Abstract

https://ssrn.com/abstract=2834326
 


 



Does Infrastructure Investment Lead to Economic Growth or Economic Fragility? Evidence from China


Atif Ansar


Saïd Business School

Bent Flyvbjerg


University of Oxford - Said Business School

Alexander Budzier


University of Oxford - Saïd Business School

Daniel Lunn


University of Oxford - Department of Statistics

September 3, 2016

Atif Ansar, Bent Flyvbjerg, Alexander Budzier, and Daniel Lunn, 2016, 'Does Infrastructure Investment Lead to Economic Growth or Economic Fragility? Evidence from China,' Oxford Review of Economic Policy, vol. 32, no. 3, autumn, pp. 360–390. DOI: 10.1093/oxrep/grw022.

Abstract:     
China’s three-decade infrastructure investment boom shows few signs of abating. Is China’s economic growth a consequence of its purposeful investment? Is China a prodigy in delivering infrastructure from which rich democracies could learn? The prevalent view in the economics literature and policies derived from it is that a high level of infrastructure investment is a precursor to economic growth. China is held up as a model to emulate. Politicians in rich democracies display awe and envy of the scale of infrastructure Chinese leaders are able to build. Based on the largest dataset of its kind, this paper punctures the twin myths that (i) infrastructure creates economic value, and that (ii) China has a distinct advantage in its delivery. Far from being an engine of economic growth, the typical infrastructure investment fails to deliver a positive risk-adjusted return. Moreover, China’s track record in delivering infrastructure is no better than that of rich democracies. Investing in unproductive projects results initially in a boom, as long as construction is on-going, followed by a bust, when forecasted benefits fail to materialize and projects therefore become a drag on the economy. Where investments are debt-financed, overinvesting in unproductive projects results in the build-up of debt, monetary expansion, instability in financial markets, and economic fragility, exactly as we see in China today. We conclude that poorly managed infrastructure investments are a main explanation of surfacing economic and financial problems in China. We predict that, unless China shifts to a lower level of higher-quality infrastructure investments, the country is headed for an infrastructure-led national financial and economic crisis, which is likely to spread to the international economy. China’s infrastructure investment model is not one to follow for other countries but one to avoid.

Number of Pages in PDF File: 35

Keywords: infrastructure, economic growth, fragility, investment theory, China, transport, cost overruns, benefit shortfalls, cost–benefit analysis, optimism bias

JEL Classification: C39, H43, H54, O11, R11, R42


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Date posted: September 6, 2016 ; Last revised: October 4, 2016

Suggested Citation

Ansar, Atif and Flyvbjerg, Bent and Budzier, Alexander and Lunn, Daniel, Does Infrastructure Investment Lead to Economic Growth or Economic Fragility? Evidence from China (September 3, 2016). Atif Ansar, Bent Flyvbjerg, Alexander Budzier, and Daniel Lunn, 2016, 'Does Infrastructure Investment Lead to Economic Growth or Economic Fragility? Evidence from China,' Oxford Review of Economic Policy, vol. 32, no. 3, autumn, pp. 360–390. DOI: 10.1093/oxrep/grw022.. Available at SSRN: https://ssrn.com/abstract=2834326

Contact Information

Atif Ansar (Contact Author)
Saïd Business School ( email )
Park End Street
Oxford, OX1 1HP
Great Britain
Bent Flyvbjerg
University of Oxford - Said Business School ( email )
Park End Street
Oxford, OX1 1HP
Great Britain

Alexander Budzier
University of Oxford - Saïd Business School ( email )
Park End Street
Oxford, OX1 1HP
Great Britain

Daniel Lunn
University of Oxford - Department of Statistics ( email )
1 South Parks Road
Oxford OX1 3TG
United Kingdom
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