Saturday, July 26, 2014

What Were the Effects of China's 8.5% GDP Expediture on Infrastructure From 1992 to 2011?

SHANGHAI, which already boasts 14 subway lines, a high-speed maglev service, two huge modern airports, some 20 expressways and a bullet-train departure every three minutes, is about to add one more piece of infrastructure—the headquarters of the new BRICS development bank. China is setting up the bank together with the four other members of the BRICS club of big emerging markets: Brazil, Russia, India and South Africa.

Fittingly, the bank will focus on infrastructure lending to poorer countries. China is also pushing to establish another multilateral lender, the Asian Infrastructure Investment Bank, which, as its name suggests, will concentrate on the same thing. With these two new banks, China is exporting a central feature of its development model to the rest of the world. It spent 8.5% of its GDP investing in infrastructure from 1992 to 2011, according to the McKinsey Global Institute. That was more than any other country, and well above the developing-country norm of 2-4% of GDP.

Given China’s growth—its economy expanded seven-fold during that time—the wisdom of investing in infrastructure seems self-evident. Research generally turns up a positive relationship between infrastructure investment and growth, especially in poorer countries. According to one broad survey of the literature by the World Bank, making Latin America’s infrastructure as good as East Asia’s would increase annual growth rates by as much as five percentage points in the countries with the worst roads and phones.

Yet it is difficult to isolate the precise effect on growth of any given project. Investment normally gives an immediate lift to GDP, whether it involves a bridge to nowhere or one to a crowded island. What matters is the long-run impact. Over time, infrastructure can gin up growth in two main ways. It can generate a rise in incomes if reduced transaction costs promote trade. And it can raise growth rates if it leads to greater information sharing and thus improved productivity. But these effects are hard to measure because infrastructure investment often coincides with economic growth, casting doubt on causality. Did the new roads boost growth or did faster growth increase demand for them?

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