China's Investment Driven Growth Makes Sense

A blog about business and economics.
April 12 2012 2:57 PM

China's Investment Driven Growth Makes Sense

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I had a hazy intention to write an anecdote-driven piece arguing that all this hysteria about China's level of investment is overblown, but fortunately for me Ryan Avent wrote a column with actual data to make the same point. China is adding capital at an extremely rapid rate for the fairly good reason that it's a country with an extremely low level of capital goods per person.

This seemed fairly obvious to me on an anecdotal level even just based on a government-affiliated tour that deliberately avoided visits to any of the poorest parts of the country. I saw people living in shacks, bicycles being used to transport wholesale quantities of socks, vast quantities of laundry drying in the open air in Shanghai, workers digging holes with shovels, etc. It's important not to confuse rates with flows. If your country was extremely poor until very recently, then most of your stuff will be very new. Consequently, it may look more impressive than the stuff in a richer but slower growing country. The most recent time I flew into Logan Airport in Boston I was in a terminal that had obviously been renovated recently and it looked really impressive—reminded me of China. The median American airport terminal is considerably older than the median Chinese airport terminal, so it looks much shabbier. But even an old airport terminal is a more useful piece of infrastructure than a terminal that's not there. An old van or truck is an easier way to transport socks than a bicycle. China's stock of capital goods is quite low, so it makes some sense to try to add to it at a very rapid pace.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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