Capitol Report: Why China’s massive infrastructure investment is a model to avoid
Some leading U.S. politicians and economists including President Obama have admired China’s massive investment in new transportation projects and wished America could do the same. Yet a new research paper suggests China’s approach is “a model to avoid” and one that could trigger a global crisis unless dramatically altered.
In a paper, four professors at Oxford University assert that a majority of large Chinese investment projects over the past three decades have underestimated costs, failed to deliver the promised benefits and played a smaller role than conventional wisdom suggests in making the country more prosperous.
“China is not a model to follow for other economies — emerging or developed — as regards infrastructure investing, but a model to avoid,” wrote professors Atif Ansar, Bent Flyvbjerg, Alexander Budzier and Daniel Lunn.
Many Western lawmakers and economists have long praised China’s investment in new roads, rail, bridges and airports as means to improve the nation’s growth and reduce unemployment. Some have also suggested authoritarian governments are better able than democracies to get projects off the ground.
“How do we sit back and watch China and Europe build the best bridges and high-speed railroads and gleaming new airports, and we’re doing nothing?” Obama complained in a speech several years ago urging Congress to spend more on infrastructure.
Jim Millstein, a former Treasury Department official from 2009-2011, makes a similar argument Wednesday, in a Washington Post column. “A well-designed program of new infrastructure spending can be just the catalyst the U.S. economy needs to get out of its rut,” he argued.
Yet the Chinese approach is much costlier and less beneficial than it appears, the researchers contend. In many cases projects are subject to special-interest manipulation, poorly designed or shoddily implemented to meet political edicts. Quality, safety and environmental issues are not uncommon and the Chinese government is heavy-handed when obtaining land, even displacing masses of citizens from seized homes and property.
The researchers examined large road and rail projects built in China from 1984 to 2008 and compared them with similar projects in rich democracies. Cost overruns averaged 30% for three-quarters of the Chinese projects, not very different from the outcomes in the U.S., Europe and Japan.
“This result puts in doubt the oft-repeated hypothesis among scholars and the media that autocratic political systems, such as China’s, may have an edge in controlling the delivery of infrastructure,” the paper said.
What about the huge surge in growth that started in China in the late 1980s, creating the world’s second largest economy? The researchers point out that China rapid ascent started in a period when investment was quite low. They assert that legal reforms and economic liberalization played a much bigger role in China’s resurgence.
The danger now is that the Chinese government is using infrastructure investment as a primary tool to keep the economy growing at a high rate, but it’s failing to accrue the expected and politically exaggerated returns, the paper argues. China accounted for almost a quarter of the world’s fixed investment in 2014, up from a mere 2.1% in 1982.
The result: Chinese debt, including state-own companies, is now higher than any other rich democracy except for Japan as a share of gross domestic product, the paper contends.
“We thus reject the orthodox theory that heavy investment in infrastructure causes growth,” the researchers wrote. “(U)nless China shifts to a lower level of higher-quality infrastructure investments, the country is headed for an infrastructure-led national financial and economic crisis, which — due to China’s prominent role in the world economy — is likely to also become a crisis internationally.”
Worries about China’s high investment and rising debt are not isolated. Other observers have also raised alarms. A recent blog on the International Monetary Fund web site, for example, said the Chinese still have a lot of work to do.
“China’s economy is like a large, high-powered ship that is still sailing fast, but in a lopsided way, listing and drawing water,” wrote Longmei Zhang, an economist in the IMF’s Asia and Pacific Department.
To be sure, the situation in the U.S. is different. Many roads, bridges and other key transportation hubs have not had the necessary upkeep. An independent estimate suggests the U.S. needs to spend trillions of dollars over the next few decades to bring the country’s infrastructure up to speed. And both presidential candidates, Hillary Clinton and Donald Trump, have vowed to invest more.
There’s little appetite in Congress, however, for an increase in infrastructure investment.