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Goverment-Subsidized Technology Won't Save China's Economy

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With China facing its most severe economic contraction in decades, Beijing is resorting to infrastructure investment to shore up growth. Officials are claiming that this spending will have a transformative impact on the Chinese economy. But without reforms to the state sector, the transformation they are expecting will prove to be elusive.

The work report presented by Premier Li Keqiang at the May 22 session of the National People’s Congress (NPC) stated that this year’s stimulus policy would focus on three main areas—“new infrastructure,” “new urbanization,” and transportation and water conservancy. The new infrastructure push will include “next-generation information networks,” “5G applications,” “charging facilities,” and “new-energy automobiles.” New urbanization will involve the “renovation of 39,000 old urban residential communities” and “the installation of elevators in residential buildings,” among other things. The transportation and water conservancy projects consist primarily of new high-speed rail lines and massive reservoir and pipeline schemes.

None of these are novel priorities. What is significant is that they have now been elevated to the status of an integrated program for reversing the tailspin in China’s GDP. The inclusion of so many high-tech initiatives is particularly noteworthy. Where previous infrastructure stimuli consisted primarily of old-school construction projects such as the many roads and bridges to nowhere that were built in the aftermath of the 2008 global financial crisis, this time the planners will be counting heavily on new economy themes.

The hope is that IT wizardry will make it possible to avoid the wasteful side effects of China’s previous building booms. As NPC delegates told the Economic Information Daily, “New infrastructure will avoid problems encountered with traditional infrastructure including excess capacity resulting from insufficient demand and infrastructure that is out of step with industrial development.” Instead, as Zhang Zhanbin, head of the Central Party School’s Academy of Marxism, explained, the new investment will be “not only beneficial for stimulating overall economic growth but at the same time will promote the transformation and upgrading of the economic structure.”

Unfortunately, this confidence in the rationalizing power of technology is ill founded. China’s state-led investment drives invariably lead to excesses, because they incentivize lower-level cadres to promote items on an official wish list regardless of their relevance to local conditions and without consideration of overall supply and demand conditions. This is not a problem that is amenable to technological fixes. It is a built-in feature of central planning itself.

The history of Chinese investment in wind turbines shows how things tend to go wrong. In 2006, a requirement that power companies increase the share of renewables in total capacity created an incentive to build wind farms on the windiest sites regardless of their proximity to the existing transmission network or the feasibility of installing new power lines. By 2010, the situation had reached the point where 26 percent of China’s wind power capacity was not connected to the grid. Many of the windmills were also exposed to constant weathering by sand from the Gobi Desert. There is no reason not to expect a replay of this experience, with local governments throughout the country scrambling to set up electric vehicle charging stations in remote locations and erect nonfunctional 5G towers.

The current expectation that 5G and artificial intelligence (AI) will make it possible for China to transition to a higher quality “mode of growth” is but the latest iteration of an idea that goes back to the earliest days of the Soviet Union, when Lenin claimed that electrification would establish the basis for a thoroughly rational economic order. In the early twentieth century, it seemed that a comprehensive plan could be successfully implemented on the basis of large-scale industrialization, which would result in a sufficient level of standardization to make Hayek’s “knowledge of the particular circumstances of time and place” largely irrelevant. Today it is imagined that a computer network could solve the local knowledge problem with AI algorithms and ubiquitous tracking devices. Yet these systems, limited as they are to following predetermined routines for solving a preset menu of problems, are not going to counteract the malincentives faced by the state sector decision-makers who must determine what that menu of problems should consist of and specify the data inputs that will be relevant to their solution.

It is not even safe to assume that all of the required data would be accessible. As the Financial Times recently reported, there is, for example, no single Chinese government database containing everyone’s personal information. Instead there are a number of siloed data repositories under the control of a variety of local-level bureaucracies and private and state-owned enterprises, many with poor incentives to cooperate with one another. Competition among rival interest groups constitutes yet another impediment to the effectiveness of big data authoritarianism.

Hopes for a “transformation of the economic structure” are thus likely to be disappointed. A much more likely outcome is that China’s “new infrastructure” will be but one more example of the false promise of technology as an antidote to the irrationality of the state.


Contact Mark A. DeWeaver

Check out www.markdeweaver.com for more commentary by this author. Mark A. DeWeaver, PhD, CFA, is a cofounder of the fund management company Ithaca Advisors, LLC, and the author of Animal Spirits with Chinese Characteristics: Investment Booms and Busts in the World's Emerging Economic Giant


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