I was intrigued by a recent Tom Woods podcast covering Gurgaon, India but I wasn’t very satisfied with the overall message I was getting about the city, so I thought I’d post my thoughts. It certainly didn’t fit very well with my free market ideals. Tom’s guest for the podcast was Alex Tabarrok, an economist at Mercatus who had written a paper discussing Gurgaon, described as a “private” city in India. The message from the podcast was that the city had experienced this growth due to a relaxation of the typical bureaucratic controls found elsewhere in India. In Alex’s words, “the city, since the 1990’s, has grown tremendously from a village of 100,000 to a city of 2,000,000 filled with skyscrapers, malls and golf courses, home to fortune 500 companies…. And it has been almost entirely privately driven.” Alex states that there’s been “no city government, almost no involvement from the state government”. But he goes on to say the problems in the city are related to services that we typically think of as being handled by government, primarily utilities like water, sewer and electric. The issue seems to be that each private entity has to handle these services individually. That is, there’s no centralization of those utilities so, according to Alex, these services are much more expensive. He goes on to say that he is surprised that these private entities have not gotten together to combine services and find economies of scale.
Alex’s story is that developers bought tracts of land and built skyscrapers, malls, golf courses, etc and they are doing great, but between the tract’s of land, it’s a disaster:
but the sewage, it doesn’t go to a central sewage treatment plant. Instead, quite often what happens is that trucks come and take it and dump it somewhere, perhaps into the river, perhaps into some unoccupied lands, some state land…
In fact, this seems to be the primary focus of Alex’s paper, which contains this statement:
We use Gurgaon, India, as a case study for the failure of the state to provide essential public goods and urban planning and the extent to which the private sector can take over such provisioning.
At this point, I can’t help but think that Alex is making the same mistake that roving Anglo-Saxens have made for centuries: that is, we tend to automatically think that “our solution” is the best solution. So if those in Gurgaon aren’t using a centralized sewer (provided by government) then they are doing it wrong. If you listen to the podcast, there’s a joking kind of tone from Alex, which seems to be saying “you dumb Gurgaonites, don’t you know how to build a sewer system?”. The puzzling question that comes to my mind is this: if there ARE NO utilities between these tracts of land, how can they be a disaster? I suspect reality is quite a bit more nuanced.
The following is just part of a comment I posted on Tom Woods’ site after listening to the podcast:
Why does Alex assume that a benevolent dictator or, it seems, ANY form of a state would have dealt with water, sewer and electric better than what they have now, but in the same breath state that Gurgaon’s situation is just as good as your average Indian city?
Alex’s statement in the podcast was something like: “while the utilities in Gurgaon aren’t great, they’re still as good as the average city in India. It’s just not as good as it would have been had Gurgaon had a benevolent dictator or an optimally planned social government”. Later on in his paper, Alex references other cities in India that have done a much better job of providing utility services. However, none of these examples was the result of either a dictator or a state.
Regarding the electric system Alex says “there are outages all the time, you can’t rely on it at all”, but yet half the worlds fortune 500 companies are set up in Gurgaon. Something about this smells fishy. In fact, he even states that the utilities built by these companies work great, so what exactly is Alex’s motivation here?
I suspect that what’s really going on here is that different individuals in Gurgaon are being allowed to place their own subjective values on resources and their use. The fall out of that is, not surprisingly, variances in type and quality of utilities. Is this really a bad thing? If we instead increase taxes and build a consistent set of common services, then by definition, we have decreased the overall utility of the population of Gurgaon since some will be paying more than they desired and some less, for these utilities. Although he doesn’t state it specifically, I also get the sense that Alex believes that some level of wealth transfer is necessary to level the playing field.
At another point in the podcast Alex talks about a business that has established adequate electric via diesel generation. Alex says:
that’s OK, but that’s inefficient compared to having a central plant.
Is it possible that Alex knows better than entrepreneurs in Gurgaon who hadn’t considered these factors? If it really is that much more efficient, then why hasn’t some developer built this central plant and provided this service and pocketed the cost difference? I suspect that builders in India know quite well what the cost’s are of various options and have made reasonable decisions. Either that or the issues with common services are directly related to the existing government controls.
Again later in the podcast, from Alex:
you have much higher costs because water is being trucked in instead of being serviced by a central system
Does he really know this? I suspect what he’s really thinking is “If we can build a central water system, then from that point forward the costs are much lower than trucking water in”. But that isn’t the choice that developers in Gurgaon face, which instead, is something like “We can pay a billion dollars to build a central system and then get water for 3 cents a gallon or we can pay 30 cents a gallon now”. What if the debt to service this cost would have prevented these business from reaching profitability? I can’t imagine Alex has any solution to this except to spread the costs via taxation, but is that the ideal solution? It seems ironic to me that the Mercatus center, a market oriented think tank, takes a position on this subject that is completely reliant on taxation and central planning.
Another point: if these businesses were not able to provide adequate facilities, then they would not have set up there, would not be able to attract and retain employees and would not be able to service their customers. But they have been able to do just that.
Digging into Alex’s paper, the most striking pattern I find is that every problem that he brings up is related to either government or public land.
To list just a few:
Sewage is often dumped in nearby rivers or open land.
If these rivers and land were privately owned, would this still be a problem?
Groundwater is in short supply and is being rapidly depleted.
If the water was privately owned and a market clearing price was allowed, would this be the case?
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.
it goes without saying that government restrictions on land development hinder prosperity.
Corruption in obtaining CLU (change land use) 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 permission, and then transferring the land to private developers.
This problem only results in corruption because public sector bureaucrats have the power to do this. There is nothing wrong with profiting from land development, but there is something wrong if these bureaucrats don’t allow competitive bids for the initial purchase of the land.
Private security does a good job protecting the middle class, but public spaces are unprotected.
Not much more to say about that except advocate for the elimination of the public spaces.
Anyway, the treatment plant is overflowing and there is nowhere else to take the waste. There is no alternative.
Of course the treatment plant is publicly owned. This is a classic example of the tragedy of the commons.
Security is typically worse in public areas than in private ones.
Not much to say about that. Alex, in the T.W. podcast, did say that private security in Gurgaon is one of it’s successes. A similar story is told in the paper regarding fire protection services.
Poor commuters rely on auto-rickshaws, cycle rickshaws, and overflowing private buses. Congestion is an enormous problem.
Isn’t it possible that the rickshaws are a viable, cost effective solutions to the problem? Regarding congestion, how much do those roads users pay for driving on them? I suspect this is nothing a market clearing price wouldn’t fix.
From reading this paper further, it appears that Gurgaon is split into three sectors: areas privately owned where those owners have supplied their own utilities and areas controlled separately by two public entities, MCG and HUDA. Alex states that a major problem is that those entities do not coordinate. Given that, I’m not sure the best solution to these problems is to create a single public entity that controls all of this. Isn’t the failure of these two entities (along with the failure of public entities in Delhi and other cities in India) enough evidence?
You can read about the failures of the public water supply here and here. How about electric? Apparently the failures of the electric grid are caused by the government supplied system. A private firm, India Power Corp, received a contract for this service just last year.
Alex’s paper fully admits that the private sector facilities have been well done but the public sector has not. From his paper:
Gurgaon looks like Singapore in terms of private-sector develop- ment, but like other Indian cities in terms of public-sector development.
I know I’ve been very negative in this post so far, but stay with me. His paper does get better.
So what is Alex’s policy recommendation from this study? After all, its easy to see the failures in any system, but difficult to fix them. In fact, it is difficult to even determine what “fix” means, since it is individuals who make value judgements. From the paper:
markets and profit-seeking firms are challenged by externalities and public goods. Our choice of the term ‘challenge’ is deliberate. Externalities and public goods do not necessarily lead to market failure. Private firms have addressed most challenges and they have provided sewage, water, electricity, roads, transportation, security, fire prevention, and other goods. But to address is not necessarily to overcome, and some challenges have been met only at high cost.
What does the bold, italicized portion of this even mean? I can only think he sees services in Gurgaon and compares it to Fairfax, VA (location of Mercatus) and holds that up as an ideal. But how do we know whether Gurgaon can afford such luxuries? How do we know that Fairfax hasn’t gotten to where it is (at least to some extent) by a transfer of wealth via taxation and Federal Reverse money printing? And, as I think even Alex would admit, that Gurgaon’s problems aren’t almost fully the result of government intervention?
First, prices of water, electricity, sewage, and so forth are close to marginal cost but average cost is far too high because of the failure to exploit economies of scale.
But creating economies of scale is extremely expensive and likely not even feasible during the early development of a city. Has Alex actually done the complex calculations to determine this? I also find it interesting to see an economist proclaim the price of something is too high. Either prices are market clearing or they are held artificially high by government intervention.
Second, competitive suppliers have produced negative externalities such as excess pollution, sewage dumping, and groundwater dissipation.
Negative externalities are caused by the lack of private property and the protection of that property. This has been covered in libertarian writing ad-nausium.
Why hasn’t Gurgaon developed natural monopolies, at least for urban infrastructure such as water, electricity, and sewage? It is far more expensive to build urban infrastructure after development than before development.
Perhaps because there is no such thing as a natural monopoly? Why would an economist at a market oriented think tank advocate for a monopoly? The paper takes the position that a monopoly would lower costs and that economies of scale are all that matters. But this position is not necessarily without debate.
Later in the paper Alex holds up New York City and a plan developed in the early 19th century as an ideal that could have been followed in Gurgaon. But again, this ideal is not without debate. For example, some despise the monotonous look of the result of this plan. These are value judgements and we shouldn’t be so quick to look only toward monetary considerations in these situations. But perhaps this is a relevant example for Gurgaon. The issue of course that the mixed bag of governance in Gurgaon prevented this kind of coordination, but then that is Alex’s point. The issue I have is that public, democratic governments track record is poor and so my position is that the idea should be eliminated.
Toward the end of the paper, we finally do find some free market recommendations for Gurgaon. The paper advocates for larger tracts of land to be sold so that common infrastructure could be built. Walt Disney World is held up as an example. However, this example fails as an analogy for Gurgaon because Disney is paid for by the concentrated wealth of it’s customers. It does however succeed in the sense that Disney is an example of a completely private “city” supplying it’s own utilities.
Another city in India, Jamshedpur, is then given as an ideal example. The paper states:
Jamshedpur is a private township and one of the best governed cities in India. Jamshedpur was the idea of visionary businessman Jamshetji Nusserwanji Tata, who, after travelling to the United States to see Pittsburgh, Pennsylvania, returned to India to found Tata Iron and Steel.
The paper goes on to describe the city as having some of the best utility services in India, and control of those services appears to be completely controlled by Tata Steel. I can’t argue with this position at all. Jamshedpur appears to be a legitimate, although somewhat small, example of a good private city. I would only point out that perhaps this is the result of a concentration of wealth, similar to Disney, but in this case due to the successful growth of a steel plant.
And finally, the paper makes what appears to be the main recommendation for Gurgaon:
If the rights to develop Gurgaon had originally been sold in very large packages, some five to seven proprietary but competitive cities could have been created in that region. Within this system the role of the state is to make it possible to auction large parcels of land. Once such parcels and associated rights to develop the land are created, private developers will provision public goods and services up to the edge of their property.
The seems like a fairly reasonable position. I would only argue that there is no need for any public goods and services. I suspect that Alex would argue that utilities, sidewalks and perhaps roads are public goods. The devil would be in the details. Would there be elected officials who have the power to control how these public goods are provisioned? If so, I would argue that would become a problem. After they are built, do they become public? If so, who maintains them? Who has a say in who that is done and where do funds come from? How is the tragedy of the commons overcome? Later in the paper:
Competitive private governments would also generate experimentation and innovation
That’s an interesting statement, private governments. I’m not completely opposed to such a concept, but I’d rather use the term “governance”. And, the devil is, once again, in the details. If this entity is a monopoly, members are elected and services funded via taxation, nothing has changed.
In short, it appears to me the lessons to be learned here are that the solutions to these problems are best served by the simple ideals of libertarianism: that is, private property and non-aggression.