Monday, February 21, 2011

The more you study China's HSR, the more discouraging it becomes

More lessons from China.  Is anyone doing their homework?  Both China and the United States have entered their high-speed rail programs with ulterior motives.  They have not given serious thought to the transportation aspects of high-speed rail; that is, how it fits into the broader orchestration of railroads, both freight and passenger, or the even larger spectrum of transportation via all modalities, throughout the nation and a century into the future.  

Instead, China has been in an obsessive rush for the sake of global prestige to over-build everything.  To some degree, they deserve leeway in this enterprise as they undergo their industrial revolution and since they have the largest population on the planet, five times the size of the US.

The US has rushed into this project for, shall we say, Madison Avenue purposes.  The Obama Administration wants us to look innovative, progressive, future-oriented.  They want to create make-work employment to show their grasp on the unemployment problem (by which they will sink or swim in the next election).  They believe in the Keynesian notion that especially during a recession, pumping more money, even "paper" money, into the economy will kick-start it toward recovery.

Even if the Keynsian fiscal approach is valid, there have to be upper limits.  Anyhow, this high-speed rail project, as we've been saying from the beginning, is not so much about high-speed trains, rail, or transit, but about external issues, such as those just identified.  And, to a degree that's true of prestige seeking China as well.

So, we are obliged to be China-watchers.  Their HSR problems will become our problems as well. Why is that?  First of all, we have been China-admirers as they build thousands of miles of track for trains going well over 200 mph.  We are embarrassingly envious.  

Furthermore, they have a highly autocratic, top-down, central planning government that does pretty much anything it wants.  I suspect many of us envy that also.  That is highly apparent as the CHSRA aggressively shoves this project down our throats.  People associated with high-speed rail enterprises are perceived as visionaries with their promise of a brighter future.  It's what many want to believe.  HSR is the tooth-fairy and Santa Claus for us adults. But, everything we do has unintended consequences.  And large efforts produce large consequences.  Hence, watch China. 

And as we now do "pay attention to the man behind the screen" to mis-quote a famous line from the Wizard of Oz, we are all seeing the sordid underside.  Both in China, and soon, in the United States. 

A Sobering Perspective on China's High Speed Rail

February 20, 2011

by Craing Pirrong  

Those who think that China’s massive investment in high-speed rail should be emulated here (now who would that be?) should find this report sobering (but probably won’t):

China’s Ministry of Railways has racked up more than $200 billion in debt, government auditors say, partly because of aggressive expansion of the country’s high-speed rail network. Experts say high ticket prices mean many of the trains on the new Wuhan-Guangzhou line run empty. Those questions are even more pertinent now with the revelation this week that the railways ministry under Mr. Liu’s stewardship has run up debts possibly in excess of 2 trillion yuan, or roughly $303 billion.The Global Times, citing a report from the National Audit Office, said in its Wednesday edition that China’s Ministry of Railways was 1.3 trillion yuan in debt in 2009, with 854.8 billion yuan in short-term debt and 448.6 billion yuan in long-term debt. The paper quoted Zhao Jian, a researcher at Beijing Jiaotong University, as saying that “the debt had at least reached 2 trillion yuan by now, and the interests of those debts have grown too large for the government to afford.”

Some experts say those debt levels are unsustainable, even for a government accustomed to running up massive infrastructure tabs, given that many of the country’s high-speed rail links are having trouble making money.

The country already has built a high-speed rail network that as of November last year stretched 7,531 kilometers, according to the ministry. By 2020 China plans to expand the network to stunning 16,000 kilometers. Yet it’s not clear whether there’s sufficient demand to support all the construction. A senior Beijing-based executive for a foreign high-speed train producer that has transferred technology to Chinese train-set makers says that on many high-speed rail routes, such as the one linking the southern city of Guangzhou and the central city of Wuhan, some trains run “nearly empty.”

China in some respects is ideal for high speed rail, due to its extreme population density. Other factors make it less ideal, at least now. It is still a poor country, and the opportunity cost of time is too low for most people to make it rational to pay up to get someplace faster.

You can always create something gee-whiz impressive if you spend enough money on it. The question is whether gee-whiz is worth the cost. Many people are obviously enamored with China’s rapid development of its infrastructure, and especially with prestige projects like rapid rail. This report suggests that regardless of how technically or aesthetically impressive this investment in rail is, the economics are far more dubious.

There’s a larger lesson here. There has been, historically, a tendency in the U.S. to exaggerate the economic performance and prospects of rising nations. This is particularly true for centrally planned ones, or at least those with a heavy dose of central direction of resource allocation. It was conventional wisdom in the 1960s, and a not uncommon belief into the 1980s, that the centrally planned USSR was more efficient that the U.S., and would eventually overtake the U.S. economically. In the 1980s, the Japanese model, which involved considerable state involvement in choosing winning industries and firms, was considered by many in the U.S. as superior to the U.S. model. 

In the 1930s, the USSR (again) and fascist economies were held out as exemplars. 

Today, China has many cheerleaders to argue that things like high speed rail and other megaprojects demonstrate that the state capitalist model is superior.

The Soviet and Japanese examples should give those singing China’s praises pause. So should an understanding of the incentive, information, and political economy problems that plague centralized schemes. Indeed, the experiences of the USSR and Japan provide some good case studies of those problems.

The reports about the shaky finances of Chinese high speed rail should not be surprising to those who have a passing acquaintance with relatively recent history, and an understanding of economics and political economy. Unfortunately, all too many policymakers and pundits who hold out China as an example for the U.S. lack both. Megaprojects inspire a certain kind of awe. They are superficially appealing. But the economics, the boring old economics, is often far less appealing–or should I say usually far less appealing?

That’s especially true where the state is heavily involved. Heavy state involvement means that the discipline of capital markets is lacking, budget constraints are soft, and resources are allocated for political purposes (prestige, corruption, the cultivation of support) rather than economic ones. The problem is especially acute in politically unfree, secretive states like China where information about boondoggles is readily concealed, and political feedback mechanisms like voting and a free press don’t constrain profligacy and waste.

I wouldn’t be surprised if high speed rail is just one example of such profligacy and waste in China. Again, history, and an understanding of the defects of state-directed resource allocation would suggest that this is the rule, rather than the exception. 

Moreover, you’d hope that people would view seemingly awesome developments in places like China with a more skeptical eye, given the opacity of the system and the lack of independent checks on the performance of these investments. But such a hope would, sad to say, itself reflect a failure to heed history, for such a lack of skepticism has been all too common since the times of Mussolini and Stalin.