China Transport Topics No.08 January 2013 74736 High-Speed Rail, Regional Economics, and Urban Development in China Andrew Salzberg, Richard Bullock, Ying Jin, and Wanli Fang World Bank Office, Beijing Traditional economic evaluations of major transport infrastructure investments focus on the direct costs and benefits arising from travel, including user time savings, operator cost savings, and reductions in externalities including air pollution, noise, and accidents. There is an emerging consensus that major transport investments may have significant impacts that are not well captured by this type of conventional cost-benefit analysis. In China, the World Bank Transport team has supported both econometric studies and on-the-ground surveys that begin to identify and quantify these impacts in the context of China’s emerging high speed rail (HSR) program. Based on this and other research, the Bank team has begun to pilot a methodology to evaluate wider economic development benefits for several HSR projects, and has found them to be significant - of the same order as, but additional to the direct transport benefits that are traditionally measured. Crucially, these benefits of larger and better connected markets accrue to businesses and individuals even when they themselves do not travel. This paper highlights this research and methodology and the policy implications related to maximizing these benefits in practice. ECONOMIC BENEFITS OF TRANSPORT important effects that are not well captured by INFRASTUCTURE INVESTMENTS this type of conventional cost-benefit analysis.1 There is a contradiction at the heart of transport The contradiction is also evident in the project appraisal. Policy-makers, particularly in development of high speed rail (HSR) in China, developing countries, tend to view major where national and provincial governments transport infrastructure investments through a stress the importance of regional economic lens that highlights their contribution to regional development in almost all feasibility studies, economic development, expanding market despite the absence of these concepts in access for goods and services, and disseminating quantified measures of economic benefit.2 Their skills and ideas. However, project appraisal belief rests, in part, on evidence accumulated in practitioners have more narrowly focused on other contexts. Studies have shown that measuring direct travel costs and benefits, that transport improvements can stimulate economic is, the value of user travel time savings and activity if they can materially improve operator cost savings, plus reductions in accessibility for business and personal travellers externalities such as air pollution, noise and – in particular, improving links to major national accidents. They have taken the view that the and regional hubs of commerce and information. wider economic impacts are too tenuous to be All else being equal, a new business located reliably quantified and/or are simply a follow-on 1 of direct benefits. Despite the obvious merits of Including but not limited to the New Economic Geography taking a cautious view, especially when large advocated in e.g. Fujita, Venables, and Krugman (1999). The Spatial Economy: Cities, Regions and International Trade. amounts of public money are involved, there is Cambridge, MA: MIT Press. an emerging consensus among economists that 2 This is often expressed using the shorthand of 1 and 2 major transport investments may have hour travel circles – highlighting the change in a given city’s economic hinterland before and after HSR. China Transport Topics No. 08 2 January 2013 within daily reach of such hubs will be more A major UK study that attempted to quantify this accessible to a larger pool of labor and other relationship estimated that, other things being businesses, raising productivity.3 This link is an equal, a doubling of economic mass would give important element of what are broadly referred rise to an increase in per worker productivity of to as agglomeration economies, the benefits 3.5% 4 . Crucially, these productivity benefits that accrue to firms and individuals from the accrue to businesses and individuals even where clustering of economic activity. they do not themselves travel. MEASURING AGGLOMERATION EXPLORING AGGLOMERATION IN CHINA Quantifying these benefits relies on a concept Most of the studies cited above focus on known as ‘Economic Mass’. Economic mass is a developed economies, and few attempts have measurement that combines the size of a city’s been made to explore the parameters that own economy with its accessibility to other govern these relationships in developing regions. Economic mass in a given location can countries. To help address this gap in research, therefore increase through one of two means: the World Bank team carried out two separate the level of economic activity can increase, or studies. One, a statistical analysis relating the surrounding areas can become more easily productivity and economic mass in Guangdong accessible, as measured by a combination of the province in southern China, is presented first.5 time and cost of travel. So if HSR (or other The second, a case study of agglomeration as it transport improvements) can reduce the friction might occur on-the-ground in a regional center of travel between regions, it can increase the in China, is presented next. ‘economic mass’ of the cities it serves. Of the three mega-city regions in China, The concept and measurement of economic Guangdong Province seems to have most to mass is relatively straightforward; where offer for such an investigation. Guangdong is the research has progressed in recent years has most productive province in China and been in identifying the relationship between the contributes the largest provincial share (over economic mass of a region and its overall level of 10%) of national GDP. Guangdong’s recent productivity. This link is based on four spatial development is also informative. The propositions: province was the location of three Special a) economic mass rises with transport Economic Zones (SEZs) designated by the improvements; national government in 1979. Since that time, the Guangdong SEZs have had markedly b) the average output of employees, and hence their wages, varies directly with different growth trajectories. Shenzhen, being economic mass, even after controlling adjacent to Hong Kong and thus directly exposed for other variables; to that large economic mass, flourished: its c) there are positive externalities from annual average growth rate of GDP from 2000- transport improvements which increase 2008 was 15%. Zhuhai, next to Macau but output for some firms independently of otherwise more distant from the main economic their use of the transport network; and centers, has had a growth rate of 13% per year in d) this increase in output is not included in 4 Rice, P.G., A.J. Venables and E Patacchini (2006). Spatial the standard evaluation of transport determinants of productivity: Analysis for the regions of projects. Great Britain. Regional Science and Urban Economics, Vol 36, pp727-752. 3 5 UK Department for Transport (2006). Transport, Wider See the forthcoming World Bank working paper Regional Economic Benefits, and Impacts on GDP. London: UK Impacts of High Speed Rail in China: Identification, Department for Transport. Quantification and Outlook. China Transport Topics No. 08 3 January 2013 the same period. Shantou, the third SEZ in level of education, capital investment and Guangdong, located more than 450km away industry composition. Overall, the best from Guangzhou and not connected to the estimates of the elasticity of productivity with national expressway network until after 2003, respect to economic mass are over double the has had the slowest GDP growth among all economy-wide results obtained in comparable Guangdong municipalities (9% per year for 2000- studies in developed countries. The best models 2008). On their own, these patterns are merely in our estimation so far imply that doubling anecdotal, but they suggested fertile ground for economic mass would give rise to an increase of further research. per worker productivity of 9-15%. This is higher than the consensus view from a comprehensive Although studies cited above have found a link review of such evidence in the developed between economic mass and productivity in economies that such a doubling would increase many developed countries, China is not yet a productivity by an amount that ranges from 5- developed country. Guangdong, despite being 8% 7 . To derive a relatively conservative one of the richest provinces in China, had a per estimate, we adopted a value of 5.3% to assess capita GDP of only USD 6,500 per capita in 2008, the economic impacts of HSR investments in which in real terms is equivalent to the level of China, as described below. US output in the 1930s. Primary and manufacturing industries, mostly low-tech and YUNFU CASE-STUDY labor intensive, accounted for over 70% of Theories and econometric estimation can only Guangdong’s output. The high-end R&D and provide a partial picture of the complex business services sectors represented only a economic impacts of transport improvements as small fraction of the tertiary sector output. they play out on the ground. Case studies can Empirical evidence for the developed economies help reveal the motivations and choices that may not therefore be directly transferrable to shape the economic response of businesses in Guangdong or elsewhere in China. peripheral regions newly connected to major To determine the nature and extent of economic centers. agglomeration in China, the study investigated The Bank has initiated such a case-study in the relationship between economic mass and Yunfu, a municipality on the periphery of the productivity using county and urban district level Pearl River Delta in Guangdong province. At economic data for 2005-2008 and explicit present, a trip from the main urban area of measurements of business travel costs. As far as Yunfu to the center of the provincial capital, can be determined, this was the first study in Guangzhou, takes 2.5 hours by road at non-peak China to do so.6 times; the main urban area is not connected by The results of the study demonstrated that rail. The Nanning-Guangzhou (NanGuang) HSR proximity to economic mass is generally line opening in 2013 will reduce the travel time associated with a higher level of average to 40 minutes. Yunfu is today at the bottom of earnings and this positive relationship remains the GDP rankings in Guangdong, and the annual robust after controlling for other factors such as average GDP growth rate of 9.8% during 2000- 2008 was the second slowest among the 6 The analysis is based on established New Economic Guangdong municipalities. During interviews, Geography models that relate hourly nominal wage rates to local businesses asserted that efforts to attract measures of economic mass. It defines appropriate control variables, tests alternative measures of spatial proximity skills, investment and development that are consistent with travel behavior, and investigates 7 the variations in the wage data which reflect labor market Rosenthal, S and WC Strange (2004). Evidence on the transitions, especially in the peripheral counties of nature and sources of agglomeration. Review of Economics Guangdong outside the manufacturing economy of the and Statistics, Vol 85, pp377-393. Pearl River Delta. China Transport Topics No. 08 4 January 2013 opportunities are hampered by poor transport opened HSR services, as described in other access. work.8 Yunfu thus provides a representative setting for A SAMPLE METHODOLOGY monitoring the development impacts of transport through a ‘before and after’ study. Based on the work described above, the World HSR service may stimulate Yunfu’s economy in Bank team in China has begun piloting a various ways: exposure to new ideas and the methodology to measure agglomeration benefits ingress of or access to highly skilled workers; net for new HSR projects. inflows of capital and/or labor to Yunfu; growth As an example, the analysis for a new 200km/hr of export-oriented secondary industries due to maximum speed passenger line between productivity improvements; and a boost to Nanning in Guangxi Province and Guangzhou special subsectors of the service industry, such (the Nanning-Guangzhou or NanGuang Railway as tourism and recreation. None of these project) is presented here. This is a new route impacts are certain. Improved accessibility may linking the existing railway network of a region in attract local talents and investors to the bright southwest China with the core Pearl River Delta, lights of Guangzhou and Shenzhen, thus saving some 220 km in travel distance compared weakening local businesses. There may also be to the current routes. It provides a much more differential impacts within the municipality direct link between the Pearl River Delta and two based on the highly localized ease of access to of China’s poorer provinces (Guangxi and the new HSR, an issue discussed in detail in the Yunnan) as well as rail services to a number of next section. inland cities along the Pearl River currently The ultimate economic impact of HSR will served by neither the rail nor the expressway depend on the extent to which the local network. It is due for completion in 2013. A communities anticipate and take advantage of major policy aim of the project is to provide the new transport improvement through support to these regions in closing the gap in adapting business plans and operations, economic development between themselves changing patterns and intensity of urban land and the much wealthier coastal area of China. use, and strengthening social and Interviews with planners and businesses in entrepreneurial networks. Findings from a field Nanning showed that local businesses are trip suggest that the local business community is already well aware of the construction of the highly enterprising and that urban development NanGuang Railway. Businesses in Nanning and plans and policies have already started to adapt along the NanGuang corridor have also themselves to the future HSR connection. A formulated their commercial plans to exploit the follow up study after the opening of the complementarity of local industrial activities to NanGuang line will seek to determine the those in the Pearl River Delta. Finally, ultimate effects. Guangdong businesses have also already made So the proposition that increasing economic significant investment in Nanning businesses, mass in China can boost productivity, supported bringing expertise as well as financial support for by the Guangdong econometric study, seems to expanding and new business activities. find manifestation in the behaviour of Our analysis was principally concerned with businesses and individuals in Yunfu. It may also estimating the economic mass of four regional be further echoed in the emerging findings of centres along the line. These urban areas are the relatively high rates of ‘generated’ (entirely new) traffic to/from regional centres on recently 8 See “High Speed Rail: The First Three Years� China Transport Topics Note 4, 2011. Available at www. worldbank.org China Transport Topics No. 08 5 January 2013  Wuzhou, 1.4 million inhabitants, 275 km freight, reductions in operator cost, and west of Guangzhou. Currently linked to generated traffic, yielded net present benefits of Guangzhou only by provincial highways. approximately 50 billion RMB in 2009 RMB. Using the elasticity of productivity with respect  Guigang, a medium-sized city of about to economic mass adopted above, the one million population in Guangxi province, agglomeration benefits were estimated at 49 previously served by provincial highway to both billion RMB (both weighed against the 2009 Nanning and Guangzhou. Current rail service to present value of project costs of 47.9 billion Guangzhou is slow and circuitous. RMB, all discounted at 12%). In our analysis,  Nanning, the capital of Guangxi then, agglomeration benefits were found on the province, with an urban population of about 2.5 order of (and in this case only slightly lower million, linked to Guangzhou by provincial than) traditional project benefits. highway and a circuitous rail service. URBAN AND TRANSPORT CONNECTIVITY  Kunming, the capital of Yunnan province, with an urban population of over 3 million, and We have presented the evidence that linked to the same major centers as Nanning by agglomeration economies are present in China, conventional rail services, national highways and and that they seem to be more significant than air services. in developed countries. We have also seen that HSR projects in China have the potential to When completed, rail travel time between deliver significant agglomeration benefits in the Nanning and Guangzhou for passengers will be right context. We conclude here with a brief reduced from the current 11 hours to around 3 review of the issues of station location and hours, providing a quantum improvement in the urban development, and how they relate to the accessibility of Guangxi and Yunnan to the realization of these economic benefits in industry and commerce of the Pearl River Delta. practice. In addition to the new railway line, a new expressway, also under construction, will reduce Given the relatively short travel times for which highway travel times. This was also taken into HSR is most competitive (2-3 hour journeys), account in the analysis. ensuring that stations are conveniently located for a city’s residents and businesses is crucial. The economic mass of each of the four centers This involves integrating HSR service both with was calculated for each year of the project as a urban development plans and with other combination of the GDP and transport cost to transport modes. relevant local urban centers. Transport cost was calculated as an ‘average’ transport cost across A common issue in China is whether to use an all modes that took into account the relevant existing (or upgraded) station for new HSR times, costs, and mode shares of road, rail, and services, or to build an entirely new station, air travel both with and without the project.9 generally on an out-of-town site. The decision is influenced by route alignment, cost, and Benefits were calculated for the 30-year period constructability considerations but city leaders following project completion. Direct benefits themselves also play an important role. Many including time savings for passengers and cities in China have actively embraced a new, 9 peripheral station location as a catalyst for the The analysis used the measure of composite utility development of a new urban district. derived from the mode split model used in the analysis. For further detail, see the forthcoming In the short run, a non-central location will World Bank working paper Regional Impacts of High dampen rail ridership and hinder connectivity, Speed Rail in China: Identification, Quantification and with longer and more challenging access times Outlook, section 4. and more difficult transfers to conventional China Transport Topics No. 08 6 January 2013 trains and long distances buses. Many Chinese expansion continues10, there will probably be HSR stations are located considerably further more than enough urbanization pressure to from city centres than their European facilitate substantial urban growth at these new counterparts. As an example, access to the new HSR stations. But implementing supportive HSR station in Wuhan is nearly as far as access to planning and development processes will be its airport, negating the advantage of city centre critical. This has sometimes proven difficult access that is recognized as one of the principal when urban master plans with long time advantages of HSR over airlines in other contexts horizons were completed in advance of HSR (see Figure 1). plans. However, no amount of planning or development can change the fact that an out of town station will never be able to replicate the locational advantages to all areas of the city that central city locations, such as those in Paris, provide to an HSR system. Not all Chinese cities have chosen to locate HSR service at out of town stations. In Jilin province, the Changchun-Jilin (ChangJi) line, opened in January 2011, connects the two largest cities in the province using upgraded downtown stations. Given the short distance between the two cities (~100km), out of town stations at either city would have significantly degraded the ability of HSR to be competitive for city to city travel.11 To increase economic mass effectively over this type of distance, central city station locations are essential. They also provide other benefits, as the ChangJi line demonstrates. The convenience of downtown access allows the line to function as an airport connector for both cities, supporting both cities’ earlier decisions to close their respective airports and focus more frequent air service at the centrally located Longjia airport (see Figure 2). The central 10 Figure 1 HSR Stations in Wuhan and Paris This is likely, given the current average urbanisation rate of China is only 50% as of the 2010 Census. According to UN This effect may be mitigated to some degree by estimates, Wuhan will add another 1 million residents over urban development migrating to HSR stations, the next 10 years. 11 even those located outside of the existing urban At their original design speed, the travel time between Changchun and Jilin was 30 min, where previously a trip core. If the current pace of China’s urban had taken 90 min on the conventional train or bus. This benefit would largely be eroded by half hour long access trips (comparable to those in Wuhan) had the stations been built out of city center at either end of the line. China Transport Topics No. 08 7 January 2013 Figure 2 The Changchun-Jilin Line, Opened January 2011 locations of the two stations also mean that a city’s jobs and population. However, planned future intermediate stations can also accommodating new growth will probably be serve as viable economic hubs, benefiting from more complicated and laborious in existing daily commuters or convenient business trips to centres than in new towns, and will require that both Changchun and Jilin. In the future, as the cities are able to effectively modify building larger Harbin-Dalian HSR line opens through regulations to accommodate the density and mix Changchun, the benefits to these well connected of uses that can benefit from proximity to HSR. stations will be multiplied by further Given recent Chinese experience, the more connectivity. In almost all respects, the ChangJi difficult decision may be to limit the spread of line appears to the authors to represent an high value functions to far flung new towns off example of Chinese best practice in regional and the HSR system, and instead to focus them in the multi-modal (air/HSR) integration; the potential city’s existing core where the benefits of economic benefits of the planning decisions agglomeration may be most readily felt. already made are likely to be reaped by the Given the long term nature of urban region in the future. development, the full impact of these decisions Downtown stations also help reinforce the may not be felt for a generation. However, their existing locational advantages of the urban core importance in ensuring that Chinese HSR delivers which tends to have the greatest accessibility to its full potential benefits argues for a renewed China Transport Topics No. 08 8 January 2013 focus on the integration of HSR into local Andrew Salzberg is a transport consultant transport and urban development planning, an working with the World Bank and specializing in issue prominently highlighted in China’s twelfth transport and urban development planning. five year plan. Richard Bullock is a transport consultant SUMMARY specialising in railway business planning, The Chinese Ministry of Railways is financial modelling and project evaluation. implementing an unprecedented program of HSR investment whose effects are only just Ying Jin is Deputy Director of Martin Centre for beginning to be felt. Recently, there has been a Architectural and Urban Studies, Cambridge renewed emphasis on ensuring that the planning University and Fellow of Robinson College, and economic evaluation process for new Cambridge. additions to the network captures the benefits of these lines as accurately as possible. Wanli Fang is a PhD candidate in regional A greater understanding and quantification of economics at the Massachusetts Institute of the wider economic benefits of these Technology focusing on the regional economic investments can and should play a larger role in benefits of transportation investment in China. future project evaluations in China. Our current research suggests that these benefits can be a This note is part of the China Transport Note significant share of the overall total, but this Series to share experience about the finding will be tested by on-going research work. transformation of the Chinese transport sector. Ultimately, the final judgement on the economic For comments, please contact Gerald Ollivier and urban development impacts of the HSR (gollivier@worldbank.org), from the Beijing program in China will be made over decades, not World Bank Office. years. However, early evidence highlights the importance of wider economic benefits, and Any findings, interpretations and conclusions supports both the drive to incorporate these expressed herein are those of the authors and do findings into improved methods of project not necessarily reflect the views of the World evaluation, and into active policy initiatives to Bank. Neither the World Bank nor the authors maximise the benefits in practice. guarantee the accuracy of any data or other information contained in this document and *************** accept no responsibility whatsoever for any consequence of their use