The Indian Economy Blog

May 8, 2007

Coordination of the Factors

Filed under: Growth — Atanu Dey @ 8:39 pm

Cities are engines of growth because they “manufacture” wealth. That is why rich economies are predominantly urban, and those economies that are largely rural are poor. Therefore the transition from a poor economy to a rich one depends on the transition of the majority of the population from being rural to urban. The scale and quality of the basic habitation unit determines the success of an economy. A large number of small villages is sufficient for poverty; a number of large cities is necessary for prosperity. Economic growth is both a cause and consequence of urbanization, as can be seen anywhere around the world.

The ingredients for wealth creation are well known and conveniently listed as land, labor and capital—they are called “factors of production.” If you have a good recipe, the ingredients yield a good product; otherwise the result is unpalatable even with the same ingredients. The recipe can be termed “technology.” Over time, through painful trial and error, good recipes have been discovered and is fairly cheaply available to anyone sufficiently motivated enough to make something useful out of the available ingredients. In some cases, however, the capital may be insufficient. Fortunately, in many such cases, capital can be borrowed.

To build the Designer Cities, the DeCis, we need land, labor, capital, and technology. The technology exists. Over the centuries people have figured out how to design and build efficient, effective, and pleasant cities. We do have the land and sufficient labor to get any job done—with a bit of training of the labor, of course. The capital is the last and most critical bit. We just need to shift our perspective and consider the city to be a massive factory for producing wealth. Once you do that, you immediately see that the money spent on building a city is not expenditure but an investment. Therefore if we demonstrate that the return on investment is positive in the case of a city, investors will go for it.

The most important bit is to bring all the factors of production and the technology together simultaneously. It essentially is the solving of what is called a “coordination problem.” If you can sequence the set of operations properly, you can build using the existing factors in such a way that every stage generates the wealth that you need to move up to the next stage. It is an upward spiral. If you do need to borrow for the first stage, you figure out some innovative financing mechanism.

The first stage is the acquisition of land. There are enough examples of how land can be the foundation upon which you can build vibrant communities. It is just a small step from that to building entire cities using the same method, as we will explore next.

[This is part five of a ten-part series. The previous post is Financing Designer Cities.]

11 Comments »

  1. [...] Coordination of the FactorsThat is why rich economies are predominantly urban, and those economies that are largely rural are poor. Therefore the transition from a poor economy to a rich one depends on the transition of the majority of the population from being … [...]

    Pingback by For the Smart Money Cookie » A better economy — May 9, 2007 @ 4:10 am

  2. I feel that the whole concept of Designer Cities is unnecessary and needlsy complicated. The idea should not be to build whole new cities, but to improve existing cities.

    There are a large number of tier II and tier III cities in india which can become the basis of these designer cities. the task should be to improve them, rather than building new ones.

    Comment by rishi — May 9, 2007 @ 8:35 pm

  3. I beg to disagree with rishi. The main advantage to building new, privately-owned cities is that you don’t have to deal with existing municipal bureaucracies — you can just completely bypass them, and show them the finger while you do it. Not only that, but by competing with them, and drawing away many of their most desirable (taxpaying)residents by offering municipal amenities that actually work 24/7 (reliable electricity and water, good sewerage and sanitation systems, efficient public transport), you can force them to clean up their act and change their priorities. That, to me, is the number one argument in favor of new private cities — complacent municipalities like those of Bombay and Calcutta need a good kick up their backsides, and the Shame Value of new cities would be immeasurable. There is, however, another, less debatable, argument: many older cities sprang up anywhere from 100 to 300 years ago, and their layouts are often not conducive to modern transportation systems like subways and freeways. In Bombay, for example, there are no records documenting the foundations of many of the older buildings, making it difficult to plan subway tunnels in the oldest sections of the city. The cost of creating infrastructure in existing cities is also often many times the cost of creating it in cities built from scratch, for a host of reasons.

    Comment by Brown Sahib — May 11, 2007 @ 11:17 am

  4. I can’t believe people are even discussing these pie-in-the-sky project without ANY basis whatsoever on who would finance these designer cities. DO people have training in econ 101 here , or follow real world market economics ? sheeeshhh…

    Comment by Madhav — May 11, 2007 @ 3:57 pm

  5. Brown Sahib,

    It is true that building a spanking new city would shame old cities like Mumbai or Delhi. However this can be equally or better accomplished by upgrading existing smaller Tier III cities. e.g. Nagpur, Satara etc. And it will be done at much lower cost.

    As regards your second point, a new city would be free from bureaucratic corruption, but only for a few years. Then it will slowly fall back to the old system. The solution is not to build anew, but to improve.

    Comment by rishi — May 11, 2007 @ 11:32 pm

  6. [...] [This is part six of a ten-part series. The previous part is Coordination of the Factors.] [...]

    Pingback by The Indian Economy Blog » Land Development — May 12, 2007 @ 10:10 am

  7. I disagree. What exactly are we aiming for over here? Creation of wealth? Sure, with this designer city concept, ur sure to create a lot of wealth. What else? Better infrastructure? Sure, since that is a type of wealth. More equitable distribution of wealth? Unfortunately, no.

    Designer Cities are going to attract people and encourage more urbanisation but is that really what we want? Let me put this way. These DeCis are first going to be occupied by the rich guys and by some members of the upper middle class because these people can afford to. Im not talking abt money incentives here but the fact that upper classes usually have less inertia to move since they can often bear the risk of losing a good life at their old home. Middle classes are more fixated and will only move much later when they are convinced that the opportunity cost is affordable. No matter what, this is always going to be the case. No marketing strategy can change that.

    The result? By the time the masses move to DeCis, the elite would have occupied a large portion of it, resulting in increased land prices and higher standards of living. While the middle classes will be careful enough to weigh their options and plan their shifting properly, the lower classes wont. Most of them will just hear about the glamour of the DeCis and turn up, hoping to make it big. And not being able to find a position and not being able to go back, they’ll just end up on the streets, eking out a living as hard as that in the villages – probably harder since back home, they might have had some land and dignity, not to mention less pollution.

    In the end, the situation is going to be the same with the richer people occupying the best parts of the city, the lower classes in slums and the middle classes somewhere in between. Equitable distribution of wealth where every class is able to at least afford a decent standard of living is just not going to happen.

    What we really need is to make rural areas more productive. Introduce better infrastructure in these areas and provide a number of jobs that can take the burden off agriculture without straining the infrastructure. Emphasize on education and health services but at the same time provide educated students incentives to stay back and improve their home villages instead of just emigrating to cities.

    This has been the focus of many economic programmes for a number of years now. They havent worked until now true, but that’s because of lack of political and social will rather than any fault in the programmes themselves. But if implemented properly, they can actually churn out much better results than any concept like DeCis

    Comment by Amogh — May 13, 2007 @ 5:26 pm

  8. rishi,

    I actually agree that we should upgrade Tier II and Tier III cities also, and I fully expect this to happen over the next 15 years, especially as new power generation capacity comes online and urban mass transit systems are created (as with the planned metro rail systems and BRT systems in Bangalore, Hyderabad, Ahmedabad, Pune and Cochin), just as many smaller Chinese cities have become metropolises over the past 15-20 years. Those cities can then absorb rural migrants in large numbers, somewhat easing the strain on existing metros like Bombay and Delhi.

    However, the form that urban development will take in these cities will inevitably be public-private partnerships. What I would like to see at the same time is wholly private cities, built from scratch and run for profit, of the sort that Macquarie, Tishman Speyer, ICICI and Nagarjuna have planned for Andhra, and Nakheel and DLF have planned in Maharashtra and the NCT area. There’s really no harm in devoting public funds to the sort of upgrading of existing cities which you propose (and which also happens to be official policy in New Delhi at the moment), while simultaneously letting the private sector experiment with an alternative urban model, in which planning, development, infrastructure, basic services, security are all in the hands of the private promoter.

    Note that the latter proviso (the private promoter having total control over services, and charging market rates for them, in lieu of municipal taxes) is the key to success and sustainability, as it aligns the interests of taxpaying residents and city government far better than mere electoral accountability. Obviously, it’s in the promoter’s interests to prevent power theft, slum encroachment, and the rest, as they will cut into his profits, just as it is in the promoter’s interests to provide swift clearance for new construction and allow FSI norms more like NYC’s than present-day Bombay’s — this is what I mean by an alignment of interests between taxpayers and private developers. Such cities will not necessarily be gated communities (I suspect there will have to be plenty of mixed-income development simply because the rich need middle-class service providers such as teachers and retail clerks, and also need poorer people who serve as domestic staff or practice a trade, such as tailors, dhobis, street vendors, rickshaw drivers, and so on), but there will be no incentive for countenancing illegal encroachment and theft. Of course, the same thing could be achieved by restricting the municipal franchise, as was once done in cities all over the British Empire, so that only “ratepayers” (as the British called them) could vote. :) This was, after all, the system in cities from London and Hong Kong to Bombay and Karachi from the late nineteenth century to the middle of the twentieth century, and I daresay it worked fairly well in providing efficient municipal governance. But that would probably be far more politically difficult to do now than just building wholly private cities from scratch. :)

    I suspect, personally, that the private model will provide better results than the public-private model in the long term, but I certainly have no objection to letting both lines of development proceed in parallel and awaiting the verdict of history.

    Comment by Brown Sahib — May 15, 2007 @ 11:40 pm

  9. Armogh,

    Urbanization is inevitable. As countries industrialize and agriculture’s share of total employment shrinks to the low-teens, and then to single digits, the vast majority of the population inevitably congregates in towns and cities. It’s not just about the decline of agriculture’s share in economic output and employment, either. As an educated professional, where would you rather live, in a town of 10000-50000 people, or in a metropolis whose sheer size ensures a greater diversity of amenities? It isn’t just about roads and electricity; big cities also offer the opportunity to interact with more diverse groups of people, enjoy a range of restaurants and specialized shops, partake of a vibrant cosmopolitan cultural scene (plays, concerts, opera, poetry readings, art films), etc. This is part of Atanu’s point — large, dense, diverse communities usually benefit from a virtuous cycle in which newcomers keep coming PRECISELY BECAUSE these communities are already large, dense and diverse.

    Yes, economic drivers are what cause rural migration in poor countries that are still industrializing. But even after economic drivers are no longer as compelling, even after material standards improve in rural areas, people (especially the younger, educated people to whom you refer) continue to flock to cities, or to suburbs within commuting distance of cities, because of all the other allures of urban life. Why else do you think there are so many twenty-somethings paying 3000$ a month for tiny one room apartments in Manhattan, when they could find slightly lower-paying jobs upstate in Syracuse or Rochester and rent three bedroom houses for under 1000$ a month?

    The vast majority of young, educated people seek out large, dense, diverse communities as a first preference, unless economic constraints dictate otherwise. This is not going to change, and there is little point in fighting it.

    Comment by Brown Sahib — May 16, 2007 @ 12:01 am

  10. Good point. I appreciate that. But that still doesnt change the fact that when rural youth turn up at cities, more often than not, they end up struggling. Many end up on the streets, often without jobs and forced to resort to desperate measures like crime or in the case of women, prostitution to make ends meet. For every migrant who gets a good life, there’ll probably be around fifty others who don’t. These people, once attracted by the lure of cities often won’t go back to their homes either. They’ll simply find some spot on the footpath and hope for a chance to make it big. They’re not contributing to the economy. In fact, by resorting to crime, they’re actually bringing down its growth.

    People getting attracted to cities in inevitable, you’re right. But by improving rural standards of living, we can bring down this migration rate to a certain extent and make sure that these people are atleast contributing to the economy in a better manner.

    And it’s not just about the people. Increasing urbanisation always leads to decreasing environmental standards, no matter how ecologically conscious a city planner is. There’ll be millions of people all engaged in small activities which in themselves don’t do much harm but collectively contribute to environmental degradation. By focusing on rural development, administrators can find it easier to integrate environmental programmes since they concentrate on smaller, more specific areas.

    Of course, the major drawback is that all this requires a conscientious government – a phenomenon which may not happen for a long time to come.

    Comment by Amogh — May 19, 2007 @ 12:07 am

  11. Well put. Yes, rural youngsters seldom have rags-to-riches careers in Indian cities. Mind you, I wouldn’t say that they don’t contribute to the economy. Some provide a pool of cheap casual labor for the construction trades. Many end up becoming small-time street vendors or domestic workers, or find jobs in restaurants, “beer bars” and the like. Others become ragpickers. And the prostitutes, in all seriousness, are also legitimate service workers. At least in Bombay, most slumdwellers are actually gainfully employed. It’s true that their incomes are too low for them to be able to afford better housing and other amenities, but it’s not true that most of them end up as criminals or beggars. Most of them find legitimate niches in the city economy, which is expansive enough to accomodate them, albeit at very low wages.

    While I do agree with you in general about urbanization causing environmental degradation, I would also offer one caveat. I’ve lived in the U.S. for many years, and I’ve spent some of that time in a couple of American “villages” — Ithaca, NY, a tiny community of under 30,000, most of them Cornell students or employees, and Pittsford Village, NY, an even tinier community of 1500. Three conclusions: (1) Once rural incomes are almost as high as urban ones, environmental impact per capita (through retail consumption, household energy consumption, etc) is also roughly the same. (2) Keeping such communities supplied with essentials from outside actually causes more environmental damage per capita than supplying, say, NYC, because of a lower goods-volume-to-emissions ratio. (3) Environmental degradation due to vehicular emissions is actually higher on a per capita basis in rural areas, because mass transit is less viable in small communities (Ithaca is actually an exception, because it is a college town), and walking from A to B is often also unviable because such communities are often quite spread-out because land is cheaper. Also because of the lack of density, and therefore of neighborhood volumes, you have to drive anywhere from 2 to 5 miles to get household provisions, use postal and banking services and the like, rather than walking to a neighborhood post office, bank or grocery store.

    Comment by Brown Sahib — May 20, 2007 @ 11:27 am

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