In Praise of Global Imbalances

SINGAPORE – In recent weeks, there has been a chorus of opinion arguing for a sharp increase in global investment, particularly in infrastructure. Former US Treasury Secretary Lawrence Summers asserted that public investment really is a free lunch, while IMF Managing Director Christine Lagarde has argued that an investment boost is needed if the world economy is to “overcome a new mediocre.”

These comments suggest that the world has been under-investing for many years. In fact, according to International Monetary Fund data, the current overall global investment rate, at 24.5% of world GDP, is near the top of its long-term range. The issue is not a lack of overall investment, but the fact that a disproportionate share of it comes from China.

China’s share of world investment has soared from 4.3% in 1995 to an estimated 25.8% this year. By contrast, the United States’ share, which peaked at 36% in 1985, has fallen to less than 18%. The decline in Japan’s share has been more dramatic, from a peak of 22% in 1993 to just 5.7% in 2013.

China dominates global investment because it saves and invests nearly half of its $10.5 trillion economy. But this investment rate is likely to decline sharply over the next 5-10 years, because the country already boasts new infrastructure, has excess manufacturing capacity in many sectors, and is trying to shift economic activity to services – which require less investment. Moreover, China’s rapidly aging population and declining working-age population will reduce long-term investment demand.