Chapter 7.2 – Ports and Economic Development

Author: Dr. Jean-Paul Rodrigue and Dr. Theo Notteboom

Ports are catalysts for economic development as they enable trade and support supply chains. Port investments have economic benefits that can be direct, indirect, and induced.

1. Ports and Economic Change

A port generally offers a value proposition to its region since it confers economic and social benefits but is also prone to environmental constraints. Significant increases in port throughput, particularly in the containerized sector, have put pressure on developing new port infrastructures on existing facilities, and for entirely new developments when additional capacity cannot be developed on existing sites. Ports are capital-intensive infrastructures that are associated with a wide array of economic impacts. This is particularly apparent because port development and world trade are closely interrelated.

There are numerous expectations by the public sector, which is often providing substantial capital investments (through the port authority or general funds), to see concrete and measurable economic impacts and benefits resulting from these investments. However, the existing literature is relatively scarce about the formal impacts of ports on regional development. Evidence is usually related to a single port over a narrow range of impacts, making general assessments difficult to infer.

Economic impacts concern the wide range of changes brought by infrastructure investment projects, while economic benefits tend to be directly measurable impacts in terms of monetary value. However, many of these impacts can only be observed after the investments have been made and the benefits measured. An ex-ante (forecasting) exercise is hazardous and commonly leads to inaccurate assessments. Port forecast models are rarely accurate. The bottom line is that the estimation of the economic impacts of port investments is an inexact field, which focuses on the effectiveness of transport infrastructure as a catalyst for indirect and induced benefits. Further, these investments are contingent on the scale and scope of changes in which they occur. Among the most relevant changes that have impacted ports and maritime transport:

  • Economic changes. Seaborne trade has increased substantially, in part because of the massive redistribution of manufacturing to low-cost locations (outsourcing) and in part because of ongoing economic growth. This underlines the growing importance of logistics to organize the resulting complex distribution system. The global evolution of container ports, particularly their differential growth rates, is indicative of the driving force of offshoring and regional economic development.
  • Technical changes. The growth in ship size to better achieve economies of scale has been a prevalent technical change, particularly since the 1990s, when post-Panamax containerships were first introduced. A growing level of ship specialization (containerships, bulk carriers, car carriers, and even cruise ships) required dedicated port terminal facilities. A more recent trend concerns automation. All of the above has been placing pressure on ports to upgrade and improve their facilities.
  • Organizational changes. The maritime and port industry is increasingly controlled by large shipping companies and terminal operators that have engaged in strategic alliances as well as mergers and acquisitions. Their goal is to provide a level of vertical and horizontal integration, which is improving the performance of the port transport chain. A number of ports were able to set inland terminals.

These changes have involved port developments that are more capital intensive while relying on less labor and consuming more land. The imperatives of maritime shipping companies have been felt on ports as they increasingly tend to compete to attract traffic, particularly since hinterlands tend to be more contested. The industry expects lower tariffs and lower port times in light of a highly competitive environment and low-profit margins. Ports acting in a monopolistic fashion find themselves with less leverage, negatively impacting their activity and regional economies.

The spatial framework of the port is also changing. Many port areas have seen the relocation of port industries to new sites, either within the region or to another country altogether. These changes have been associated with a dislocation of the relationships of many ports with their localities and regions; this has been labeled as port regionalization. While the port remains a strategically important infrastructure, its economic benefits are less directly apparent within the community, with weaker but more complex relations at the regional versus global levels. Further, ports are subject to different economic functions, such as gateways and transshipment hubs, each having different locational behavior.

The impacts of port infrastructure investments are expected to positively influence port throughput effects on local economic development. However, evidence across the world underlines that this influence is weak, with elasticity levels between throughput and employment that are typically less than 0.05 jobs per 100 tons. This implies that growth in traffic volumes is not associated with significant direct gains in employment. This elasticity is among the weakest in the transport sector, particularly regarding airports, which are the infrastructure with the highest elasticity. Still, the employment impacts of ports are positive and are usually higher for the service sector than for the industrial sector. Empirical evidence underlines that port infrastructure investment projects foster economic development and are important when a port is nearing its operational capacity. Under such circumstances, the lack of investments will lead to additional externalities, namely congestion, which will undermine the competitiveness of a whole region, if not a nation.

2. The Economic Benefits of Ports: Direct, Indirect and Induced Effects

Like other transport infrastructures, several economic impacts of port infrastructure investments result in economic benefits. Economic theory often refers to ports as important economic development factors, particularly from a historical standpoint where they promoted commerce and the welfare of nations. It is not surprising to realize that most of the world’s major cities are port cities, even if, in many cases, port activity now plays a rather small role in the general economic framework of their regions.

The basic argument is that ports expand the market opportunity of both national and international firms by expanding the port cargo base and hinterland. By expanding the market areas of firms, ports increase competition, resulting in lower prices for port traffic users. These involve all economic activity sectors, including manufacturing firms, heavy industries, resource extraction industries, or retailers. Therefore, the economic benefits of ports are specific to the nature of the hinterland they service. They can be straightforward for hinterlands heavily dependent on resources since the output is directly handled by the port or more nuanced when the hinterland involves manufacturing firms producing intermediate goods.

Increasing competitiveness brought by port investments can also be a double-edged sword for a national economy. It enables foreign firms to better access a national economy and compete with national firms, with some sectors being put out of business. However, the benefits of having better access to foreign markets and cheaper goods usually far exceed the risk of having inefficient national firms being undermined. Increasing competitiveness promotes positive economic benefits at the aggregate level, but these benefits are not uniformly distributed among sectors and geography.

Ports can be considered “funnels” to economic development since they act as catalysts and incite development in specific economic sectors and locations near ports or along corridors. The economic benefits of ports are commonly categorized as direct, indirect, and induced. Indirect and induced benefits are far from being clearly identifiable. It is difficult to demonstrate that the economic activity and use of the related resources would only occur due to the port investment. When a port investment does lead to increased economic activity, the benefit is properly measured by the net value of the additional output. The direct benefits to the port are financial in nature and would be taken into account in any financial appraisal as well as in economic appraisals. However, the financial benefits would be valued somewhat differently, with economic appraisals using a social discount rate and, for some inputs, possibly valuing them at shadow prices.

3. Assessing the Economic Benefits of Port Investments

The economic benefits of ports are usually measured at an aggregate level by indicators such as value-added, employment, taxation revenue, and return on investment. These indicators are primordial for the decision to invest in port development and must take into consideration:

  • Demand forecasts are trying to evaluate the expected traffic that the investment will support and facilitate.
  • Liner shipping strategies, particularly how they service markets and how the port fits within their service configuration in terms of ship capacity and frequency. While some ports are acting as load centers, others are transshipment hubs. The function of transshipment is often the outcome of the strategy of a shipping company to service-specific regions.
  • Hinterland transport capacity and accessibility are contingent on the cargo bound to and originating from the port. It defines the existing and potential cargo base that could be handled by the port.
  • Competition between terminals, since there may be competing terminals within the same port facility. Terminals in a monopolistic situation usually have more pricing power but can be linked with higher returns.
  • Financing of investment relates to the capital source and conditions. Large port infrastructure projects are usually financed by bonds issued by port authorities or by investments made by international financial institutions such as development banks, sovereign wealth funds, or pension funds.

Assessing this information can involve different methodologies:

  • Surveys are based on interviews and questionnaires or microeconomic data on firms. They try to identify and quantify the relationships between the various port actors, often from a qualitative perspective, but commonly in terms of employment. These studies have underlined the important relationships between freight forwarders and agents. The economic benefits of ports are reflected in the complex system of transactions of the actors involved.
  • Comparative analysis inferring economic benefits observed at a reference port, particularly its economic base. This approach tries to infer the economic changes that have already taken place in a comparable port setting (similar traffic and composition of traffic) to the port being investigated. Since local and regional economic conditions are not similar, such studies do not provide particularly accurate results. Still, they provide useful guidelines about what could happen to a port and its regional economy once an investment occurs.
  • Input-output analysis models that seek to identify inter-sectorial multipliers, such as between port traffic and regional employment. They underline the agglomerating effects of port activities, either around the port or around the port region. Such studies have underlined low levels of elasticity between port traffic and service sector employment.

Input-output analysis is one of the most commonly used techniques. I-O analysis is based on a set of tables that quantify the linkages and transactions between different sectors of the economy. The quantities of inputs and outputs for a given period are entered in an input-output matrix/table in order to analyze what happens across various sectors of an economy by performing a multiplier analysis.

A multiplier is an index (ratio) that indicates the overall change in activity level that results from an initial change in activity. It effectively adds up all of the successive rounds of re-spending, assuming that major factors such as input prices are unchanged and that there are no resource limitations.

All sector-based multipliers (including direct, indirect, and induced effects) can be calculated when the matrix is complete and includes private consumption figures. The I-O technique can be used to prepare multipliers for a variety of impact measures, such as output, employment, and income. Multipliers can also be estimated for major components, such as by cargo type. Input-output analysis follows a top-down approach building upon comprehensive data per sector. Data collection can also rely on a bottom-up approach which implies the overall impact numbers are computed based on firm-level data. In the latter case, data collection can be based on the balance sheets or annual accounts of individual firms, or data is collected via surveys.

The technique and results of an I-O analysis are relatively easy to understand, and the expertise required is readily available from a large number of consultants and academics. However, the use of the technique also faces some issues:

  • It can be quite costly if the required input-output base tables are not available at the national and regional level or are outdated. As the structure of a regional economy may change over time, the use of older I-O tables might lead to wrong results. In many cases, new regional tables are generated using survey methods or existing tables updated by incorporating more recent data on production and employment in the region.
  • It does not incorporate any constraints on the supply side. For example, port development in a tight labor market can lead to crowding effects or the shift of employees from one industry (e.g. chemical industry) to the port sector. In such a case, the net employment effect for the regional economy stays the same (no net gain in the total number of jobs).

There are also integrated modeling techniques available to measure the economic impact of ports. These approaches combine input-output analysis and econometric techniques to analyze the response of an economy over time to external shocks. A very advanced technique is the computable general equilibrium (CGE) modeling, which estimates the optimal mix of economic variables (e.g. consumption) in response to an external shock. Integrated modeling and CGE modeling are more sophisticated than multiplier analysis, but the data requirements of these methods are very high, so are the costs to perform the analysis.

Port activities have multiplying effects within an economy, which are much larger than the port itself. While the economic importance of port grows, particularly for the sectors they are connected to, their relative importance within the region they are servicing is often declining. This diminishes total economic benefits for a regional economy as this economy grows and becomes more complex. The following are the most commonly observed economic benefits of ports on regional employment:

  • Port throughput is, in general, positively related to employment in port regions, implying that the higher the throughput, the more employment. Employment impacts are more substantial in the industry than in the service sector.
  • Employment impacts vary by commodity sectors. Container and break bulk traffic usually have twice the employment impact as dry and liquid bulk traffic.
  • Private ports usually have more regional employment impacts than public ports since they usually serve commercial supply chains.
  • Each direct port employment is commonly associated with about 3 to 4 indirect jobs, although such figures vary widely according to the surveys and the context. There is limited empirical evidence about job multiplier figures.

However, the economic benefits per unit of port cargo handled, either in terms of employment or economic activity, usually increase with economic growth. The lower relative benefits of port investments are thus masked by economic growth, while the economic importance of ports is increasing. The economic benefits are less directly related to port activities but more related to the dynamics of the supply chains they support. This support becomes operational and functional, a benefit that is crucial to national competitiveness. Therefore, global trends underline a decline of the direct economic benefits of ports but a notable rise in their indirect and induced economic benefits. This trend is challenging because direct economic benefits can be readily assessed, while indirect and induced effects are complex to capture.

4. Employment Effects of Ports

Ports are important job generators. Shipping, cargo, and industrial activities and services in port areas generate direct employment effects. The logistics and industrial clusters in ports employ a vast labor force linked to cargo ship loading and unloading operations, ship operations and services (agencies, pilotage, towage, and bunkering), land transport, logistics activities, cargo services (freight forwarding and customs broking), industrial production facilities and government agencies.

The skills of the port-related employees and the interactions between them contribute to the competitiveness of seaports. Port activities are also responsible for a wide range of indirect employment effects through the linkages of harbors with other economic sectors and the spatial interactions with large logistics and economic poles outside port areas. Job creation in ports is mirrored on employment levels in education and training, tourism, and even in more cultural segments of the economic spectrum such as (maritime) museums. All the above activities provide people with wages, salaries, and other earnings and are major tax revenues for governments at different geographical levels.

The employment effects of a port activity usually extend beyond the initial round of employment generated by that activity. For example, stevedoring companies purchase a part of their inputs from local suppliers. The production of these inputs generates additional employment in the local economy. Suppliers, in turn, purchase goods and services from other local firms. There are further rounds of local re-spending, which generate additional employment. Similarly, households that receive income from employment in stevedoring and related activities spend some of their income on local goods and services. These purchases result in additional local jobs. Some of the household income from these additional jobs is in turn spent on local goods and services, thereby creating further jobs and income for local households. As a result of these successive rounds of re-spending in the framework of local purchases, the overall impact on the economy exceeds the initial round of output, income, and employment generated by stevedoring. In essence, seaports create employment impacts in four ways:

  • Direct employment includes the jobs local firms provide to support services to the seaport. Seaports create direct port employment through all types of activities in the port cluster. These jobs are dependent upon seaport activity and would disappear if the seaport activity were to cease. Typical direct jobs include dockworkers, ship agents, pilots, tug boat operators, freight forwarders, employees of port authorities, ship chandlers, warehouse operators, terminal operators and stevedores, railroad, barging, and trucking companies. 
  • Ports also generate indirect jobs due to local purchases by the port-related companies directly dependent upon seaport activity. Hence, port activities are responsible for a wide range of indirect employment effects through the linkages of harbors with other economic sectors and the spatial interactions with large logistics and economic poles outside port areas.
  • The employees of port-related companies spend part of their wages and salaries. Induced jobs are jobs created locally and throughout the wider national or supranational economy due to purchases of goods and services by those directly employed. Induced employment can include grocery stores, local construction industry (housing), retail stores, health care providers, local transportation services, local and state government agencies providing public services and education to those directly employed, and businesses providing professional and business services in support of those directly employed.
  • The last group of employment effects consists of related jobs. Manufacturing and distribution firms in and outside the port partly rely on efficient cargo handling operations in seaports. For instance, the steel industry requires the cost-efficient import of iron ore and coal for the blast furnaces and needs the port for exporting finished products such as steel booms and coils. Manufacturers and retail outlets, and distribution centers handling imported containerized cargo rely on efficient port operations. The dependency of related jobs on the port is a function of the location. When industrial activities or distribution centers are located in the port, or in close proximity, the low competitiveness of the seaport could lead to a loss of jobs. In such a case, it is difficult to make a strict distinction between direct and related jobs. When these activities are located in the more distant hinterland, then inefficient operations in one port could lead to a shift of the cargo flows to a competing port. A shift of traffic between ports generally preserves the employment levels in the related industrial companies and distribution centers in the more distant hinterland. The demand for the final product (e.g. steel products or consumer products) creates the demand for employment with these shippers/consignees, not using a particular seaport or marine terminal.

The extent of the employment effects of port activity is affected by the boundaries of the economy that is being analyzed. The increasingly international nature of port and shipping activities and the characteristics of global production networks and global supply chains make the employment effects of port activities increasingly extend beyond the local port level to a regional or even supranational level. A few examples underline this trend:

  • Shipping lines are operational on a global scale. At a local scale, they might generate employment via their liner shipping agencies in the ports of call. However, the jobs related to ship management, container fleet management, and investment and commercial strategies are usually concentrated in global or regional headquarters.
  • Global container terminal operators such as PSA, HutchisonPorts, DP World, or APM Terminals generate many operational jobs at the local port level but keep some activities centralized in global or regional headquarters, such as equipment purchases. Terminal operators might purchase terminal equipment not from local operators but from foreign suppliers in Europe (e.g. Kalmar, Gottwald) or overseas (e.g. Shanghai-based ZPMC).

For a particular port activity, the flow-on employment effects to the national or international economy will thus generally be larger than the flow-on effects to the regional economy.

5. Measuring Employment Effects

The appropriate technique for analyzing the economic impact of specific port activity is determined by the characteristics of the activity and the region being analyzed and the purpose of the analysis. The availability of data is also an important factor. Measuring the employment impacts of ports is not an easy task. There are several methodological problems when evaluating port impacts:

  • Identifying activities that are dependent on the port and evaluating their degree of dependency such as how much of the employment in a local bank is linked exclusively to the port. The measurement of the degree of dependency is potentially exposed to the risk of subjectivity. A lack of exact data can lead to an overestimation of the degree of dependency and an overestimation of the employment effects.
  • The intensity of the employment impact of the port, such as how much of the consumption activities and multiplier effects can be attributed to the existence of the port. Also, an estimation bias can occur when no exact figures are available.

Many of the above problems are structured by making a difference between direct, indirect, induced, and related jobs. However, there is no unique standard methodology for defining the types of impacts, which makes port comparisons difficult. Benchmarking employment impacts of ports is further complicated by the large variety of methodologies applied (mostly bottom-up approaches) and a general lack of recent and port-relevant economic input-output data at the macro-economic scale.

Despite a lack of a uniform approach on the issue, many port authorities and (national) government agencies produce figures on the economic impact of their respective ports, including the employment effects. A few European examples:

  • Every year the National Bank of Belgium publishes figures on the economic impact of the ports of Antwerp, Ghent, Zeebrugge, Ostend, and more recently, also for the ports of Brussels and Liège. The studies are part of the Working Papers series of the National Bank.
  • The Ministry of Transport, Public works and Water Management of the Netherlands regularly commissions a ‘Havenmonitor’ report (Port Monitor).
  • In the autumn of 2008, Oxford Economics was commissioned by the Chamber of Shipping, British Ports Association (BPA), and United Kingdom Major Ports Group (UKMPG) to prepare two economic impacts studies on aspects of the UK maritime industry. One focuses on ports and the other on the UK shipping industry. These studies are entitled “The economic contribution of ports to the UK economy” and “The economic contribution of the UK shipping industry”.

The employment effects are mainly expressed in full-time equivalent (FTE), and a distinction is generally made between direct and indirect/induced effects. Employment impacts are often disaggregated to the level of individual ports or port regions and specific economic activities (cargo handling, industrial sector). However, the results are often not comparable among countries or even ports within the same country as there is a great diversity in measurement methods between countries/ports. There are methodological differences, particularly in terms of the definition of the port area and the economic sectors, the terminology used, the level of aggregation of the data, the followed approach (i.e. top-down via an input-output table with sector data or bottom-up based on firm-level data) and the definitions and methods deployed to analyze indirect/induced employment effects. The observed methodological differences can result in non-transparency and wrong benchmarking exercises. Stakeholders might show some mistrust of the results obtained, even if the methodology is made very transparent. The fact that methodologies differ further fuels criticism on employment studies for being over-optimistic regarding real job creation.

Despite the lack of a standardized methodology, some common conclusions apply:

  • Total employment effects of ports (direct and indirect/induced) are significant and typically represent between 1 and 5% of the total employment in a country.
  • In many ports, local direct employments effects of port activity are stagnating or decreasing due to a combination of deindustrialization, containerization, and the increasing use of automated port handling systems and technology. As a result, the growth in direct FTE in many (but not all) port areas is either negative or close to zero while throughput volumes increase.
  • More and more jobs are created outside the port area. A large variety can be observed in how these processes are materializing in specific individual ports. At one extreme, some ports have succeeded in attracting more businesses and thus more jobs in the port area in recent years. At the other extreme, some seaports have become merely transit centers servicing economic and logistics centers in the immediate or more distant hinterland. When employment effects increasingly extend beyond the local port level, ports might be confronted with a lower direct employment level but higher indirect and related jobs. Potential reasons for less direct jobs include productivity gains, outsourcing activities to companies outside the port, or the delocalization of activities to the hinterland.

6. Global-Local Mismatch of the Economic Benefits of Ports

With the setting of global supply and transport chains, there has been a growing level of mismatch between the benefits of port activities and the scale and scope of these benefits. While at the aggregate level, it is clear that port investments have economic benefits, the spatial and sectoral distribution of these benefits is far less evident. One particular mismatch concerns local (community) versus regional / national / global benefits. The following points underline this mismatch:

  • Labor usually comes from the local community, and its benefits (mostly wages) are derived in the region, particularly indirect job multipliers. As port employment went down because of mechanization and containerization, so did the local labor benefits. Yet, several port jobs are remunerated at a wage, which is much higher than those usually found in the manufacturing sector. The most important employment multiplier of ports is usually over trucking.
  • Capital usually does not come from the community but is provided by national and international funding sources, such as investment banks, pension funds, and terminal operators. Thus, the return on this capital (e.g. loan or operational revenues) does not accumulate in the port region but along global financial centers.
  • Firms can be local in ownership, but the commercial trends have underlined vertical and horizontal integration in the port industry. For instance, this means that terminal operation at one port is usually part of a portfolio of terminals located in different ports across the region or even the world. Thus, profits derived from terminal operations are not necessarily invested in the port they were generated.
  • Port land use is usually regulated by leasing and concession contracts, but land prices are often a tool for attracting investors and usually do not reflect real value. This underlines that the impacts of ports on real estate values are not necessarily fully accounted for.
  • Local transport infrastructure, namely roads, are usually provided for free (or at a fee lower than costs). This represents a form of local or regional subsidy for globally-focused activities.
  • Taxes and customs duties are just partly earned by the port region. They are usually a national source of income used to fund other social and infrastructure programs.
  • Environmental (pollution) and social (noise, accidents) externalities are assumed by the community, while the generators of these externalities usually bear only a fraction of them.

Therefore, port benefits are increasingly distributed across actors and concern geography that transcends the local community and, at times, the region. This trend skews the assessment of the benefits of port investments, where the local economic impacts can be much less significant than those at the regional or national levels. Conflicts or pressures can result from local communities that may be disappointed because their expectations about the economic benefits of port activities may not be met. At the same time, their perception of environmental externalities is present. Still, despite the complexity of assessing their economic impacts, ports remain fundamental to the economic well-being of the nations, regions, and localities they are embedded in.


Related Topics


References

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