Infrastructure investments in China: Road to hell or Europe?

Some who find the investment in infrastructure futile cite a negative return on investment: a few days ago, economists of the University of Oxford published a paper on the economic implications of Chinese infrastructure investment, arguing that it has contributed to a fragile economic environment in China. The paper made some waves in the China watcher community and the media. The problems with this paper are manifold: thus, for example as Andrew Batson points out, the paper does not deal with infrastructure spending per se but with total investment and debt. Another problem, as a Financial Times article points out aptly, is the neglect for positive externalities. Villages, towns, and cities flourish along railway stations, highways, and airports – thus making the project worthwhile from a state point of view. 

With regard to OBOR, state-owned companies shoulder much of the infrastructure investment, with private companies still shying away. This does not mean, however, that it will stay this way. Alibaba has made inroads in Kazakhstan, Russia, and Central Asia. Companies situated along the border regions have also benefitted from heightened trade volumes. But not just them – Chinese and foreign firms in the Chinese coastal regions start taking advantage of reduced transportation times and costs. The Brussels based think tank Bruegel published a working paper titled “China’s Belt and Road initiative: can Europe expect trade gains?” The authors argue that EU businesses can benefit greatly from OBOR in its current disposition as an approach to “ease bottlenecks for cross-border trade, in particular through transport infrastructure”. The improvement of infrastructure, the authors point out, will stimulate trade between China, European countries, as well as countries along OBOR. Centered on the construction of infrastructure to reduce transportation costs, the report concludes that OBOR “is very good news for Europe as far as trade creation is concerned”. 

However, what happens to be seen is how the thrust to reduce transportation time and costs is manageable with countries along OBOR’s will generate positive externalities. For example, Russia and Kazakhstan want the trains to stop as often as possible on their journey to Europe to foster growth along the lines, while China hopes to reach Europe as fast as possible. 

Whatever the case, stay tuned…