If we look at the efficiency of fixed capital investment, measured as additional
GDP divided by total fixed capital investment undertaken in that year, we see
that fixed capital investment efficiency has declined over time. While the effi-
ciency measure ranged between 0.7 and 0.4 until mid-1990s, it has since declined
to values ranging between 0.3 and 0.1 in more recent years.
This decrease may be a result of wasteful and lavish designs in public infra-
structure projects. Roads, for example, are planned so that each side has three
lanes, then a green belt, and then one or more extra lanes, sometimes for tractors
or bicycles. What is more, gorgeous memorials can be found at each crossroad
or roundabout. However, there are often very few cars on these roads. Similarly,
Chinese local governmental office buildings are often larger and more splendid
than those of the Japanese central government! Different local governments seem
to be competing with one another in terms of grandeur and lavishness.
How is it possible that the Chinese local governments can construct such big
and gorgeous roads and buildings? One possible reason is that they do not have
to pay for the land they acquire for the construction purposes. This is a form
of institutionalized wastage. This system lowers the efficiency of fixed capital
investment.
