Home > Development Economics > China’s unproductive investment justified.

China’s unproductive investment justified.

For Developing Economies to grow certain variables have been identified as fundamental to the cause. These fall into two broad areas:

Human Capital – health, education and fertility.
Legal Infrastructure – rule of law (property rights), government interference, democracy and monetary control. These influence fixed capital investment which determines technology.

China InvestmentWhere a Developing Economy has these characteristics, but low income per capita, their potential for increasing GDP/capita is great. However economies with poor governance and low education will remain stuck in this low-income trap. This has been the position a number of African nations have found themselves in for so long.

In the initial years of growth developing economies open themselves up and embrace developed nation technologies and infrastructure. However, to further develop they need to become more innovative and drive the change themselves rather then relying on other countries. It is at this point that many economies struggle and get stuck in what is often known as the middle-income trap.

Many countries are still at such an extremely low level of development and there are years of catch-up growth ahead. China has a high rate of investment as a percentage of GDP but is this just catch-up growth? Many have said that it is too focused on unproductive investment and China’s policymakers are building cities, roads etc to keep the economy growing (Chart 7). However according to the HSBC report China’s level of development today is so much lower than that of the Asian tigers before their rapid expansion (Chart 8). They believe that the strong rate of investment is entirely justified – providing China with much-needed basic infrastructure.

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  1. Simon
    August 24, 2013 at 9:01 pm

    China has over invested. With investment such a large part of GDP any adjustment will be painful and protracted. For examples of possible aftermaths of over investment look at Japan since 1990 and Russia since 1998.

    The adjustment for China will be also hard because they have relied heavily on foreign demand. The USA was in a similar position wrt to Europe prior to 1929. Then it was the USA that had large foreign reserves and an economy heavily reliant on foreign demand and investment for employment and growth. The adjustment during the depression years was much harder in the USA. Unemployment skyrocketed wages fell. Real wages for those with jobs rose dramatically because prices fell. But with no employment there was no internal demand to replace lost foreign demand.

    At present the USA is adjusting much better to a low demand world because consumption was always a much larger slice of its GDP. Also it can and will repatriate demand that has been appropriated by its trading partners.

    The adjustment China has to make is developing its internal demand so that consumption becomes a much bigger slice of GDP. If it succeeds in this, and it will because it has to, the increased internal demand will be a good news story for New Zealand and other exporters of soft commodities.

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