Private Cities: Centralized and Decentralized

The following post is heavily based on “Lessons from Gurgaon, India’s private city” by Shruti Rajagopalan and Alexander Tabarrok. This article is so dense and packed with good information that I cannot help but suggest reading in entirety. Note that if you do much of the content of this post will be redundant; it is easier to point out the things that I will leave out than what I leave in. If you decide to rely on my impressions instead of going it alone please continue reading.

So what exactly happens when a city builds itself? Obviously a city building itself is an abstraction. To be more specific, what happens when people build a city without either A) a municipal body or B) a single owner? Well to understand the effects of lack of centralized control/standards we’ll need a control. Preferably our control will be geographically proximate, and have similar fauna, a similar economy and political climate. We’re in luck! Nirvana has struck and we have two cities in close proximity with two different central structures. No I didn’t find them Shruti Rajagopalan and Alexander Tabarrok did. Give them a round of applause. So let’s dive into the story of Faridabad (our control), and Gurgaon(test case) in the state of Haryana India.

“Gurgaon was little more than a village in 1979, when it was split administratively from the more populous and developed are of Faridabad in Haryana…Faridabad has struggled while Gurgaon has thrived, riding a wave of post-liberalization growth and becoming an information technology (IT) hub and one of the fastest growing urban centres in India.” Lessons from Gurgaon

So what exactly is the difference between these two notable cities? The primary difference is serial vs. monopoly bureaucracy. Now Gurgaon isn’t Singapore and it definitely isn’t Disney World as we will see later. There is no visionary which led the development of Gurgaon, there were however some semi-hegemonic actors and peculiar circumstances which allowed for its explosive growth. Gurgaon serves as a contrast both to centralized ownership and serial bureaucratic corruption. We will start with the advantages of monopolistic bureaucracy and then describe what polycentric development looks like. We will then circle back and compare polycentric development to centralized ownership development.

“The key element in Gurgaon’s explosive growth was the state of Haryana’s lifting of restrictions on the land acquisition process and the unusual lack of local government in Gurgaon. The lifting of restrictions and Gurgaon’s natural advantage in being close to Delhi (itself laboring under restrictions) allowed private developer to build residents, office parks, and manufacturing facilities that met the demand of India’s booming high tech sector during the high-growth period that followed liberalization of key sectors in the early 1990’s.” Lessons from Gurgaon

Both Gurgaon and Faridabad lay in the same state, Haryana. This state created a more streamlined process for land acquisition as compared to the rest of India. Faridabad, in addition to the provincial government, had a municipal government Gurgaon did not. Gurgaon benefited from being underdeveloped agricultural land which spared it the extra burden of having an urban planning bureaucracy. This permitted a huge construction boom during the 90’s boom period. The province which Gurgaon lays in, Haryana did not create a municipal body for the city until 2008. This meant that all land use permissions for Gurgaon in practice went through only one office: the Haryana Chief Minister’s Office (a regional NOT municipal office). In addition to only having one office to ask permission to build something, the Haryana Office was notable for having little restrictions on types and permissions for land use.

“Gurgaon was governed by a monopolist, the Chief Minister’s Office of Haryana. Centralized control reduced transaction costs and also incentivized the CMO not to raise toll rates so high as to kill the goose. In contrast in Faridabad, decision-making and toll-taking was spread across many different bureaucracies and total tolls reduced development even below the rent-maximizing level, to the detriment of all.” Lessons from Gurgaon

Centralized bureaucracy tends to lower transaction costs; this is similar but not identical to the effects of centralized ownership. Bureaucrats may not “own” a piece of land but often they take bribes to acquire the permit or bribes to increase the speed of transactions. In the case of the Chief Minister’s Office, the Bureaucrats extracted rents by acting as consolidators and speculators.

“Corruption in obtaining CLU permissions is common in most cities in India, and Gurgaon is no exception. Often, middlemen associated with the Haryana administration bought land from farmers and villagers by taking large loans from private developers, acquiring the requisite CLU [Certificated of Land Use] permission, and then transferring the land to private developers. Corruption was especially acute in Gurgaon because land prices were increasing along with demand.” Lessons from Gurgaon

While it would be best to have independent speculators, the CLU through proxies acted as a speculator to rationally allocate and consolidate land holdings. Rather than having to negotiate with each property owner individually over a period of years, the CLU through speculation paved the way for large developments to occur. Being the hegemonic actor it could easily buy land well in anticipation of future growth since all permits went through that office. The CLU was also the holder of land permits therefor there was no uncertainty when it acquired land as to whether the CLU would issue permits to itself (and its clients). While Gurgaon benefited from a hegemonic actor who lowered rent-seeking and streamlined land development, this was still a form of corruption. Corruption is not always so benign, certainly rather than encouraging excessive rent-seeking can strangle corruption.

“Increases in the overall population and in the urban population (where productivity is higher than in rural regions) as well as improvements in national productivity will likely generate more than enough wealth to support the expansion. The problem is political and organizational. Many current less-developed countries, including India, remain high in corruption and low in efficiency, especially in the administration of their towns and cities.” Lessons from Gurgaon

To properly understand why Gurgaon experienced explosive growth when Faridabad did not we will have to delve into the nature of corruption and of course its expressions in India.

Serial vs. Monopoly Corruption

Many less developed countries have higher time preference, higher tribalism and/or lower IQ. It is difficult to come up with a systematic explanation for the benefits of one civic system over another precisely because the characteristics of the populations in question are not uniform. There is no control in social sciences: biology has been uncooperative in this matter. Modern India probably looks much like medieval Europe in terms of corruption. Yet the word corruption seems only to make sense in the modern climate. Is a baron charging a toll an example of corruption? Let’s take a look at the definition of corruption, because, well, defining our terms never hurt.

corruption

1. dishonest or fraudulent conduct by those in power, typically involving bribery.

2. the process by which something, typically a word or expression, is changed from its original use or meaning to one that is regarded as erroneous or debased.

The definition of corruption implies that those in power have some sort of expectations for conduct. Expectations for conduct further imply some sort of set of standards which are expected. No one would call a thief corrupt, nor would one call a Chieftain corrupt even if they might display the same behavior. In first case there is no expectation of morality and in the second the behavior is consistent with the powers of their station. In either case there are no such expectations for “uncorrupted” conduct. It may be rational and sane for a Chieftain to accept the employ by a wealthier civic body. So can a baron be corrupt? The answer is only if he is part of a larger political structure and only if that structure attempts to impose a set of standards. Corruption then is a matter of formalized expectations within a larger system.

As it turns out “corruption” isn’t as clean cut an issue as one would think. There a non-insignificant amount of countries which are very corrupt and very wealthy. Their economies sing along as if nothing was wrong, their streets are clean and the busses come on time.

“Even in Japan and Korea, where corruption is very common, the level of bribes tend to be significantly lower than in Russia or the Philippines…Because low bribes keep potential competitors out, political competition keeps corruption down (see Demsetz [1968]).” Corruption

One will note that Japan has basically maintained a single party state for much of its modern existence. While it is hard to measure such a vague metric such as “political competition” it is much easier to measure a still vague but clearer metric of trust. When one brings the metric of trust into the picture it becomes very clear why some societies are “corrupt” and which are not. Trust is a social tool; it is derived primarily from both investment in and enforcing of norms. Norms can be built up either implicitly through a longstanding homogeneous population (in addition to a long history of civilization) or they can be created explicitly through enforcement through an effective hierarchy. Japan may be corrupt in the sense that their actions don’t align with their stated bureaucratic values, but their corruption none-the-less follows a set of de facto norms. This creates both low transaction costs (bribes) and lower legal, regulatory, and political uncertainty. The people of Japan despite de jure illegal behavior are able to maintain trust in each other and their government. As is the case here we will begin to see a pattern: social perceptions are often more important than reality.

“Bribe increases can be easily detected in several circumstances. First, when the government has an effective policing machine to monitor the actions of the bureaucrats, such as the KGB in the Soviet Union or Mayor Daley’s Democratic Party machine in Chicago, it is hard to charge excessive bribes without being found out. Second, when the ruling elite is small, as in the Philippines or in Communist Russia, deviations from normal bribes will be easy to see. Third, when the society is homogeneous and closely knit, as in East Asia, deviations from normal bribes are likely to become known to friends and family, and such knowledge is likely to spread. Police states, small oligarchies, and homogeneous societies are thus likely to come closer to joint bribe maximization then more open, less tightly governed and more heterogeneous societies.” Corruption

I would wager that the U.S. if examined in the proper light by metrics other than its own would also be found to be *gasp* very corrupt. Sadly we are left only with Western studies on corruption, which I would hazard underestimate the ways in which Western countries have systemized and formalized corruption. You might not have to pay a bribe to get something built in America but you may *want* to donate to someone’s campaign. Again defining corruption falls into pitfalls because its definition is based on the theory of legitimacy and a standard of the “normal” functioning of the state. Just because one is de jure uncorrupted doesn’t mean there isn’t de facto corruption. This is not to say that corruption is a good thing, but that some forms are superior to others, that is to say some forms do less damage than others. Overall most people would agree that American corruption is fairly benign.

“The ability of the cartel to punish those who charge excessive bribes is also essential to enforcing collusion. The ability of the leadership to exclude deviators from the rents associated with being an insider is essential. When large rents come from being a communist in Russia, a democratic politician in Chicago, a part of the ruling clique, or a member of the military elite, and when the sovereign can take these rents away from the deviators, deviations are unlikely. On the other hand if the rents are small, and, more importantly, the sovereign is in no position to take them away, joint bribe maximization cannot be sustained. For example, in feudal Europe, in post-Communist Russia, and in many African countries, the central government is so weak that it cannot fire or penalize officials in the provinces, or even bureaucrats sitting in the capital, for running their own corruption rackets. In this situation the “independent monopolists” model, with its devastating economic consequences, describes reality best.” Corruption

Let us examine a more recent example of corruption. In Thailand though corruption is quite common, especially among the political elite, it is common to see retroactive punishment of corruption. Any political actor who runs afoul of the “royalist network” can be ousted. A recent example in Thailand is the punishment of the previous President Thaksin after a military/royalist coup.

“Attacks on the wealth accumulated by elected politicians, often described euphemistically as ‘unusual’ (pid bokati), have given extra impetus to the rectitude of military coups. In the case of Thaksin, his telecommunications fortune-a product of shrewd manipulation of government contracts and concessions-was an obvious target. Given widespread suspicions about Thaksin’s massive wealth, the government did not even feel the need to offer a detailed explanation when it froze billions of dollars of his assets (Political Desk 2007).” –Why Democracy Struggles

What Thaksin did was not necessarily outside the system. The system is corrupt in the sense that officials can use it to their own benefit. This however is coordinated corruption which tends to keep rents low. Thaksin may indeed have been excessively corrupt but given he was a political enemy he would have been purged either way. In addition coordinated corruption gives a political excuse for purging whenever it is convenient. By allowing members to engage in corruption the system also buys their loyalty. If one runs afoul of the military/royalist inner party then one is liable to end up in jail on charges of corruption.

What we have looked at so far are the ways in which societies can have relatively benign corruption (It was not corruption which made the USSR poor). However in order to understand Gurgaon we have understand India. Understanding India means understanding the different kinds of corruption. So far we have examined formalized competitive corruption and cartelized corruption. These are two of the more benign forms of corruption: formalized corruption being better than monopolistic corruption and monopolistic corruption being better than cartelized corruption. With all these forms of corruption there is the possibility though not the guarantee that rent-seeking can function where it does not stall growth (though it will slow it). The most common form of corruption in India is serial independent corruption.

“With multiple monopolists, bribes are similar to taxes, except that tax rates on different activities are set by independent agencies. In setting tax rates in this way, the agencies maximize their own revenues rather than the aggregate tax revenue. Because they ignore the cross elasticity of demand, the aggregate tax revenues are lower in this case.” Corruption

This problem is similar to the mobile and stationary bandits problem, which is to say, is an issue of property rights and commons. When the stationary bandit steals from his flock, he is concerned with the total revenue extracted. Maximizing his revenue is not just a factor of how much he can extract this year, but also leaving enough capital so that his flock can maintain or exceed their previous productive activities. Serial independent corruption ignores the total cost of bribes because each actor is concerned only with his own revenue stream (like the mobile bandits). By maximizing their own revenue actors decrease total revenue because the total cost rises above the revenue maximizing point. Note that revenue maximizing is not actually ideal for the subjects. From the subjects’ perspective it is only ideal that the revenue maximizing point is not exceeded, undershooting the revenue maximizing point is actually better for the subjects. When the revenue maximizing point is exceeded the cost disincentivizes the use of services and total revenues drop. A monopolist actor would notice the drop in revenue, because he naturally can see the sum of the tolls extracted. The most common example of serial corruption is the serial toll road. This example is apt as this is a common feature in some parts of India.

“This, in fact, is a very close analogy. In India, taking a road between two towns indeed requires paying a bribe in every village through which the road passes. Taking goods inland in Zaire is more expensive because of corruption than bringing them from Europe by ship to a port. In 1400 there were 60 independently run tolls along the Rhine. Along the Seine there were so many tolls that to ship a good twenty miles cost as must as its price. In contrast rivers in England were free of such tolls, which in part explains the ability of England to develop specialized, commercial agriculture feed London, the world’s center of commerce [Heilbroner, 1962]. These examples suggest how costly free entry into bribe collection might be to development.” Corruption

As we can see serial corruption is a serious problem. If taking goods over land is so expensive in Zaire than using western shipping then there is no possibility of the development of major local industry. Even if Zaire could produce goods for a lower price at the same quality as the western world, it would still have to sell them at a higher cost due to serial tolls. Transportation costs create hurdles for the development of complex economies. One of the foundational aspects of capitalism is specialization. Specialization by definition requires both trade and transportation. For any given form of production the amount of inputs needed will be many these tolls will raise the cost of production at every step of the way. What is telling is that is that serial corruption is looks more like the 1400’s than now. It’s probably not quite as bad as that but it’s not a good sign. Serial corruption is exactly why Gurgaon is exceptional. To understand why it is called the Singapore of India, one has to understand not only why it is like Singapore but why it is unlike the rest of India. As it turns out Gurgaon actually has little resemblance to Singapore, but is simply unlike the rest of India.

“Comparing the development of Haryana with the rest of India illustrates the important distinction between ‘monopoly corruption’ and ‘serial, competitive corruption.’ A corrupt monopolist chooses the revenue-maximizing ‘toll’ – that is, a bribe – which entails not killing the goose that lays the golden eggs.” Lessons from Gurgaon

Gurgaon gets comparisons to Singapore because it an example of the explosive private growth. Like Singapore it doesn’t have a bureaucracy that gets in the way of private growth. Unlike Singapore, Gurgaon succeeds because it lacks a central coordinator, not because of wise forward thinking actors.

Hegemonic Actors and Growth

As I have said, what made Gurgaon special is lack of serial corruption and coordinated hegemonic actors. The fact that there was only one office from which to purchase land permits (CLU) was a boon for property developers like DLF and Ansal Properties (both property developers from Delhi). Delhi was a big boon for the region giving it access to both people, and capital. Delhi itself had issues with complex construction regulations and rates for bribery. This eventually pushed industry and corporations to seek areas with similar demographics but lower transaction costs to develop. Given one office had a monopoly on land permits Gurgaon was an easy choice.

“Zoning and land-use rules restricted the supply of land in Delhi, resulting in heightened scarcity, which in turn led to a proliferation of illegal construction and corruption in virtually all kinds of building and land allotment. With no revisions in the Delhi Master Plan until 2007, opportunities for legal real estate development shrank. Businesses and citizens looked to nearby Faridabad and Gurgaon for cheaper land and greater growth opportunities.” Lessons from Gurgaon

DLF and Ansal Properties were able to buy up large stretches of land and do limited sub-municipal level planning, as such the city developed in *some* ways very well. They developed large “private sector residential townships which would eventually serve as housing for their commercial developments. DLF and Ansal served as the very first speculators for the value of Gurgaon, which is to say the value of having corruption over an area.

“In addition to developing residential areas, DLF assembled parcels of land for commercial use. Between the mid-1980s and 1990s, Gurgaon developed as Delhi’s industrial and residential suburb, but this was a slow process. The industrial era of Gurgaon began with the establishment of an Indo-Japanese joint venture in 1982, the Maruti-Suzuki automobile plant and its ancillary factories. In another important collaboration, Hero Motors and Honda set up a plant in Gurgaon in the mid-1980s to manufacture motorcycles. Several other factories in such diverse industries as car components, telecommunications equipment, and fashion garments followed this trend and started establishing operations in Gurgaon.” Lessons from Gurgaon

Naturally Gurgaon didn’t arise out of nothing. It capitalized on a growing trend of outsourcing IT which was becoming a booming sector. First the advantages of Gurgaon had to be discovered. The gold rush starts with the first gold discovery. Regional advantages to industry are subject to the same information and speculator advantages as other goods. As it turns out GE is the company which started the “gold” rush to Gurgaon.

“An important turning point was when Jack Welch, then chairman of General Electric (GE), met with the telecommunications minister and the prime minister of India in 1989. General Electric started partnering with Indian firms and started the outsourcing revolution in India (Solomon and Kranhold, 2005).” Lessons from Gurgaon

Notice that the trend was not GE building an IT facility out of nowhere. It first started with a meeting with the “telecommunications minister and the prime minister of India”. GE acted as an icebreaker for an entire industry which would become a large part of the region’s economic growth. The icebreaker can demonstrate to bureaucracy the advantages of cooperating with capitalists. The cost of the first entrant into a semi-closed market is high. If the bureaucracy seeks to capitalize on this trend the transaction costs to entry into the market declines and the real cost (cost of buying or renting property) rises. Naturally as legislative road blocks are removed and the information of economic advantage spreads more companies will seek to capitalize.

“The rapid rise of the export-oriented IT/BPO industries required large floor spaces that large private entities were willing to supply in Gurgaon (Debroy and Bhandari, 2009). American Express, for example, followed the example of GE in setting up one of its largest global credit-card operations in Gurgaon. As IT workers moved to Gurgaon it became even more cost-effective for firms to establish operations in Gurgaon. The city grew rapidly, following an agglomeration process familiar from the history of other industrial cities such as Detroit, Michigan; Bollywood in Mumbai, and Silicon Valley in California (Glaeser, 2008).” Lessons from Gurgaon

Growing economies grow into their own economies of scale. If the infrastructure for IT exists for 10 corporations already, then nominally less capital rich companies will begin to enter the market. Success at least for a while attracts more success. By bundling goods developers made sure that in the absences of reliable public services businesses could assure steady operations. These bundles of goods were only possible because of the micro-economies of scale of multi-national corporations. With these bundles corporations could operate in what was a relatively underdeveloped area.

“Typically, these multinational corporations leased parcels that had been developed as business parks by private developers such as DLF. These parks were developed to the specifications of big firms, keeping in mind the type of operations to be carried out and the requisite infrastructure. All these business parks came with full electricity backup (to ensure seamless operation during electricity outages), security personnel and infrastructure, parking lots, cafeterias, and so on. Leasing space tailored to the needs of IT and other outsourcing operations provided operational flexibility to these corporations. This also meant that multinational firms did not have to struggle with land-acquisition problems to set up their operations in India (Chatterjee, 2013).” Lessons from Gurgaon

To understand the magnitude of the growth of Gurgaon we have to look back to its roots. The city experienced explosive growth as well as attracting massive amounts capital from multi-national corporations. This is a testament to the power of lowering transaction costs and should be a lesson for any future city both the good and the bad.

“As late as 1991, the Gurgaon district had an urban population of some 121,000; by 2001, this had expanded to 870,000 and by 2011 to 1.5 million (1991 Census). As of 2013, nearly half of the Fortune 500 companies have operations in Gurgaon, including American Express, General Electric, Motorola, Dell, Microsoft, IBM and Google. Many other leading firms from around the world have also chosen to locate in Gurgaon (Hindustan Times, 2013a). As a result, Gurgaon has becoming a leading destination for India’s young middle-class workers in the tech industry. Along with these workers have come amenities. Gurgaon has 43 shopping malls, including the Mall of India – on the largest malls in the world – many luxurious apartment towers, gleaming skyscrapers, seven golf courses, and at least half a dozen five-star hotels.” [Emphasis Mine] Lessons from Gurgaon

Economies of scale only emerge through either cooperation or hegemonic actors. Naturally the hegemonic actor DLF was not far behind in providing grouped services. I would suspect that DLF is largely responsible for the character of private services in Gurgaon. As we will see in the next section there are a number of reasons why these business parks came with so much infrastructure. Not every business park needs full electricity backup, security personnel, parking lots, AND cafeterias. This is not to say that these things are unheard of, but the situation in Gurgaon has made these things all but a necessity. There are definitive consequences to decentralized private growth.