Research Companion to Construction Economics

Construction Economics applies economic theory, concepts and analytical tools to the construction industry, the companies and organisations comprising it, andthe projects it undertakes. Over time, the field has been extended beyond the minimisation of capital cost on projects to include life-cycle cost considerations, theidea of value, sustainable construction and climate change, and applications of technology. Attention has also  included consideration of companies andorganisations, and strategic, industry-level considerations involving the economy and construction markets, government policy, and international finance andeconomics. 

The Elgar Research Companion on Construction Economics provides an overview of current research and a critical examination of complex issues in the field. It also provides the opportunity for some new or under explored issues in the field to be discussed. Each chapter analyses the existing knowledge on the topic, compares the various views on it, and presents a reference point for further research leading to further development of the subject. The book has 24 chapters authored by recognised experts on their topics. This is an influential collection which represents a relatively complete work on the field of constructioneconomics. 

This important milestone in the development of construction economics is published by Edward Elgar. Details on the contents and contributors can be found here.

Infrastructure Investment and Economic Growth

 Growth in real GDP per worker and five types of infrastructure per worker

 

There is a new paper from three World Bank researchers on the relationship between infrastructure and economic growth, a difficult topic they tackle with some sophisticated econometric techniques using data from the World Bank and the Penn tables. Disentangling the economic effects of infrastructure from the effects of other macroeconomic factors requires long time periods and a method to extract estimates from the data.  The researchers use a pooled mean group estimator to compare differences between countries in growth of real GDP per worker and investment in five types of infrastructure per worker between 1992 and 2017.

 

Because other factors like population growth, education levels, openness to trade and type of exports have significant effects on economic growth, any measured effect of infrastructure investment will be small by comparison. This research estimated the strength of the relationship between real GDP per worker and infrastructure investment by the size of the infrastructure coefficients, shown in the table below. While the coefficient values are indeed small they also show clearly that higher investment in each of the five types of infrastructure leads to higher real GDP per worker, as shown in the figures below.  

 

This is an important result. Their model credibly finds larger effects for infrastructure investment on economic output than previous studies, and found the effects of infrastructure were higher in the three decades after 1991 than the two before. There are separate estimates for a group of low- and middle-income countries and another group of high-income countries. Infrastructure has more effect in the group of developing countries compared to industrialised countries.

 

The paper starts by reviewing previous research on the impacts of infrastructure investment on economic growth and development. Some studies showed a strong positive relationship between infrastructure development and economic growth, others found a mildly positive relationship or no relationship. The author’s note “Many factors are responsible for these varying results, such as differences in methods, differing approaches to measuring infrastructure development, the varying development stages of countries included in the sample, varying time periods, and geographical factors such as high or low population density.” 

 

Their study evaluates the contributions to growth in a panel of 87 countries over the period 1992 to 2017 of three main categories of infrastructure: transport, electricity, and telecommunications. The main estimate uses a pooled mean group estimator to estimate their effect on growth, and finds larger effects for infrastructure investment on economic output than found by previous studies. They also find the effects of infrastructure are higher in the three decades after 1991 than the two before. 

 

Although other studies have shown a strong positive relationship between infrastructure and economic growth in less developed countries lacking adequate infrastructure, whether this finding holds for industrialised economies remains an open question because other research has not found a significant effect. Is there a threshold level of economic development (measured in terms of per capita GDP or human development indicator) below which the relationship between the infrastructure and economic growth is stronger, and is the relationship is weak or absent above the threshold? 

 

The paper has separate estimates for 48 low- and middle-income countries and 39 high-income economies. Infrastructure has larger effects in the group developing economies compared to industrialised economies. Theinfrastructure coefficients that measure the effect are smaller in the developed country sample than the developing country sample, in Table 11. Railways essentially have a zero effect on both groups, unlike their effect in the earlier period 1970-91.  Compared to 1970-91 developing country coefficients for roads, electricity and mobile phones and particularly telephones are all higher.

Their Figures plot the relationship between real GDP per worker and the different infrastructure indicators in the 87-country panel from 1992 to 2017, with higher infrastructure per worker associated with higher real GDP per worker. This relationship is notably strong for electricity generation capacity (r = 0.77) and the telecommunications variables (r = 0.52 and r = 0.67 for mobile and fixed line telephones, respectively).

Figures 1 - 5. Real GDP per worker and various infrastructure variables, 1992-2017 country means

Timilsina,Govinda R.; Stern,David S.; Das,Debasish Kumar. How Much Does Physical Infrastructure Contribute to Economic Growth An Empirical Analysis. Policy Research working paper, WPS 9888 Washington, D.C.: World Bank Group. 

 

https://documents.worldbank.org/en/publication/documents-reports/documentdetail/553061639760111979/how-much-does-physical-infrastructure-contribute-to-economic-growth-an-empirical-analysis

What is Construction Economics?

 Construction economics investigates issues and topics associated with the construction and maintenance of the built environment by firms, industries and projects, using economic theory, concepts and analytical tools.

 Construction economics is also concerned with the macroeconomic role of the construction industry and its relationship with associated manufacturing, professional services and materials industries. 

Construction economics applies a broad range of approaches to economic aspects of the construction firms, industry, and projects. These include industry economics, industrial organization and other management studies, financial and behavioural economics, econometric analysis and modelling, legal and institutional research, and transaction cost economics.

Topics of interest in construction economics include the roles of participants and processes, productivity and value for money, environmental performance and sustainability, the delivery process and procurement, the financing, viability and competitiveness of construction firms and projects, technological and institutional development, construction statistics and measurement, international construction, regulation, and government policies affecting the industry. 

Some of the earliest construction economics publications were on developing economies, bidding strategy, input-output data, building cycles, multinational firms, market structure, firm performance, size and scope, and the role of construction in long run economic growth. Over time organizational behaviour, transaction costs, decision making under risk and uncertainty, R&D and innovation were added. Recent work has been on issues around construction statistics and data and the measurement and performance of the construction industry and construction projects. 

Over the last five decades, contributions to construction economics have come from diverse viewpoints and places. There have been contributions from economists like Patricia Hillebrandt, Paul Strassman, Graham Ive, Stephen Gruneberg, Martin Skitmore and Goran Runeson, but also from architects, quantity surveyors, sociologists and engineers like Ducio Turin, Ranko Bon, George Ofori, Jim Meikle, Graham Winch, David Gann and Lauri Koskela. Construction economics is multi-disciplinary and uses multiple models to disentangle and analyse issues associated with the construction industry in particular and the construction of the built environment more broadly.

Fewer Large Contractors in Australia

Long-run Changes in the Number and Size of Firms in the Australian Construction Industry 

There have been five Construction Industry Surveys (CIS) by the Australian Bureau of Statistics (ABS), the most recent for 2011-12.  All five surveys found the construction industry is overwhelmingly made up of small firms which contribute most of the industry's output and account for almost all of the number of enterprises. Table 1 shows the breakup between contractors in Building and Engineering and the subcontractors in Construction services (which were called trades in the earlier surveys). The 2002-03 survey used different categories of businesses (not establishments) in residential, non-residential and non-building, and trade services and is not comparable with the other surveys. In 2002-03 there were 339,982 businesses of which 269,228 were trade services and 70,753 were residential, non-residential and non-building businesses.

How the size of firms is measured in the CIS has changed twice. The three surveys in 1996-97, 1988-89, and 1984-85 divided firms into three sizes: employ less than 5, employ 5-19, and employ 20 or more. The 2011-12 survey divided firms into small 0-19, medium 20-199 and large with over 200 employees. The 2002-03 survey divided firms by income and the data cannot be compared to the other surveys however, although income was used to classify firms, the 2002-03 survey produced a similar result, finding 90% of firms were small or very small. Here the 1996-97 survey and the 2011-12 survey data is presented. The breakup of firms by size is in Table 2.

In the 1996-97 survey businesses with less than five employees accounted for 94% of all businesses and over two-thirds of all employees. Less than 1% of businesses employed 20 or more. Businesses with less than five employees accounted for slightly less than half the total income and expenses, whereas businesses with employment of 20 or more accounted for almost one-third of these. The data in Table 3 is percentages, showing the importance of the 0.62% of large firms. Their 13.6% of employees earned 32.3% of salaries and wages, generated over 28% of income and nearly 25% of gross output.

The survey in 2011-12 classified firms by the number of employees into small 0-19, medium 20-199 and large with over 200. The same data for the 2011-12 survey is in Table 4. The changes between 1996 and 2012 are revealing. The total number of firms has increased marginally from 195,000 to 210,000, but the share of small firms has increased from 94% to 98% as the number of medium and large firms fell from 12,300 to less than 5,000. There was a trend with the number of medium sized firms decreasing to less than half, while slightly increasing their share of industry employment.

In 2011-12 less than 0.1% of firms were large, employing 18.6 % of the workforce, paying 32% of wages and salaries and generating 27% of industry income and 25% of output. 

 

These are remarkably similar to the 1996-97 CIS numbers, however, the 186 large firms in 2011-12 had almost the same share of employment, income and output that 1,200 firms had in 1996-97. This was a significant increase in industry concentration. In the 1996 survey the 1,200 firms employing 20 or more had a total of 66,000 employees and accounted for 13.6% of employment and 24.4% of industry output. 

 

In 2012 there were 186 firms employing 200 or more with 177,000 employees, accounting for 18.6% of employment and 25.5% of IVA. These long-run changes in industry structure can not only be the result of business failures, which are common with SMEs but less so for large firms. Instead, there has been a long wave of mergers and acquisitions reducing the number of large firms and increasing industry concentration. 

A stylized representation of construction industry firms by market type is in table 8, showing how concentrated markets can be the outcome of either firm size or specialization. Figure 5 relates market type to contract size. As a firm gets larger it takes on bigger projects and compete with fewer other firms. How construction economists sought to reconcile theoretical and conceptual models of construction firms with the messy reality of the construction industry is discussed in the next section.

New Anticorruption Website

Practical help for public officials and politicians planning anticorruption reforms

CurbingCorruption is a new website that provides concrete anticorruption advice tailored to specific sectors such as construction, education, health, fisheries, etc. For those concerned about this issue it will, I think, be an important resource.

It has been set up by Mark Pyman, and developed by him with assistance from other anticorruption specialists. Pyman was the Programme Director for Transparency International tackling corruption in the military and Defence Ministries worldwide 2004-2015, and in Afghanistan he was one of three international Anti-Corruption Commissioners 2015-2017. He believes that much more progress against corruption is possible, as the mission statement explains:

Our vision is that corruption can be addressed and reduced better than people realise. Even in the toughest corruption environments, where progress may only be possible in tiny steps, there are many improvement measures that can help, and which can form the basis of a much larger improvement when circumstances change.

We believe that there are two key components to doing this. First, enabling public officials and politicians to develop counter-corruption initiatives. At present, only a very small proportion of people in these positions have knowledge or experience of ways to tackle corruption. Public officials, because they operate the machinery of government, are in perhaps the best position to enable sustainable reforms and to collaborate with politicians, civil society, corporate stakeholders and others.

Second, building up knowledge, insights and experience at sector level. At present, most anti-corruption knowledge is at the national, cross-government level, which is broad and complex. At sector level, whether public service delivery sectors like health or economic sectors like telecommunications, there is both more knowledge and more ownership from those working in the sector. This increases the chances of success whether for small initiatives, such as within a department, or large ones, such as across a whole agency or ministry.

The site collects a vast number of reports and studies, all referenced and usually linked, and the sector reports contain many examples of a wide range of initiatives from around the world. The construction sector report runs to 59 pages. The Introduction to the Construction, Public Works and Infrastructure page says:

The value of this sector is huge, with roughly half of all fixed capital investment by governments and Public-Private Partnerships being in the construction of public infrastructure. The volume is increasing every year. The value of losses through corruption is estimated at between 10 and 30% of this total, and others believe that a similar amount could be lost through mismanagement and inefficiency (Wells 2015, Matthews 2016). This means that by 2030, unless measures are introduced that effectively improve this situation, close to $6 trillion could be being lost annually through corruption, mismanagement and inefficiency. Losses on this scale cannot be tolerated in any sector, but losses in infrastructure investment have particular significance, because infrastructure underpins every aspect of economic growth and human development. ‘Engineering and construction’ is the sector with the most reported bribery and corruption in advanced economies globally – see the figure below from Price Waterhouse Coopers (2014).

 

The website is still a work-in-progress, but the idea is to use what’s already on the site as a foundation and to crowdsource additions and revisions by inviting users to contribute their own experiences, insights, and suggestions, and eventually for the website to be managed by collaborative groups of users, with different teams focused on different sectors.

This will, I hope, become a widely used resource in the fight against corruption and illegal practices. It shows there are alternatives to accepting corruption as inevitable and something to be accommodated, and highlights the role of local action as well as institutional measures.

Previous relevant posts:

Australian Royal Commissions here

Canadian Charbonneau Commission here