The Indian Economy Blog

May 12, 2007

Land Development

Filed under: Growth — Atanu Dey @ 10:10 am

When I first moved to the US, I was struck by the phenomenon of shopping malls located far away from the city, about an hour along some highway. Land, it occurred to me, was cheap outside the city and what they did was to build these huge malls that were in some sense islands of urban activities in the middle of rural areas.

Because of the cheap land on which the mall was built, the rents that businesses paid to locate themselves there were low. Because lots of businesses located at the mall, every business found it worthwhile to locate there. Because of the presence of so many businesses at one location, people found it worthwhile to visit even if they had to drive an hour or two. They could catch a movie, buy stuff, grab dinner, hang out and watch people, and just have a good time. Malls looked like well-planned micro-cities where people worked and did stuff but nobody actually lived there. Malls were made possible because people had cars to drive to them.

Malls come in different sizes in the US. There is the Great Mall of America, for instance, along interstate 880 in the SF Bay Area, occupying a few hundred acres. Then you have the humongous mall in Nevada occupying thousands of acres better known as Las Vegas. The general pattern is straightforward. Some developer buys a large tract of land, gets into agreements with a few “anchor” stores such as JC Penny or Macys, builds the mall, and the rest of the stores and other service providers such as fast food restaurants and movie theaters follow dutifully. In the case of Las Vegas, the anchor stores are the casinos and hotels. It is important to recognize that malls, large and small, are micro-cities whose economy is entirely service based, not based on manufacturing or agricultural production. But there is absolutely no reason that you cannot use the same micro-city model and blow it up to the size of a city and base the economy of the city a combination of manufacturing and services.

The basic model is simple. First, acquire a sufficiently large piece of cheap land. Second, make improvements on it such as adding utilities, roads and buildings. Third, get a few big commercial interests to locate themselves on this land. Finally, sell or rent subdivisions of the “improved” land to whoever wants it at such a price that you internalize the positive externalities you created by improving the land and coordinating the co-location of numerous businesses on the property. The profits made by the developer accounts for only a small fraction of the total wealth created by the process.

The same process can be followed for creating the designer cities that India needs by the hundreds. Briefly, a sufficiently large, perhaps 10 kilometer square, cheap land is acquired by a “developer.” The developer could be a public-private consortium. The developer then persuades some “anchor tenants” sufficiently large to give credibility to the later arrivals that this will be a going concern. Improvements on the land are begun and as the work proceeds stage by stage, smaller bits are sold off to interested parties to pay for the on-going improvements on the land.

In the next bit, let’s explore this a bit more with a hypothetical example.

[This is part six of a ten-part series; the next part is Pune Deci. The previous part was Coordination of the Factors.]

17 Comments »

  1. > But there is absolutely no reason that you cannot use the same micro-city model
    > and blow it up to the size of a city and base the economy of the city a combination
    > of manufacturing and services.

    That’s pretty much how Jamshedpur came to be the largest city in Jharkhand, with next to no help from the government. I sometimes wonder how much better it could have been with some active management — an airport, say, and active wooing of new businesses.

    Comment by Prasenjeet — May 12, 2007 @ 10:57 am

  2. Hasn’t this been happening in India in various shapes and forms since Independence? I am thinking of what in India are called colonies. Many of them were developed around industrial plants, but nowadays there are non-industrial micro cities being developed in places like Noida, Greater Noida and Gurgaon. In fact, Gurgaon itself is a designer city.

    The challenge in developing cheap land in India is transportation. Unless employment is made the hub, and commuting to work is inexpensive, people cannot survive in micro cities. That is not a major issue in the US, where micro cities have developed in the middle of nowhere because of the easy availability of cars and roads. Gurgaon grew as a micro city because of the IT, call centers and other white and pink collar industries that became the employment hub, providing jobs within an easy, inexpensive commuting distance.

    My point is that the micro city concept is very much in evidence in India but the “anchors” that you speak of have to be employers, whereas in the US, the anchors could be anything or nothing at all. I live in Florida where the only industry, apart from tourism, is the construction of homes and shopping centers – in other words, the development of micro cities for their own sakes, without employment or retail anchors.

    Comment by Sarat — May 12, 2007 @ 4:29 pm

  3. In the US, most of the families have their own cars. Hence traveling to those far off malls is easy. In India, maybe the mall owner can arrange for some sort of transport (buses) that can ferry people from some strategic point in the city to the mall and back. Also access roads are a major issue.

    But, the biggest question is if the average Indian family would want to travel so far off on a regular basis to buy their stuff when shops selling the same stuff are just round the corner.

    Comment by Full2njoy — May 12, 2007 @ 8:59 pm

  4. “But, the biggest question is if the average Indian family would want to travel so far off on a regular basis to buy their stuff when shops selling the same stuff are just round the corner.”

    Not on a regular basis, but Sunday jaunts to far-flung bazaars and haats have been a fixture of rural India for a long time. The incentive to walk a few miles is to get a bigger variety at a lower cost, the same incentive that draws American shoppers from 30 miles away to big Wal-Marts and regional shopping centers.

    The biggest controversy in the US, and in the distant future India may face the same issue, is the decimation of in-town retail due to regional shopping centers. Today the small towns of the US are practically ghost towns. The local hardware store, drug store, butcher, baker and all those retailers that created a sense of community have disappeared.

    India is not likely to face that danger for many decades and maybe never. Europe has not, and Europe has its fair share of regional superstores. Europe, and to a greater extent India, have much higher population densities and higher transportation costs that make local retail still viable. At $5 a gallon, an Italian isn’t about to drive 60 miles roundtrip. Gurgaon, with its dozens of malls, has lots of thriving bazaars as well.

    Comment by Sarat — May 12, 2007 @ 9:11 pm

  5. The American Mall is one of the worst economic ideas ever. Please let us not import that model. As Jim Kunstler calls it, the American suburbia & mall is the worst misallocation of capital in the history of mankind. Did you ever notice how these monuments are kept alive ? CHEAP ENERGY. People wasting precious fossil energy and driving hour or so everyday to work. Driving an hour to a mall to buy $5 gap t-shirts and other cheap chinese goods ! Now America is locked into the energy consumption binge and having to go to wars to grab the last drop of energy. By the way, don’t forget the amount of CO2 emitted, in driving to these malls. I used to live in the SF bay area too. People used to drive some 25 miles from San Jose to the Gilroy mall, just to get a $5 off on Bass Shoes. SOme people actually used to drive, just for the heck of it, to “hang out” :) Folks, let not the glossy exterior of America fool you. There are some real structural problems there which are coming to the fore .. see the decline of dollar recently.. and when cheap energy runs out, watch out.

    Whatever you guys dream of DeCi, keep 2 things in mind : 1) Energy and energy efficiency. 2) Environment. For that matter, i believe energy and environment will be the foremost issues of this centrury.

    Anyway, more on end of cheap energy:

    http://www.theoildrum.com

    A fantastic critique of American suburbia:

    http://www.kunstler.com/mags_diary21.html

    Take care.

    Comment by Madhav — May 12, 2007 @ 9:19 pm

  6. “As Jim Kunstler calls it, the American suburbia & mall is the worst misallocation of capital in the history of mankind. Did you ever notice how these monuments are kept alive ? CHEAP ENERGY”

    Yup! The most efficient allocation of energy, obviously, is the live-work-play community, which is urban and not suburban. Recently, in the US, the affluent and more modern suburbs are recreating the very old town center concept, where one lives above the stores and restaurants. But where does one go to work? To some place 20 miles away. Back to inefficient use of energy.

    At the heart of the American suburban lifestyle is the American craving for space (bigger houses on bigger lots), a luxury that exacts its toll in massive misallocation of energy.

    Comment by Sarat — May 13, 2007 @ 3:34 am

  7. Question. I heard that Reliance or some other company was proposing to build malls outside of the metros, along the highways.

    Comment by Sarat — May 13, 2007 @ 3:38 am

  8. I think you guys need to hear from someone who grew up with suburbia.

    There are some nuances to the American mall that have not been touched on in this discussion. While the assumption that they would not exist without the ubiquity of the private auto is correct, a mall is not simply built on cheap land in the middle of nowhere. They all have service areas defined by nearby housing. While many single-family homes do have spacious lots, modern planning dictates that high-density housing be mixed into most developments. Huge malls with specialty goods and entertainment have larger service areas. This, however, is no different than a city center with its specialty shops. In Minnesota, where I live, the Mall of America features an indoor amusement park, many specialty retailers, lots of entertainment, and good dining. That is hardly something one “finds around the corner”. Thousands of smaller “strip malls” hardly require lengthy commutes, since they are scattered around everywhere! Here is gets bitterly cold. Indoor malls are a response to harsh climates. The Mall of America is served by plenty of public transit, including light rail powered by electricity.

    We live a short distance (under one mile) from a mall development, but around 20 miles from Minneapolis, where we seldom shop. Although my wife’s work is a mile from home, mine is 25. Our response is to buy a hybrid auto and cut my weekly work travel with two days of telecommuting. A two-income family is the norm here – and commuting a distance to at least one of these jobs is quite likely.

    Cheap energy has driven low density urban sprawl, but malls have followed suburban housing, not the other way around. The suburbs are still perceived here as safer, cleaner, and more pleasant than central cities. Higher energy prices will shrink the service areas around suburban malls, but there will likely be accommodations and some other balance will be reached.

    It’s been awhile since I’ve visited India, but I seem to recall the substandard housing was in a ring outside the big city centers, the inverse of what we have here. It will be interesting to see how high energy prices influence urban infrastructure there, as it certainly will here.

    Comment by Patrick — May 13, 2007 @ 7:11 am

  9. I very much agree with Atanu on this. The key to improving any cities is local, self government, a set of building codes and policies that are defined and adapted to the local city’s needs. Do we know who the city mayor is for our current cities? In our present-day cities who is the person responsible for the city? Who needs to be held responsible if, for instance, the traffic policing is problematic.

    Private cities which are not drowned in bureaucracy, which have a unique culture of their own are the need of the day. We need more cities which compete with each other. As someone pointed out, these can serve as motivators for the older cities to get their act together.

    Comment by Hem — May 13, 2007 @ 8:27 pm

  10. From Atanu’s post: “The same process can be followed for creating the designer cities that India needs by the hundreds. Briefly, a sufficiently large, perhaps 10 kilometer square, cheap land is acquired by a “developer.” The developer could be a public-private consortium. The developer then persuades some “anchor tenants” sufficiently large to give credibility to the later arrivals that this will be a going concern. Improvements on the land are begun and as the work proceeds stage by stage, smaller bits are sold off to interested parties to pay for the on-going improvements on the land.”

    Atanu:
    I am not sure I understand the difference between what you are hypothesizing and what is already happening in India and perhaps all over the world.

    If the topic is urbanization by design – with malls, industry and housing mere manifestations – then isn’t it true that India is already engaged in large-scale designed urbanization of rural areas adjacent to cities?

    The only big city in India I know well is Delhi. When Noida was built, it was a milestone in Delhi’s expansion. In fact, even the name Noida was a designer name. Today there is Greater Noida, linked by an expressway, Gurgaon, Faridabad, Indirapuram-Ghaziabad, all built as designer cities on land that was cheap. Interestingly enough all these new “cities” are in separate states, and unlike the classic suburbs, do not depend on one city center, central Delhi, for their sustenance. It is the same American story of urban regions as opposed to the 50-year old model of one city with its surrounding suburbs that were mostly bedroom communities, not cities in their own right.

    Today we have Southern California, Chicagoland, the Bay Area, Tristate, South Florida. India has NCR (National Capital Region).

    Now it is true that all these new designer cities are being built contiguous to urban centers rather than in rural “islands,” but that is a matter of practicality. Even in the US, with easy and inexpensive transportation, new developments are seldom remote from existing developments and infrastructure.

    Again, my question, Atanu, is how your proposals differ from what is now par for the course. No offense, I do like your thought process and have lurked around this blog for almost two years.

    Comment by Sarat — May 13, 2007 @ 8:27 pm

  11. “make improvements on it such as adding utilities, roads”. hmmm…i think that’s where the story pretty much ends :( there’s no incentive for any builder to build anything that he can’t make money off. did you know how many glitzy malls and office buildings in our suburbs are still waiting for a power connection and how many 7 star apt complexes are waiting for roads. they are running on 100% power backup and burning all that diesel..god bless our environment. residents proudly claim – “All four!!” which means they can continue to run all 4 air conditioners even if there’s a power failure.

    Comment by ashutosh — May 13, 2007 @ 9:14 pm

  12. Sarat, I think that the difference between what I am proposing, a “DeCi” and what is happening in India is evident. I have touched upon the difference in the previous bits but just to repeat myself, the difference is in the effort that goes into the design, the planned coordination of all factors that go into the new urban areas. The difference is in seeking out the best urban design known to humankind, not the haphazard random ill-planned urban eyesores that rise up from among the general rubble in already existing urban areas. Perhaps the next few posts will make the distinction clear if what is already said is insufficient to outline the difference.

    Comment by Atanu Dey — May 14, 2007 @ 8:48 am

  13. [...] May 14, 2007 « Land Development [...]

    Pingback by The Indian Economy Blog » Pune Deci — May 14, 2007 @ 8:53 am

  14. When policy decisions are being made in the UK, a regulatory impact assessment – encompassing social, economic, environmental and increasingly, health impacts of the various policy alternatives – is conducted before making a choice. Should such factors not be taken into account in civil development projects? If they are, are there any stories in this fascinating DeCi thread that can be shared? Thanks.

    Comment by Shefaly — May 14, 2007 @ 3:50 pm

  15. Why are we comparing land development in US and INDIA. why can’t something totally new concept of development be done in india. Where were we 10 years back and now all of a sudden in the recent years trying to convert india like US?!!!

    Comment by Lokesh — May 15, 2007 @ 1:12 am

  16. We should stop imitating the US of A. We Indians compare India with the US or the UK. Main reason being so many of us live there and do not check to see what goes on beyond the scenes, because we are so blinded by the difference to our own country. The USA is a bad example to take as a template. UK is even worse to compare with because the UK is apeing the US as well. Some of the EU countries make a much better example. Countries like Denmark, Finnland, Norway, Switzerland, Austria and Holland. They have environment friendly policies, higher living standards when it comes to distribition of resources like education (college education free in most countries in the EU), heath care (free as well), employment, freedom of expression, respect of privacy and the most important human rights. Unfortunately they also have malls.
    Malls destroys local businesses which is the traditional form of business in India. An example: a small shop provides more employment than a huge mall in terms of turnover, apart from being run by someone who is his own boss. What we need in India is this precious species – enterpreneurs, and huge Malls are the best way to destroy them. Besides, it sounds rediculous to me to waste time driving an hour to go shopping, spending alot of money on gas, polluting the environment by doing so, looking for a parking place in the mall, then fighting through the stressed mass of people overwhelmed by how much they could save because they can spend their money by coming there. Money which they don’t have as yet, so they will have to work hard to earn to pay of the credit. Basically this system is planned meticulously to make people consume and keep them stupid by making them think they do something clever.
    What would be a better solution is well residential, commercial and industrial areas which are well connected by rail or public transport. Cars or private transport is not a option for India as it is a disaster for the environment. This way an area does not depend on one industry. Vienna in Austria or Zurich in Switzerland are fantastic examples for development. In Vienna there is no need for a car as the public transport is so well planned. In Holland, the statistic is – two bicycles for each person – they just go by bicycle everwhere. Europe is not just good for Bollywood backdrop …

    Comment by Liz — May 15, 2007 @ 2:25 am

  17. Liz, you have forgotten to mention a key factor that enables the nice things in the Continent – very high taxation, enabling welfare states. Indian taxation system is probably a closer approximation to that in the US than in say, Sweden.

    The other key factor is scale – comparing Zurich (where I have lived in the past) with Delhi or Bombay, even Pune is just a non-starter. Delhi’s population exceeds Switzerland’s entire population. When I see the repeated shams and failures in governance in the UK (where I live now) I wonder how those ministers and civil servants would do, if they were transposed into a diverse and complex large-scale environment such as India.

    Further, ‘redevelopment’ is a bigger challenge than ‘development’ esp on the large scale needed in India. That said the Delhi Metro is a great example of such a redevelopment project (that it is not discussed often in glowing terms continues to surprise me).

    Another issue is – whose responsibility is it to establish frameworks and whose is it to implement policies? The role of private enterprise in infrastructure is evolving in India; and I do not see that as wrong. Some great construction projects in the UK are privately managed and not entirely publicly funded. The enabling conditions in India however need an overhaul.

    At any rate, the Netherlands is unique, even in the European context. They are an unusually liberal and broad-minded people, with a strong secular tradition (although the effect of the reformed and the Calvinist traditions, latter also visible in Scotland, is evident in their lives and you will recall the neatly pulled back curtains in homes, if you have been to Holland). As for bicycles, yes it is true their Queen rides as well but Dutch people also take public transport (they have very good trams and train connections) and drive cars in large numbers (the Prince Klaus Plein junction beats the ‘spaghetti’ junction on M6 hands down). So any comparison with outliers is a bit of an exercise in futility, I am afraid.

    Comment by Shefaly — May 16, 2007 @ 12:54 pm

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