Executive Summary

With the rise of New Economic Geography (NEG) the spatial dimension in economic thinking has celebrated an impressive comeback during the recent decades.¹ Not least, the Nobel Prize being awarded to Paul Krugman in 2008 highlights how widely the im­portance of a deeper understanding of regional economic disparities has been acknowl­edged among economists. One of the fundamental outcomes of NEG models is that ac­cessibility to regional markets promotes regional economic development due to the inte­raction of agglomerations forces, economies of scales and transportation costs.

Recent empirical research confirms that there is a positive relationship between regions’ centrality with respect to other regions and their economic wealth (e.g. HANSON, 2005) and that there is evidence for a causal importance of access to regional markets for the economic prosperity of regions (REDDING & STURM, 2008). From these findings, a direct economic policy dimension emerges. Centrality is not exogenous to economic policy but, of course, depends on transport infrastructure. Therefore, by (public) investment into infrastructure, accessibility as well as economic growth can be promoted.²

The expectation that transport innovations would lead to sustainable economic growth has long since motivated public investment into large-scale infrastructure investment. The US interstate highway and aviation programs certainly feature among the most prominent examples of the 20^th century. In the 21^st century, promoted by sustainability requirements and congestion of highways and skyways, which further suffer from terror­ism threats and security costs, high speed rail (HSR) systems are increasingly attracting

the attention of transport planners and policy makers. Various countries all over the world now plan to develop their own HSR networks, following the examples of Japan and some European countries such as France, Germany, and Spain, which started to develop HSR in the second half of the 20^th century.

In the US, the Acela Express along the Northeast Corridor is evidence for the rise in signi­ficance of HSR, although these trains only facilitate an average speed of 240 km/h (150mph), a velocity that is relatively modest compared to European and Japanese sys­tems. This line, however, is only the first step toward the development of a true inter-city HSR network across the US. THE US DEPARTMENT OF TRANSPORTATION (2009), recently announced its strategic plan, which would include completely new rail lines that feature velocities of possibly up to 400km/h (250mph). The plan already identifies US$8 billion plus US$1 billion a year for five years in the federal budget just to jump-start the devel­opment of the system.

Besides the requirement of more energy efficient transport in order to reduce carbon dioxide emissions and oil dependency, the key argument in favor of HSR transport builds on the idea that a faster connection between cities and regions will promote economic development. This is in line with the general theme emerging from spatial economics research, which predicts that more intense spatial interactions between economic agents drive internal returns and human capital spillovers and ultimately productivity through agglomeration economies. Evidence, however, on whether these expectations are met by the reality of existing HSR systems is hardly available.

The objective of this study is to use the example of HSR to investigate the role of regional accessibility in the realm of economic policy, thereby bringing NEG and transport eco­nomic research closer together. REDDING & STURM (2008) show that the spatial distribu­tion of economic activity reacts to a major exogenous shock -Germany's division follow­ing WWII -as predicted by theory. We focus on an empirical assessment of whether a significant adjustment in spatial economic patterns can be found for a relatively limited shock to accessibility, or whether the respective forces are dominated by path dependen­cy in the existing spatial configuration.³

One of the empirical challenges in identifying the impact of HSR results from the fact that rail lines are usually endogenous to economic geography. The strongest economic agglomerations are connected (first) as they naturally generate the largest demand. In other words, given that it is likely that the areas connected by HSR are those that do or are expected to perform best, it is difficult to establish the counterfactual of what would have happened in the absence of an HSR line and to disentangle its effects from the nat­ural growth path. Second, if the largest agglomerations are connected, the marginal im­pact on accessibility of an HSR line, due to large home-markets and competing transport modes, may be too small to trigger measurable effects.

Ideally, we therefore want to investigate the impact of HSR on peripheral areas that do not experience a particular economic dynamic. These cases, however, are very difficult to find as the connection of such areas would naturally run counter to economic and finan­cial viability. We find such a “natural experiment” in the case of the new high speed rail track connecting the German cities of Frankfurt and Cologne. The line is part of the Trans-European Networks and facilitates train velocities of up to 300 km/h. In the course of this new track, travel time between both metropolises was reduced by more than 55% in comparison to the old track and by more than 35% in comparison to car travel. Most important, the small towns of Montabaur and Limburg became connected to the new line.

The connection of these towns, which, arguably, represented peripheral locations, was the outcome of long and complex negotiations among authorities at the federal, state and municipality level, the rail carrier “Deutsche Bahn” and various activists groups. The resulting track was finally considered the best compromise in light of cost, speed, envi­ronmental and network considerations on the one hand, and heavy lobbying pressures of the involved federal states to maximize the number of stations within their territories,

on the other. As a consequence, Cologne and Frankfurt can now be reached within about a 40-minute train ride, making the location central with respect to two of the major re­gional economic agglomerations with a total population of approx. 15 million.

Altogether, our natural experiment offers the joint advantage of providing exogenous variation in access to markets, which facilitates the isolation of treatment effects from correlated effects, and being man-made and reproducible and, thus, of direct policy re­levance. Since the new track is exclusively used for passenger service it is further possible to disentangle effects from increased labor mobility and human capital and information spillovers from the physical transport cost of tradable goods.

Our results highlight the potential of HSR to promote economic growth and are suppor­tive for economic geography theories more generally. We argue that as a straightforward application arising from these findings, an economic geography framework can poten­tially be employed in order to simulate the effects of major transport projects as a basis for decision making.

[1] In many aspects NEG is building on the work of the early period of economic geography (e.g. CHRISTALLER, 1933; LÖSCH, 1940) adding formal models and spatial dynamics. The history of spatial economic thinking dates back to at least VON THÜNEN (1826).

[2] Other political dimensions related to NEG include the prospects of temporary subsidies and regulations having a permanent impact on the welfare of immobile factors (e.g. REDDING, STURM, & WOLF, 2007).

[3] See for the role of initial conditions and historical accident in shaping the pattern of economic activity ARTHUR (1994), BALDWIN & KRUGMAN (1989) and DAVID (1985), among others.

[4] See e.g. NEARY (2001), OTTAVIANO (2003) and OTTAVIANO & PUGA (1998) for an introduc­tion to the literature.