Does Infrastructure Investment Lead to Economic Growth or Economic Fragility? Evidence from China
By A. Ansar, Bent Flyvbjerg, Alexander Budzier, Daniel Lunn. 2016
357 citations recorded by the source corpus.
China’s three-decade infrastructure investment boom shows few signs of abating. Is China’s economic growth a consequence of its purposeful investment? Is China a prodigy in delivering infrastructure from which rich democracies could learn? The prevalent view in economics literature and policies derived from it is that a high level of infrastructure investment is a precursor to economic growth. China is especially held up as a model to emulate. Politicians in rich democracies display awe and envy of the scale of infrastructure Chinese leaders are able to build. Based on the largest dataset of its kind, this paper punctures the twin myths that (i) infrastructure creates economic value, and that (ii) China has a distinct advantage in its delivery. Far from being an engine of economic growth, the typical infrastructure investment fails to deliver a positive risk-adjusted return. Moreover, China’s track record in delivering infrastructure is no better than that of rich democracies. Investing in unproductive projects results initially in a boom, as long as construction is ongoing, followed by a bust, when forecasted benefits fail to materialize and projects therefore become a drag on the economy. Where investments are debt-financed, overinvesting in unproductive projects results in the build-up of debt, monetary expansion, instability in financial markets, and economic fragility, exactly as we see in China today. We conclude that poorly managed infrastructure investments are a main explanation of surfacing economic and financial problems in China. We predict that, unless 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 is likely also to be a crisis for the international economy. China’s infrastructure investment model is not one to follow for other countries but one to avoid.
Subfields: Development, Economics and Econometrics
View Paper: https://www.semanticscholar.org/paper/c3848c61db1e0d727a98bada8748680ef850024b
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Citations in the corpus
- Can high-speed rail have a transformative effect on the economy? (2017, background): “But it can also lead to attempts to underestimate the role that transport may have as an enabler of growth; Ansar et al. (2016) have argued that HSR investment has slowed rather than enhanced Chinese growth by essentially resurrecting the crowding-out argument in a purely aggregate study that…”
- Can transport infrastructure change regions’ economic fortunes? Some evidence from Europe and China (2017, background): “On the negative side, Ansar et al. (2016) suggest that the assumption in the models discussed above, that lower transport costs translate into higher levels of productivity, which is beneficial to the economy, ignore the impact of typical underperformance relative to ex-ante forecasts.”