Port Infrastructure and Economic Growth
It is generally accepted that good infrastructure is a key requirement for economic performance measured in terms of medium to long term economic growth. Indeed, most measures of a country’s competitiveness will include an assessment of infrastructure in the calculation. After all, logistics and SCM key aspects of today’s business world.
Not surprisingly, good infrastructure in and around ports is considered to be particularly important to the performance of an economy such as Ireland that relies heavily on trading and that does not have major land borders with its main trading partners. But just how important might this requirement be? Put a different way, what is the relationship between port infrastructure and economic growth?
The Importance of Ports in Ireland
The relationship between growing international trade and economic performance is well studied and almost unequivocally positive. Add to this the fact that 80 per cent of global trade by volume and over 70 per cent by value are carried by sea and are handled by ports and the importance of ports to economic growth appears obvious.
International trade is hugely important to Ireland. For example, it is estimated that Ireland’s exports in 2020 rose to close to €109 billion, and that both exports and imports are expected to grow well ahead of overall economic growth in 2021 and 2022 as the economy recovers from the COVID-19 disruption.
It’s a small step to conclude that inefficiencies in the ports as a result of inadequate infrastructure could disrupt the flow of exports and thereby reduce the rate of economic growth, often thought of as the rate of recovery. This idea is often used to support calls for state investment in ports.
Based on this, it also appears to be a small logical step to conclude that, where constraints are identified, investment in infrastructure to overcome identified constraints will promote economic growth. This type of argument has been used many times to justify investment in major ports such as Cork and Dublin.
There has certainly been a huge ‘lightening’ of Ireland’s exports in recent years as knowledge intensive goods and services have come to comprise the main part of the value. However, the physical movement of goods remains important.
Even so, the available research suggests that the relationship between investment in port infrastructure and economic growth is much more complex that the simple logical steps above might suggest.
Do Ports Promote Economic Growth?
One issue that must be addressed is to ensure that the question is properly framed. It’s one thing to consider the impact of an investment in infrastructure that addresses a known constraint. That will likely pay a dividend, in terms of the efficient working of the port at least.
However, it can be very difficult to study the impact on economic growth. The problem is not just identifying the linkages that might arise, but assessing the impact of an investment that addresses a negative requires that a hypothetical baseline is set out.
This baseline would be the rate of growth if the constraint were allowed to persist, more accurately, if the specific investment in infrastructure were not undertaken. One issue to consider is that there may be different ways to work around the constraint.
This is a different problem from asking what would be the impact on economic growth of a general investment in infrastructure. In this case, the question relates to an investment where the payoff is based on an assumption that there is a direct relationship between port infrastructure and growth.
In this formulation, the issue can be addressed by examining past data on investment and economic growth and controlling for variables to identify if a relationship exists.
A number of researchers have undertaken port impact studies to identify this relationship and the results are often used to justify public support for investment.
However, the inconvenient fact is that there has been little agreement between the results of studies on this issue. Some have indeed found that improvements in ports stimulate economic growth in their regions and countries.
However, others have found that little or no support for the argument that ports promote economic growth. Indeed, a number of studies in industrialised countries have pointed to the negative role of port investments in a region as automation and facilities for containers reduce the numbers of jobs and value added activity in the port.
This lack of consensus is seen in studies of the impact of developing port hub facilities. These studies have concluded that the potential for major payoffs in this respect may be a lot less than has been suggested. Overall, structural changes in shipping and trade flows, and the impact of recurring financial crises in recent decades means there is a lot less certainty in this respect than previously thought.
Port Infrastructure and Economic Growth in Ireland
So can we draw any conclusions from this research that might provide a foundation for examining the importance of port infrastructure for Ireland’s future economic performance?
We’ll leave aside arguments that such investment would directly stimulate economic activity. While this is true, the payoff from investment in port infrastructure is long term and it would not be difficult to identify other types of investments where the short term impact on activity would be expected to be considerably greater.
A review of research and data from 2018 sheds some light on the relationships between the quality of the port infrastructure in a country, overall logistics performance, and the effects of improvements on economic performance.
It identified that the quality of the available port infrastructure does indeed have a significant positive effect on the performance of a national economy. The study also found a significant linkage between the quality of the ports and logistics performance in an economy.
However, the experience over time shows that these benefits arise outside the ports, and that there will likely be long term negatives associated with the economic activity that can be directly attributed to the port as it invests in upgrading its infrastructure.
This means there is a trade-off. As ports invest, their direct economic importance will decline. But their positive impact on the performance of their wider regions grows as the efficiency of their operations improves indicating a positive relationship between investment in port infrastructure and economic growth.
There was a further interesting finding. The positive impacts are less obvious in developed economies and the impact of improvements in ports in under-developed economies that drives these results to a considerable extent.
It is likely that there are many factors contributing to this finding. However, the lightening of trade is almost certainly a key factor. As economies develop towards the ever importance of knowledge, their exports rely less on physical handling. As a result, the role of port efficiency in driving economic performance weakens.
Implications for Ireland
Does this undermine the argument for public investment in ports in Ireland? Two factors need to be considered before jumping to this conclusion.
The first is the finding that, as economies mature, the benefits of ports are seen in their positive contribution to the wider performance of logistics in the economy. In other words, the benefits arise externally.
In economic terms, there is an important market failure that supports the idea of public sector intervention in terms of providing investment support.
The second, and not altogether unrelated, is the consideration that, ultimately, the goal is not economic growth, but the standard of living in the economy. Consequently, it is the impact of efficient ports on consumption, not exports, that matters.
Consumption is more closely related to imports. And, in line with other western developed economies, Ireland’s imports have not been lightening at the same rate as exports. Indeed, the importance of imported manufactured goods in consumption is rising.
The efficiency of ports and logistics has a direct impact here. Inefficiency increases the cost of obtaining a unit of consumer goods without any improvement in the utility value of those goods. If there are delays there are negative impacts. Consequently, investments to address constraints and improve efficiency will improve consumer utility.
In conclusion, for an economy at Ireland’s stage of development, arguments for investment in port infrastructure should be based on addressing identified constraints. These have wider positive impacts and provide a rationale, although not a definitive conclusion, in favour of public support for investment to address such constraints.
Kevin Hannigan has worked as an economic consultant based in Ireland for the past 25 years and lectures on economics at various institutes including the Irish Management Institute. He has undertaken economic research in a wide range of areas with an emphasis on policy evaluation and appraisal. He has a broad knowledge of the Irish and European economies and a deep appreciation of the importance of the economic context for the formation of business projections, the evaluation of alternatives and the outcomes of decisions.