HONG KONG – Many observers tend to regard the rise of unoccupied modern “ghost towns,” funded through risk-laden local-government financing vehicles (LGFVs), as symptoms of China’s coming collapse. But this view underestimates the inevitability – indeed, the necessity – of such challenges on the path to development.
In 2012, the venture capitalist William Janeway argued that economic development is a three-player game involving the state, private entrepreneurial innovation, and financial capitalism, with inevitable cyclical overshoots that create the conditions for the next wave of invention and output growth. The United States had ghost towns and local bank busts once it began investing in railways, mining, and industrialization in the mid-nineteenth century. But it experienced no systemic crisis that spilled over its borders.
Without large-scale infrastructure investment, especially in transport, the productivity gains that enabled America’s emergence as an industrial power would have been impossible. Though the process included significant creative destruction, rapid economic growth offset losses resulting from excess capacity.
Similarly, when viewed through the long lens of history, China’s ghost towns will prove to be potholes on the path to development. China’s massive infrastructure investment, funded largely through LGFVs, will most likely be remembered for its critical contribution to the country’s economic modernization.