Abstract
Regional governments frequently seek to attract major projects to promote their region’s economic development, often by means of subsidies, publicly provided infrastructure, and environmental clearance. Justification for such measures is routinely provided in economic impact statements indicating the new project will increase regional and national output and employment, which are taken as proxies for economic welfare. Increasingly in Asian and Pacific countries, these impact assessments are made with the aid of computable general equilibrium (CGE) models. With their key characteristics of resource constraints and price responsiveness, CGE models are well equipped for analyzing major projects’ economic impacts. Frequently, however, CGE assessments do not report results in economic welfare terms, and simulation design is often ill suited to correctly estimating net social benefits. In this paper, we simulate, under a variety of stylized scenarios, a hypothetical example of a major mining project in the Western Australian region to test whether output measures like GDP and gross regional product are good indicators of economic welfare. We show that key factors in determining gross national disposable income (GNDI), an economic welfare measure, are terms of trade effects, profitability, public concessions and infrastructure, cost of foreign financing, and taxation of foreign-owned returns. However, while GNDI is sensitive to these determinants, GDP is not and thus forms a poor indicator of economic welfare.
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Notes
- 1.
While the use of CGE modeling for economic impact analysis is probably more common in Australia than most other countries, it is in widespread use globally. Some examples of CGE economic impact modeling in other countries in the Asia-Pacific region are Ahmed et al. (2013), Corong et al. (2013), Dixon et al. (2010), Fan (2010), Khan and Gottschalk (2017), and Liu (2006).
- 2.
There are many examples of CGE economic impact studies which emphasize impacts on GDP and employment. See ACE Group (2011) for one example.
- 3.
VURM was formerly known as MMRF (see Naqvi and Peter 1996).
- 4.
Our paper reports results for dozens of simulations undertaken over a lengthy forecasting run. The full eight-state implementation of the model takes a substantial time to run. With no loss of generality to our research findings, significant computational time is saved by implementing a two-region (a region of focus – Western Australia and the rest of Australia) implementation of the model.
- 5.
This is equivalent to gradually returning the national unemployment rate to base case (a standard assumption in macro models) with national labor supply remaining on base case throughout the policy simulation. Hence, we implicitly assume that the working age population, the participation rate, and hours worked per worker are all unaffected by the shock. There are some empirical grounds for these assumptions, but they are made chiefly to quarantine our core results from second-order labor market adjustments, some of which would require additional strong policy response assumptions. Regarding the labor supply elasticity (which governs participation and hours per worker), at the level of the aggregate labor market, these are likely to be quite low. For example, Nassios et al. (2019), in their review of labor supply elasticities in CGE models, find support for an estimate around 0.15 at the economy-wide level but note that the value is likely to be lower (or even negative) for male workers and higher for female workers. The version of VURM used in this paper does not distinguish labor market categories at this level, nor do we consider the gender or occupational composition of the workforce of the major project examined herein. A deviation in the working age population would require a national immigration policy response to the major project. In this paper, we wish to isolate the effect of the major project from changes in immigration policy. We do not think a relaxation of these assumptions would change the direction of results reported herein. A positive labor supply elasticity would generate an employment response positively related to both the GDP and real consumption deviations reported herein. The net welfare consequences of the labor supply response would need to account for the value of foregone activities outside the formal labor market. A positive immigration response could further lift real GDP (via additional factor supply) while depressing real consumption per capita (via congestion of fixed factors and damping of the terms of trade (Giesecke 2006).
- 6.
This is a somewhat strong assumption in the short run, but not one that materially affects our conclusions. For example, Giesecke and Madden (2013) allow for gradual adjustment of regional populations in response to changes in regional per capita living standard relativities and the possibility that these relativities do not fully close in the long run because of differences in regional location preferences. Regional migration dynamics like these, if applied to the case investigated herein, would damp the short-run WA activity responses reported in Charts 9.4 and 9.6 and augment the short-run WA price response reported in Chart 9.5 while having little impact on the long-run deviations reported in these charts. At the level of the national economy, the regional migration assumptions are unlikely to exert a material influence on key macro variables and are thus unlikely to affect any conclusions reached on the basis of the results reported in Charts 9.7, 9.8, 9.9, 9.10, 9.11, and 9.12.
- 7.
Also, see Giesecke and Madden (2013).
- 8.
See Dixon et al. (1992) for an early application of this method.
- 9.
That is, for the 15 years of the project, plus a 4-year post-project adjustment period.
- 10.
In distinguishing rdebt and rfor, we anticipate scenarios in which rates of return on investment opportunities available to domestic shareholders and the cost of foreign debt to the firm may differ.
- 11.
During the decade to 2015, which contained the peak of the most recent Australian mining boom, Australia’s unemployment rate averaged 5.2% and was as low as 4.5% for a substantial period (3 years, 2006–2008). In 2018, the national unemployment rate remains low, falling to 5.1% in October. With unemployment at such low levels, peak industry lobby groups made frequent claims of “skill shortages” and gave strong support to the expansion of Australia’s skilled migrant intake. In VURM, this situation of full or near-full employment is modeled by the closure assumption described in Sect. 9.2.4.3.
- 12.
As discussed in Sect. 9.2.1, foreign demands for each region-specific commodity are modeled as inversely related to their foreign currency price via constant elasticity export demand functions. Hence, contraction in export volumes must be associated with a rise in foreign currency export prices, that is, a terms of trade gain in the absence of countervailing import price movements.
- 13.
The 15 sets of flows are in constant dollars. In calculating the NPV values plotted in Chart 9.11, we discount these flows at a real rate of 5%.
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Giesecke, J.A., Madden, J.R. (2020). Regional Modeling of Major Projects: What Factors Determine Net Social Benefits?. In: Chen, Z., Bowen, W.M., Whittington, D. (eds) Development Studies in Regional Science. New Frontiers in Regional Science: Asian Perspectives, vol 42. Springer, Singapore. https://doi.org/10.1007/978-981-15-1435-7_9
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