Regional Economic Impacts of Large Projects: A General Equilibrium Application to Cross-Border Infrastructure

A general equilibrium framework is used to study the regional economic effects of infrastructure improvements designed to reduce the costs of interregional trade. The results suggest that in the short run the kind of transport cost reductions consistent with improvement of inter-regional transport facilities will produce a modest increase in inter-regional trade volumes in both directions. This coincides with a small increase in real consumption in both regions and correspondingly small reductions in poverty incidence. Over a longer period, the benefits to both regions, including reductions in poverty incidence, are much larger, as investors respond to the changed structure of incentives with new capital investments, and as workers move to regions of greater return to their labor. Because these benefits are significant in both regions, the results do not confirm the common presumption that the benefits from cross-border infrastructure projects occur only, or overwhelmingly, in the richer region.