The Infrastructure Thing

More than half of Chinese infrastructure investments have “destroyed, not generated” economic value as the costs have been larger than the benefits, according to researchers at Oxford university, a finding that will fuel debate over the viability of China’s infrastructure-heavy growth model.

Source: China infrastructure investment model under fire – FT.com

A fascinating article, and a reasonable proposition. Except for three things.

First, China remains short of infrastructure in key areas. A few examples: freight rail remains in desperate need of an upgrade; highways are groaning under the load of China’s car-crazy masses; and the power grid needs a switch to sustainable energy sources before coal chokes the country. As such, spending on new infrastructure per se is not necessarily misdirected.

Second, much of the infrastructure that has been built over the last thirty years is either worn out or was poorly built in the first place. The Chinese slang term “tofu construction” refers to just this phenomenon, and news reports offer discouragingly regular examples of underbuilt architecture.

Finally – and perhaps most important – most infrastructure (at least, the bits not made out of “tofu,”) is designed to last for a long time, often dozens of years. Any ROI calculation taken soon after completion is likely premature. By design, infrastructure should precede development, and is often the impetus of wider economic activity. Thus the effect of any given project on the wider economy is often impossible to gauge until long after construction.

Waste and graft permeate infrastructure development in China, and the government would do well to avoid dependence on infrastructure spending for growth. That said, more well-managed and thoughtful investment in infrastructure is needed, and will be for a long time.

And one last thought: better for reasons both economic and political that the government’s Keynesian spending goes into infrastructure that is ahead of its time than into military hardware and facilities.

 

Mincing Words on Chinese FDI

China Invests (Somewhat) More in the World
Derek M. Scissors
American Enterprise Institute 
January 2014

In a deep-dive based on the data produced by the American Enterprise Institute and Heritage Foundation in their China Global Investment Tracker, Derek Scissors shows us how large China’s foreign direct investment effort has become and how fast it is growing. By the end of 2015, if all things go as expected, China will surpass $100 billion per year in funds invested overseas.

The numbers are large, but when measured against other capital flows in the past, not yet at a level which should concern average Americans. Indeed, there are significant benefits from such investments. Nonetheless, Scissors suggests, we should not assume all Chinese FDI is a good thing. He joins a growing chorus of voids suggesting that national security, the growing role of China’s state-owned enterprises, and genuine reciprocity should guide policymaker approaches to Chinese FDI as much as economic benefit.

Scissors does a superb job at laying out the key issues, and I especially liked his nuanced approach to SOEs. Disappointingly, he stops short of suggesting a framework that would allow us to distinguish Chinese investments that should be welcomed, and those that should be rejected. Reading between the lines (and in keeping with AEI’s economic approach), Scissors is more concerned about debating the laissez-faire end of the business community who would prefer that government simply got out of the business of regulating Chinese foreign investment.

A worthy roundup of the issue.

To Fix China, Fix Her Cities

“The Urbanization Solution”
Lu Mai
Government Designed for New Times
McKinsey & Co.

2012

China is on the back end of the largest and most rapid urbanization in the history of mankind. In the past 30 years, the nation’s population has gone from being 80% rural to over 60% urban. Lu Mai, Secretary General of the China Development Research Foundation and an expert on rural affairs, pens a forthright essay saying that China should stay the course: the more people you move to the cities, the more manageable China’s problems will be.

At the same time, Lu doesn’t want forced relocations. The market is the best mechanism to drive the process, he says. The appropriate role for the government is to serve as an enabler, making the process of integration into the cities as smooth as possible, and ensuring that migrants are provided the necessary services and statuses to make their shift from the countryside as smooth as possible.

Lu is wise enough not to call for the outright elimination of China’s hukou household registration system. Doing so would touch politically sensitive nerves, come across as slightly wild-eyed, and anyway would miss the point. Lu’s focus is on outcomes: get people into the cities, and anticipate and address the challenges this is going to create for municipal governments and the migrants themselves.

A quick read, but a good one.

China and the Money Diversion

China After Tian’anmen
Perry Link
The New York Review of Books
31 March 2014

Those among us who watch these sorts of things, but who don’t talk about them, share a quiet understanding that 2014 is one of those little anniversary years in China.

The fourth of May marks the 95th anniversary of the May Fourth Movement, a 1919 grassroots nationalist campaign protesting the Chinese government’s handling of the Versailles treaty, a key event in the history of the Chinese revolution. The first of October marks the 65th anniversary of the founding of the People’s Republic of China; and the fourth of June marks the 25th anniversary of the incident in Beijing’s main public square in 1989.

It is perhaps this latter milestone that inspired Rowena He to pen her new Tiananmen Exilesand that inspired Perry Link to write the foreword to that book. The foreword is excerpted in Link’s NYRB essay.

In his article, Link takes us through the background of China’s modern social contract: the shock of the June 4th incident was followed by a concerted effort on the part of the Party to shift the nation’s focus away from politics and toward prosperity. Commerce, opportunity, rising living standards and the social stability that made all of them possible absorbed the attention of the nation for the next two decades. The quid pro quo, of course, was that the people would not ask hard questions of their leaders.

For a generation, this approach has yielded great success as China’s economy continued to rise on the back of consistent and high economic growth. But the number of people enjoying consistently rising standards of living is falling, and the nation faces simultaneous crises in both the environment and ethics. As Link notes:

At a deeper level, though, Chinese people (like any) do not feel secure in a system built on lies. The wealthy send their money abroad—and their children, too, for education. In 2013 several surveys and reports showed sharp increases in the plans of whole families, especially among the wealthy, to emigrate, and there is no reason to think that poorer people would not follow this trend if they had the means.

The nation’s most prosperous are turning into a quiet flood of refugees to societies with rule of law, strong ethical systems, and who place limits on opportunity in favor of a better lifestyle.

Link summarizes a narrative familiar to many of us. It does more than simply justify the current silent exodus: it sets the stage for the next act in China’s economic and political evolution.

Prospects for the Shanghai FTZ

The Role of Economic Development Zones in National Development Strategies: The Case of China by Wang Xiao is a doctoral dissertation submitted to the Pardee Rand Graduate School. The author takes a methodical, data-driven approach to determine the extent to which economic development zones actually helped China’s development, when they did so, when they were less helpful, and what makes for more effective zones. The conclusions offer a hint as to the prospects for Shanghai’s much-ballyhooed Free Trade Zone to help in China’s search for an economic second wind.

Lies and Damned Lies

In “How to Make China More Honest,The Heritage Foundation‘s Derek Scissors contends that Chinese statistics are little more than politically-motiviated lies. He suggests that this means that the “Chinese miracle” could be part of the grand fib. More to the point, though, he says that the only way to keep China honest is to collect enough data about China to give lie to its own prevarications, and use that data to undermine China’s propaganda. The challenge, of course, is how to collect that data if China really doesn’t want you to do so.