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Does infrastructure investment lead to economic growth or economic fragility? Evidence from China

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Listed:
  • Atif Ansar
  • Bent Flyvbjerg
  • Alexander Budzier
  • Daniel Lunn

Abstract

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.

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  • Atif Ansar & Bent Flyvbjerg & Alexander Budzier & Daniel Lunn, 2016. "Does infrastructure investment lead to economic growth or economic fragility? Evidence from China," Oxford Review of Economic Policy, Oxford University Press, vol. 32(3), pages 360-390.
    • Handle: RePEc:oup:oxford:v:32:y:2016:i:3:p:360-390.
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    2. repec:eee:regeco:v:65:y:2017:i:c:p:116-126 is not listed on IDEAS
    3. Wang Zhenhua & Zhang Guangsheng, 2016. "Industrial policy, production efficiency improvement and the Chinese county economic growth," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics, vol. 34(2), pages 505-528.
    4. Schmidt, Torsten & Blagov, Boris & Döhrn, Roland & Grozea-Helmenstein, Daniela & Jäger, Philipp & Micheli, Martin & Rujin, Svetlana, 2017. "Die wirtschaftliche Entwicklung im Ausland: Leichte Belebung der internationalen Konjunktur," RWI Konjunkturberichte, RWI - Leibniz-Institut für Wirtschaftsforschung, vol. 68(1), pages 5-32.
    5. Dieppe, Alistair & Gilhooly, Robert & Han, Jenny & Korhonen, Iikka & Lodge, David, 2018. "The transition of China to sustainable growth – implications for the global economy and the euro area," Occasional Paper Series 206, European Central Bank.
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