Investment Leads To Consumption

A blog about business and economics.
Oct. 18 2013 6:31 PM

Investment Leads To Consumption

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NANJING, CHINA - JANUARY 1: People seem to be really into the Nanjing subway.

Photo by China Photos/Getty Images

Simon Rabinovitch in Nanjing for the Financial Times gives us another example of the Chinapocalypse genre, looking at how the city's GDP has been powered by furious construction of new metro lines:

The Chinese government has been talking for years about rebalancing the economy to unleash more consumption and it has made some progress toward that goal, but over the past few months it fell back on investment to head off the risk of a slowdown.
Investment in fixed assets such as rail lines and apartment towers accounted for 56 per cent of the country’s growth in the third quarter.
But Nanjing, a city of 8m people, also underscores the limits of this economic model. Bills are starting to come due on Nanjing’s ambitious subway plans and the government says it cannot fund the expansion without raising ticket prices.
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So a few points on this. Right now Nanjing has a two line Metro system. When the current stimulus binge is over, it'll be a six line system. That's for a city whose population is somewhat larger than the metropolitan area of Madrid. Madrid has a 13 line metro system, that serves about 630 million riders annually. Nanjing's existing two-line system serves about 340 million riders a year. So expansion to six lines is not some kind of obvious overindulgence in mass transit. But the system is going to need to raise fares in order to increase its revenue base. And guess what happens when a transportation operator raises fares and increases revenue? Household consumption goes up!

You invest to do a better job of serving your customers, and then with a better product to offer the customers consume more.

Now I don't know anything about Nanjing and it's possible that these four new lines are all hideously misdesigned and the whole project is going to turn out to be a fiasco. But the bare facts of the story sound like a large recently-poor city is investing a ton of money in physical infrastructure because it's badly under-endowed with infrastructure, and as that infrastructure comes into place the local economy will pivot away from investment (in new infrastructure) to consumption (of the services the infrastructure provides) which is exactly what you would expect to see happen.

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