Infrastructure spending appears to destroy economic growth

Bent Flyvbjerg and three of his colleagues from the Said Business School in Oxford have been investigating whether investments in infrastructure lead to economic growth or economic fragility by studying what has been happening in China. The results of their work have just been published in the Autumn edition of the Oxford Review of Economic Policy. They reviewed evidence from 74 road and 21 rail projects built from 1984 to 2008. The authors compared the planned benefit cost ratios (BCR) with the realised BCRs. Their expectations were that benefits would not be fully realised unless actual passenger volumes reached those forecast.

Their findings were that 55% of projects had in reality a BCR of less than one, i.e. they were unviable from the outset. A majority suffered from both a cost overrun and benefit shortfall. Only six projects (6%) showed benefits which greatly exceeded costs. So in the majority of cases these infrastructure investments have destroyed economic value.

The China Development Bank (CDB) which has funded this infrastructure spending has also funded loans to state enterprises in Africa and Latin America. These loans enabled them to buy Chinese goods and services. One of the countries receiving such a loan was Venezuela, which still needs to repay $20 billion of its $60 billion loan.

The consequences of the debt fuelled infrastructure model are serious, and not just for the China Development Bank. When you add its debt and that of other state-owned or state-controlled enterprises to the official debt burden, it turns out that China’s true government debt is between 190 and 220% of GDP. Only Japan has a higher level of debt (as a proportion of GDP). This means that a third of China’s $28.2 trillion debt load is accounted for by its infrastructure gamble. Eventually the costs of this unproductive debt overhang will have to be borne by Chinese savers.

China appears to be repeating the path trodden by Japan which undertook $6.3 trillion of infrastructure investment between 1991 and 2008. There was almost no economic growth in Japan during that period. Japan now has a crushing debt burden of 230% of GDP. The outcome in China may be worse than in Japan due to the former’s poor and rapidly ageing population.

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