CHINA SPENDS MORE ON INFRASTRUCTURE each year than North America and Western Europe combined. That’s according to a new study published last week by global management consulting firm McKinsey & Company. The fact that China is investing so much in roads, rails, ports—and everything else that keeps society up and running—hints at big trends that could shape the global economy in the coming decades.
“Infrastructure investment has actually gone down in half the G20 economies,” says Jan Mischke, senior fellow at McKinsey Global Institute, who worked on the report. The culprit was the global recession in 2009. But it hasn’t stopped China.
Between 1992 and 2013, China spent 8.6% of its GDP on building roads, railways, airports, seaports, and other development projects that are key to keep people and goods on the move, and keeping the economy strong. That same spending figure was just 2.5% for Western Europe, and 2.5% for the US and Canada put together.
“The report is an important wake-up call about the perils of under-investment in infrastructure,” says Robert Puentes, a senior fellow specializing in metropolitan policy at the Washington-based think tank, the Brookings Institution. "The super-charged growth in China's economy is fueled by these investments in infrastructure."
Europe’s and North America’s infrastructure is getting old, fast. It needs more money to be replaced, made better, and made safer. More investing also means greater environmental sustainability, more jobs, and innovation that fuels new technologies.
Last year, for example, the US Department of Transportation study revealed that more than 61,000 bridges in the country are “structurally deficient”; in 2014, US Vice President Joe Biden described New York’s LaGuardia Airport as “third world.” In 2013, the UK government announced a £100 billion infrastructure plan, saying that the UK had “for centuries been pioneers in infrastructure,” but in recent decades, “let this proud record slip.”
Last week's study asserts that, based on the current trajectory of investment, the world will be left with major infrastructural gaps: The world will need to invest $3.3 trillion a year for the next 15 years to keep pace with economic growth forecasts.
The report is an important wake-up call about the perils of under-investment in infrastructure.
Having said that: Of course China would be spending a lot on more ways to get its citizens from point A to point B. Emerging markets like India and China are looking to build from scratch, not just improve things that already exist. The report even says that 60% of worldwide infrastructure investment need will be in emerging economies like China, Eastern Europe, Latin America and the Middle East.
But Puentes points out that one has to remember, when looking at the report’s numbers, that different countries spend different amounts on different things. For example, the US is required by law to spend a mandatory amount on certain programs, like Social Security, a federal welfare program.
“If the US spent zero on Social Security and defense, the percentage of the total that goes [toward] infrastructure would be higher,” Puentes says.
Jan Mischke agrees: China will need to invest more of its GDP annually, and the US and Europe will need to invest less, since there’s a lot of infrastructure already in place. The problem? “China has actually invested much more than needed, and the US, much less than needed,” Mischke explains. "Despite this overinvestment, China's needs for the future remain vast. The key opportunity for China is to deploy capital to more productive areas like research and innovation, and to raise efficiency and effectiveness of spending."
Incidentally, China is home to the world’s first maglev train—a superfast train that replaces wheels with magnetic levitation and reaches a top speed of 430kph (267mph). It opened way back in 2004, and it represents futuristic technology that most other nations can only dream of, even today.
China's taken its impressive infrastructure business on the road: Last year, it signed a £32 billion deal with Brazil and a £5.2 billion deal with the UK to help build new infrastructure in those countries, like railways and power plants.
Puentes says the key to building robust infrastructure programs is in mixing public and private investments — ginning up “true partnerships between government agencies, private firms, financiers, and the general public. This is how many nations successfully develop infrastructure around the world today,” he says.
For instance, Japan’s train system is an example of this public-private balance fuelling the development of a widespread, reliable transportation framework. Its extensive rail network has been a combo of privately invested money and public funds from the government for years.
The emerging market of India, meanwhile — which placed second in the McKinsey study, spending 4.9% of its GDP on infrastructure — saw more private sector companies helping to build roads starting in the mid-2000s.
China has actually invested much more than needed, and the US, much less than needed.
Looking ahead, though, things will only get trickier. There are a lot of new technologies that aim to disrupt the way we build roads, send goods, and transport ourselves. Self-driving cars and deliveries by drones, for example, are realities that are being rapidly realized, and will definitely disrupt how we decide to allocate money to transit projects.
One thing is for sure, though. Considering how quickly ageing infrastructure is in some of the world’s richest nations — including the US and UK — looking to the East for a good example could prove to be the smartest spending decision of all.
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