1.2 Transport and the economy:
The relationship between transport and the economy

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Transport is essential to the efficient working of the economy, bringing together the inputs used in the production of goods and services and getting outputs from the production process to customers.

‘Estimates suggest that if all other drivers of growth were to increase by 10% and transport infrastructure were to stay constant, then realised growth in income would be just 9%, i.e. 1% point less than it otherwise would have been.’
Venables, Laird and Overman, 2014

The potential economic impacts of transport improvements are not only likely to be significant and wide-ranging, they are also likely to be context specific. For example, some industry sectors benefit from being part of a cluster of similar or related businesses with access to wide and deep pools of specialist skills, other sectors rely more heavily on connectivity to international gateways for access to overseas markets, whilst other sectors function perfectly well wherever they are located.

Developing an understanding of the transport and transport-related challenges and opportunities facing alternative industry sectors is an important first step in the development of an investment programme to improve productivity and competitiveness.

Investment in transport networks can influence the functioning of labour markets, business productivity and competitiveness. These impacts interact over time and can lead to improvements in economic output and the geographical distribution of economic activity. They can also impact on the environment, quality of life and the overall attractiveness of towns and cities.

Improvements in transport connectivity driven by increased network capacity, reduced travel times and costs together with improved network reliability generate improvements in productivity through what are sometimes referred to as ‘agglomeration economies’.

Reduced transport costs mean that businesses can:

  • Connect with potential suppliers, enabling them to access higher-quality and/or lower-cost inputs.
  • Connect with potential customers, enabling them to supply markets further afield.
  • Connect with a wider pool of talent in the labour market, allowing skills to be better matched to employment opportunities.

Reduced transport costs mean that individuals can:

  • Participate in the labour market.
  • Access a wider range of jobs, increasing the chances that they can find a position that provides a better match for their skills.
  • Connect with leisure and retail opportunities, allowing them to access a wider range of products or reach similar products at cheaper prices and helping to increase the competitiveness of local businesses.

Through these mechanisms, improvements in connectivity can drive increases in productivity and employment, resulting in increased economic output.

Where transport investments are ‘transformational’, they can also influence the location of economic activity, for instance allowing businesses to relocate to more productive locations with better access to skills, other resources and customers. Investing in transport connectivity can not only influence the amount of economic activity in a region, it can also influence where it is located.

Figure 1.1 Transport investment and economic growth

Figure 1.1 Transport investment and economic growth

Figure 1.1 sets out a framework showing the ways in which transport investment, under the right circumstances, can drive economic performance. The figure highlights how direct impacts from investment can create market efficiencies which in turn can lead to changes in productivity and economic growth. The mechanisms for delivering economic impacts include:

The figure highlights how direct impacts from investment could create market efficiencies leading to investment and relocation decisions which in-turn can lead to changes in productivity and economic growth. The mechanisms for delivering economic impacts include:

  • Benefits to transport users. Time savings from reduced journey times and improved frequency quality and reliability of transport networks and services. Transport-user benefits can also include amenity benefits from improvements to public realm and/or the attractiveness of the route.
  • Benefits to non-users. In the case of public transport investments, these include reduced negative externalities from car travel (i.e. reduced congestion and CO2 emissions) and option values (i.e. the value that is placed on maintaining a public asset or service even if there is little or no likelihood of the individual actually ever using it).
  • Productivity effects. Productivity impacts generated through efficiencies resulting from improved connectivity, which effectively brings businesses, suppliers and workers closer together. These benefits are additional to user and non-user benefits at the national level.
  • Induced investment impacts. Changes in the level or location of private sector investment as a result of a transport investment. These benefits are context specific and may be partially displaced from other areas.
  • Employment impacts. Labour market impacts resulting from connectivity improvements, which may allow people to move to more productive jobs or enter the labour market as a result of reduced and cheaper commuting journeys.
  • Regeneration impacts. Local economic impacts resulting from improved local image and attraction of land use development. In some cases, transport can act as a catalyst of local economic growth. These benefits may not be completely additional at a national level and may arise as a result of displacement of economic activity from elsewhere.

In addition to the potential long term impacts on productivity, the construction of large infrastructure projects provides an injection of resources into local economies during construction which may create new employment opportunities. Whilst this expenditure may simply be redirected from other government activities, the local impacts could be both significant in the short term and catalytic over the longer term.

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Key takeaways

Investing in new transport connectivity across modes can generate a wide range of economic benefits, as well as environmental and social benefits.

Before making investment decisions, local decision-makers need to understand the nexus between transport and the economy so that they can make the right choices. For example:

  • How important to local economic growth is investing in better transport links relative to investing in ICT, housing or skills?
  • Is it better to improve transport links within urban areas or between urban areas and with international gateways?

The relationship between transport and the economy is complex and context specific, with some industry sectors relying more than others on good transport links.

A recent review commissioned by the Department for Transport provides an important discussion of the issues and evidence on the relationship between transport investment and economic performance.

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1.3 Quantifying the economic impact of transport investment