region in Scandinavia.

A common labour market

The bridge has turned the Oresund area into a single job market. As the  time-distance barrier was reduced dramatically, and the land-see bottleneck was eliminated, the traffic is steadily increasing: every day: 20.000 people commute to work between Sweden and Denmark. A daily average of 19.400 vehicles crossed the Oresund bridge in 2011. All forms of trafic have increased, but commuting has shown the strongest increase by far. Though the past three years brought low growth years for the bridge, mainly as a result of a sharp fall in economic activity caused by the turmoil of the financial crisis, the traffic did not decrease until 2010 (also due to the Swedish krona, which then recovered its former strength in 2010). In addition to greater accessibility, growth in commuting has been driven by the dramatically rising house prices, as well as the increased workforce shortages in the Greater Copenhagen area. Commuting is, therefore, embarassingly one- directional, with around 96 per cent of all commuters living in Sweden and keeping their jobs in the other side of the Oresund. In general, commuters are well-educated and well-paid young people, being pronounced targets of the bridge's policy.

Nordic countries: a happy family?

Nordic identity is alive and well: these countries have a great many things in common, though the Swedes and the Danes were not always the best friends through history (the Oresund area was under Danish authority until 1658). There is certainly a Nordic way of doing business for instance, with consensus as its main watchword. The Nordics put  greater emphasis on partnership and co-operation than most other European counterparts. Then there is religion, Martin Luther, whose reforms left a powerful cultural and moral legacy, leading to exceptionally successful, export-oriented economies. However if the two countries on both sides are to prosper together, Danes and Swedes will have to make efforts of further harmonising labour, tax and social policies. The Oresund region could therefore become a laboratory of transnational regional co-operation within the EU. Development towards a bi-national, integrated, functional urban region is in progress, though the space is much slower, than expected, but doing fairly well. 

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Importance of the First Nature Geography in Regional Development

by Otabek Saydikaharov

Spatial inequality in a country could be because of the natural advantages of some regions comparing to others and also due to the agglomeration effects which might lead to clustering of activities. Advantage of first nature geography simply means that being close to rivers, coasts, ports, forests etc. some regions may benefit from natural endowments through specialization in certain type of activities like fishing , growing crops and forestry. A few decades ago, there were two regions in Uzbekistan, Karakalpakstan and Khorezm benefiting from water endowment of Amudarya and Syrdarya rivers and of formerly one of four largest lakes in the world, the Aral Sea. During the Soviet Union, Karakalpakstan and Khorezm specialilised in rice production and were one of the main rice-producing regions in the Soviet Union. After the independence those regions’ specialization did not change and they continued to be Uzbekistan’s largest rice producing regions.

However, during the Soviet Union period two main rivers which are sources of the Aral Sea, the Amudarya and Syrdarya, were channeled only to irrigation and substantially used for agriculture especially in the aim of increasing the amount of cotton and rice production. Unsustainable irrigation projects like a massive irrigation in the Kyzylkum Desert were introduced during this period, and continuing irrational use of water sources after the collapse of Soviet regime created a very serious problem - the evaporation of Aral Sea (see figure 1).

The disaster of the Aral Sea caused huge devastating economic problems especially for the local people in Karakalpakstan and Khorezm who were generating their income only depending on the endowments of the first nature geography. In rural areas of these regions majority of population depend on their farming lands for the livelihood however because of water shortages these lands adversely affected and polluted and as a consequence local economy decreased and rural population encountered economic hardship, malnutrition and illness. The drought in 1999-2001 had a severe effect on Karakalpakstan’s rice production. The agricultural land area decreased and total rice production fell from 414,000 in 1999 to175, 000 tons in 2000.

Once in Karakalpakstan tens of thousands of people were employed in fishing industry but now as a result of careless use of first nature geography this industry no longer exists causing the increase in unemployment rate and threat to poverty. According to the assessment of certain organizations the drying up of the Aral Sea has led to direct and indirect socioeconomic costs of USD 144 million in total.

Substantial amount of chemical pesticides were used in lands to increase the cotton production, and later when country faced water shortages those lands instead turned to be the source of danger. Winds then scattered the dust of chemicals to the surrounding areas causing health problems for the habitats and also damaging the agricultural deeds. According to observations, there are up to 10 major dust and salt storms occurring a year in the region and they are often between 150 and 300 km wide. In these regions, people are mostly suffering from protein and vitamin deficiencies resulting from malnutrition as well as anemia, tuberculosis, immunological problems, birth defects, children’s liver, kidney and respiratory diseases because of ecosystem contamination. The increase in levels of such various diseases has already become one of the main concerns of the government.

Due to the irrational immense use of first nature and myopic regional policy in the past, the current government encountered long term adverse impact of past experience. In order to increase the production of cotton and rice in water abundant regions so as to increase export, careless use of water resources brought huge cost to the government.  The government has been looking for possible ways to recover the Aral Sea and consequently ecosystem condition of that region. One of the options was to bring water from Caspian Sea but after estimations it was found to be too costly. Since it was believed that there is no way which can totally recover the previous condition of Aral Sea regions the government let the habitats of Karakalpakstan and Khorezm to migrate to the capital and get residence permit without any difficulties. As a result of huge migration and increased demand for houses, house prices soared up in the capital which made much more difficult situation for middle class citizens to buy a house in the city.

Since first nature geography matters a lot in the process of individuals’ and firms’ decision making about locations to live or operate, each policy implemented by government should also take its importance in regional development into account. Otherwise, adverse impact might occur and cost the government considerably in the long term as happened in Uzbekistan.

Figure 1. The Shrinking of the Aral Sea: Socio-Economic Impacts

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History Matters: Two Significant Barriers to the Regional Policy of Mongolia

by Manlaibaatar Zagdbazar

According to the New Economic Geography theory, history matters because increasing returns to scale generate positive feedbacks that tend to cause economies to “lock in” to particular locations. Here, however, I would like to analyze other kind of reasons to show that history really matters.

1) Path dependence in railway standards.

As railways developed and expanded, one of the key issue was that of the track gauge (the distance, or width, between the inner sides of the rails) that should be used. A large part of the world uses a "standard gauge" of 4 ft 8 1⁄2 in (1,435 mm), while the former Soviet Union countries use a “broad gauge” of 5 ft (1.524mm). When a railway line of one gauge meets a line of another gauge, a break of gauge occurs, which entails big cost and inconvenience to traffic that passes from one system to another. For example, Transmongolian Railway, where Russia and Mongolia use broad gauge while China uses standard gauge; on the border, each carriage has to be lifted in turn to have its wheels changed. The whole operation can take several hours.

This challenge of gauge size does not only inhibit the trade between China and Mongolia, but also makes it more difficult to implement many regional projects in South and East Mongolia – greatly endowed regions full of mineral resources and suitable for other development potentials. In the picture shown below, red dashed lines are new railroad building projects that use “broad standard” gauge. Unfortunately, no one wants to invest into these projects because they still have the break of gauge problem with China’s railways.

2) Political and psychological inertia.

The country of Mongolia is divided into 21 provinces and the capital city. Provinces are subdivided "sums", in total number of 331 items. Such “patched” administrative division is too costly for only 1 million of rural people (total population of Mongolia is about 2.7 million), because each sum has a permanent settlement as administrative center having its own secondary school and dorm, a hospital, a cultural center, and police that are subsidized by central government. To demonstrate, in most sums, school has only few students, while required operational costs are huge: salary for teachers, building maintenance costs, and heating, especially during very cold winter. All these costs cannot be well reasoned under low quality of education. 

Historically, this administrative division was inherited from the socialist time and was originally created to develop the network of collecting livestock by-products. Now, as people migrate to big towns, these artificial administrative centers are being almost deserted. For last two decades, some politicians tried to change the situation by creating bigger administrative units which were supposed to be more efficient and natural, but the majority of politicians and public were against this idea, being morally and emotionally used to having these old units. In addition, the Constitution and the Election code also make it difficult to change the old system and, therefore, “locked in” inefficient artificial spreading still exists.

Consequently, in real life, regional policy can face bigger historical barriers than initially expected. If you create and find better solutions you have to invest enormous amount of efforts and resources to implement it. 

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Trans-Siberian Railway: Voice of Siberia

by Ekaterina Serikova

Do you know where Siberia is located? Some Europeans feel that it is just “too far”. I would not exaggerate by saying that even Russians do not always know exactly where this region is located, assuming the periphery of it. However, it would have been even worse  if  in  the  20th   century  the  general  governor  of  Eastern  Siberia  N.  Muravyov- Amurskly did not start to build Great Siberian Way that connected central Russia with Siberia. This railway had significant influences on many areas’ development where it was built, while analyzing its impact on the development of Siberian region is of particular interest. The goal is to show how government  infrastructure projects can give live to economy of a particular region, entailing certain extent of policy selectivity and a matter of history.

The  project  heavily  affected  the  Siberian  region  in  several  aspects:  industry development, trade, labor mobility, foreign investments, and international relations.

Siberia was a huge and well-endowed region, having huge reserves of coal and peat, more than 50% of the whole of Russia’s forest reserves, lots of gold fields, salt, and non- metallic minerals.  Obviously, the Railway aimed to take advantage of these industries, which caused their rapid development. For  example, the changes in gold industry was caused not only by increased gold extraction, but also by structural changes, such as the switch from manufactures to modern factories as well as technical renewing due to easier transporting of necessary inventory and hardware. Thus, despite the Russian-Japanese war, average yearly gold extraction in 1901-1910 was 2289 poods1, which is 127% higher than during the last decade of the 19 century2.  Since the railway needed fuel, coal industry advanced a lot: by 1910 coal extraction already constituted 7% of total Russian coal extraction. Being mostly developed as “servicing” industry for the railway, coal industry growth also improved technological progress in other industries, switching them away  from  firewood   usage.  Other  industries  mentioned  above  were  also  raised significantly: salt, wood, and butter was exported heavily.

Obviously, such intensive industrial growth attracted huge capital inflow in the region. By 1912 a large net of trade places was already created: 60,000 retail shops, total trade in the Siberian part of the railway increased more than in 4 times in 1900-1913.

The Railway also led to the movement of labor to the cities located along the way, which can be explained  by people’s expectations of higher wage and access to larger market. Consequently, the cultivation area was extended together with agriculture growth and increased specialization. 80% of all imports of agricultural machinery in Russia were sent to Siberia because there were huge amount of unused land and lots of labor that came  because  of  the  Railway.  Later,  these  places  became  the  largest  and  the  most developed  Siberian  cities  with  the  highest  land  rent  –  Novosibirsk,  Irkutsk,  Omsk, Krasnoyarsk, which are still fundamentally important  Siberian cities. The creation of large cities and movement of labor into them, however, caused demise of  previously popular trade places, such as the Irbit fair that stayed more than 100km away from the Railway.

However, the overall impact of the railway was not as positive as it seems to be: many economists claim that the Great Siberian Way was the cause of making Siberia a “raw materials adjunct” for the whole of  Russia. As we can observe, development of local industries was not symmetric, it mostly favored industries  that  were connected closely with the needs of the railway. For example, metallurgy died as fast as it was raised  due to railway needs: smelting cast ironing was 540,000 poods in 1895 versus 150,000 poods in 19082.

Beside  this,  relations  between  Russia  and  China  began  to  develop  sharply: merchants from Siberia moved to China as well as a huge number of swindlers flowed into Siberia being attracted by high  profits. The rise of local and international trade caused progress in banking sector: by 1912 there were  already  106 bank offices in Siberia. However, they were mostly involved in trading finance instead of local heavy industry financing.

Being started from a local project connecting central Russia with Siberia, now Trans-Siberian Railroad is the largest international railway in the world that connects Far East with Western Europe, reaching 5,867 miles in length. For the country, it is also the source  of  income  which  has  increased  throughout  the  time  together  with  increased international trade and railway’s capacity. After 100 years of existence, this Railroad can still offer perspective alternatives for the future: there is a plan of prolonging the Railway to Sakhalin Island over the Nailski Strait, which will connect Eurasia with Sakhalin3.

Trans-Siberian Railway demonstrates a dramatic support of successful government interventions  in  economic  life  and  regional  development.  Despite  policy  selectivity favoring some particular places  (cities  along the railway), such interventions can be vitally essential for initial economic development of far regions.

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Have Citizens of Belgrade Paid Too Much?

by Snezana Ilic

In everything that man pushes by his vital instinct, builds and raises, nothing is more beautiful or more precious than bridges. Bridges are more important than houses, more sacred because they are more useful than temples. They belong to everybody and they are the same for everybody, always built in the right place in which the major part of human necessity crosses, more durable than all other constructions and they do not serve for anything secret or bad.

Using those words the Yugoslavian writer who was awarded the Nobel Prize for Literature, Ivo Andric, explained his ardor for bridges almost 50 years ago.

The Sava Bridge, Belgrade, Serbia

A few months ago, when I saw  the newly built bridge on the Sava River in Belgrade, Serbia -  I felt the same enthusiasm. The bridge is standing proudly and waiting to be officially opened for traffic in December 2011, aiming to become the new symbol of the city.

The necessity of the bridge is clear having in mind that the city is situated on the constellation of two rivers, the Danube and the Sava, and has 1.7 million residents  with only two functioning bridges across the rivers to connect the old part of the town (The Old Belgrade) and the new one which stands for business center (The New Belgrade). Furthermore, the bridge represents the missing element of the The Inner Major Half-Ring (UMP)  that connects Western and Northern part and much larger area of the city.

However, the opponents of this construction were very loud in the years before the building started. Many architects stated that this bridge would present physical danger, and it would be unsuitable to build a main road through the city core which would give to the residents of Belgrade an enormously expensive and dysfunctional bridge in the wrong place.

According to the results of previous studies on the bridge , estimated positive effects are numerous. First, the results of the analysis which used the volume of traffic in 2005. showed that there would be decrease in mileage by about 100,000 km per day if only passenger cars are taken into consideration. This would save about 11 tons of fuel a day. There would be used  3,250 tons less fuel per year. By 2021 year, when the volume of traffic is expected to increase by 35%, results are even more significant amounting to savings of about 35 tons of fuel per day or 10,000 tons per year. As a consequence of those savings, there will be less air pollution. Second, the average time required for travel would be shorter by around 30 minutes. Third, the new bridge and the ring would reduce traffic flows on existing roads and bridges in the center (30%), and thus eliminate delays and adverse effects caused by this (the project itself provides a series of effective measures of environmental protection, specific pavement, protective sound barrier, etc.). This list can be extended with less tangible benefits such as the bridge would provide a look of a metropolis to the city.

However, now I would like to turn to the indirect economic effects, sometimes more difficult to assess but equally important. Concerning its position, the bridge will provide higher accessibility to the business core of the city which will lead to the higher employment density.

Proof for this can be found in the case of construction the Auckland bridge . Furthermore, in the same study, the strong relationship between employment density and productivity  measured by the average wages was proven. Based on this, one might expect the same relationship to be established between two parts of the Belgrade  that are now connected. This is the case especially because the productivity measured in terms of average wages (Table 1) is the highest in the business part  (out of 17 municipalities). The main factors of agglomeration are benefits arising from increase in wages and productivity coming from densification of activities in urban areas. It is planned to build a tram road across the bridge as part of a public transportation network which will improve accessibility even further since transport possibilities are important in determining whether the city will be dense or detached. 

Table: Annual average wages by municipalities, Belgrade

In addition, the improved accessibility between two parts of the city optimizes land use over the city, and it will surely increase the land prices in the areas close to the bridge.

Having in mind the role that cities can play in enhancing both regional and national development, the significance of an increasing productivity in the cities itself is one of the major urban policies to be considered.

Next time while crossing any bridge make sure to devote a few moments of admire to those magnificent constructions whose great impact we tend to forget. 

Interesting: Discovery channel made a documentary movie “Built it Bigger” about this bridge, since it is the longest single pylon cable bridge in the world.

Trailer

More information

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Addiction to Ryanair

by Vija Pakalkaite

A Ryanair story takes place in a tiny airport of Kaunas which is the second largest city in Lithuania. This story could be compared to drug addiction in such a way that it provides euphoria (region is quickly developing), but has its costs (the “health” of a country Lithuania is weakening – people are emigrating).

Short history

Ryanair came to Lithuania in 2005 and chose Kaunas airport to operate. Due to an economically successful launch in 2005, in 2010 Ryanair decided to establish an airplane base in Kaunas airport, which means, that planes not only land-take passengers-leave, but also stay overnight. In addition, Ryanair announced its plans to establish an aircraft technical maintenance center in Kaunas in years to come.

In May 2011 Ryanair announced a very unpleasant surprise to the Kaunas airport (but pleasant to the residents of Vilnius), by announcing it will begin to provide flights from the capital city Vilnius airport as well. However, once a dull and uninteresting Kaunas airport now is full of life. It is planned that in 2011 this airport will serve around 850,000 passengers.

What to expect

Theoretically, if transportation costs are high, the spreading forces would dominate and different sites would try to do all economic activities within the teritorry instead of importing some. As transport costs fall, agglomeration forces will take over. It becomes possible to take advantage of a scale economy and then transport good cheaply to the other sites. This could be applied to the transportation of labor force as well. When flights become cheaper  people would use them to move to the larger cities which already have many residetns and labour. The entry of Ryanair to the Lithuanian airline market was one example of rapidly falling transportation costs to the consumer.

In addition, one of the features of the low-fare airlines is that they choose airports that are not of primary importance to provide their services. Such airports usually charge airlines with no or low fare and expect to gather benefits by providing additional services to the travelers. So they expect that the regional economy around the airports will expand, and airport facilities as well would be expanded.

Special shuttles soon were established

Until Ryanair‘s decision to fly from Vilnius,Kaunas airport was the only „window“ to the world where one could catch a low-fare airplane in Lithuania. As a result, all  passengers who wishedto use Ryanair had to reach Kaunas airport first. This was not so easy for passangers especialy during the night. The entry of Ryanair increased the demand of easing possibilities to reach Kaunas airport, and the supply was subsequently provided.

Special shuttle services were soon provided both in between Kaunas airport and Kaunas city, as well as other largest cities, including Riga which is the capital of Latvia. The former shuttle takes people from the Kaunas airport and brings them to hotels and other places in the Kaunas city then back to the airport. It is a special bus route which schedule is adjusted to the flight schedule. Besides, a “special prolonged stop” in the shopping town “Urmas” with more than 70.000 square meters of retail space was incorporated in the route of the shuttle service. The latter ones, for example, a Lithuanian shuttle taxi operator „Ollex“ bring passengers from Vilnius directly to Kaunas airport (price 11 EUR) and from the seacost city Klaipėda too (price 18 EUR), the schedules of the shuttle are as well tied to the schedules of the Ryanair flights.

Regional development

There were new cafeterias  established in the vicinity of Kaunas airport, some of them even in local residencies. A pizzeria was opened and a couple of bed-and-breakfast places in a nearby disctrict. Near the airport a shopping center is being built as well as a hotel inside the Kaunas airport. When Ryanair opened a base in Kaunas airport in 2010, Kaunas hotels became booked 80% of the time. In the city of Kaunas itself a bunch of new bars was opened, and the existing bars are full of foreigners.

Establishement of Ryanair base also revitalizedthe flat rent business in Kaunas, because pilots and fligh crews  are  renting flats in Kaunas. There are 100 employers in the base, and it is calculated that the establishment of the base directly or indirectly created a thousand of work places in the region.

How Lithuanians “agglomerated” London

However, not everything was so picture perfect. Once a nation of 3.5 million Lithuania now has just 3, 045,000 residents. The country in ten years since 2001 lost 12% of population, out of which 76% because of emigration. The acceptance to the European Union, visa-free Schengen zone and low-fare airlines decreased the price of travelling. During ten years, the region of Kaunas lost around 13% of its residents – similar to the entire average of Lithuania. Most popular destinations to emigrate for Lithuanians are United Kingdom, Ireland, Spain, and now, since it opened borders to the labor from new EU members, Germany. It is believed, that in London and nearby it around 100,000 Lithuanians are settled.

This being said, Ryanair routes are adjusted to the emigration habits of Lithuanians. There are 15 routes from Kaunas, out of which 8 fly to various destinations in the UK, one in Ireland, and one in Germany. The rest half dozen of flights go to the Netherlands, Belgium, Norway, France and Finland which could be considered to be more for tourism.

Short conclusion

Ryanair entry to Lithuania via Kaunas indeed gave positive stimulation to the economy of the Kaunas region, but many of the economic activities are directly related with the presence of Ryanair itself. If this airline ever decided to leave Kaunas airport many of the positive effects would soon disappear. Ryanair could have contributed as transportation means for many of the Lithuanians to emigrate and it still does so. However, if not as a result of this airline, a Lithuanian who truly wanted to leave the country would find a way to do it. 

When Irish low-fare company Ryanair decides upon the routes it probably first thinks about the profits it will earn, and only then about the impact to the economy of a region or a country. In this photo you can see the author of the blog post and Ryanair CEO Michael O'Leary in 2010, when he decided to establish a plane base in Kaunas airport.

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The Success of ZGC Science Park, China

by Anastasiia Shirinina

In the 1980s, the idea of a science park establishment quickly moved beyond the Western countries and parks were also established in Brazil, India, Malaysia, in the former "Eastern Bloc" - in Eastern Europe, CIS and China.  There are about 400 science parks created in the world today. Many others are in the process of creation. The success of science parks in promoting technology transfers and attracting clusters of technologically intensive and innovative firms has motivated countries all over the world, including China, to give an incentive to regional development. Due to the economic significance of China, its unique and complicated political and economic structure, the increasing number of foreign investments targeted to diverse spheres of Chinese economy, its considerable integration into global economy, the Chinese model of science parks can be a very peculiar example.

Zhongguancun (ZGC) Science Park in Beijing is the first and largest science park and cluster of semiconductor, computer, telecommunications and other firms in China. This park is not only a considerable income and research contributor of the economy, but also it bears a historical significance in providing the important transition from government control to relative freedom; moreover, it gave a rise of technological creation and transformation, new science parks foundation based on the government strategy to promote science.

The huge Chinese Zhongguancun Science Park is integrated into the city of Beijing, what is a very typical trend in the last quarter century - "science park in the city",  what makes it easier to connect innovators with financiers, moreover, the park itself reinforces the development of the city. However, all fragments of the parks are located in different parts of Beijing, where the large sub-parks usually have own specialization: software and electronics, new energy and industrial design, new materials, biotechnology, medicine, digital media, creative industries, etc.

There are over 22,000 companies (9 per day were recorded at the peak of development) and about a million employees in this park. No other places in China have such a large pool of talents as ZGC Science Park does. This is the "youngest" region in China - the average age of people here does not exceed 30. Park consists of more than 30 leading universities like Peking University and Tsinghua University, over 200 research institutions represented by the Chinese Academy of Sciences and Academy of Engineering, the largest national library in Asia, and the State Patent Office. The average annual income of the ZGC Park is $75 billion, including 650 companies with annual income more than $10 billion. The park is developing rapidly: profits volume of scientific and technological development has increased by 30% per year at the end of the last century, in the last decade it gave a steady growth over 25% per year.

It all started in October 23, 1980 - one of the scientists from Chinese Academy of Sciences Chen Chunxiao opened the first office of technological development at Zhongguancun street. Chinese economy at the time was in the rapid process of transition to a market economy and was extensively developing. After six years there were about 100 innovation companies, dealing with electronic equipment and marketing. The street became known as "e-street".

The computer era and then Internet era came. Communist Party of China quickly realized what an important phenomenon emerged in the street Zhongguancun, and decided to support it. In June 1999, the "Zhongguancun Science and Technology area of development" was officially opened under the motto "develop science and technology for the construction of the state." This is how the first Science Park appeared in China.

Zhongguancun Park has been created and developed as a top national project under the strict guidance of the Chinese government. However, in August 18, 2000 (almost a year before WTO accession) it was privatized to Beijing ZGC Life Science Park Development Co., Ltd. what was approved by Beijing Municipal Government. This was a breaking point and significant step to marketization of the economy and reason for a rapid rise of the other science parks and scientific centers which are more than 130 nowadays. However, the state still takes careful care of these research parks.

The park has large information, industrial and experimental base.  There are more than twenty multinational corporations’ branches opened here. They are attracted not only by the Chinese government’s subsidies, but the main reason is that the global giants are interested in the local market where they have an immense opportunity to promote their innovative products.

Many important discoveries were made in ZGC Science Park, like the first set of printing technique of Chinese characters, the first crystal of large integrated circuits with millions of subscribers. The first China's commercial Internet was opened here. Thanks to Zhongguancun China achieved the international communication and information standards.

Along with science parks a program of "100 Talents" has been developed: every year 100 brilliant scientists from around the world were invited to work in China, being offered very high salaries. Moreover, a large ethnic Chinese group who had worked for the Silicon Valley companies came back to PRC and led strategically important companies, became the directors of research institutes or held other important positions.

All these achievements and results prove the success of the first and the biggest ZGC Science Park in China, Beijing.

Figure 1. ZGC Science Park Map in 2006

Figure 2. ZGC Science Park Production Distribution

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Economic Effects of Cologne (Köln) - Frankfurt High Speed Rail

by Natalia Costin

The Cologne – Frankfurt high speed rail started operating in 2002 .The Speed of the train, running at 320 km/h, reduced the journey from 2hr 15 min to over an hour. The number of passengers willing to travel increased significantly by 2010 to around 20-25 million from 9 million. With high speed rail, travel time between Frankfurt and Cologne is 55 percent faster than with old track and 35 percent faster than with travel by car.  As a result of a new ICF we would expect some economic changes in Cologne and Frankfurt, however our expectations would be wrong because an economic impact was present just in the cities situated on the line of high speed rail which were: Limburg, Siegburg and Montabaur.

Travel Time Treatment

 

Research from LSE looked at prosperity and growth of intermediate stations, Limburg and Montabaur and compared the economic performance of those towns with more then 3,000 other municipals in the neighborhoods . During four year period of fast train activity the economic growth grew by at least 2, 7 percentage more in those two cities that are on the route compared to unconnected neighbors.  Additionally in Limburg and Montabaur in the market potential indicator is present an increase of about 30%. 

ICE train stations in Limburg and Montabaur are most often used for work purpose, to travel daily to Frankfurt. This point highlights that high speed rail Cologne- Frankfurt has an important effect on job creation in both regions. For example per day there is approximately 80 percent of daily commuters from Limburg and 60 percent from Montabaur.  Additionally the attractiveness of ICE increases with time.  Figure 1 show that Cologne and Frankfurt can be reached now by roughly 40 minutes train rides from Limburg and Montabaur, “making their location central with respect to two of the major regional economic agglomerations with a total population of approx. 15 million”. 

High speed rail motivate people to move closer to its route. There was a survey taken in Montabaur and Limburg which could provide an explanation for inflow of new residence.  The results of survey highlight the point that about 20 percent of Montabaur commuters and roughly 15 percent of Limburg commuters moved closer to high speed rail because of improved speed and accessibility it offers. 

In case of another intermediate station Siegburg, investigations of the Geographical Institute of Bonn University have shown that roughly 90 percent of passengers travel with high speed rail to and from Frankfurt. Additionally it was observed that partly as a result of Inter-City Express real estate investment increased there. Studies of Bonn University stated that Inter-City Express in Siegburg as well increased the inflow of population similarly to Montabaur and Limburg. For example 3 percent of Siegburg population has chosen the location based just on high speed rail access.

Frankfurt as a result of Inter-City Express had attracted more commuters compared to Cologne. There were not that many trips for example from Siegburg to Cologne as from Siegburg to Frankfurt. Frankfurt was more attractive place for commuters because in Frankfurt there is larger labor market. It is interesting to mention that there is no evidence of formation of megapolis between Frankfurt and Cologne, as someone would expect. The reason could be reduced business interaction between both regions because Cologne is a cultural center while Frankfurt is a financial and banking center.

In conclusion in main regions Cologne and Frankfurt no significant changes in economic impact were described as a result of Inter-City Express. However the increase in accessibility of high speed intermediate stations such as Limburg, Siegburg and Montabaur to Frankfurt and Cologne promoted rise in economic development. The increase in market access influenced on the increase in GDP, higher employment possibilities, increase in real estate price, variation in access to market and reduced travel time.  

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Deepening the Port of Charleston

by Daniel Bunn

In 2004, the Port of Charleston took its inner harbor to a depth of 45 feet making it the deepest port in the South Atlantic. Since that time, the port has risen to become the 8th most active U.S. port as measured by the dollar value of goods handled. However, with the ever-constant forces of globalization and technological progress at work, it is now necessary for the port to be dredged to a depth of 50 feet. The simple reason for this is that bigger ships are on their way. Even the Panama Canal is being altered to accommodate larger container ships. Although a difference of 5 feet might not sound like much, this change is important for allowing some of the larger container ships into the port. Technically speaking, the economies of scale that are at work in the shipping industry are going to continue to be accommodated by the Charleston port.

The potential economic impact of this deepening project is hard to measure, so it is simplest to look at the level of activity supported by the current port and use that as a baseline to project a general expansion on this base. The 2008 Economic Impact Study completed by the South Carolina State Ports Authority found that 10.9% of state jobs are supported by port-related activity. The location of this activity is represented in the figure below taken from that report.

Just within the state, there is an obvious clustering of port-related activity in the Northwest corner particularly along Interstate Highway 85. What is interesting about this corridor is that it is becoming less and less of an independent economic region as it becomes more and more integrated with the cities of Charlotte, NC, and Atlanta, GA, both of which are very large centers of economic activity for the Southeast US. So, it’s entirely possible that even if the port did not exist, there would still be a higher level of concentrated economic activity in the Piedmont region.

Now back to the port.

If the port of Charleston supports so much activity in the Northwest corner of South Carolina, then it can be assumed that the deepening project will simply increase the amount of activity in this region and along with international trade-related activities, other intermediate functions will arise such as financing and non-tradable services. This is because a deeper port that can accommodate larger ships that bring more goods in and out of South Carolina and, in particular, the Piedmont region, will facilitate an increase of the level of economic activity as well as the amount of concentration in the Northwest part of the state. Though it is difficult to say how quickly these effects will take place (the deepening project is not due to be completed for another 10-13 years) it is certain that increased trade-related activity will appear even before the project is completed.

Some other factors to consider when determining what the impact of this project will be include the widening and deepening of the Panama Canal, the joint effort between Georgia and South Carolina to establish another port on the Savannah river in Jasper County, SC, as well as the deepening of the port in Savannah, GA. These four things, including the deepening of the port in Charleston, will surely have a large combined impact on the states of South Carolina and Georgia with the largest impact within the state of South Carolina falling in the Northwest corner as the Atlanta and Charlotte economic areas spill over into the cities of Greenville and Spartanburg.

With Paul Krugman’s economic geography model and its extensions in mind, I believe that the lower costs of trade faced by market participants in this area will probably lead to stronger forces of agglomeration with a continual increase in the size of the agglomerated area. Perhaps, as the trade costs continue to fall, the city of Charleston will expand its role as a location for facilitating trade rather than an economic center in and of itself. However, the small towns in South Carolina will probably continue to shrink as the spreading of economic activity continues to decline.

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Why are Transport Projects so Important for Our Economic Development?

By Evgenia Ivanova

As the US President Barack Obama has once said: “A major new high-speed rail line will generate many thousands of construction jobs over several years, as well as permanent jobs for rail employees and increased economic activity in the destinations these trains serve.” The quote is indeed true and it made me think how we rarely have the chance to stop for a moment and consider the positive economic benefits of transport projects. Their tremendous impact on the way we live not only shortens the distance and brings us close together but they also alter our environment through agglomeration formation. The high-speed rail (HSR) serving the road between Cologne and Frankfurt in Germany is an excellent example to illustrate my point.

Opened for the first time in 2002 as an Inter-City Express (ICE) high-speed passenger dedicated line, it serves the 177 kilometers distance between Cologne and Frankfurt. With trains running at a speed of 320 km/h, this ICE has reduced the rail time from 2h 15 min to just a bit over an hour for the non-stop services. Less than ten years after the first train started operating, there are plenty of evidence for the positive effects that the ICE line brought for the regional development and the labor markets of the smaller towns interconnected by the service.

Evidence of Agglomeration Formation and Development Impacts

With the construction of the line we observe an increased intra-regional accessibility, where the cities form a band and each city pair is no more than 40 minutes away from each other, thus giving the opportunity of daily commuting. A number of recent studies have analysed the economic effects of better transport accessibility as a result of high speed rails and concluded that there is a tendency of 0.25% growth in GDP for any 1% increase in market access. The existence of the HSR has indeed confirmed the results of these studies and transformed the region by boosting its economic growth and allowing for agglomeration formation (Figure 1).

Figure 1

The most remarkable was the regional economic transformation of the two intermediate stations Montabaur and Limburg on the route. The two cities are located exactly between two major agglomerations - the Rhine-Main area and the Rhine-Ruhr conurbations – and each of them has become more reachable to the traditional employment center-cities Cologne, Frankfurt as well as Wiesbaden. Despite the proximity of the regions around Montabaur and Limburg to large metropolitan areas, until the opening of HSR in 2002, they have preserved their rural character, with high quality of life and affordable land and rent prices. Several months after the beginning of the train services the regions started growing in migration attractiveness due to the lower prices of living there and the lower costs of commuting to the megalopolis cities.

Since Frankfurt is the main employment market in the region and an important hub on the road, which has a better connection and more frequent services especially during rush hours, it attracts the majority of commuters from Montabaur, Limburg and the surroundings. I should mention here that 80% of daily commuters from Limburg and about 60% of commuters from Montabaur travel to Frankfurt using the ICE line. Also a significant number of people chose to reallocate to the smaller towns from the neighboring large agglomerations, which strengthens the recent trend of people moving from the core metropolitan areas to the periphery, seeking higher quality and lower land prices and at the same time having the advantages of shorter and cheaper commuting to their work places.

The impact of the HSR on Montabaur, Limberg and the surrounding regions has been indeed positive. The population gains through the migration of new residents are tremendously important and beneficial, having in mind the demographic problems which Germany, similar to the rest of Europe, is facing nowadays.

Since the line is relatively new, functioning for less than 10 years, there is still no economic boom observed in the regions connected by it. However, the significance of the urbanization tendencies, the residential migration and the increase in the real estate prices as a result of it, give positive prospects and make us optimistic about the future development of the cities.

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Is the Game Worth the Candle?

by Nurgul Tilenbaeva

Is the game worth the candle? This is a “number one” question in the minds of economists, politicians, and the general public in Kyrgyzstan with regards to the new railway project “China – Kyrgyzstan – Uzbekistan”. As the name suggests, this new transport line initiated by the respective governments of three countries intends to connect China to Central Asian region, namely Kyrgyzstan and Uzbekistan (see Graph 1). Far from being it, the plan is to subsequently expand the line to connect China to Europe through Central Asia, Iran, and Turkey, thus the project promises to grow into a large-scale enterprise involving more than 10 countries under its umbrella. The role of the Kyrgyz Republic in this case is the role of the transit country for Chinese goods, which are to be transported along the new railway line. With the estimated cost of about 2 billion USD this project risks being too expensive and even loss-making for Kyrgyzstan. Is the risk worth taking?

The Route of the Intended Railway Line “China –  Kyrgyzstan – Uzbekistan”  

According to estimations it will take twelve years of railway operation for the line to become profitable, and it promises annual revenues of around 200 million USD for the Kyrgyz economy. Because of a significant reduction in transportation costs (the new railway line is 268 km long in the Kyrgyz segment as compared to the existing 900 km connection between China and the rest of Central Asia) there are benefits to Kyrgyzstan arising from increased trade flows and boosted cooperation with China. Moreover, the railway line will go through Naryn and Jalalabad oblasts of Kyrgyzstan, which represent the least developed regions of the country. And, as the economic theory suggests (namely, the New Economic Geography model of Krugman) building a road, or in this case a railway line that will subsequently decrease distance between cities, will have a large impact on the distribution of manufacturing production and lead to substantial agglomeration of economic activity in those regions. This will create a lot of new jobs in these underdeveloped parts of the country and attract more people to migrate there. Overall, the theory suggests that this will have huge positive welfare implications for the regions close to the railway line in the form of increased number of manufacturing varieties, higher wages, etc. So far, the railway project “China – Kyrgyzstan – Uzbekistan” sounds like a panacea for all woes solving a whole lot of problems and causing none. This is not particularly true, however.

In addition to expected positive effects of the project, there are negative ones as well. Because of the high cost of actually building the railway line, which was earlier mentioned to be around 2 billion USD the natural question of financing the project arises. This is where most of the problems come into picture. Up to now it has not been decided yet as to how Kyrgyzstan is planning to finance its segment of the railway line. However, there are two options frequently suggested by policy-makers. The first alternative would be to get a long-term, low interest rate loan from China and finance the line from these resources. Then when Kyrgyzstan starts enjoying the benefits of the railway line, it will start repaying the loan from this money. This alternative is not reliable and risky in a sense that it does not provide any guarantees for being able to repay the loan (it only assumes that the country will get expected positive revenues from the railway line operation). The second option in minds of Kyrgyz policy-makers is to exchange mineral resources for the services provided by the Chinese. Under this alternative, three minefields of the Kyrgyz Republic (Jetim-Too iron ore deposit, Sandyk aluminum deposit, and Terek-Say gold deposits) will be given away to China. This last option is even worse, since the socio-political situation in Kyrgyzstan is very unstable, and the idea of giving away ore deposits to China will be perceived by the general public as “selling the Kyrgyz lands” to a neighboring country. With two revolutions in the past ten years, this could easily trigger a social outbreak, which could lead to very negative consequences. Thus, Kyrgyzstan is ended up having two bad financing alternatives, and it will have to choose the lesser of two evils. In addition to all this, it has been reported that the local population of Naryn and Jalalabad oblasts is acting against the project, mostly due to ecological reasons. Moreover, the inhabitants of these regions as well as some experts claim that the value of deposits potentially offered to China is measured in trillions of USD, while the cost of the project is only 2 billion USD. In addition to all this, the great benefits of anticipated agglomeration in Naryn and Jalalabad may not come true because for the policy to have an effect it must reach a critical mass, and it might not happen in this case…

So, coming back to the question raised at the beginning: Is the game worth the candle? It is very difficult to provide a definite answer to this question and it is also probably too early to do that. However, given good policies the railway project “China – Kyrgyzstan – Uzbekistan” has a potential to become a great investment project increasing the welfare of Kyrgyz citizens.

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