Economic Effects of Infrastructure

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1 Economic Effects of Infrastructure Naoyuki Yoshino Dean, Asian Development Bank Institute (ADBI) Professor Emeritus Keio University

2 Infrastructure Finance: Use of long term domestic savings Infrastructure investment Government Budget Government Bank Tax Postal Savings Domestic Investors (Pension Funds and Insurance) Overseas Investors Asian Financial Crisis ODA

3 Long term and Patient investors are needed. Bank deposits Bank loans (-5 years). Life insurance ( years, 3 years) 3. Pension funds (, 3, 4 years) Long term financing 4, Asset Management of long term instruments 5. Financial education has to be developed 3

4 4

5 Map of Japan Governance of Public Works Three Bridges were constructed () Accountability () Transparency (3) Responsibility Ex-ante and Ex-post Evaluation South Kyushu North Kyushu Chugoku Shikoku Kinki Hokuriku Tokai Hokkaido North Kanto South Kanto Tohoku Okinawa (not included) 5

6 Regional Disparities of Economic Effects large differences in Spillover effects Hokkaido Tohoku Northern Kanto Southern Hokuriku Tokai Kinki Chugoku Shikoku Northern Southern Kanto Kyushu Kyushu Direct Effect Indirect Effect (Capital) Indirect Effect (Labor). Hokkaido Tohoku Northern Kanto Southern Kanto Hokuriku Tokai Kinki Chugoku Shikoku NorthernSouthern Kyushu Kyushu Direct Effect Indirect Effect (Capital) Indirect Effect (Labor) 6

7 Direct Effect and Spill-over Effects Production Function Y=F( Kp, L, Kg ) Output Direct Effect Y= Output, Kp= private capital, L = labor Kg = public capital (infrastructure)

8 Non-affected region Highway Spillover effect Employment Private investment Spillover effect Non-affected region

9 Spillover effects Return to investors Direct Effect (Kg) Indirect Effect (Kp) Indirect Effect (L) % Returned %Increment

Case Study: Southern Tagalog Arterial Road (STAR), Philippines Micro-data The Southern Tagalog Arterial Road (STAR) project in Batangas province, Philippines (south of Metro Manila) is a modified

10 Case Study: Southern Tagalog Arterial Road (STAR), Philippines Micro-data The Southern Tagalog Arterial Road (STAR) project in Batangas province, Philippines (south of Metro Manila) is a modified Built-Operate- Transfer (BOT) project. The 4. km STAR tollway was built to improve road linkage between Metro Manila and Batangas City, provide easy access to the Batangas International Port, and thereby accelerate industrial development in Batangas and nearby provinces.

11 Difference-in-Difference (DiD) Analysis where: D = (Treatment group) T = Treatment period D = (Control group) = Treatment Effect Assumption: Equal trends between Treatment and Control groups Pre- Post

12 () Property tax Treatment D (.63) Treatment D.4** Period t+ Treatment D Period t+ Treatment D Period t Treatment D Period t- Treatment D Period t- Treatment D Period t-3 Treatment D Period t-4, forward (.5).447** (.6).47*** (.8).4** (.674).63* (.645).7* (.8).573*** (.) Difference-in-Difference Regression: Spillover () (3) (4) (5) (6) Property Business Business Regulatory Regulatory tax tax tax fees fees (.874) (.36) (.47) (.3) (.46) ***.**.48*** -. (.3).574*** (.8).57** (.3).387 (.78).336 (.54).45 (.578). (.758) (.3).64*** (.45).44*** (.47).56** (.57).6** (.7).785** (.8) 3.48*** (.8) (.45).5*** (.54).64*** (.48).77** (.47).84** (.53).7*** (.544).56*** (.35) (.84).44** (.4).64** (.83).38** (.64).48** (.634).*** (.63).88*** (.563) (.48).55*** (.6).64*** (.8).838* (.448).44** (.43).38*** (.36).5*** (.45) (7) User charge. (.5).48*** (.3).37** (.64).35 (.7).5 (.74).4 (.74).73*** (.58).3*** (.67) (8) User charge.364 (.8) -. (.5).434** (.67).4 (.58).7 (.56).47 (.53).676 (.55).787 (.745) Construction.83** * (.7) (.6) (.855) (.8) Constant 4.6*** *** *** *** -.6 (.48) (8.83) (.) (.4) (.87) (6.566) (.64) (7.84) N R Clustered standard errors, corrected for small number of clusters; * Significant at %. ** Significant at 5%. *** Significant at %.

13 The Southern Tagalog Arterial Road (STAR Highway), Philippines, Manila Tax Revenues in three cities Yoshino and Pontines (5) ADBI Discussion paper 54 Completion 3

14 Fees + Additional return from tax revenues Increase rate of return on investment Toll fees Ticket revenue Investors Employment Spillover effect Private investment Spillover effect Increase in Tax revenues

15 Return the spillover effects to Investors 5

16 Cross-border Infrastructure Investment Role of Multilateral Institution Country A Large City Country B Spillover effect, Promote SMEs Spillover effect Increase in Tax revenues

Railway Uzbekistan Railway GDP growth rate Time Divide regions affected and not affected by railway connection to Treated group and Control group 7

17 Railway Uzbekistan Railway GDP growth rate Time Divide regions affected and not affected by railway connection to Treated group and Control group 7 Naoyuki Yoshino - Umid Abidhadjaev. Impact evaluation of infrastructure provision: case studies from Japan and Uzbekistan. December 4-5, 5. Islamabad, Pakistan

18 Difference-in-difference: regression 8 Naoyuki Yoshino - Umid Abidhadjaev. Impact evaluation of infrastructure provision: case studies from Japan and Uzbekistan. December 4-5, 5. Islamabad, Pakistan

years year GDP GDP Term Connectivity effect Regional effect Spillover effect Launching Effects Short.83***[4.48].7[.45].33[.4] Mid.5***[6.88].36[.].7[.46] Long.6***[3.4] -.4[-.].**[.4] Anticipated Short.

19 years year GDP GDP Term Connectivity effect Regional effect Spillover effect Launching Effects Short.83***[4.48].7[.45].33[.4] Mid.5***[6.88].36[.].7[.46] Long.6***[3.4] -.4[-.].**[.4] Anticipated Short.[.33].85[.75] -.8[-.] Mid.3[.5].64[.3] -.[-.3] Long.7[.3] -.6[-.].5[.67] Postponed Effects.76*[.5] -.4[-.7].58*[.3] Anticipated Short -.54[-.66].4[.78] -.3[-.] Mid.3[.44].84[.4].3[.3] Long.[.5].[.6].87[.] Postponed Effects -.4[-.] -.7[-.35].5[.44] Note: t-values are in parenthesis. t-value measures how many standard errors the coefficient is away from zero. legend: * p<.; ** p<.5; *** p<. Naoyuki Yoshino - Umid Abidhadjaev. Impact evaluation of infrastructure provision: case studies from Japan and Uzbekistan. December 4-5, 5. Islamabad, Pakistan

20 Additional tax revenue, Regional GDP growth and Railway Company Net Income, LCU (bln.) Period Short term (-) Mid-term (-) Long-term (-) Coefficients T()* Y (Tax revenue).83*** [4.48].48*** [6.88].6*** [3.4] Y Affected (Direct + Spillover effects) Company net income (Revenue - Costs) Source: Authors calculatios

21 Japanese Bullet Train

22 Impact of Kyushu Shinkansen Rail on CORPORATE TAX revenue during st PHASE OF OPERATION period {4-}, mln. JPY (adjusted for CPI, base 8) Variable Regression Regression Regression 3 Regression 4 Regression 5 Treatment [-.] Number of tax payers * * 5.86* * * [.5] [.5] [.5] [.5] [.] Treatment [-.87] Treatment [-.6] Treatment [-.7] TreatmentCon [-.65] Constant [-.35] [-.35] [-.35] [-.35] [-.3] N R F Note: Treatment = Time Dummy {-3} x Group. etc. t-values are in parenthesis. Legend: * p<.; ** p<.5; *** p<.. Clustering standard errors are used, allowing for heteroscedasticity and arbitrary autocorrelation within a prefecture, but treating the errors as uncorrelated across prefectures COMPOSITION OF GROUPS Group Group5 Kagoshima Kagoshima Kumamoto Kumamoto Fukuoka Group3 Oita Kagoshima Miyazaki Kumamoto Fukuoka Group7 Kagoshima Kumamoto Fukuoka Oita Miyazaki Saga Nagasaki GroupCon Kagoshima Kumamoto Fukuoka Osaka Hyogo Okayama Hiroshima Yamaguchi

23 Impact of Kyushu Shinkansen Rail on CORPORATE TAX revenue during nd PHASE OF OPERATION period {-3}, mln. JPY (adjusted for CPI, base 8) Variable Regression Regression Regression 3 Regression 4 Regression 5 Treatment 733.** [.] Number of tax payers *** *** *** *** *** [3.3] [3.4] [3.4] [3.4] [3.7] Treatment * [] Treatment ** [.] Treatment ** [.34] TreatmentCon 763 [.58] Constant ** ** ** ** ** [-.7] [-.8] [-.8] [-.] [-.] N R F Note: Treatment = Time Dummy {-3} x Group. etc. t-values are in parenthesis. Legend: * p<.; ** p<.5; *** p<.. Clustering standard errors are used, allowing for heteroscedasticity and arbitrary autocorrelation within a prefecture, but treating the errors as uncorrelated across prefectures COMPOSITION OF GROUPS Group Group5 Kagoshima Kagoshima Kumamoto Kumamoto Fukuoka Group3 Oita Kagoshima Miyazaki Kumamoto Fukuoka Group7 Kagoshima Kumamoto Fukuoka Oita Miyazaki Saga Nagasaki GroupCon Kagoshima Kumamoto Fukuoka Osaka Hyogo Okayama Hiroshima Yamaguchi 3

24 mln. JPY Total tax revenue, mln. JPY Group 7 Group 5 Group 3 Group Previous period [8-] Construction [-3] Operation [4-] Operation Group 8 [-3]

25 Public-Private Partnership (PPP) Give incentives to operating entity

26 Possible Solutions Start up businesses, farmers Hometown Investment Trust Funds A Stable Way to Supply Risk Capital Yoshino, Naoyuki; Kaji Sahoko (Eds.) 3, IX, 8 p. 4 illus., illus. in color Available Formats: ebook Hardcover Springer Japan, Cambodia Vietnam, Peru 6

27 Investment in SMEs and start up businesses 7

29 Access to Finance by SMEs and Large Firms in Japan

30 Barriers for SMEs in Accessing Financial Institutions Source: ADB OECD study on enhancing financial accessibility for SMEs: Lessons from recent crises. Mandaluyong City, Philippines: Asian Development Bank, 3 3

31 Examined Variable 3

32 Cluster analysis: the average linkage method Dendogram Using Average Linkage 3

33 Factor Loadings of Financial Variables after Direct Oblimin Rotation 33

34 Credit Rating of SMEs using Asian Data (i) Sales (ii) Assets (iii) Liquidity (Cash) (iv) Total Debt 34

35 Grouping Based on Principal Component (Z-Z) and Cluster Analysis 35

36 Wind Power Fund Construction costs = million US $ Future Environment Relies on You

37 Various Wind power generators were constructed in Japan The fund constructed more than 6 areas of wind powers

38 Investors people Each person US$ Private Financial Scheme of Wind Power Collected by Individuals (started in -) Hokkaido Green Fund Construction Costs = million US $ Sell to Power Company Final User PE +.5 5% surcharge

39 Donation Investors Financial Scheme of Wind Power Collected by Individuals Hokkaido Green Fund (6%) Senior Bank Loans (%) Government Fund, Carbon Tax (%) Sell to Power Company Final User PE=5% surcharge Sales Of Power

40 Solar Power Panel Funds in Japan

41 Japan Greece Italy Portugal Ireland France OECD-Total Spain Belgium United States United Kingdom Iceland Canada Hungary Austria Netherlands Slovenia Germany Finland Slovak Republic Czech Republic Poland Denmark Sweden Switzerland New Zealand Korea Norway Australia Luxembourg Estonia percent Gross Debt / GDP of selected OECD Countries Gross Debt / GDP of selected OECD Countries Note: General government gross financial liabilities as a percentage of GDP Source: OECD Economic Outlook No. 5 (database), Publication Date: 6 May 4 DOI:.787/gov-debt-table-4--en 4

General Account Budget -Breakdown of Expenditure National Debt Service 3,7. 4.3% Interest Payments,3..6% Food Supply,5.7 (.) Promotion of SMEs 85.3 (.) Energy 64. (.) Former Military Personal Pensions 444.

42 General Account Budget -Breakdown of Expenditure National Debt Service 3,7. 4.3% Interest Payments,3..6% Food Supply,5.7 (.) Promotion of SMEs 85.3 (.) Energy 64. (.) Former Military Personal Pensions (.5) Economic Assistance 5.8 (.5) Miscellaneous 6,5.6 (6.4) Contingency Reserves 35. (.4) Redemption of the National Debt 3, % Others,656.8.% National Defense 4, % Education & Science 5, % Public Works 5, % Social Security 3, % General Account Total Expenditure s 5,88.3 (.%) Local Allocation Tax Grants, etc. 6,44 6.8% Primary Expenses 7, % (Note)Figures may not add up to the totals due to rounding. (Note)The ratio of Social Security expenses to General Expenditures*:54.% *General Expenditures equals to the Primary Expenditure minus Local Allocation Tax Grants, etc.

43 Banks and Postal Savings (5) JAPAN 7.8% Bank of Japan (5) JAPAN.% Life and Non-life Insurances (5).3% Overseas Investors (5) 8.5% Public Pension funds (5) 6.4% Private Pension Funds (5) 3.4%

44 Balance Sheet of BOJ Unit: Trillion Yen Total Asset: 7 ETF etc. 6.6 Total Asset: 58 Long term JGB 8 Others Banknotes 87 Current deposit 47 ETF etc. 8 Total Asset: 4 Long term JGB 4 Others Banknotes Current deposit 7 ETF etc.3 Long term JGB Others Banknotes 87 Current deposit 77 FY FY3 FY4 Data Source:BOJ

45 Japanese Government Bond Yields year year.5 Source: MOF

47 47

48 Yoshino and Sakakibara () The Current State of Japanese Economy and Remedies, Asian Economic Papers, MIT Press, Vol., No.. 48

49 Yoshino, N., Taghizadeh-Hesary, F. (5), An Analysis of Challenges Faced by Japan s Economy and Abenomics. Journal of Japanese Political Economy. Routledge: Taylor and Francis, DOI:.8/34X.4.85 Yoshino, N., Taghizadeh-Hesary, F. (6). Causes and Remedies of Japan s Long Lasting Recession: Lessons for China. China & World Economy. Vol 4 (): 6 4

50 Reasons for Vertical IS curve 5

51 Domar Condition 5

52 Bohn s Condition 5

54 Government Spending and Taxation Rules

55 55

56 References McNelis, P and N, Yoshino () Macroeconomic Volatility under High Accumulation of Government Debt: Lessons from Japan, Advances in Complex Systems, Vol.5, Suppl. No., pp Hoshi, T. and T. Ito (4) Defying Gravity: can Japanese sovereign debt continue to increase without a crisis?, Economic Policy Journal, Vol., Iss.7, pp Yoshino, N. and E. Sakakibara () The Current State of Japanese Economy and Remedies, Asian Economic Papers, Vol., No., MIT Pres Yoshino, N. and T. Mizoguchi () The Role of Public Works in the Political Business Cycle and the Instability of the Budget Deficits in Japan, Asian Economic Papers, Vol., No., pp. 4-. Yoshino, N. and T. Mizoguchi (3a) Change in the Flow of Funds and the Fiscal Rules Needed for Fiscal Stabilization, Public Policy Review, Vol.8, No.6, pp Yoshino, N. and T. Mizoguchi (3b) Optimal Fiscal Policy Rule to Achieve Fiscal Sustainability: Comparison between Japan and Europe, Presented at Singapore Economic Review Conference 3. Yoshino, N and U. Vollmer (4) The Sovereign Debt Crisis: Why Greece, but not Japan?, Asia Europe Journal, June, Vol., Iss.3, pp Yoshino, N., Taghizadeh-Hesary, F. (5), An Analysis of Challenges Faced by Japan s Economy and Abenomics. Journal of Japanese Political Economy. Routledge: Taylor and Francis, DOI:.8/34X.4.85 Yoshino, N., T. Mizoguchi and Taghizadeh-Hesary, F. (5) Optimal Fiscal Policy Rule for Achieving Fiscal Sustainability: A Japanese Case Study, Asian Development Bank Institute, Working Paper, No. 53. Yoshino, N., Taghizadeh-Hesary, F. (6). Causes and Remedies of Japan s Long Lasting Recession: Lessons for China. China & World Economy. Vol 4 (): 6 56

Economic Effect of Infrastructure : macroeconomic effects and microeconomic effects

Economic Effect of Infrastructure : macroeconomic effects and microeconomic effects Naoyuki Yoshino, Masaki Nakahigashi, Victor Pontines and Umid Abidhadjaev Asian Development Bank Institute ADBInstitute