China’s Construction Fetish

Most of China’s just-announced $586 billion stimulus will go to transport systems, with more than half devoted to railroad projects alone. But, while concentration of resources in the government’s hands through state ownership and taxes served China well for the past 30 years, what the country needs now are reforms that boost private consumption.

NEW HAVEN – As we digest the implications of China’s $586 billion stimulus plan, it is intriguing to ponder why China chooses infrastructure, buildings, and big projects every time growth needs a boost. Should, or can, China achieve long-term growth only by adding physical structures? If and when the time comes to pause or change course, will China’s existing political-economic institutions accommodate such a transformation?

During a recent trip to Brazil, my taxi driver complained about Sao Paulo’s bumpy streets and highways. I responded, “I thought the high oil and iron ore prices had made Brazil boom….Why hasn’t Brazil spent more on its infrastructure?”

He replied, “The Brazilian economy has been doing well. But, whenever the government has extra money, President Lula likes to give tax rebates and subsidies to people, instead of using it on the roads. Why?”

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