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The Hebrew Scriptures tell us that, when King David captured the cities of the Ammonites, he ordered its residents “to work with saws and iron picks and iron axes, or sent them to the brickworks” (2 Samuel 12:31 NRSV). Although biblical scholars offer various interpretations, it appears to us the king set his captives on a building spree. We can find no evidence from the Holy Scriptures or other sources of what the Ammonites built or whether this did anything to improve the well-being of those who lived under King David.
We mention this because, as the military-political rivalry between the United States and China takes more ominous tones, China’s economy seems to be at a crossroads. China’s economic growth over the last 40 years has been spectacular, making China the “workshop of the world.” It has lifted over 800 million Chinese out of extreme poverty (living on less than $2 a day). China’s real per capita income has risen 25-fold from 1978 to 2019.
But while most of this miracle resulted from China opening up to the rest of the world and embracing policies that are more characteristically capitalist than socialist, the process has always been under the thumb of an authoritarian government. What impresses us is that much of China’s growth since 2008 has been based on erecting infrastructure and buildings, led by quasi-state entities that borrowed and invested in the projects. Seems their profitability was not the first priority.
China created this construction boom through policies that limited investment opportunities for household savers, artificially kept borrowing rates low, and funneled resources to local government financing vehicles (LGFV). In recent years, domestic investment accounted for 44% of China’s gross domestic product, compared with 20%-25% in the rest of the world. Housing construction accounted for up to 25% of China’s GDP in some years. Housing construction has never accounted for more than 7% of the U.S. GDP.
The result is thousands of miles of unused highways and 130 million unoccupied apartments. Many LGFVs are on the brink of bankruptcy. Yet the government continues to focus on construction. One columnist opines that China’s “leaders have instead doubled down on … [the] construction of more apartment buildings and factories.”
Most of us think the point of economic development is to improve the living standard of the average household, not to construct large amounts of unused infrastructure, buildings and factories. Seems neither President Xi nor King David got the memo.•
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Bohanon and Horowitz are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.
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