"What's Wrong with Shanghai?"
I thought Marcus Gee's latest column in the Globe and Mail, was dead on the money. Of course, maybe it's also just reinforcing a somewhat unexplainable sense that Shanghai seems artificial. On the other hand, massive, mostly empty sky scrapers just can't be sustainable. Bottomline: much of China's capital investments have been made with little regard to maximizing productivity - directed and managed by government firms. It's going to come back to haunt them.
5 comments:
"and are now suffering from excess capacity".
By how much and how is "excess" measured? If there's more space and it's cheaper to start a business by renting a place, than Taiwan or HGK than it's "excess"?
Bubbles, T. Friedman mentions in his book, Bill gates perspective about bubbles. Thank to these, the massive investment and expansion would not be possible otherwise. Is there any doubt that the somewhat empty offices will be used in the future? Is there any doubt that having a lower price for rent than HGK is better?
Additionally, he somewhat missed what's under the skyscrapers, the metro. A massive construction, extremely expensive yet also extremely useful and important. New lines opening up almost every year. This is the same facet that future generations will benefit from as well.
BTW I was under the impression that many of the skyscrapers were built with foreign funds.
I was also under the impression that FDI is what kick started the economy, the prof. would rather that was not the case? That money would have been invested into the education and innovation of rural companies and farmers without the "base" being laid out first?
Bubbles are generally undesirable though I'd agree that there are benefits. e.g. this real estate bubble in the US (though arguably caused in large part by government interventions), will result in cheaper housing - and this is generally a good thing (though you clearly have to trade this off with the hangover we're suffering through now). The bandwidth bubble a decade ago have accelerated internet commerce and online applications today (again, generally good things).
That said, "bubble" by definition means a short term inefficient allocation of resources. Resources in the short term are limited. I am guessing that that current unused space will eventually be rented, but that's the thing about resource allocation. Governments don't give markets economic liberty by choice - in fact, historically, it's quite the opposite. Markets however allocate resources more efficiently by responding to financial signals - supply and demand reflected in prices people are willing to pay for various products and services.
Just because something will eventually be useful doesn't mean that the money should be spent now (e.g. in the short term you can have investments that generate much higher returns - reduced regulations / reduced taxes that allow for markets to generate their own demand - or education for that matter if you prefer).
Markets also get it wrong sometimes - but given that markets represent a more collective wisdom (and this shows up through price signals), this is why economic liberty is consistently a better determinant of economic growth than practically any other measure (see World Bank's Doing Business guides or Heritage Institute's Economic Liberty Index).
Rent prices incidentally is obviously an indicator of demand for housing in a geographic area. I don't know enough about Shanghai's real estate development to say different than what was linked but let's say that rents are substantially lower than what they should be because of government overinvestment - and yet HK's rents are higher but the economy/markets are in a better shape. If rents and the economy remains the same in both markets clearly people don't find the trade off sufficient in HK to move to Shanghai.
Incidentally, having been on the Shanghai subway a few times, it's shocking that the transit system isn't highly profitable. If I recall there's been a lot of suspicions about corruption. HK's MTR is profitable for instance (though granted, much of their income seems to also be from real estate sales).
I'm not exactly sure what the prof is suggesting with respect to where the funds should have gone - but clearly by having government confiscate property and fractions of their actual values, there has been a large transfer of wealth to government and corrupt officials that not only destroyed value for the private sector but funds confiscated were quite likely also wasted as he suggests. (I suspect that excess capacity is measured by % vacancies which is often tracked by realtors in a given market)
PS - Thanks for dropping by and taking the time to comment!
Thank you for taking the time to explain to a layman what it all means.
I'd just like to mention that it doesn't work the same in China as it does in the USA for example. One of the reasons for all the skyscrapers is not only for immediate financial reasons, but due to certain policy that would like to see a massive exodus to urban centers. It's actually planning for the future, and not just hoping.
I agree that what's going on is not perfect - nothing is - but it has been doing "it's thing". Lu Jia Zui is a phoenix, an artificial city designed from the ground. Look at what it is now. It worked. I recall seeing some numbers about shanghai compared to hong kong and taiwan and it's actually not that bad.
As far as markets, I recall reading in the underground economist the writers criticism of economists - they tend to forget the human factor and hold on to theories. Shanghai would not be what it is without the local powers that be evacuating locals and creating new areas. I look now at other cities abroad and see just how stuck they are because they can't do likewise. Even if the market will play it the write way - there is the human factor which includes TIME. How long would it take for the market to do its thing, perhaps by theory 120 years. In this duration of time what could change? Do we want to wait that long? etc. Well, the local gov wanted to leap frog and they managed to do quite well - although it can't be said that the buildings are energy efficient. On the other hands look at the wide roads and metro etc.
BTW I completely agree that private business had and still have a major part in China's growth and limiting entrepreneurship and the sucess of small businesses will hurt china badly.
I understand the Chinese government's motivation towards rapid urbanization. The question I think that the professor asks - or rather more explicitly argues, is that while central planning can have positive outcomes, they are rarely (if ever) good at managing the trade offs.
Thus you believe that Jia Zui has worked, but would those resources have been used more efficiently elsewhere? Sort of like the environmental crusade ignoring financial costs - one would hope that at least some people are happy with the billions that are being spent. Of course I don't know the answer to that question, but in a way there's also a wider utilitarian question that has to be asked: what's the goal? If it's to alleviate poverty and/suffering, surely if it takes a decade to fill those buildings that's not ideal when suffering could have been alleviated in the past?
I'm afraid I'm ignorant of the specifics of Shanghai's development, but according to the prof's stats, it's largely government driven, and here's the problem - if the demand were there, developers would quickly build skyscrapers themselves. You might not have as much flamboyant architecture, but developers at least make a trade off between cost of capital, rents, and time (far more effectively than if you're the government and believe you have a more or less blank cheque).
re: criticism of economists, at the basis of economics is figuring out what motivates people. You wouldn't have markets if you didn't have people - so I don't think it's possible to ignore the human factor while clinging to supply and demand charts. A market price is more significant than any poll because it
provides specific information of what people want and are actually willing to pay for. It's an aggregate indicator of need in a society and as a result capital gets allocated accordingly.
Within the context of a city's development, as I suspect you'd agree, a city is far more than the sum of its buildings (think New York, or even Hong Kong) - plus what will happen if the central government reduces its support for whatever political whim as happens? It takes more than cheap rents or else you would have everyone flocking to Detroit where there are $100 USD homes in previously nice districts for sale. I think city planners can to a certain degree direct development, but needs of a city change over time - so to plan for the next few decades with such a structured approach so as to build the buildings themselves is questionable policy at best.
I agree that a lot of cities have too much by way of development restrictions (it's said that rents in Manhattan are 20% higher because of rent control). Cities can welcome developers and the development they bring while ensuring that property rights of individual owners are protected). They can pass on real costs to increase the population density, etc. There are a lot of levers that they have access to, to encourage market forces to play their role.
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