Government investment crowds out private investment in the medium-to-long term and deters consumption, argues a prominent economist who says easing government investment growth is the only way to guarantee long-term development.
Speaking at a May 22 forum organized by the China Development Research Foundation, Wang Xiaolu, deputy director of the National Economic Research Institute, China Reform Foundation, said while the crowding-out effect may be hard to measure, it exists in the medium-to-long term, Caixin.com reports.
The proportion of investment in infrastructure to gross domestic product peaked at 10 percent in Japan and South Korea. The ratio is undoubtedly more than 10 percent in China, which suggests excessive government investment –particularly given China's urbanization rate of 58 percent. Over-investment causes a decline in effectiveness and ties up resources, Wang says.
Between 2000 and 2010, China’s investment rate rose 15 percentage points, but the consumption rate declined from over 60 percent to below 50 percent. The change can be attributed to investment-friendly policies, including loose monetary policies and proactive fiscal policies, Wang says. He says the current slowdown in government investment will help reduce risk and bring stronger, more sustainable future growth.
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