Connections Transport & ICT Measuring Economywide Effects of Big Transport Projects: The Case of Georgia Will Upgrading Its Main Highway Boost Output, Trade, and Development? Carolina Monsalve Georgia is upgrading its principal highway, running for more than 350 kilometers between the Black Sea on 4.2% its western border and Azerbaijan in the east, at a cost of about $2.3 billion, or nearly 14% of its 2014 GDP. Apart from the immediate effects of the construction (financed largely by international institutions), how much will this relatively large investment improve The estimated economic conditions in Georgia? Will it significantly long-term reduce travel costs, and if so, how much of the gain GDP gain will flow through to the whole economy? Answers arising from to those types of questions are rarely quantified for reduced travel infrastructure projects in developing countries, either because the projects are too small or the necessary costs country-specific model is lacking. The Georgia project offered a unique combination of circumstances that made the estimations feasible: (1) a large investment relative to the size of the economy, (2) an already existing model and dataset depicting how the sectors of Georgia’s economy interact, and (3) partial completion of the road upgrade that allowed a simulation of expected gains to be informed by actual interim outcomes. The government of Georgia is bringing its trans- investments will improve connectivity between the national East-West Highway up to international Black Sea and Azerbaijan, which borders the Cas- standards to strengthen the country’s position as pian Sea; lower the cost of transport and logistics; a transport and logistics hub on the E60 interna- and thus improve Georgia’s connection to global tional highway corridor, which runs between China markets. Upgrading is finished on about one-third and France. International financial institutions are of the road length, and the government is targeting expected to finance the bulk of the estimated $2.3 full completion by 2022. billion project, toward which the World Bank has committed about $500 million. The Modeling Opportunity The road carries almost one-fourth of all vehicle Developing countries typically do not have the traffic in Georgia and almost one-half of its interna- institutional capacity to create a detailed macro- tional traffic. At current traffic volumes, upgrading economic model of the domestic economy. Hence, it to the international four-lane motorway standard showing how changes stemming from even a large will reduce travel times by raising the allowable project would ripple through such a country’s vari- travel speed and, by realigning some sections, ous economic sectors to affect the overall economy reducing the overall length of the highway. The is usually out of the question. MAY 2016 NOTE 2016 - 8 However, researchers at the ISET Policy Institute, be somewhat lower if externalities such as global affiliated with Tbilisi State University, had already and local pollutants from generated traffic had developed the economywide data (in a social ac- been added to the analysis. On the other hand, the counting matrix, or SAM) and a corresponding overall impact on GDP of the EWH would be larger macroeconomic model for Georgia. These made than 4.2 percent, once the impacts of construction a study of the impacts of the road upgrade both itself have been included, as have the road safety practical and cost effective.1 benefits. Other long-run gains exceeding 4 percent in real The Modeling Approach terms were in exports, household consumption, and household income, with rural income gaining The ISET researchers had constructed a static slightly more than urban. computable general equilibrium model (CGE), a framework well suited to the inquiry. For example, All quintiles of household income made long-term a partial equilibrium model, less complex and data welfare gains ranging from 2.6 percent for the low- intensive, is most suited for analysis of a single est quintile to 4.4 percent for the highest, lower economic sector. Unlike a CGE model, it does not quintile group. The first two quintiles with the low- take into account the fact that changing the level est income—the bottom 40 percent with annual of output in one sector (or its costs) affects other income up to GEL 1000 (USD 602)—gain relatively sectors. less than other household groups reflecting lower usage of transport for that group. In conjunction with SAM data, a CGE model traces the effects of a change through all other parts of the economy. It essentially produces a “with“ and Limits and Extensions of the Model “without” picture—estimating the economy’s GDP, Modeling the macroeconomic effects of the high- income, and other variables at the end of the mea- way upgrade could be extended in several ways. surement period both with and without the shock. First, it could be used to assess the impact on With the CGE model and SAM data, the study neighboring countries, particularly important be- aimed to determine the extent of the economic cause the East-West Highway is a gateway to Black stimulus and welfare improvements that would be Sea ports. generated by use of the upgraded road. The shock Second, assuming the data requirements could be would be the reduction in transport costs gener- met, the model could assess the regional effects of ated by lower vehicle operating costs and lower the highway project within Georgia. travel times at the current volume of traffic on the road. Lastly, constructing a dynamic CGE model (track- ing impacts of annual developments including The vehicle operating costs were extrapolated changes in the capital stock) could strengthen from the observed lower vehicle operating costs on the assessment of key economic effects, including already-completed sections of the road upgrading. trade impacts. Lower travel times were based on the higher allow- able speeds on the renovated road and its short- ened length. Lower travel time allows other sectors to boost 1 The data on transportation costs were collected as part of the production and use more transportation. Lower ve- World Bank’s project feasibility studies. The cost of recalibrating the model and collecting additional data was $31,000, excluding staff hicle costs serve to free resources for other sectors time. The expense included developing a new SAM to assess dis- that are boosting output. tributive and sectoral impacts, creating new code for the model, and estimating changes in transport costs. Results The results showed that the reduction in travel For more information on this topic: costs resulting from upgrading the East-West World Bank, Georgia: Assessing Economy Wide Indirect Impacts of East-West Highway Investments through CGE Modeling, Highway has a positive effect on growth and Report ACS15092, 2015 http://pubdocs.worldbank.org/pubdocs/ welfare. Compared with outcomes in the absence publicdoc/2015/8/998961441025265376/Assessing-Economy- of an upgrade, Georgia’s real GDP would be 4.2 Wide-Indirect-Impacts-of-East-West-Highway-Investments- percent higher in the long term. This figure would through-CGE-Modeling. Connections is a series of knowledge notes from the World Bank Group’s Transport & Information and Communication Technology (ICT) Global Practice. Covering projects, experiences, and front-line developments, the series is produced by Nancy Vandycke and Shokraneh Minovi. The notes are available at http://www.worldbank.org/transport/connections. MAY 2016 NOTE 2016 - 8