How Can We Improve Evaluation Methods for Public Infrastructure?

Given the smaller total budget for public expenditure and the fact that the cost of public funds to Ireland has increased, it is more important than ever to ensure that public investment is prioritised properly in order to derive maximum benefit. Inorder to prioritise we must evaluate. A variety of evaluation methods can be utilised, but perhaps the most widely used is cost benefit analysis. The usefulness of costbenefit analysis crucially depends on a number of parameters and inputs. This paper considers the international literature on two issues, namely, the impact of risk in theform of inaccurate cost or benefit estimates and the setting of the appropriate discount rate, both of which can impact significantly on the usefulness of costbenefit analysis. The evidence on the expected costs and benefits of projects highlights that projects often do not go according to plan and that these estimates are subject to systematic optimism bias, which, while not universal, appears to be widespread. In relation to the appropriate choice of a discount rate, a riskless rate should in general not be used unless all risks have been properly assessed and costed within the analysis. This paper concludes that the discount rates that are currently used in Ireland appear to be low. Furthermore, the paper highlights that if the conventional exponential discounting is used then costs and benefits that occur in the distant future are essentially ignored. A declining discount rate accounts better for costs/benefits that occur in the distant future and is consistent with the observed pattern of time preference of individuals. This paper recommends a hybrid approach be adopted where costs and benefits are discounted using exponential discounting up to a point at which the discounting is switched to declining discounting.

Some Further Results on the Impact of Migrants on Trade

This paper investigates the relationship between migration and trade. Specifically it adds to the existing literature by allowing for the endogeneity of migration, as predicted by theory, while also allowing for the relationship between trade and migration to be non-linear. In contrast to previous single country studies this paper utilises a large cross section dataset for 26 countries and their trading partners.DYNREG, International Migration, International Trade, Gravity Model

Economic Integration and Structural Change: The Case of Irish Regions1. ESRI WP176. 2008

Following a prolonged period of relative economic isolation Ireland opened up its trade to international competition during the 1960s and became a member of the European Economic Community (EEC) in 1973. This meant that the indigenous firms that grew up under the protection of tariff barriers were exposed to international competition. Subsequent initiatives by the European Union, such as the Single European Market (SEM) and European Monetary Union (EMU) have further contributed to the economic integration of Ireland into Europe. Ireland is now one of the most open economies in the world with the sum of imports and exports accounting for about 150% of GDP, although it should be noted that Ireland has particularly strong trading links with non-EU countries and especially the US. In addition to the opening of trade, from the 1960’s Ireland pursued an industrial policy focused on attracting foreign direct investment (FDI)

Macro-regional evaluation of the Structural Funds using the HERMIN modelling framework

The structural fund interventions play a crucial role in improving the social and economic cohesion of the EU. A particular focus of the structural funds is on those regions that lag behind to the extent that their GDP per capita is below 75 per cent of the EU average ? Objective 1 regions. In 1999 these regions accounted for 25 per cent of total EU population, and in general they are poorly endowed in a number of areas, such as infrastructure, human capital, and modern high productivity industries and services. As a consequence, they tend to have higher rates of unemployment. The amount of investment that is funded though the structural funds by the EU is substantial (?103 billion over the period 1994 to 1999 for Objective 1 regions). Given their size and significance, EU legislation requires the appraisal of the structural funds. However, while systematic monitoring and evaluation frameworks are available at the national level and at the project level, a rigorous and systematic method for quantifying the socio-economic impacts of structural fund interventions on the regional economies has not been developed to the same extent. Thus, policy-makers seldom have access to accumulated research on the macroeconomic and macro-sectoral performance at a regional (NUTS II) level, which would allow them to assess the overall impact of the structural funds. One modelling framework ? HERMIN - has been widely applied to Structural Fund analysis at the national level (Greece, Ireland, Portugal, Spain, Estonia, Latvia) and macro-regional level (East Germany and Northern Ireland). In this paper we review the theoretical foundations of this modelling approach, outline its application and highlight the results from the application of the HERMIN modelling framework to structural funds evaluation. This review will highlight not only the strengths of the approach but also the weaknesses and areas for further research. The theoretical underpinning of the HERMIN model is that of a small open economy model with a Keynesian role for domestic demand. The HERMIN framework is designed as a macroeconometric model composed of four sectors: manufacturing (a mainly traded sector), market services (a mainly non-traded sector), agriculture and government (or non-market) services. This level of disaggregation is the minimum necessary to identify the key sectoral shifts in a developing (regional) economy over the years of the Structural Funds programme. The model incorporates the mechanisms through which the Objective 1 national or regional economy is inter-connected to the external world, and most importantly it incorporates mechanisms through which the Structural Funds impact on the economy in the short and long-run. It therefore captures not only the short run Keynesian demand effects but also the long-run supply side effects.

Estimating the Impact of Metro North. ESRI WP301. June 2009

The single largest project under the Irish National Development Plan (NDP) 2007-2013, is the construction of a Metro system. Despite the fact that this is the largest project under the NDP and the government’s transport strategy, Transport 21, no cost benefit analysis on the project has been published. This paper aims at addressing this lack of published analysis by considering the likely economic impact one of the Metro projects, Metro-North. In doing so the paper implements two novel methods namely the use of estimates from hedonic house price models and the results from macroeconomic studies instead of the conventional cost-benefit analysis. The two methods come up with contradictory results in that the hedonic pricing methodology would suggest that the Metro-North project should not proceed while the macroeconomic approach suggests the investment should go ahead. These results are dependent on the underlying assumptions, excluded benefits and parameters used, but given the analysis in the paper alternatives can be implemented readily

Irish Public Capital Spending in a Recession. ESRI WP298. May 2009

In the past the first expenditure to be cut during an economic downturn was capital expenditure. However, the cuts in capital expenditure of the late 1980’s and 90’s had left Ireland with an infrastructure deficit. This note highlights a number of important issues, which should be considered before decisions to spend tax payer’s money to support the construction sector are taken. Overall the paper concludes that in the context of a relatively high cost per job created via public investment, public capital projects should be undertaken on the basis that they have a long-run return to the whole economy

WHO IS PAYING FOR REGIONAL BALANCE IN IRELAND? ESRI Research Bulletin 2009/1/3

During good times and bad times, there has been ongoing debate about the extent of regional disparities in income and appropriate policy responses. In a recently published paper Edgar Morgenroth analysed the extent to which resources are redistributed across regions in Ireland through taxes and public expenditure and how this has affected regional disparities. Morgenroth’s analysis shows that the operation of the fiscal system reduces income disparities across counties. The gap between the counties with the highest and lowest incomes before taxes and subsidies is significantly reduced once subsidies and taxes are taken into account. The difference between the ‘poorest’ and ‘richest’ counties increased over the period 1995 to 2002, suggesting that there was income divergence during the ‘Celtic Tiger’ era

Projected Population Change and Housing Demand: A County Level Analysis. ESRI Research Notes 2014/2/3

While the recent debates on the housing market have focused particularly on Dublin, much of the public focus and most of the analysis of housing in Ireland2 has been in the context of a national housing market. However, many variables, such as prices, new construction (completions), planning permissions, and vacancy rates vary considerably across the country, which implies that there is no homogenous national housing market but rather that there are many local housing markets.3 For example, house prices have been three to four times higher in the county with the highest price compared to the county with the lowest price

Housing Supply and House Price Trends: a County Level Analysis. ESRI Research Notes 2016/1/1

Developments in the housing market and in particular the availability and affordability of both owner-occupied and rented housing have been a topic of significant discussion over the recent past.2 Purchase prices for housing nationally have increased by 35 per cent since early 2013,3 while rental prices have increased by almost 20 per cent since early 2012,4 impacting on the affordability of housing. While higher prices affect all households, they have the biggest proportionate impact on those with lower incomes. Although not a complete measure of housing need, the waiting lists for social housing maintained by local authorities indicate a significant increase in the number of households unable to secure accommodation in the market

What Should Policy Makers Learn From Recent Advances in Growth Theory and New Economic Geography? ESRI WP150. September 2003

During the last decade issues such as growth and convergence, core-periphery structures, and regional development have come to the forefront in policy circles. At the same time as political concerns about regional development increased, new theories of economic growth and economic geography were developed. This paper provides a brief review of this literature and attempts to draw out some policy conclusions. The most fundamental policy implication of the models discussed above is that one needs to understand the mechanisms that determine growth and the location of economic activity. The endogenous growth literature highlights the role of externalities and spillovers which require that governments fulfil the important role to ensure that the engines of growth are supplied at the optimal level. The major contribution of the new economic geography is that it shows that concentration and the emergence of cities is a natural outcome of market interaction