Transcript Slide 1

Aviation and Economic Performance
Peter Forsyth
Monash University
BTRE Transport Colloquium
Canberra June 2007
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Key Issues
How does aviation impact on economic
performance- GDP, overall economic
welfare- and what policy implications are
there from these impacts?
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Outline
• Introduction- what are the issues?
• How aviation can affect economic
performance
• Assessing aviation’s impacts
• Policy implications
• Conclusions
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Issues
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Aviation is like other industries- it produces outputs which are
valued by users
This is counted as its contribution to performance- GDP,
employment etc
An extra $100m of productivity gains in aviation would add
$100m to GDP
But does aviation do more?
Could an extra $100m of aviation services add $150m or $250m
to GDP?
Would increasing aviation share of GDP lead to a substantial
increase in GDP?
Some say yes
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What Changes are being Considered?
• Increase or decrease in aviation output
• Due to liberalisation, productivity
increases, or shocks like SARS,
imposition of carbon taxes
• Not considering complete removal of
aviation
• These are policy relevant changes
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Transport and Performance
• Key role of transport is in reducing transactions costs,
affecting scale economies, market integration,
specialisation, agglomeration
• Link markets and increase competition
• Facilitate tourism
• Infrastructure debate- is investment in (transport)
infrastructure extremely productive? Some evidence says
yes
• Bottlenecks matter, but evidence in general is fragile
• Are there big positive externalities created by (air)
transport?
• Does additional transport remove major distortions?
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Possible Aviation Externalities
• Negative- GGE, noise
• To focus on positives:
• Linking markets- scale economies,
specialisation, enhancing competition
• Economies of density
• Agglomeration economies
• Tourism- additional economic benefits
from extra tourism
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Market Effects
• Mainly through freight, and perhaps, business travel
• Lower transport costs bring markets closer together
• Cheaper air freight enhances competition in electronics
goods markets
• Scale economies- can locate at one place and transport
goods, to get greater scale economies
• Cities can specialise
• Are there major externalities here? Effects factored in by
decision makers, and benefits from transport are counted
by them
• Producers pay transport costs to gain scale economies
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Economies of Density
• Well documented in air transport literature
• Larger aircraft are cheaper per passenger or per tonne to
operate
• Increased market size leads to lower air fares or greater
frequency (with lower generalised costs)
• Externality is present- there is a tendency to undersupply
• The effect is easy to measure, and robust, but it is not
large
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Agglomeration
• A big theme in transport/location/trade literature
• More firms of a type producing at one location lowers the
cost of all the firms
• An externality between the firms
• Better air transport can facilitate agglomeration
• Mainly freight and business travel
• For example, financial services
• The new hub of activity will gain- but what about the
periphery which loses activity?
• Will Macquarie Bank move to London (and will Australia
lose from this)?
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Tourism
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Aviation facilitates tourism flows
Additional inbound tourism- is this positive for the economy?
Not necessarily, but it could be if
(a) tourists pay more than the resource costs for the product
they buy (taxes)
(b) terms of trade effects
(c)tourism stimulates economic activity and adds to
employment
(a) and (b) are quite possible for Australia- matter of measuring
the effects
(c) not very likely for Australia, with tight labour markets and
skill shortages at the present
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Patterns of Tourism Flows
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Suppose that international air fares on a route come downliberalisation, productivity increases
This stimulates inbound and outbound travel- any net effect
likely?
Very likely that inbound traffic will grow more than outboundthat there will be a positive net effect on tourism
The liberalisation paradox- when two countries liberalise their
ASA, both experience an net gain in inbound tourism
A consequence of trade diversion towards the liberalising
countries
Lowering aviation costs lead to net increase in inbound
tourism, with consequent tourism benefits
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Aviation Impacts
• Lower cost aviation can impact on patterns of economic
activity
• This can generate some positive externalities
• These are not likely to be very large
• Some effects (e.g. Agglomeration) are very difficult to
quantify
• A $100m cost reduction in aviation could lead to a gain in
GDP a little above $100m
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Modelling Studies
• Can modelling studies help estimate the magnitude of
these effects?
• Big numbers are now fashionable- may transport
investments are claimed to have very large “economic
benefit”
• Melbourne port deepening; expanding London Heathrow
airport; liberalising aviation markets (and special events)
• Claimed net benefits some multiple of costs, revenues
• How can you get such large numbers?
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Input Output Models
• Often used to estimate economic impacts (on output,
GDP, employment) of a change
• Measure direct and indirect effects
• But- inputs are assumed to be freely available at no cost
• No negative impacts on other industries
• Guaranteed large “economic benefits”
• Should not be used to evaluate aviation investments or
policy changes
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Computable General Equilibrium (CGE)
Models
• Complete model of all markets in the economy
• Inputs have to come from somewhere- and have a cost
• Additional economic activity here means less activity
elsewhere- crowding out
• Can be used to estimate impacts
• Widely used in Australia to study economic impacts of
policy changes
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Cautions
• Changes in GDP do not necessarily measure changes in
economic welfare
• Employment assumptions: impacts on activity can be
large if labour is assumed to be in excess supply- not
appropriate for Australia now
• Other assumptions matter- savings, exchange rates
• CGE models can be misused- can get big numbers under
certain assumptions
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Uses of CGE Models
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Can pick up effects of distortions (e.g.. taxes)
Can pick up terms of trade effects
Generally cannot pick up scale effects
Cannot pick up agglomeration effects
Can be used to measure tourism benefits
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Econometric Studies
• Can relate variable of interest (air passengers, business
passengers) to performance (GDP, productivity)
• Estimate relation econometrically
• Used in the infrastructure debate
• No underlying economic model- no way of explaining the
results in a rigorous manner
• What is driving the results? A question rarely answered
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Modelling Examples
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Oxford Economic Forecasting (econometric)
12 m extra passengers in UK leads to extra ₤2.5b GDP ($A500
per pax)
Implausibly large
ACI, ATAG, IATA/InterVistas The Economic Impact of Air
Service Liberalization (I-O Multiplier)
UK-UAE liberalisation- 1.1m extra pax, benefits of $US1.1 ($US
1000 per extra pax)
Australia-NZ single market-1.7m extra pax, benefits of
$US1.452m ($US854 per extra pax)
Implausibly large
Melbourne Airport Economic Impact Study 2003 (CGE)
Plausible impacts
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Recommended Approach
• Use Cost Benefit Analysis to capture direct effects
• Can measure economies of density, though not market
integration and agglomeration effects
• Can capture distortions, terms of trade effects and any
impacts on economic activity using CGE
• Can combine both in a CBA framework
• Example, assess the benefits and costs of air service
liberalisation, including measuring tourism benefits with
the help of CGE model
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Policy Issues
• How large are the benefits (costs)of changes which
increase (decrease) aviation output?
• Relevant for:
• Liberalisation of aviation policy
• Investment in infrastructure (airports etc)
• Investment in security to avoid costs of crises
• Tax policy- passenger service charges, state stamp
duties on aviation
• Airport regulation policy
• Should aviation be included in a GGE Emissions Trading
Scheme?
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Implications
• If gains from aviation are as large as sometimes claimed,
the policy implications are huge
• Liberalise everything
• No taxes
• Exempt aviation from GGE measures
• Make security free
• Subsidise aviation as much as feasible
• Build airports before any congestion occurs
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Aviation and Economic Performance
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Efficient aviation is positive for good economic performance
Aviation has some negative (GGE) and positive externalities
Underlying economics suggests some small, though positive
effects on economic performance from aviation
No reliable evidence exists for large positive effects of aviation
on economic performance (unless there are bottlenecks or
poorly functioning economies)
Worth exploring aviation’s effects more but should not expect a
major shift in perspective
Can use standard techniques (CBA and CGE Models) for
evaluating aviation policy options
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Thank You!
[email protected]
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