Sunday, August 26, 2012

„We Built It, They Didn’t Come” The Tale of Great Expectations

Empty airport of Cork in 2011

There is this old wisdom that compared to low transport costs the lower transportation cost is even better. This was a rationale for many transport projects in the past and a good slogan however it is not quite clear whether that is a sound argument to build railways, motorways and airports upon. Here is the brief case of Ireland: they have made it all. What they did not know at the time what they had coming: a big recession due to the turmoil it the USA and also a bursting bubble at home. The question arises: did they fail because they have made oversized projects and have invested huge amounts in vain or due to the economic slump of 2008. Could they have planned more carefully? Was this particular project bad by design? Answering all these will be a long shot but let’s give it a try and go in detail about Ireland’s latest transport project.
Ireland has come a long way from being one of the poorest countries in Europe to a fast growing one which earned him the nickname Celtic Tiger. From 1995 until 2002 they experienced substantially rapid growth. By 2004 they slowed down to an average growth rate 4,4-5% and that was the time when they began to implement the projects in question.
They designed a Spatial Policy with the announced objective to attract new and innovative industries in the country. This would have been a paradigm change for Ireland considering the fact that the majority of Irish industry was -and is still in the present - conventional mass production, employing low skilled workers. They reopened and connected railways, built motorways and introduced internal air services and the idea behind it was that Ireland could re-earn its “Celtic Tiger competitiveness” by transport improvements.
Based on the economic theory we expect from transportation improvements to have impact on the productive sector through product and labor market effect as well. The product market effect origins from the fact that by reduced transport costs firms source materials and deliver their product more efficient. Furthermore the labor market effect means that it is also cheaper to access labor supply.  So there is hypothetical potential to yield economic benefits by improving transport opportunities although we did not see it in this example. The new capacities like the airports and new railway lines run at loss. The expected new industries did not arrived so there are massive inefficiencies, the transportation network is oversized and the employment has shrunk. According to the transport minister Leo Varadkar the lesson they learnt is – not surprisingly, very core of economic theory – to optimize the size of investments, cut back spending and stop subsidizing inefficient transportation forms. They already introduced market forces by opening up railways to competition and they are also planning to franchise out local bus companies.
            What about the new firms? Why didn’t they come? The usual suspect is the global turmoil which is also the explanation suggested by the Irish government. As we know it began in the US by the shock which was due to a bubble in the housing market. This initial shock spilled over to the financial system which later on infected the real economy.  It makes sense that the firms did not come because they faced too high a risk to invest under such circumstances and they rather postponed new project because it would have been too costly to finance.
However I would make a case for not to overestimate the effect of the depression. The problem of the Irish transport project is rather that they misestimated the potential benefits and did not include incentives that also count for a firm when it choose its location like availability of skilled labor, special needs of the particular industry, local demand and taxes and subsidies. In the case of Ireland there were these foreseeable factors they left out and to make the consequences of this miscalculation even more serious the worst case scenario happened.
The truth is that we still do not know for sure whether transport improvement is only a catchy phrase or a sound policy instrument to expand output and employment. We have our pro cons mostly in the form of different cases, so there is no obvious choice of transport cost to set. Speaking of catchy phrases the most popular ones are nowadays clusters. In order to attract such high tech industries there are some basic conditions. There must be at very least a university and a research program which can be served as a core of concentration. What’s more the economic theory also implicates that there are demand conditions also needed. In this view what in Ireland was lacking is the policy’s objective to make room for innovation and actively support the existing clusters to attract there new companies.

Réka Sulyok


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