ON THE ECONOMIC EFFECTS OF INVESTMENT IN RAILROAD INFRASTRUCTURES IN PORTUGAL

Abstract

The objective of this paper is to identify the effects of railroad infrastructure investment on aggregate and regional economic performance in Portugal. At the aggregate level, we show that railroad investment crowds in private investment and employment and have strong effects on output. At the regional level, we show that railroad investment affects private investment positively in all regions, employment in only Lisbon and the North, and output in all regions with the exception of Alentejo. The effects are regionally distributed in a rather uneven manner with Lisbon and the North capturing the bulk of the effects. Our results also highlight the relevance of regional spillovers. In terms of the relative effects of comparable railroad investment in the region and elsewhere in the country, we find that the North and the Center benefit more from investment elsewhere while the remaining regions benefit more from local investment. Finally, from a country-wide perspective, railroad investment located in Lisbon generates the largest marginal benefits, which reflect, mostly, the large effects in the Lisbon region itself. By contrast, railroad investment in the remaining regions has a much lower marginal benefit to the country, but these benefits reflect mostly spillovers. This highlights the difficulty in implementing policies that simultaneously maximize aggregate growth and reduce regional disparities.Keywords: Railroad Infrastructure, Public Investment, Regional SpilloversJEL classification: C32, H54, R531. INTRODUCTIONThere is broad agreement in both academic and policy circles on the critical role of public infrastructure investment as a driving force for the economy. Therefore, it is no surprise that such investments are consistently at the center of the policy debate in many countries.1 The Portuguese case is no exception. The policy debate over public investment in transportation infrastructure in Portugal has traditionally focused on road investments. This is true in the context of the development, after 1998, of the highway network system under public-private partnerships and financed by shadow tolls, as well as the more recent Plan for Investment in Priority Infrastructure of 2005. In the last few years, however, the debate has shifted towards a focus on railroad infrastructure investments.This noticeable shift in focus is in good part explained by the fact that, with the sustained investment effort in the past decades on road infrastructures, the country may have reached a stage of rapidly diminishing marginal returns to road investment. While there are still deficits in coverage for national and municipal roads, the extension of highways in Portugal has increased six-fold since 1990 and Portugal now has one of the largest shares of highways in the road network in the EU and one of the largest extensions per capita and relative to its GDP of the OECD. In addition, the current concerns about climate change and the environmental impacts of transportation activities also lead to a greater focus on railroad transportation which is widely perceived as more environmentally friendly. Indeed, the National Program for Climate Change as presented in Instituto do Ambiente (2006) has mandated policies to promote a modal shift towards railroads as a means to reduce energy consumption and associated greenhouse gas emissions. These policies focus primarily on the modernization of the existing network of railways and subways as well as the development of a high speed railway network.The current debate in Portugal about railroad infrastructures has focused on traffic demand, financial rates of return and political considerations, but has been conditioned by the absence of any empirical evidence on the macroeconomic effects of such investments. Indeed, the literature on the macroeconomic effects of public investment in Portugal is scant2 and, in particular, on the macroeconomic effects of railroad investments is non-existent. …