Post No.: 0487
Last time on this topic of understanding a (typical or at least historically traditional) country’s path towards economic development, we looked at how our shared social identities and networks affect public policies (Post No.: 0452).
This includes the building of a tax system – do the tax collectors in one’s country see themselves as vital and respected for serving the country’s common interests or are they corrupt because they tell themselves that the money would be misappropriated or wasted if handed over to the treasury when their own biological families could benefit from this cash instead? It’s kind of like the tension between falling over in the penalty box or not after feeling the faintest of contacts from an opposition player – to fall over would benefit the team’s own fans if a penalty is awarded but would lower one’s respect from all other football fans in total. A ‘good’ footballer can thus either mean one who is honest or one who knows how to push the limits of what one can selfishly/groupishly get away with. It’s similar with a tax collector when serving her/his own family versus the country as a whole. A person’s self-interests sometimes don’t align with a country’s collective-interests. Also, what’s ‘acceptable’ will depend on the surrounding norms – do other people behave in the same way?
Unfortunately, a corrupt system is locally stable. Thus one solution is to dismantle the social networks and identities, norms and reinforced narratives that corrupt behaviour i.e. start again with building a tax system and hiring totally new tax collectors who’ll be instilled with a better identity, norm and narrative – one about gaining respect for serving the country rather than themselves. It’s incredibly difficult to try to reform a massive, dysfunctional organisation – it’s usually better to start again with a small unit of people who all adhere to the right culture, then gradually hire more and more people who’ll pick up that culture and grow and reinforce it. Likewise, merely changing the CEO of a systemically corrupt corporation is seldom enough. New football managers who aren’t given the funds to meaningfully overhaul their squads are hamstrung in their ability to change the culture of a club. Organisational culture can be extremely difficult and slow to change, even when change is acknowledged to be necessary.
Moving on… Industrialisation and urbanisation are both pivotal for taking economic growth to the next level, by exploiting economies of scale with regards to production. Going big also allows us to exploit specialisation – the bigger an organisation, the more specialised and skilled in their specialisations the employees can be (compared to someone like a start-up entrepreneur who must juggle accountancy with marketing and sales, etc.).
To break out of poverty and enter prosperity, we increase average incomes by increasing average productivity, and we increase productivity by harnessing the power of scale and specialisation. (This goal must however nowadays be squared with the global environmental considerations we can no longer feign ignorance about.)
Spatially, the story of scale and specialisation is about urbanisation – the mass movement of people to concentrated urban areas. Sector-wise, it’s about industrialisation – increasing scale and specialisation in the production process, which is most evident when it comes to global manufacturing (e.g. cities that mainly produce one thing, such as cloth or steel). However, this efficiency comes at a risk to such places if its particular industry collapses or global competitors out-compete those places. Maximising production, efficiency and profits can therefore in some contexts be opposed to diversity, adaptability and robustness. But if well orchestrated, these are coordinated public policy processes that appear to be a necessary, although not alone sufficient and are intensive, condition for prosperity. Private individual interests might collide with public interests hence things like town planning for roads, services, protecting or providing public or common goods, and laws like planning permission, are crucial. Political policies matter too, such as how open to international trade a country is.
High productivity is highly complex thus needs to be managed. It involves managing, processing and utilising huge amounts of information, knowledge and resources. This happens at the levels of individuals (educated people), teams (coordinating and streamlining groups of people into firms or agencies) and networks of teams (connecting firms and/or agencies together so that they can make the most of each other’s specialisations, and clustering businesses together like in retail parks or business districts, which are efficient for both businesses and customers if they can reach these places).
A key component that enables this is high connectivity, and good cities and urban centres can provide this connectivity – they are essentially geographic hubs and dense markets that conveniently link workers with firms, firms with customers, and firms with other firms. Things can change though, such as the evolving nature of high street retail due to online competition, meaning that many town centres currently aren’t quite the marketplaces they once were. But although business can increasingly be done remotely in modern times, spatial proximity is still overall an advantage (e.g. the proximity to an airport, rail network or skilled graduates).
As economies grow, people go from walking to cycling, to using motorcycles, to cars, along with buses, trams and/or trains. Buildings also go from shacks to two/three-storey houses, to apartment blocks, to skyscrapers. Density, and transport infrastructure, are key for achieving high connectivity, and the gradual increase in population density and increase in transport technologies must proceed in line with each other. For instance, it’d be a waste to invest in a metro system if there aren’t enough people to use, and who can afford to use, it. Having said that, it can be difficult and expensive to retrofit metro systems into existing heavily built-up cities, or to really retrofit any kind of infrastructure like roads or sewers once people have settled onto a plot of land, such as in the case of slums (which organically grow in the absence of town planning and regulation) compared to a clear/cleared site; unless (usually opposed) centralised force is used. This suggests that a proactive ‘sites and services approach’ of building the basic infrastructure before people settle onto a plot of land might be the better long-term decision – but the risk is expensive ghost towns if people don’t end up settling there (perhaps because of an unforeseen economic crisis).
Buses are efficient modes of transport in cities but they need roads, which need public investment. But when roads are built, as people become more affluent – they’ll buy private cars and then congest those roads with their own private cars, which then also hinders the efficiency and attractiveness of using buses. And people with private cars tend to have higher incomes that generate more tax revenues and so it’d be politically unpopular to do anything to displease that demographic. Nonetheless, buses should have priority over private cars on the roads if a city or country wants to raise the productivity of the poor. (There are environmental reasons too.) These are some reasons why tram systems have been built in the middle of many cities of the world. Implementing congestion charging zones is another/a complementary solution.
Having both high density and high connectivity is the ideal goal, although high connectivity is overall more important if people have available and efficient modes of transport, or can work from home/remotely because of the high connectivity provided via fast and reliable wireless and/or cable telecommunications technologies. Meow.
People also need to be able to buy and sell land with clear legal rights attached, and therefore there must be a public register of ownership. We cannot have capitalism without effective governments that enforce property rights. It’d be a ‘Wild West’ where stealing isn’t a crime otherwise. Land markets enable a decentralised process of growth in a city, as in not everything needs to be centrally planned. This is better in this case because as a city grows, the purpose of the land changes, mainly from rural and residential to commercial, and those who own the land will react to that according to market forces.
If the public owns the land (or at least all of it), or no one can legally own it, then there’s more risk and hesitation in investing in a property in case the government or someone else will later take it away or squat on it. But what happens in a lot of poor countries is that informal settlements occur before there’s a system of clear land rights. This can be an inefficient state of affairs since someone will probably need to be present and literally squatting on a premise to guard it 24/7 from other people potentially claiming it for themselves (like animals in wild nature must essentially do!) And while the public sector tries to retrofit infrastructure around and under these settlements, more and more people will start to build even more informal settlements around the perimeter and so the problem only expands. Building a nice house will make it even more attractive for appropriation too. Lastly, without legal rights to a piece of land, it’s much harder to get a bank to lend you money to build a house since building a house is beyond most people’s immediate means – with legal rights to a piece of land, the bank can use that land you own and what’ll be on it as security/collateral if you default on your mortgage.
Without land rights, the local government cannot purchase rights either, to build infrastructure, hospitals, schools and change land use where it sees fit as the city gradually grows, thus all that development would stall too. This is one reason why problems like sewerage and clean water supply stall in such places. So land tends to become frozen in inefficient usage because of a standoff between insecure squatting claims and illegitimate claims.
Building regulations are double-edged in a developing country though – they are important for the safety of citizens but if people cannot (borrow to) afford to comply with them because they are too stringent then the growth of a town/city will stall.
Low-rise buildings in the centre of large settlements are an inefficient use of land. Also, when land prices rise in the middle of cities, the people who own that land benefit but they didn’t earn that alone – the value of that land rises due to a collective effort that makes that city productive and attractive. The land becomes more valuable because of everybody’s work. Aristocrats and heirs of land don’t do much (or often any) work themselves but can find their land appreciating in value obscenely as a result of the efforts of others around their property. So what can sensible furry public authorities that have the common interest at heart do?
Well they could tax these economic rents – the appreciation of the value of land in this case. That public register, which records who owns which patches of land, can work as a tax list too – sales and changes of ownership are tracked so that no transaction can fall under the radar of the tax collectors. And if you sufficiently tax that appreciation, it’ll theoretically pay for all the infrastructure you need because of the ‘Henry George Theorem’, which states that the appreciation in land values will exceed the cost of any public investment needed to make a town/city efficient and valuable, as long as the investment is sensible to do anyway.
But there’s still a chicken-and-chicken-egg situation – how do we pay for that infrastructure before there’s enough economic activity to appreciate the value of the land to tax and pay for it?! Well just like ordinary people when buying a house, the local government will need to borrow money, but the security/collateral in this case will be the future appreciation in land value, which will be sufficiently taxed during sales or inheritances. Governments don’t need to own the land – just tax the appreciation.
Meow! We’ll continue on this thread another time…