A new BRICS development bank has been established with its headquarters in Shanghai. The focus of the bank will be on infrastructure in developing countries. China has used infrastructure spending as a extensive part of its own development strategy – China’s national trunk highway system of 35,000km of highways was built between 1992 and 2007 at a cost of $120bn. It has spent 8.5% of its GDP investing in infrastructure from 1992-2011 and according to McKinsey the developing country norm is 2-4% of GDP.
Although it is difficult to measure the precise effect of infrastructure spending, it is the long run impact on an economy that is the most important. The Economist identified two benefits from infrastructure spending:
1. It can generate a rise in incomes if reduced transaction costs promote trade.
2. It can raise growth rates if it leads to greater information sharing and thus improved productivity.
Recent research into the high-altitude railway connecting the Chinese province of Qinghai to Tibet provides a natural experiment. The region was one of the poorest in China meaning that prior growth did not prompt investment. The results showed a 33% increase in GDP/person in counties that got the railway = 12 billion Renminbi extra GDP a year, exceeding its 33 billion Renminbi cost in just 3 years. The main positive out of this railway network was the ability of local manufacturers being able to sell to the national market. However there is a downside as local industry find it hard to compete with goods from more advanced areas and this can lead to a contraction of its economy and ultimately a loss of jobs.