Underground Economy? Tel Aviv Subway System Could Give GDP a $32 Billion Boost

A study says the greater population and business density resulting from the Tel Aviv Metro would boost productivity and innovation

Illustration of the Tel Aviv light rail, due to open in 2021, December 18, 2016.
NTA - Metropolitan Mass Transit System Ltd.

The giant construction project that envisions three subway lines serving the greater Tel Aviv area won’t just be a boon to commuters, it could add significantly to the size of the Israeli economy by of all things letting more people and business be crowded into the region.

A study by the Aaron Institute for Economic Policy led by Sani Ziv and Oren Shapir estimates that the three subway lines will at the minimum increase Israel’s gross domestic product annually by 1% starting in 2040, or 27 billion shekels ($7.8 billion at current exchange rates).

The impact could be even more if the Tel Aviv Metro – which is meant to augment the Tel Aviv Light Rail already under construction – spurs more high-density construction in the region, with more skyscrapers and the urban renewal of older neighborhoods. Under that scenario, the addition to GDP starting in 2040 could be 4.4%, or 112 billion shekels ($32 billion) annually.

People don’t ordinarily smile on the idea of jam-packed streets and high-rise construction, but for the economy it means greater interaction between people and businesses.

“We’ve drawn on the extensive economic literature showing that when employment and business is dense, in parallel with accessible transportation, productivity is increases,” Ziv said.

In April, the Tel Aviv Metro project was approved in principle by the National Infrastructure Committee and is now moving forward under the aegis of a handful of ministries and the Metropolitan Mass Transit System, the same state-owned company that is building the Tel Aviv Light Rail.

At an estimated cost of 150 billion shekels, the Metro will be the biggest infrastructure project ever undertaken in Israel.

Its economic impact will take time: Even under the most optimistic time line, the Tel Aviv Metro will not begin operations until 2030. When it does, its contribution to the economy will be many times more significant than the light rail, which is due to start in 2021, according to Ziv and Shapir.

Their study goes beyond the usual cost-benefit analyses of big transportation projects, which focus on things like the contribution to the economy of reduced travel times, fewer road accidents and less air pollution. Ziv and Shapir also look at what they call the impact of “agglomeration” – the increased concentration of people, businesses and services in a smaller area.

Economists have long recognized the advantages of this in enabling the greater sharing of inputs, knowledge and infrastructure, in reducing the costs of bringing employees, employers and investors together, and by better diffusing knowledge between entrepreneurs, employees and competitors due to their physical proximity.

“There is a lot of empirical evidence that in more crowded cities productivity and wages are higher than in less crowded one and the number of businesses that open is greater,” Ziv said. “Even research and development activity is more intense, so the number of patents developed in denser areas is greater.”

The key to getting density to work is a good public transportation system that brings people to their jobs, not to mention business meetings elsewhere. High-quality public transportation frees up roads for trucks, making their work more efficient, too.

Israel has been a public transportation laggard, with a history of underinvestment and an overreliance on cars. The result is massive traffic jams and long commuting times. “The Metro program looks like that something is finally changing,” Ziv said.

He and Shapir have divided the region, which is home to about 4.2 million people, into 10 zones. Around the core of Tel Aviv are two rings – an inner ring that includes the suburbs of Bat Yam, Givatayim and Herzliya and an outer ring encompassing Rosh Ha’ayin, Netanya and Ashdod. Each ring has been divided into three sections.

In the most optimistic of three scenarios, where the subway system spurs high-density construction, the economic benefits are the greatest.

“Most people say that in Israel this can’t happen, but I think it could,” said Prof. Zvi Eckstein, who heads the Aaron Institute and is dean of the Tiomkin School of Economics at the Interdisciplinary Center Herzliya. He helped guide the research.

Speaking at a roundtable to mark publication of the study, Tamir Cohen, the Finance Ministry official overseeing the Infrastructure 2030 program, agreed that the Tel Aviv Metro project was about more than transportation.

“It’s a must to let the economy continue growing at a fast rate in the medium and long term,” he said. “It will improve productivity, let us go forward with a strategic housing program and accelerate urban renewal …. When the next government is formed, the Metro will be one of the first items we’ll put on its agenda.”

To hasten its development and avoid the obstacles that often ensnare big infrastructure projects in Israel, the government plans to pass a Metro Law designed to rein in regulators and the heads of local governments, Cohen said. He compared the measure to the special law Britain passed to speed up construction of the Crossrail project in London.

“If we don’t improve the way infrastructure projects are advanced, and all relevant entities aren’t harnessed in, we’ll only benefit from the Metro in 40 or 50 years, if at all,” Cohen warned.

Nir Brill, vice chairman of the National Economic Council, said the Metro is key for more housing to be built in the greater Tel Aviv area.

“We’ll eventually reach a stage where we’ll have to stop construction in the metropolitan core because there will be no public transportation,” he said. “We’ll have to create more and more bedroom communities on the outskirts of the metropolis.”

But he took issue with Ziv and Shapir’s forecast for as many as 8 million residents in metropolitan Tel Aviv, saying it was unrealistic and contradicted the government’s policy of encouraging population growth in other parts of the country.