3.9 Infrastructure investment grew steadily beginning in the early 1990s

FIGURE 3.9 Infrastructure investment grew steadily beginning in Infrastructure investment was a key factor the early 1990s in supporting China’s rapid growth. Industrial development and urbanization dramati14 cally increased the demand for energy, water, and industrial land. Without corresponding

Share of GDP ( percent) 2 4 6 8 10 12 increases in infrastructure investment China’s growth would have rapidly run into physical constraints. Although investment in infrastructure was relatively limited during the 1980s, it picked up beginning in 1990 and has risen sharply since the global financial crisis, when the authorities used public investment 0 (primarily financed by off-budget financing 198119831985198719891991199319951997199920012003200520072009201120132015 channels) to stimulate growth (Herd 2020) (figure 3.9). Numerous cross-country studies Source: Herd 2020. Note: GDP = gross domestic product. have established a causal relationship between economic growth and a minimum amount of infrastructure investment.42 However, this literature also shows that the relationship is not linear, and above a certain level, the amount of public investment in infrastructure is ultimately a function of the service quality a government wishes to provide and the willingness and ability of users to pay for it—either through taxes or user fees. China’s approach to infrastructure investment has emphasized high service coverage, while using a combination of general government transfers and local land development auctions as a means of financing. Tariffs cover capital and operational costs in the energy sector, albeit with significant cross-subsidies from industry to households (World Bank 2020; World Bank and DRC 2014), but capital costs (and sometimes operational costs) are generally not recovered in the other infrastructure sectors (transport, water, and other municipal services).43 This approach to infrastructure financing, put in place following the fiscal recentralization of the early 1990s, worked well until the early 2010s. In the aftermath of the global financial crisis, to which China reacted with a large debt-financed infrastructure push, concerns over its sustainability have grown. Today, China’s public capital stock per worker (largely made up of infrastructure assets) corresponds to the level in the OECD, even though the country’s per capita GDP is only a fifth of the OECD average (World Bank and DRC 2019). The contribution of traditional infrastructure investment to economic growth is thus unlikely to continue going forward. New infrastructure investments in fields such as digital technology, clean energy, and intracity transport will to some extent replace the role of traditional connectivity infrastructure as a driver of future growth, but more sustainable financing models and an overall rebalancing toward consumption will also be needed. The remainder of this section focuses on the contribution of rural infrastructure investments to poverty reduction through improved connectivity, market integration, and job creation. The impact of infrastructure on poverty reduction worked along several pathways. First, it greatly facilitated and sometimes catalyzed the establishment and development of competitive businesses in inland and rural areas. Second, infrastructure construction and maintenance, being a labor-intensive industry, generated demand for relatively low-skilled labor. In some of the government’s poverty reduction interventions the two went hand in hand, such as when public investments in the construction of rural roads or irrigation infrastructure were designed to benefit local low-skilled workers by incorporating local employment requirements in bidding documents. Finally, infrastructure investment in safe water, connectivity, and energy, particularly in poor areas, directly improved poor families’ access to basic services, and thus improved their well-being. In the early reform period, heavy investments in intercity expressways were a major force in China’s economic transformation, particularly in the coastal areas (Hajj and Pendakur 2000).

Total gross fixed capital formation in infrastructure, as a share of GDP