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China, Prometheus Unbound

By James H. Nolt

In the 1970s, many students studied an economic history book by David Landes, Prometheus Unbound, about how the technological revolution swept Europe, North America, and Japan to transform production possibilities. China is experiencing a similar, if even more rapid, technological revolution today.

We are starting to take China’s rise for granted, but 40 years ago nobody was predicting this sort of dramatic transformation of the world’s biggest nation. Retrospectively, economists say China’s brilliant success resulted from freeing markets. This is part of the story, but not the only cause, since China still has, by the standards of textbook economics, myriad market regulations, obstructions, and outright failures.

An important factor in China’s rise, which also figured in the post-war boom of Japan and the pre-war boom of Nazi Germany, is a massive increase in public investment, supported by a high savings rate. Despite a small boom in U.S. public investment during and after the Eisenhower presidency when the interstate highway system was built, and more recently, with the installation of the internet infrastructure, American public infrastructure spending has stagnated or decayed compared to fast-growing countries like China. The U.S. neglects public spending so its rich can enjoy ever-more-generous tax cuts while growth lags.

Among the most prominent signs of public infrastructure development in China are the numerous new airports and high-speed train stations. Up to 6 million workers labored to complete China’s comprehensive high-speed rail network, although the number currently employed is lower because the system is largely complete. Nearly all Chinese cities are now connected by frequent trains traveling at least 185 miles per hour, which is three times faster than Americans typically drive on interstate highways. The rail system is supplemented by a highway system nearly indistinguishable from that of the U.S., except that it is newer. Yet even Chinese who do own a car often prefer high-speed train travel for its greater safety, comfort, and speed. Needless to say, it is also less damaging to the environment.

The transportation revolution is completed by comprehensive public transportation within China’s numerous huge cities. Most cities have modern subway systems, which are still expanding with new lines. All cities have comprehensive bus routes. Parking is still expanding, struggling to keep up with the rapid growth of car ownership. In most cities, every subway station, many bus stops, and other popular places like shopping malls and universities offer free bicycles for the “last mile.” A magnetic card or phone app unlocks the bike and rental is free for the first hour or two. Wherever they are parked, municipalities track and retrieve them using radio chip technology. Travel anywhere is fast, convenient, and inexpensive.

While the transportation revolution in China may be the most obvious fruit of public investment that casual visitors first notice, the second most obvious, but arguably more important, is the world’s greatest housing boom. China employs about one-third of all the construction cranes in the world. If you are anywhere near a city, they are rarely out of sight. The resulting conglomerations of high-rise apartment buildings proliferate nearly everywhere. Each large apartment complex includes shopping malls, smaller shops, and other offerings for residents. Consequently, most urban Chinese now live in apartments that are fairly new.

This massive construction is a result of the financing peculiarities of local governments throughout China. In the U.S., property taxes typically fund state and local governments. China has no property taxes. Instead, local governments largely fund themselves by acting as giant property developers. Each earns income by building properties and flipping them for a profit. Most projects are built in partnership with private developers or are sold to them. Thus, this public spending does not crowd out private investment, as in economic textbook myths, but stimulates it. Many newly rich Chinese owe their fortunes to the real estate business.

The massive real estate boom has powerful secondary effects by driving demand for building, finishing, and decorating materials. It is has been the major engine of China’s development in recent decades. Although it mobilizes both public and private investment, public investment and planning are what kick-starts it.

The newest engine of China’s growth is the “new economy,” stimulated by the proliferation of the internet and smart phones. The latter are prevalent even among low-paid workers, and it is hard to find a young person without one. Even many elementary school students carry them.

Just as China largely skipped wired phones to proceed directly to wireless, many Chinese use phone apps as means of payment rather than credit cards or cash. Even the smallest shops and food stalls display QR codes that can be scanned by a phone camera for quick payment. Phone apps are also replacing paper tickets for public transportation.

Conflict between the old economy and the new can be seen in the frenzied construction of shopping malls. New malls are everywhere. Some are still packed with shoppers, but others see little customer traffic. Part of the reason is that internet purchases are rapidly displacing in-store shopping. Shopping excursions remain a popular social pastime, but they are often for meals with friends or to pick up fashion ideas. Actual purchases are cheaper online, in part due to the huge markups evident in the swankier Chinese department stores. Adjusting for quality, prices are often higher than in the U.S. Discount stores and online retailers sell similar merchandise for much lower prices. Except for vanity purchases, high-end retailers seem over-built and vulnerable.

The massive growth of the internet-based economy is rooted in significant public investment in fiber-optic cables, cell towers, satellites, and switching systems. This underlying physical infrastructure seems to be bearing up rather well under the strain of rapid expansion.

Western media most often mention the Chinese government’s internet restrictions rather than its vast investment in infrastructure development. Yet those restrictions are minor annoyances compared to the ever-increasing access to information and entertainment. Although there has been some crack-down on internet piracy in China recently, content from around the world, legitimate or pirated, is still more freely (considering the access price) available in China than in the U.S. Some websites, such as Facebook, YouTube, and Google, are restricted in China, but these obstacles are easily bypassed using VPN software. No doubt Chinese authorities monitor the internet for evidence of criminality or potentially violent dissent, but this does not stifle all online criticism of public authorities. Overall, the vastly increased access to public information in China is far more consequential than the remaining restrictions.

I am not arguing that China is trouble free. I have written that China has a growing debt problem and that the contradictions in its growth pattern are likely to produce some serious economic crises over the coming years. Nevertheless, compared to the illogical aversion to public investment in the U.S., the massive success of China in lifting a billion people out of poverty and into a thriving, competitive economy should be a lesson in the virtue of public investment.

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James H. Nolt is a senior fellow at the World Policy Institute and an adjunct associate professor at New York University.

[Photo courtesy of Fabio Achilli]

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