“..there is no evidence of over-investment in infrastructure at the aggregate level. Nevertheless, there is strong evidence that the marginal return to infrastructure investment in the PRC has been rapidly declining.” This is according to Zhigang Li writing in an Asian Development Bank Institute Working Paper from January this year.
Believe it or not there’s a lively debate in academia about the benefits of infrastructure development. A paper from a few weeks ago even suggested it was worse than useless in China Does Infrastructure Lead to Growth or Fragility?.
The work in this paper though concludes, admittedly without a lot of hard evidence, that infrastructure development is probably a good thing as three manifest benefits accrue. First it reduces costs, second it allows for the ‘spatial redistribution of economic activities’ i.e. manufacturing clusters can develop and finally it facilitates increasing productivity.
Distortions in the China market to do with too much government and especially local government involvement need to be tackled and the paper concludes with four ‘Policy Recommendations’ applicable not only for China but other developing economies as well. They are:
- Recognize that urbanization and infrastructure development leads reliably to growth.
- Promote research into and get a better understanding of the ‘social returns’ from infrastructure development. Narrow cost/benefit analysis may understate the benefits of some development. Some development benefits may be overstated.
- Neither the government nor Ms. Market are sufficient alone for optimal development. The best model is public-private cooperation.
- Tailor development policy by region and local market conditions. In China’s case, encourage roads in the West and telecommunications in the East for example.
As China transitions to it’s new consumption lead growth model this is an important topic as returns to infrastructure investment are only going one way. In future planners will have to make more nuanced arguments as to why projects are needed and what their overall benefit will, in fact, be.
For example, Shanghai has plans for 25 metro lines by 2025 (currently 14). Is all that really necessary and what’s the ROE on line #25 going to be? A lot lower than on lines 1 through 10, no doubt.
The early part of the paper has some useful history and facts on the pace of development and you can access the work in full via this link Infrastructure and Urbanization.
Happy Sunday.