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The Economic Effects of Public Capital Stock
: Measuring Productivity Effects and Welfare Effects
Through Urban Area Classification

summary

Investment in public capital, such as roads, bridges and other infrastructure, is sometimes criticized for several reasons: for damaging the environment, for worsening the country's fiscal situation, and for encouraging bid-rigging among contractors. Another common criticism is that the effects of public capital improvement are decreasing. To address this concern, the long-term stock effects of public capital, rather than its short-term flow effects, are analyzed.

This study classifies the stock effects of public capital into productivity effects and welfare effects. The former is the effect of the public capital in increasing the productivity of economic activities and enhancing economic growth. Examples include shorter travel times, lower transportation costs, and increased freight volume. The latter is the effect of the public capital in improving people's living standards and raising the level of domestic economic welfare-for example improved amenities and sanitation, and a greater sense of security.

The stock effects of public capital often either extend beyond the administrative boundaries of prefectures or are limited to narrower areas. Thus the Urban Employment Area (UEA) was chosen to be the sphere of social and economic activities, and economic effects of public capital in different sectors.

To examine the productivity effects, a panel analysis of product functions was conducted. The three factors of a) the stock amount of public capital, b) the stock amount of private-sector capital, and c) the number of employees, all between 25 years from FY1974 to FY1998 for both types of UEAs, Metropolitan Employment Area (MEA) and Micropolitan Employment Area (McEA), were used as explanatory variables. MEAs and McEAs are determined by the population of the DID (Densely Inhabited District: a population of 50,000 or over for MEAs, and between 10,000 and 50,000 for McEAs) of the core city and the commuters' ratio of 10% or more from the suburb to the core. The gross production of the area was used as an explained variable. The productivity effects were observed for the industrial infrastructure and the infrastructure of daily life in the MEAs. The marginal productivity (productivity effects) were the greatest for industrial infrastructure

To examine the welfare effects, a cross-sectional analysis of the land price function was conducted. The four factors of a) per-capita income of selected municipalities located within MEAs and McEAs, b) commuting time, c) the stock amount of public capital and, d) the number of employees of the MEAs and McEAs that the selected municipalities belong to were used as explanatory variables. The residential land price in each municipality was used as an explained variable. Figures for FY1990 were used for all these variables. The welfare effects were observed for the social capital as a whole. By sector, the welfare effects were observed in all sectors of McEAs, and in sectors of land conservation, industrial infrastructure, and infrastructure of daily life of MEAs. The size of the marginal utility measured by land price (welfare effects) of the social capital as a whole was greater for McEAs than for MEAs. In both employment areas the marginal utility was the greatest for industrial infrastructure followed by the infrastructure of daily life and then by land conservation.

The study illustrates the economic effects of social capital stock from a macroeconomic viewpoint and suggests the course of future debate on the improvement of public capital.　The authors hope that the results obtained here will serve as a reference when setting the budget allocations for public works spending and the directions of public capital improvement. The authors mention five "limits" to the study. The first two are that the problem of simultaneous bias remains, and different city sizes could have been chosen in determining the bid function. The latter three are that new analytical methods should be developed and used to overcome the limits of the study, namely: a) benefits of the social capital stock beyond the UEAs cannot be tracked, b) benefits of the social capital stock that are difficult for citizens to be aware of cannot be sufficiently tracked, and c) the results indicate merely the average effects of social capital improvement conducted to date.

Key words

public capital stock, productivity effect, welfare effect, marginal productivity, marginal utility, Urban Employment Area (UEA)

issue

Reports No.68/2006 Apr.

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