New Frontiers in Regional Science: Asian Perspectives 1 Hirotada Kohno Economic Eff ects of Public Investment An Emphasis on Marshallian and Monetary External Economies New Frontiers in Regional Science: Asian Perspectives Volume 1 EditorinChief YoshiroHigano,UniversityofTsukuba ManagingEditors MakotoTawada(GeneralManagingEditor),AichiGakuinUniversity KiyokoHagihara,BukkyoUniversity LilyKiminami,NiigataUniversity EditorialBoard SakaiYasuhiro(AdvisorChiefJapan),ShigaUniversity YasuhideOkuyama,UniversityofKitakyushu ZhengWang,ChineseAcademyofSciences YuzuruMiyata,ToyohashiUniversityofTechnology HiroyukiShibusawa,ToyohashiUniversityofTechnology SaburoSaito,FukuokaUniversity MakotoOkamura,HiroshimaUniversity MorikiHosoe,KumamotoGakuenUniversity BudyPrasetyoResosudarmo,CrawfordSchoolofPublicPolicy,ANU Shin-KunPeng,AcademiaSinica GeoffreyJohnDennisHewings,UniversityofIllinois EuijuneKim,SeoulNationalUniversity SrijitMishra,IndiraGandhiInstituteofDevelopmentResearch AmitrajeetA.Batabyal,RochesterInstituteofTechnology YizhiWang,ShanghaiAcademyofSocialSciences DanielShefer,Technion-IsraelInstituteofTechnology AkiraKiminami,TheUniversityofTokyo AdvisoryBoard PeterNijkamp(Chair,ExOfficioMemberofEditorialBoard),TinbergenInstitute RachelS.Franklin,BrownUniversity MarkD.Partridge,OhioStateUniversity JacquesPoot,UniversityofWaikato AuraReggiani,UniversityofBologna New Frontiers in Regional Science: Asian Perspectives Thisseriesisaconstellationofworksbyscholarsinthefieldofregionalscienceand inrelateddisciplinesspecificallyfocusingondynamisminAsia. Asia is the mostdynamic part ofthe world.Japan, Korea, Taiwan, and Singapore experiencedrapidandmiracleeconomicgrowthinthe1970s.Malaysia,Indonesia, and Thailand followed in the 1980s. China, India, and Vietnam are now rising countries in Asia and are even leading the world economy. Due to their rapid economic development and growth, Asian countries continue to face a variety of urgentissuesincludingregionalandinstitutionalunbalancedgrowth,environmental problems,povertyamidstprosperity,anageingsociety,thecollapseofthebubble economy,anddeflation,amongothers. Asian countries are diversified as they have their own cultural, historical, and geographicalaswellaspoliticalconditions.Duetothisfact,scholarsspecializingin regionalscienceasaninter-andmulti-disciplinehavetakenleadingrolesinproviding mitigatingpolicyproposalsbasedonrobustinterdisciplinaryanalysisofmultifaceted regionalissuesandsubjectsinAsia.Thisseriesnotonlywillpresentuniqueresearch resultsfromAsiathatareunfamiliarinotherpartsoftheworldbecauseoflanguage barriers,butalsowillpublishadvancedresearchresultsfromthoseregionsthathave focusedonregionalandurbanissuesinAsiafromdifferentperspectives. The series aims to expand the frontiers of regional science through diffusion of intrinsicallydevelopedandadvancedmodernregionalsciencemethodologiesinAsia andotherareasoftheworld.Readerswillbeinspiredtorealizethatregionalandurban issuesintheworldaresovastthattheirestablishedmethodologiesstillhavespacefor developmentandrefinement,andtounderstandtheimportanceoftheinterdisciplinary and multidisciplinary approach that is inherent in regional science for analyzing and resolvingurgentregionalandurbanissuesinAsia. Topicsunderconsiderationinthisseriesincludethetheoryofsocialcostandbenefit analysis and criteria of public investments, socioeconomic vulnerability against disasters,foodsecurityandpolicy,agro-foodsystemsinChina,industrialclustering inAsia,comprehensivemanagementofwaterenvironmentandresourcesinariver basin, the international trade blocand foodsecurity, migration and labor market in Asia,landpolicyandlocalpropertytax,informationandcommunicationtechnology planning, consumer “shop-around” movements, and regeneration of downtowns, amongothers. Researchers who are interested in publishing their books in this Series should obtainaproposalformfromYoshiroHigano(EditorinChief,[email protected]. tsukuba.ac.jp)andreturnthecompletedformtohim. Moreinformationaboutthisseriesathttp://www.springer.com/series/13039 Hirotada Kohno Economic Effects of Public Investment An Emphasis on Marshallian and Monetary External Economies HirotadaKohno ProfessorEmeritus UniversityofTsukuba Tsukuba Japan ISSN2199-5974 ISSN2199-5982 (electronic) NewFrontiersinRegionalScience:AsianPerspectives ISBN978-4-431-55223-9 ISBN978-4-431-55224-6 (eBook) DOI10.1007/978-4-431-55224-6 LibraryofCongressControlNumber:2016934049 ©SpringerJapan2016 Thisworkissubjecttocopyright.AllrightsarereservedbythePublisher,whetherthewholeorpartof the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilarmethodologynowknownorhereafterdeveloped. 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Printedonacid-freepaper ThisSpringerimprintispublishedbySpringerNature TheregisteredcompanyisSpringerJapanKK Preface So far, we have expressed the intention of our studies in the form of economic effects of public investment and public investment criteria—that is, the following twothemeshavebeensubjectsofinquiry: A: Theoryandmeasurementoftheindirecteconomiceffectsofpublic investment,basedontheMarshallianandmonetaryexternaleconomies B: Theoryandmeasurementofthepublicinvestmentcriteria,basedonthe interregionalinput‐outputprogrammingmodel Thistime,thesetwoareseparatedandwillbepublishedinseparatevolumes. There has always been the theme of public investment criteria in our deep thoughtswhenevertheeconomiceffectsofpublicinvestmentareargued. AlthoughthetitleofthisvolumeisEconomicEffects ofPublicInvestment,the argumentproceedsincontentintheformof(A)above,thatis,withtheemphasison the“indirect.” For what reason should we adhere to the Marshallian and monetary external economies? The reason is this: the new epoch-making theory was desired in responsetotheparadigm-change-likebackgroundofthetimesinthetransportation field of the new construction of ultra-gigantic public investment; public facilities (infrastructure)suchastheMeishin(Nagoya–Kobe)Expressway(July1,1965),the To-Mei(Tokyo–Nagoya)Expressway(May26,1969),andtheTokaidoNewTrunk Line(October1,1964);andotherprojectsduringaperiodofabout20years(1955– 1975). Corresponding to such events, in the investigative research field, two large works were of pressing need, of the preparation–learning–aftercare concerning the Report on the Kobe–Nagoya Expressway Survey by Ralph J. Watkins for the Ministry of Construction, Government of Japan (August 8, 1956, 188 pp.), and Materials on The Shizuoka–Toyokawa Expressway Project prepared for the Inter- national Bank for Reconstruction and Development, e.g., IV. Materials on Toll TrafficandEconomicBenefits,NihonDoroKodan[JapanHighwayPublicCorpo- ration(Tokyo,Japan,December1964(S.39),A4edition,73pp.].Forthisdifficult v vi Preface problem,theoldhistoricalschool-likeTreatiseonTransportdidnotworkatall,and anewtheoryandmethodwereindeedrequired. Onconsiderationofhowmuchthepecuniaryeconomiceffectsshouldbe,forthe payability/feasibilitystudyoftheMeishinExpressway,wewereatthattimefacing the problem of what the amounts of the indirect economic effects ought to be, except for the effects of savings in running costs and reduction in transport time, whichformthemajorityofthedirecteconomiceffectsinpopularthinkingandare textbook-like. For this, there are several antithetical concepts: (1) What is said to be indirect economic effects are intrinsically nothing but what is transferred from the direct effects, so it will not be able to add up to the direct effects. If this assertion is aggravated, then it turns out to be perfect transfer theory. (2) To the contrary, exceptingthetransferredindirecteconomiceffects,thereisanassertionthatthere areindependentlyexistingindirecteconomiceffectsapartfromthese.(3)Suppos- ing the future demand function at the target period included all such various indirect effects, there also is an assertion that if only the direct effects have been estimated, there is no need to worry about the measurement problem of indirect effects.1 Howeveritmaybewithamathematicalmodel,itisuniversallyadmittedthatthe estimationinadvanceofsuchfuturecompositedemandfunctionwillbeextremely difficult. This is the great crux of the subject standing in our way before the measurementofeconomiceffectsofpublicinvestment. ThisproblemisexplainedfirstinChap.9briefly,andinexpositionofthepoints in dispute in the latter part of this preface, our intention of how to cope with it is takenup. More definitively, we have put the root of analysis on the windfall-like effects broughtaboutbytheinitialimpactsofgiganticpublicinvestments,thatis,thegreat downfallof(long-run,short-run)marginalcosts. For a start, a summary by chapter is given. First, in Chap. 4, there are the following examples of the (pure) indirect economic effects which are not the indirect effects transferred from the direct effects: (1) ease of traffic congestion on existing roads, (2) scale-enlargement of factories–warehouses, and (3)Marshallianexternaleconomiesareenumerated. In Chap. 5, especially, the Marshallian externality is explained. The concept will be further clarified in that “technological and marketable propagation‐diffu- sion of the technological external economies” ought to give rise to the scale- enlargement of upstream industries (raw materials purchased, product selling, advertisements, craftsmen’s training, etc.) which will be input materials to the industry concerned (for instance, bread production and selling) which enjoys directly the technological innovation effects of expressways, the repercussion effects of which also are received. Here, the basic process is shaped into a “propagation‐diffusion basis.” 1Kanemoto,Y.,andK.Mera.1985.RegionalScienceandUrbanEconomics15:343–363. Preface vii In Chap. 9, based on the market equilibrium model, the confirmation of the independentexistencetheoryhasbeengroundedonthediscrepancyofthemagni- tude of the generation base vs. incidence base benefits and has attained the most importanttargetofthisvolumebydemonstratingtheexistenceoftheindependent existencedoctrineoftheindirecteconomiceffects. In Chap. 10, based on the general equilibrium model, further generalization of theexternalityoftechnologicalpropagation‐diffusioncanbeattained. Theaboveformsthemainstreamofthisvolumeandhasbeentreatedsystemati- callyinChap.1,Sect.1.4(No.1);inChap.4,Sect.4.3(No.2);inChap.5,Sect.5.1 (No.3);andinChap.10,Sect.10.2(No.4). Another large stream is the measurement method on the individual economic effects(byitem).Thisisnotalarge-scaleeconometricsmodel,norisitalarge-scale interregionalinput‐outputprogrammingmodelofthesecondvolume(bywhichwe can only derive macro gross economic effects), but, rather, what is said to be the “World Bank Method,” which we will show in Tables 1.1 and 1.2 in Chap. 1, in which the following items are included: running costs saving, transport time reduction, decrease of load-damaged (goods-holder’s benefits), enlargement of market area, and relaxation of upper limits (capacity restriction) of transport lot (1- or 2-t vehicle ! 20-t vehicle setup). This will have borne fruit in the scale- enlargement effects of the factory‐warehouse and will also be revealed to be Marshallianeconomiceffects. Wemustmakementionofonemorefactthatconcernsthemeasurementofthe time-savingevaluationrateofChap.2andmeasurementofpublicpollution(noise) evaluationrateofChaps.6and7. Tables 1.1 and 1.2 mentioned above show that these are measured in terms of physical units. The individual effects by item must be summed up to one scalar magnitude,thatis,wemustconverttheseeffectstomonetarytermsandsumthem up.Forthispurpose,weneedacoefficientofconversion.Here,thereisindispens- ablederivationwork. Chapter3isaneasyelucidationoftheperfecttransfertheoryofindirecteffects, andChap.8istheelucidationinnumericalexpressionofthefollowingformula: Benefitsinincidencebase>Benefitsingenerationbase basedoncoordinateconceptssuchasgenerationbasevs.incidencebaseasthetime axis of measurement, remained vs. transferred, direct vs. indirect, etc. (of course, substantially,thistheoremwillbestudiedinChaps.9and10). Finally,socialcostsandmeasurementofChap.6arecoordinateconceptsofthe social benefits which we have studied as the main research target, and they are positedandputtogethertoformacounterparttoeachother. Asexplained above,asummarybychapterisgiven;then,fromotherpointsof view, we refer to the normative subjects at issue of three points, though with hesitation,whichareasfollows: viii Preface Advocacy of the Independent Existence Theory of Indirect Economic Effects The subject of our counterargument is the proposed model by which the future market demand function 40 or 50 years from now will be able to be forecast, in whichallthedirectandindirecteffectswillbeincludedduetotheimpactofahuge publicinvestmentprojectliketheTokyo–NagoyaExpresswayclassthathasturned up.Ifthemodelwerevalid,itwouldbeanepoch-makingproposal–proposition. Thismightbeshownbytheexamplethatthewordingtospreadthemagnitudeor socialmissionoftheindirecteconomiceffectsoftheMinistryofLand,Infrastruc- ture, Transport and Tourism (formerly the Ministry of Construction) has disappearedthese30years;nevertheless,thereremainenormouspublicstructures suchastheHonshu–ShikokuBridgeExpressways(three),thelongEnasanTunnel (August 23, 1975), the second Tokyo–Nagoya (To-Mei) Expressway (April 14,2012),andothers. This volume is what attempts to bring forth our counterargument against the modelabove.Beingpowerlessagainstitislikeaflytryingtobiteatortoise. This is the method and measurement of economic effects (Sect. 9.2.1, 9.2.2) basedonthemarketequilibriummodel,withwhichwetakegreatpainstocarryout the existence proof of the equilibrium solution, with the measurement results obtained,andsubsequentlytheanalysisinChap.10. By these dealings, the indirect economic effects that exist independently and differ from the transferred indirect effects are confirmed, and our target has been attained.Theseeffectscanbeaddedtothedirecteffects. Aswethought,theindirecteconomiceffectsofhugeprojectstowhichourhand can reach ought to be taken hold of, optionally and gradually by the items of indirecteffectsrespectively.Summedupthese,thecomprehensiveindirecteffects inthissenseareobtained,whichwecontributetopublicinvestmentcriteria. Itisouropinionthatthisscenariowillbethemosteffective.Wehadbettergive up, for the time being, measuring all the items of indirect economic effects, e.g., indicated as Items 1]–13] in Sect. 11.5.2, at one stroke. The traffic congestion- easingeffectsdescribedinSect.11.5.2,choosingjustoneitemfrom13Itemsisa goodexampleforthetrafficcongestion-easingeffectsinbigcity. Controversy Regarding Social Costs AsifthefundamentalhumanrightsoftheFrenchRevolutionwerebeingimitated, human rights of pedestrians are enhanced, fictitious human rights of which are proposed in terms of prohibitive costs, in order to protect citizens from noise pollution. (It seems that most citizens will not want such ridiculous rights. They willchoosenotsuchabstractrights,but,rather,theusualpracticalones.Everyone willbeawareoftheadditionaltaxburden.)Itisourview thatthisisbasedonthe Preface ix strongwilloftheproposer.Againstthis,thecounterargumentfromthestandpoint ofpracticalsenseismade. Ifwewouldreadaccuratelytheassertionsofbothsides,theywouldbedispelled asamatterofcourseconcerningwhatshouldberight.Itisthewayoftheworldthat everythinghasgonewrongwithus.(Thegreaterpartofthepeoplesuchascitizens, theintelligentsia,andjournalistswillnotread;theyonlypraise.) To get the people concerned to read, we had better make the results of our measurement of social costs public as a definitive edition in order to make them understandandsupportthetruth.ThisisdoneinChap.6. Inquiry into and Restoration of Pecuniary¼Monetary External Economies Thosewhoparticipateinpublicinvestmentwillhopetogetagraspofthecompre- hensive effects including the direct and indirect economic effects, with which to investigatepublicinvestmentcriteriathoroughly.Therefore,theindirecteffectsare indispensableforus. Theimpactsoftheproject,however,areontheusersasthetechnologicaldirect effectsonlyatfirst.Apartormostpartoftheimpactwillcomefromthenextstage as transferred indirect effects, transferred from one firm or consumer to another, oneaftertheother. Apartfromthis,goingbeneaththesurfacelikewaterrunningundergroundatthe beginning, with the impact at the same initial time, there are also indirect effects that will manifest themselves as Marshallian external economies at a stage along thewayandwilljoininthetransferringoftheindirecteffectsmentionedabove. Theseareprevalentinthemarketeconomy,theeconomicsociety,asthesequence ofpecuniaryexternaleconomies,exceptthetechnologicalexternaleconomiesatthe firststage,thatis,columnα(seealsocolumnsβ,γ,....)ofFig.1.1of1.1). When the initial impact propagates and diffuses and converges at the general equilibrium solution, there exist the effects expressed by the revised price (cid:2) quantity, as the differences before and after the advent of impact, which are in a verysmallquantityattheunitlevelofgenerationofeacheffectandyetrangeacross allgoodsandservicesandoverwholeregions. The difficult problem, however, is left unsolved: that, if possible, we want to separate (a) what the effects due to any specific initial impact may drift to and (b) the others, at the mouths of all streams. If this is solved, all the problems of economic effects will be settled. The current mainstream of thought is that for a long time there has been no need to measure what once flows into the market economy. Those like us, who take charge of public investment, however, would like to discriminate and pick up the so-called pecuniary external economies that flow in andareburied,withoutfail,inthemarketeconomy.