November 10, 2011
Manila, Philippines
There’s a key concept in economics called the law of diminishing returns. It sounds complex, but it’s actually very easy to understand.
Imagine for a moment that there are two towns cut off from each other by a vast river. Communications and trade are infrequent at best. But if you build a bridge, you’ll get a tremendous boost to the possibilities for trade and commerce. Economic activity rises dramatically.
Build another bridge a half-mile from the first one and you’ll ease congestion, speed up travel times, and create some further improvement in the region’s economy. But the additional returns on investment for the second bridge pale in comparison with the first.
So on and so forth for the third, fourth, fifth bridge that you build. Each successive bridge provides less and less of a boost to the regional economy.
What China has been doing for years now, is the equivalent of having built thousands of bridges, each one providing diminishing returns to its economy. Even more concerning, China has been building these economic bridges, so to speak, even though when they weren’t necessary.
Consider that the share of fixed asset investment in China, at more than 65%, is the highest for any major economy in modern history. What’s more, China’s own electricity authority recently reported that there are 64.5 million dwellings in China where absolutely no electricity is being used. The investments they’re making are producing little return.
