So I emailed Professor M. Pettis a while ago, asking about: ‘China is a target rich environment; do we really expect *that* many loans to go bad? You could draw a line on a map, build a train, and people would use it…’ He writes thusly – probably to more intelligently phrased questions in the same vein:

… The second objection – perhaps not so different from the first – is that since China is so much less developed than Japan was in 1987, an infrastructure investment surge is a lot more sustainable. After all, Japan already had great infrastructure in place at the time, so that much of its new investment after 1987 was inevitably in the form of highly wasteful “bridges to nowhere”. Since China has much lower quality infrastructure stock, they argue, there is much more it can do in the way of sustainable investment.

I am always a bit puzzled by how widely-held these views seem to be, especially in China but also abroad. The idea that being poorer makes policy easier can’t have emerged from looking at the experience of developing countries. I suspect that it arises from assuming that poverty does not represent differences in real factors – worker productivity, education, the institutional and legal framework, etc. – so much as in policy mixes.

It is true that poorer countries are able generally to achieve faster growth rates than richer countries, perhaps because they have only to play catch-up, but there is little evidence from other countries that poverty leads systematically to more profitable investment or to more sustainable consumption growth. I think both objections stem from implicit assumptions that there is some highly attractive upward limit to either consumption or infrastructure investment, and that the further away we are from that limit the stronger the attraction towards it. But if that assumption weren’t mistaken poverty should have ended long ago.

And the key point for me:

… The scope for nominal improvement in infrastructure is certainly higher in China than in Japan, but nominal improvement doesn’t matter. It is the economic value of that improvement that matters, and the economic value of improving the railroad in China is not necessarily higher than in Japan since, for example, every hour of transportation time saved in Japan may be substantially more valuable than an hour saved in China.

In fact I would argue – as have many economists, by the way – that China’s obsession with high-technology or state-of-the art infrastructure is extremely wasteful because the benefits of the most advanced technology only justify the costs if labor productivity and labor costs are very high.This is perhaps another way of saying that China’s highly capital-intensive growth is far from optimal for China, and probably only reflects the fact that capital is so cheap in China, at least for the capital-intensive SOEs that get the bulk of bank financing. This means that achieving Japan-style levels of infrastructure are not necessarily the best way to invest in infrastructure.The optimal infrastructure level in China is lower than the optimal in Japan, so the fact that China starts from a lower base does not automatically mean that it has more scope for profitable investments.