Dec 01 2009

Economic growth, the Chinese way

YouTube – Chinas empty city – 10 Nov 09.

My buddy living in Shanghai posted this video to his Facebook profile today. It demonstrates how misaligned incentives in China lead local government officials to launch massive government infrastructure projects, all with the goal of meeting the growth targets handed down from Beijing.

Building roads to nowhere and cities that stand empty certainly creates jobs and new spending by the workers employed in their construction, so in that regard at least one goal of such projects is achieved. But whether or not all growth is good growth depends on whether efficiency in the economy is increase or decreased as a result of the growth strategies used.

Hundreds of billions of dollars worth of resources in China are currently being allocated by the government in Beijing towards massive public works projects such as this sparkling new city in remote Inner Mongolia. But it seems that government plans don’t always fall in line with the wishes of the nation’s people. A wise man once said, “build it… and they will come.” Apparently in China, that’s not always true.

I happen to have traveled in Inner Mongolia a few years ago with a group of students from my school in Shanghai. It was a sad thing in my opinion to witness the rampant development of the once pristine and culturally rich Inner Mongolian steppes. Ethnic Mongolians had been put on large reservations (not unlike the Native American people 150 years ago) and turned into tourist attractions. The cities were populated almost entirely with ethnic Han Chinese, there for the purpose of building more new cities, mining raw materials, and selling them to the rest of China’s industries.

Fiscal policy (the use of government spending and taxes to stimulate or reduce the overall level of demand in an economy) is a powerful tool for achieving the macroeconomic goals of full-employment, economic growth and price level stability. When used effectively, government spending can also improve efficiency in an economy by allocating society’s scarce resources towards socially and economically valuable projects. In China, it appears, the government’s incentives are aimed more towards pleasing the higher ups and continuing to inflate the speculative  bubble in real estate that has almost certainly formed, rather than pursuing socially desirable and allocatively efficient projects that actually help the Chinese people. Damn shame!

Discussion Questions:

  1. What type of fiscal policy is the government in China pursuing? Expansionary or contractionary? What is the difference?
  2. Why is government spending sometimes less efficient than private sector spending?
  3. What would have been an alternative policy to allocating over $220 billion of public money into infrastructure projects that may have resulted in a more efficient allocation of China’s resources than projects such as the “empty city” in the video above?

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

5 responses so far

5 Responses to “Economic growth, the Chinese way”

  1. Gerald Mebaneon 30 Nov 1999 at 1:00 am

    An interesting discussion is worth comment. I feel that it’s best to write extra on this topic, it may not be a taboo topic but generally persons are not enough to speak on such topics. To the next. Cheers

  2. Andrew McCarthyon 02 Dec 2009 at 8:27 am

    great video, the last clip of the lone traffic officer is a bit funny

  3. Bjorn Kvaaleon 21 Jan 2010 at 10:22 pm

    By increasing the government spending, China is definately in contributing to expansionary fiscal policy. It is the world's fastest growing economy because of the major public work projects it is committed to. The difference between the Chinese government and the American government is that it takes the Americans a lot longer to start a project or find a solution, whereas the Chinese are a lot quicker. By building better infrastructure, China is laying the pathway for future economic success. Due to the large number of workers available and their cheap costs, many firms are building factories in China. Although China's economic success has been steadily growing, it might turn out to be an economic bubble waiting to explode.

  4. Bjorn Bon 22 Jan 2010 at 5:37 am

    Its and interesting method for increasing GDP. Essentially, by increasing G, they are increasing the GDP, but they are also improving their infrastructure. Even if it isnt used now, in the long run, they would have a larger production possibility. Obviously, if these improvements would have no benifit to the people whatsoever, this is a different story. This seems like a characteristic of a non-privatized industry, which is a lot less efficient than that where profit seeking firms are responsible. It is interesting to notice how this formerly communistic country is a lot less shy to have a large government involvement in business, though we notice that there is a lot of waste, despite the stunning GDP growth… I wonder if this can really go well in the long run?

  5. EFL teaching Exerciseson 19 Jan 2015 at 12:17 pm

    EFL teaching Exercises

    Economic growth, the Chinese way | Economics in Plain English