How highways contribute to economic growth

A4 motorway, Poland (Ralf Lotys, CC BY 4.0)

Everyone who drives a car is able to enjoy great roads, but this pleasure comes at a certain cost. There are measures confirming that road construction costs are lower than the benefits, while investments in motorways provide a strong boost to the economy.

According to the targets set out in the legislation currently in force in Poland, the planned network of motorways and expressways should ultimately reach approximately 7,650 kilometers, including 2,000 kilometers of roads of the former category. Thus far this plan has only been completed halfway. The combined length of the existing motorways is about 1,640 km, and that of expressways is 2,100 km. This gives a total of approximately 3,750 km of high-speed roads.

However, if we were to consider humanity’s past and present capabilities, then the current infrastructural projects pale in comparison with the achievements of the recent past. In “Capitalism in America: A History”, Alan Greenspan and Adrian Wooldridge wrote that starting from 1870, railway companies in the Unites States laid more than 13 miles of new rail tracks every day for the next 40 years. The authors cite David Wells, who calculated that in 1887 railways in that country transported so much cargo that if they had to be replaced, then every living American would have to carry on their own back 1,000 tons over a distance of one mile or carry one ton over a distance of 1,000 miles. This means that the local cargo transport was booming and the more goods were carried, the more wealth was created, and the more money people had in their pockets.

Sometimes people oppose the construction of transport routes in favor of other needs that require intensive financing. These failed arguments are being successfully refuted by a constantly growing body of scientific studies that confirm the benefits of road construction and shed more light on this phenomenon. Professors Treb Allen from Dartmouth College and Costas Arkolakis from Yale University argue that benefits from new sections of freeways are higher than their construction and maintenance costs, even if they are built in mountainous areas. This conclusion was presented in their work entitled “Welfare Effects of Transportation Infrastructure Improvements” published by the National Bureau of Economic Research (NBER Working Paper No. 25487).

In a study utilizing graph theory, used for the modelling of relationships between pairs of objects, as well as spatial analysis, the authors identified a group of approximately 900 American cities that have at least 50,000 residents and are located within 6.2 miles from the nearest highway. They subsequently calculated the shortest road connections of each of these cities with the 25 nearest neighboring cities. This led to the creation of the so-called adjacency matrix consisting of almost 7,000 connections. In the next stage of the study, the authors calculated the potential effects of adding a new highway of 10 lane-miles for each inter-city connection (lane-miles are calculated by multiplying the mileage of a road by the number of lanes it has; for example, a 2.5-mile highway section with four lanes would have 10 lane-miles). These effects were assessed in terms of changes in traffic patterns, travel times, and volumes of trade between all pairs of cities. As a result of the study the authors obtained information on how the highway investments would affect the distribution of economic activity and how they would translate into benefits for the residents.

It turned out that for three-quarters of the analyzed 7,000 highway segments, adding 10 additional lane-miles would generate benefits of USD10-20m, which would be significantly higher than even the highest construction and maintenance costs. The “returns” from such investments would include reduced travel and freight transport time due to less time spent in traffic jams and less congestion on the roads. Even greater effects are found when it comes to connections between centers of economic activity or in locations where few alternative routes exist. Two segments near New York City would generate benefits exceeding USD500m a year. Meanwhile, the expansion of the Long Island Expressway would generate up to USD719m annually. Out of the top 10 segments with the highest rate of return, seven are located in the New York City area, and one is located in the vicinity of Los Angeles. However, two others are located in the remote wilderness of Indiana. Perhaps this shouldn’t be surprising, considering that the state is referred to as the “Crossroads of America”. The researchers determined the size of the necessary expenditures by assigning highway sections to four different terrain groups, from urbanized areas to rural flatlands (where the slope of the road is less than 5 degrees), rural-rolling landscapes (slope between 5 and 15 degrees) and rural mountainous areas. The cost of 10 lane-miles varies from USD1.9m in rural-flatlands to USD6.5m in rural-mountainous areas.

The Unites States are certainly different than Europe. However, the conclusions reached by the Americans are consistent with the conclusions of researchers from Slovakia. The latter is a country at a similar level of development as Poland, although it is slightly less densely populated (111 people per square kilometer, compared with 124 people per square kilometer in Poland), but also more mountainous. Vladimír Baláž, Dušana Dokupilová and Eduard Nežinský from the Slovak Academy of Sciences posed the question of whether highways bring wider economic benefits and attempted to answer it on the example of Slovakia (“Do Motorways Induce Wider Economic Benefits? Evidence from the Slovakian Republic”, Economický časopis, 66, 2018).

Since the accession to the European Union, Slovakia has built a robust car assembly industry almost from scratch and has also developed a consumer electronics industry. The functioning of these factories largely depends on the timely delivery of components, engines and parts from abroad. The value of Slovakia’s exports of goods and services reaches almost 100 per cent of the country’s GDP (for comparison, in Poland it amounts to approximately 45 per cent of its GDP). Efficient road connections are therefore a necessary condition for economic success. The analysis presented in the discussed paper leads to the conclusion that the expansion of the Slovak motorway network has been associated with an increase in wages in the very well-connected areas of the country. Other benefits have also been identified in these areas, although on a smaller scale: decrease in unemployment rates, positive net migration and an increase in the number of companies and apartments. It would not be wrong to assume that if analyses similar to the cited American and Slovak studies were carried out in Poland, the conclusions would likely be the same or very similar.

Effects on the global scale

A global context to these deliberations is provided by the studies carried out under the auspices of the World Bank. Its researchers focus on the largest ongoing Eurasian infrastructural project of a New Silk Road known as the Chinese One Belt One Road. In a paper entitled “Trade Effects of the New Silk Road” (WPS8694, January 2019), S. Baniya, N. Rocha and M. Ruta estimated that the development of transport infrastructure under the framework of the New Silk Road could boost trade between the countries by 2.5 per cent, and by up to 4.1 per cent in the most favorable scenario. If significant progress could also be achieved in the management of new transport corridors, then trade could increase by 4.6-7.2 per cent. If the additional investments and increased managerial skills were supplemented with new agreements facilitating trade exchange, then all three factors taken together could increase trade by 11.2 per cent, and by up to 12.9 per cent in the best case scenario.

In the World Bank report entitled “Belt and Road Economics: Potential Effects, Complementary Reforms, Risk Mitigation”, the Bank’s Global Director of Trade, Investment and Competitiveness, Caroline Freund estimated that the implementation of the New Silk road could increase global GDP by almost 3 per cent in the best scenario, and by 0.7 per cent in the most modest scenario. The global GDP currently amounts to approximately USD80 trillion. Three per cent of that amount is USD2.4 trillion, and 0.7 per cent would be USD560bn. Meanwhile, the costs of New Silk Road are estimated at USD 1,000 billion.

However, benefits are not directly comparable with costs because the former are repetitive and will occur over the subsequent years, while the cost is paid once, apart from the much lower expenditures on maintenance. This means that the economic development that takes place as a result of infrastructural investments not only pays for these investments, but also increases the ability of governments to meet many other social needs. Admittedly, this calculation does not account for the unavoidable environmental costs, but the rapid increase in the population of Africa and Asia will come at a great price in any scenario.

Road investments in Poland are slow and expensive

The economic benefits from the expansion of Poland’s network of highways would have been much greater, had it not been for the excessive length of the investment process and the remarkably high construction costs. Protracted construction works mean longer traffic jams, and therefore longer delivery or commute times, higher fuel consumption, and higher financial costs. The costs of motorway investments are much higher in Poland than in the US. In the summer of 2018, Deputy Minister of Infrastructure and Construction Marek Chodkiewicz said that in the years 2013-2016 the construction of motorways cost an average of PLN53.1m (USD17.7m) per one kilometer (0.62 miles) , while the construction of expressways cost PLN38.7m (USD13m) per one kilometer in the years 2017-2018.

A comparison with the figures provided in the study by Allen and Arkolakis is not sufficiently reliable, because the Americans probably did not take into account the costs of road junctions, animal crossings, parallel roads for local traffic, etc. However, more reliable data are also available. The American Road and Transportation Builders Association reported that the average cost of a four-lane highway is USD4-6m per one mile in rural and suburban areas or USD8-10m in cities.

Most of this enormous difference in costs could probably be explained by the much smaller scope of works included in the American estimates, e.g. due to the fact that environmental requirements in the United States are much less stringent than in Europe. The fact that the average density of population and physical structures in the Unites States is much lower than in Poland could also have an impact on the costs. Another important factor reducing costs in the Unites States is probably the extensive experience and efficiency of local road construction giants, as well as greater market competition. However, a large part of the unfavorable difference in prices can still be blamed on the low efficiency of the investment process in Poland.

Smart motorways and the costs of accidents

To some extent, the fact that Poland is lagging behind Western Europe in terms of the length and density of high-speed roads could prove to be an advantage, similarly to what has happened in the banking sector, which is known for its broad use of the latest technologies. This relates to the implementation of solutions known as “smart motorways”. At this point Poland only has one fully completed motorway and two others that are still under construction.

Road accidents are also a major problem in Poland. According to the Polish National Road Safety Council, in 2015 they created losses amounted to approximately PLN50bn (USD12.4bn), that is 3 per cent of the GDP at that time. Any possible reduction in the number of accidents and collisions would means more funds left to be spent on other things.

The motorways’ displays in the United Kingdom and in Australia inform drivers that they will be able to use the so-called hard shoulder. This keeps traffic flowing despite significant obstacles. At the same time, the displays present information about significant speed limit changes and warn drivers that the road is under the constant surveillance of very sensitive cameras. Special sensors informing about the entry and exit of successive vehicles are also installed on the roads, which facilitates traffic management in normal conditions. According to research from Australia, this reduces the number of collisions by 30 per cent. Separate speed limits are also assigned for individual motorway lanes. The use of the emergency lane for normal traffic, known as “all lane running”, permanently or occasionally transforms a two-lane road into a three-lane road. To maintain safety, so-called emergency refuge areas are introduced approximately every 2.5 kilometers. They are intended to be used in the event of a vehicle breakdown or accident.

Smart motorways were originally invented as a result of the search for ways to increase the capacity of roads without incurring the enormous costs associated with their expansion — according to the financial statements, the average cost of “all lane running” is only a third of what needs to be spent on the construction of a new lane.

Highways England, the government operator responsible for managing English motorways, has claimed that since the implementation of “smart motorways” solutions began in 2006, the so-called journey reliability has increased by 22 per cent. Most importantly, the number of injuries caused by road accidents has decreased by half, and no fatal accidents have been recorded on such sections.

This is certainly not the end of innovative road solutions. It is now becoming technically possible to control the movement and the speed of vehicles irrespective of the will of their driver. However, there is no certainty that smart motorways and even more advanced solutions could be successfully implemented in Poland. The most important reason for this uncertainty is the reluctance of Polish politicians to enforce even basic levels of compliance with safety rules on our roads.

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