Why Infrastructure Spending isn't Always the Answer

"As we digest the implications of China's $586-billion (U.S.) stimulus plan, it is intriguing to ponder why Beijing chooses infrastructure, buildings, and big projects every time growth needs a boost. Should, or can, it achieve long-term growth only by adding physical structures? If and when the time comes to pause or change course, will China's existing political-economic institutions accommodate such a transformation?

[W]hile China's new stimulus plan overwhelmingly emphasizes infrastructure, it gives short shrift to social programs, such as health care and education, even though they can reduce household saving pressure and increase private consumption.

China has decent infrastructure, impressive buildings, and an excessive industrial base. What is missing is sufficient private consumption to power endogenous growth. To correct this, China needs to boost its people's sense of future financial security and affect a rise in private income commensurate with GDP growth. Building a nation demands more than steel and concrete."