Investments in local infrastructure that promoted urban livability in Mexico also led to sustained development of the local economy in terms of the size and profitability of private sector firms
Urban development is a key driver of economic growth and increased productivity in much of the world, and infrastructure investment is central to making cities work (Bryan et al. 2020). Investments in urban infrastructure can affect firms’ decisions to locate, hire, invest, and start up or shut down (Glaeser and Gottlieb 2009, Glaeser et al. 2020). By understanding how urban infrastructure investments impact local economies, governments can better target investments to encourage economic growth.
Studying how urban development works is difficult because it is challenging to empirically estimate the impact of infrastructure investment on businesses. Infrastructure investments often rearrange the patterns of production, commuting, and land value within a city, such as when a new road enables workers from a peripheral neighborhood to travel to the center of the city for work (Almagro and Domínguez-Iino 2022, Balboni et al. 2021, Franklin et al. 2023, Tsivanidis 2022). This makes it hard to tell whether local investments deliver net positive benefits to the city, or whether they simply rearrange existing business activity.
To better understand how urban infrastructure investments stimulate private sector development, our research (Rogger et al. 2023) looks at highly localised investments that target urban livability rather than private sector productivity. We study Mexico’s Programa Hábitat, a three-year infrastructure investment programme in which US$68 million was allocated across 370 neighborhoods in 68 Mexican municipalities. Programme funds were invested in infrastructure improvements, such as street paving and electrification, as well as residential amenities, such as community centres and sports fields. What makes it even more amenable to evaluation is that the programme was randomly introduced in specific neighborhoods within larger cities, and so represents a rare case of a national-scale infrastructure programme implemented as a randomised controlled trial.
Firms grow when neighborhoods improve
The first feature of the Hábitat programme important to our study is that almost all programme funds were spent on improvements to residential neighbourhoods. Prior research has shown that these investments improved the livability of neighbourhoods—for instance, by increasing walkability and decreasing crime—and led to a 10% property price increase (McIntosh et al. 2018). Because the programme did not invest in infrastructure directly targeting firm productivity, we wanted to know how these investments in urban livability affected nearby businesses. In other words, what does this sort of gentrification do to the local economy?
The second important feature of the programme is its experimental setup. The programme defined a set of 370 eligible neighborhoods in cities across Mexico, which were then randomly allocated to be treated. This means we can use the Mexican government’s census of firms to make a straightforward comparison of growth rates over time. Beginning with the census conducted in 2008 (the year before the experimental phase), we then use data from 2013 (the year after the experimental programme investments concluded) and 2018 (six years after the end of the programme) to examine impacts. This experimental setup allows us to compare study neighborhoods that received investments with control neighbourhoods in the same municipality that didn’t, to study how investments in study neighbourhoods affected nearby firms.
Our results reveal the surprising impact of government investments in urban livability on the private sector. We find that the Hábitat programme had a substantial effect on commercial activity in study neighbourhoods, even though this was not its target. Better lighting and proper pavement mean a better economy.
One year after the programme investments, we find that wage spending has increased by 18% in study neighborhoods, and about 3% of firms have been pushed out and replaced by smaller, faster-growing firms (on top of the natural level of turnover). Wages remain elevated six years after the investments, but increases in capital stocks and revenue have also accelerated. This is particularly the case for service sector firms in study neighborhoods, where revenues are 9% higher and capital stocks are 22% higher than in control neighborhoods. Overall, these long-term effects suggest that economic growth as a result of infrastructure investments has become self-reinforcing in study neighbourhoods.
Changing the nature of the firm
What do these results tell us about how investments in urban livability contribute to private sector productivity and economic growth? In the short term, by increasing property values, investments in urban livability drive increases in wages, operating as a “cost shock” that pushed out unproductive firms. In the long term, consumer spending power also increases, improving the growth prospects of more productive firms. We find that these benefits are concentrated among firms that provide non-tradeable products and services, which benefit from localised shifts in demand. In this way, the very nature of the local economy shifted in response to the infrastructure investments.
Understanding the impact of investments in public infrastructure and urban livability on the private sector helps us better calculate the benefits of this kind of investment. We calculate that through private sector firms alone, the tax collected in treated neighborhoods increases by almost $US5 million per year. At this rate, firm taxation alone would allow the Hábitat programme to pay for itself in 14 years. This has implications for how we view the estimated benefits of other infrastructure investments. To calculate the benefits of infrastructure investments, in other words, it isn’t enough to look at increased property prices alone. Private sector firms benefit from these investments—even if they aren’t the target—and firm taxation can be a meaningful way to recoup their costs.
These findings provide granular evidence that governments can stimulate private sector development through investments in public infrastructure. By making a city more livable, they can change the incentives firms have to form, operate, and invest.
References
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Balboni, C, G Bryan, M Morten, and B Siddiqi (2021), "Could Gentrification Stop the Poor from Benefiting from Urban Improvements?", AEA Papers and Proceedings, 111: 532–537.
Bryan, G, E Glaeser, and N Tsivanidis (2020), "Cities in the Developing World", Annual Review of Economics, 12: 273–297.
Franklin, S, C Imbert, G Abebe, and C Mejia-Mantilla (2023), "Urban Public Works in Spatial Equilibrium: Experimental Evidence from Ethiopia", American Economic Review, forthcoming.
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Glaeser, EL, M Luca, and E Moszkowski (2020), "Gentrification and Neighborhood Change: Evidence from Yelp", NBER Working Paper No. 28271.
McIntosh, C, T Alegría, G Ordóñez, and R Zenteno (2018), "The Neighborhood Impacts of Local Infrastructure Investment: Evidence from Urban Mexico", American Economic Journal: Applied Economics, 10(3): 263–286.
Rogger, D, L Iacovone, LF Sánchez-Bayardo, and C McIntosh (2023), "Local Infrastructure and the Development of the Private Sector: Evidence from a Randomized Trial", Working Paper. Available at: https://danrogger.com/files/papers/Rogger%20et%20al_2023_Infrastructure%20and%20the%20Development%20of%20the%20Private%20Sector.pdf
Tsivanidis, N (2022), "Evaluating the Impact of Urban Transit Infrastructure: Evidence from Bogotá’s TransMilenio", Unpublished manuscript.