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Infrastructure’s Class of Its Own

BEIJING – After several months of disappointing economic indicators, China’s State Council has unveiled a “mini-stimulus” package, focused on social-housing construction and railway expansion. The decision came a month after Premier Li Keqiang’s declaration that China had set its annual growth target at “around 7.5%” – the same as last year’s goal. The implication is clear: While consumption-driven growth remains a long-term goal for China, infrastructure will continue – at least in the short term – to serve as a key driver of China’s economy.

Of course, China is not the only economy that depends on infrastructure investment to buttress economic growth. The World Bank estimates that infrastructure investments accounted for nearly half of the acceleration in Sub-Saharan Africa’s economic growth in 2001-2005.

According to the Bank, a 10% increase in infrastructure investment is associated with GDP growth of 1%. Such investment also creates jobs, both in the short term, by creating demand for materials and labor, and in the long term, for related services. For example, every $100 million invested in rural road maintenance translates into an estimated 25,000-50,000 job opportunities.

But these benefits are diluted in China, owing to its excessive reliance on public funding. Indeed, in recent years, less than 0.03% of Chinese infrastructure investment – which amounted to roughly 9% of GDP – was derived from private capital.