China's infrastructure projects

The longest sea-crossing bridge, with a length of 36 kilometers and six lanes wide, spans Hangzhou Bay near Shanghai. It was built at a cost of 1.6 billion$ (11.8 billion yuan) after five years of construction and a further nine years of planning. The economic benefits of this expensive project are not clear; the traffic diversion has caused losses in the Zhejiang Expressway.
The US’s deepening recession is slamming China’s export sector, just as it has everywhere else in Asia. The immediate problem is a credit crunch not so much in China as in the US and Europe, where many small and medium-sized importers cannot get the trade credits they need to buy inventory from abroad.

As a result, some once-booming Chinese coastal areas now look like ghost towns, as tens of thousands of laid-off workers have packed their bags and returned to the countryside. Similarly, in Beijing’s Korean section, perhaps half the 200,000-300,000 inhabitants — mainly workers (and their families) who are paid by Korean companies that produce goods in China for export — have reportedly gone home.

With roughly $2 trillion in foreign-exchange reserves, the Chinese do have deep pockets to fund massive increases in government spending, and to help back-stop bank loans. Many leading Chinese researchers are convinced that the government will do whatever it takes to keep growth above 8 per cent. But there is a catch. Even if successful in the short run, the huge shift toward government spending will almost certainly lead to slower growth rates a few years later.

Simply put, it is far from clear that marginal infrastructure projects are worth building, given that China is already investing more than 45 per cent of its income, much of it in infrastructure. True, some of China’s fiscal stimulus effectively consists of loans to the private sector via the highly controlled banking sector. But is there any reason to believe that new loans will go to worthy projects rather than to politically connected borrowers?

In fact, China’s success so far has come from maintaining a balance between government and private sector expansion. Sharply raising the government’s already outsized profile in the economy will upset this delicate balance leading to slower growth in the future.

It would be preferable for China to find a way to substitute Chinese for US private consumption demand, but the system seems unable to move quickly in this direction. If government investment has to be the main vehicle, then it would be far better to build desperately needed schools and hospitals than ‘bridges to nowhere’, as Japan famously did when it went down a similar path in the 1990s. Unfortunately, China’s local officials need to excel in the country’s ‘growth tournament’ to get promoted. Schools and hospitals simply do not generate the kind of fast tax revenue and GDP growth needed to outperform political rivals.

Even prior to the onset of the global recession, there were strong reasons to doubt the sustainability of China’s growth paradigm. The environmental degradation is obvious even to casual observers. And economists have started to calculate that if China were to continue its prodigious growth rate, it would soon occupy far too large a share of the global economy to maintain its recent export trajectory. So a shift to greater domestic consumption was inevitable anyway. The global recession has simply brought that problem forward a few years.

Kenneth Rogoff
The author is Professor of Economics and Public Policy at Harvard University, and was chief economist at the IMF. Copyright: Project Syndicate, 2009.