Sunday, November 30, 2014

Did China Waste 6.8 Trillion Dollars In Mismanagement and Corruption?

According to a report by China's National Development and Reform Commission and the Academy of Macroeconomic Research the country wasted nearly $6.8 trillion dollars in investment money (as cited in Business Insider).  Half of the investment money between 2009 and 2013 was wasted in ineffective construction projects that were supposed to improve the nation’s infrastructure to spur growth.  A sign of major corruption or just mismanagement?

Low interest rates can spur all types of investments and these are beneficial for national growth. There is always a cost with such stimulus if infrastructure investments in the provinces don't actually lead to growth or simply don't have a return on their investment. Local government makes decisions on where and how to spend resources but continued poor investments can damage growth. 

As with any large project it is possible that money is not spent in the most effective places to obtain a significant return on investment. For example, an expanded highway will have one return rate over 10 years while the development of discounted industrial parks may have another. Some will improve upon the infrastructure and expand the economy while others will help a few business but have a lower overall impact. 

Likewise, China is known for higher levels of corruption. This is typically the case in restricted economies that follow a communist system where central government makes most decisions. Government becomes the major source of income and officials and their associated companies find a way to skim off the top of major projects. Development is a great buzzword that leads to the reallocation of resources. 

The $6.8 trillion dollars may not have been a complete waste but certainly didn't get the bang for the buck it was originally intended to have. Poorly designed projects, lack of proper financial planning, inefficient development, a week development plan, and of course corruption can zap stimulus power. At present the Chinese economy is expected slow down a little while further stimulus in the form of lower interest rates are used to prop up growth.

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