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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