Monday, November 17, 2008

Stimulus: Where Will They Build?

Last week China made a big splash by announcing plans for a huge stimulus package to revive its economy and show the world how important and resonsible China is.

Having spent 40-to-50% of GDP annually over the past decade on building roads to everywhere, a railroad over the Himalayas, new sports stadiums and airports in every major city, subways, mag-lev trains, bullet trains, a rather large dam, and three huge water diversion projects, Chinese bureaucrats are now assigned to come up with ways to spend $586 billion more, mostly on infrastructure. As one newsletter put it, "The hills are alive with the sound of building." Authorities are even thinking about building low-cost housing for rural migrants in cities (although developers used to building high end luxury projects may not go along with this.)

China has also put new emphasis on protecting farmland. It has set a "red line" for the minimum amount of farmland and a minimum grain planted area threshold. It just announced that the whole population should pay attention to grain security and that farmers will not have to worry about having their land taken away.

We have an impending collision of policies here. Where are all these roads, airports, apartments, etc. going to be built? Airports for example, are always built about 50 km outside the city on a big patch of farmland. Roads go through vacant land, and that implies either farmland or wilderness (also in short supply and up for protection). Where will this infrastructure bebuilt? It will have to be built on farmland. Solution: create bogus farmland somewhere else to offset the loss of the land used for the industrial park.

Suppose you're a developer who wants to build an airport on the outskirts of your city, but it's going to take up several square miles of farmland and the prefecture is under orders to maintain the farmland base at a fixed level. You round up some university students, bus them out to some mountainside for the day, feed them lunch and have them drop seeds in the ground all over the mountainside--presto! new farmland has been created--no net loss.

Perhaps a system like carbon credit trading can be introduced where some enterprising official presiding over some distant mountainside or desert can sell "cultivated land credits" to developers who need to offset cultivated land used up in building projects.

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