A central economic question of our time (continued)
(Please see our previous piece on this issue as background.) The Economist has a piece full of interesting facts. The question is whether its central premise, posed in the italicized paragraph below, is correct.
Over half of the world’s infrastructure investment is now taking place in emerging economies, where sales of excavators have risen more than fivefold since 2000. In total, emerging economies are likely to spend an estimated $1.2 trillion on roads, railways, electricity, telecommunications and other projects this year, equivalent to 6% of their combined GDPs—twice the average infrastructure-investment ratio in developed economies. Largely as a result, total fixed investment in emerging economies could increase by a staggering 16% in real terms this year, according to HSBC, whereas in rich economies it is forecast to be flat.
Such investment will help support economic growth this year as America’s economy stalls—and for many years to come.…Morgan Stanley predicts that emerging economies will spend $22 trillion (in today’s prices) on infrastructure over the next ten years, of which China will account for 43%. China is already spending around 12% of its GDP on infrastructure. Indeed, China has spent more (in real terms) in the past five years than in the whole of the 20th century. Last year Brazil launched a four-year plan to spend $300 billion to modernise its road network, power plants and ports. The Indian government’s latest five-year plan has ambitiously pencilled in nearly $500 billion in infrastructure projects. Russia, the Gulf states and other oil exporters are all pouring part of their higher oil revenues into fixed investment.
Good infrastructure has always played a leading role in economic development, from the roads and aqueducts of ancient Rome to Britain’s railway boom in the mid-19th century. But never before has infrastructure spending been so large as a share of world GDP. This is partly because more countries are now industrialising than ever before, but also because China and others are investing at a much brisker pace than rich economies ever did. Even at the peak of Britain’s railway mania in the 1840s, total infrastructure investment was only around 5% of GDP.
“Never before has infrastructure spending been so large a share of world GDP.” Is that a good thing or a bad thing? The Economist and some analysts assume it is a good thing, and perhaps makes world GDP more stable in the face of slowdowns in the EU and US. But what iron law says that that is true? Perhaps spending so hugely on infrastructure turns out to produce wasted and idle productive capacity in the face of a big downturn in final demand.
Is it not also possible and plausible that the great trade and growth among developing countries is a more fragile thing? China’s exports appear to be holding up quite nicely so far (up 28%, year over year), but doesn’t it remain to be yet seen if the great progress in the developing world is truly self-sustaining? For example, is it not true that by historical measures, a significant correction is long overdue?
To those who say that nothing like that is apparent on the horizon, we respond: everyone thought the good times were here to stay in internet stocks, housing prices, commodities of all sorts, subprime mortgages, and LBO loan syndication almost up to the very moment that they went over the cliff. It is when articles like the one above seem so unquestioning of their basic premise that we wonder most just what lies around the corner. (For example, if everyone saw the future so clearly and correctly, every energy dependent company in the US would have hedged almost all of their fuel needs a year ago.)