Arnold Kling  

China's Allocation of Capital

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Tyler Cowen thinks that China is making the wrong bet.


Automobiles, steel, semiconductors, cement, aluminum and real estate all show signs of too much capacity. In Shanghai, the central business district appears to have high vacancy rates, yet building continues.

The Financial Times agrees.

The scale of the excess capacity is breathtaking. At the end of 2008, China's steel capacity was 660m tons against demand of 470m tons. This difference is much the same as the European Union's total output. Yet, notes the report, "there are currently 58m tonnes of new capacity under construction in China". To the extent that gross domestic product is driven by such absurd spending is a measure of waste, not of economic welfare.

One of the trends that I repeat is the increased share of output that is going to be toward education and health care. If China wants to jump on that trend, their investment ought to be focused on human capital rather than physical capital.


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COMMENTS (6 to date)
Zdeno writes:

Arnold, wouldn't you agree that the majority of activity in the American "education" field is either intelligence signaling or ideological indoctrination?

Perhaps America really is making the smart bet here, churning out her legions of humanities students, lawyers, power-point savvy business students etc., rather than fuddy-duddy tangibles like steel, oil, cars, textiles, and manufactured goods. But the balance of trade suggests otherwise.

Cheers,

Zdeno

E. Barandiaran writes:

Maybe you have not read the comment I left on Tyler's link to the FT editorial:

You link to a Financial Times editorial on China's excess capacity. The editorial refers to huge supply excesses in specific industries but makes no reference to their effect on prices. In the FT model, prices do not adjust. Pathetic.

8 writes:

The amazing thing isn't the empty city or the empty interstate highway, it's how it is filled within a couple of years. Pudong was a ghost town 5 years ago, not anymore.

Productivity in healthcare and education is blocked by institutional forces in the U.S. It's not clear to me that China suffers this problem, if anything their model of teaching suggests potential gains as the web allows class size to go from 100 per teacher to 10,000, or 10 million.

E. Barandiaran writes:

I visited Pudong when construction was starting in 1994, then I visited the new branch of the People's Bank of China in 1996, and by the time of my last visit (April 1997) a lot was already built. In those years the expectation was that it'd take as much as a decade to move companies and people from Shanghai and other places to Pudong, but I understand that five years ago most buildings were largely occupied. The relevant question is how the Chinese government negotiated this occupation, that is, how costly it has been for the government to achieve it. I don't know the answer.

agnostic writes:

China isn't yet an open-access order (in North, Wallis, & Weingast's term), so it probably couldn't get much out of large public goods provisioning like health care and education.

If they're going to focus on public goods, the ones that mature natural states first provided were related to transportation -- railroads, public roads, impartial police forces to patrol them for bandits, etc.

thebastidge writes:

Developing human capital means less central control- very threatening to those whol hold power now.

The qualittative difference between educated thinkers and subject drones isn't captured by a numerical comparison between expenditures on infrastructure and expenditure on human capital.

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