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This article discusses the value of investing in infrastructure, particularly in China. China’s large plans to provide infrastructure lending programs to poorer countries begs the question of whether infrastructure really boosts GDP or whether a rise in GDP leads to increases in infrastructure projects. This question is usually referred to as the causality question.
An analysis of a high-altitude railway built from Tibet to one of China’s poorest regions, Qinghai, suggests that the answer to the causality question that increased infrastructure leads to higher GDP. The result of building this railway was a 33% increase in GDP per capita in Qinghai.
However, there are some shortcomings to increases in investment. A country must be ready to face the fact that returns on investment will dwindle. It must also consider the fact that increased infrastructure could damage GDP, because localities no longer feel the need to produce when more advanced cities provide the same good or service (which the country’s production level will stay the same, the city’s will diminish). A reduction in GDP may also be a problem when decentralization becomes popular and the “clustering effect that makes big cities fertile grounds for innovation” ebbs.
In summary, while there is no question that infrastructure is a crucial pillar to long-term growth, it must be kept in mind that it is not the only pillar.
For more on infrastructure and investment, read “Concrete Benefits” and “Government Spending Booms Not So Great for Long-Term Growth”