BOONDOGGLING ON A MASSIVE SCALE:

China Gambles on Big Projects for Its Stability (JOSEPH KAHN, January 13, 2003, NY Times)

China's top leaders, many of them trained in the mechanical sciences, are not just making mountain cities into transportation hubs. They also want to pump 48 billion cubic meters of water each year from south to north, transport natural gas from Central Asia to China's southeast coast, and construct the world's largest dam, longest bridge, fastest train and highest railroad.

Even more than modernizing its infrastructure or, as some critics see it, erecting monuments to its emerging might, China is desperate to keep the economy growing quickly. Over the past few years, it has reached deep into the national treasury to finance projects that it hopes will create jobs and stimulate enough growth to ensure social stability and to keep the Communist Party in power.

As a new generation of leaders takes control, China is using heavy government investment to escape the worldwide slowdown and maintain growth above the 7 percent level that the government deems crucial to avoiding mass unemployment and urban unrest.

The plan has worked, so far. China last year reported defiantly robust growth of 8 percent, attributed to surging exports and a nearly 25 percent increase in state-directed investment.

But the strategy is risky. The once fiscally prudent central government is now running hefty budget deficits. State banks, told a few years ago to clean up bad loans and begin acting like capitalist lenders, are pumping tens of billions of dollars into officially sponsored projects that have sometimes failed to produce real returns. [...]

Some economists argue that such investments are smart bets on the future. Only a small percentage of the urban population earns middle-class wages, and China cannot rely on consumer spending to spur growth the way most industrialized nations can.

China also needs to expand faster than wealthy countries to generate jobs for workers laid off by state-run factories and for farmers flocking to cities to seek something better than subsistence income.

"The government is sucking up savings and investing in the future," said Andy Xie, a regional economist for Morgan Stanley. "The financial returns on these kinds of investments are low. But the payoff for the economy is high."

Mr. Xie argues that China's work force is becoming significantly more efficient. He estimates that China is experiencing productivity growth of 4 percent a year. An eight-lane highway between two crowded cities greatly enhances productivity when it replaces a two-lane road. Cellphones have revolutionized communications in a place where fixed-line phones were scarce. [...]

[Fred Hu, chief China economist for Goldman Sachs], argues that as China suffers through a period of falling prices and low consumer spending, Beijing is right to inject money into the economy.

"This is China's New Deal," Mr. Hu said. "Every problem is easier to solve when growth is faster."

He says that as if the New Deal was a good thing. But what are the chances that a communist government that's isolated from the world, its own people, and political, economic, and, most importantly, demographic reality is making wise choices about where and what it builds? Posted by Orrin Judd at January 14, 2003 9:15 AM