Mega-Infrastructure Projects in LDC Cities

The Economist reports about the 1/2 built Sea Link Bridge in Mumbai.   Years ago, I acquired two copies of Altshuler and Luberoff’s Mega Projects.  While Keynesians tend to focus on the short run stimulus effects of huge government projects, I’m more interested in the long term quality of life and productivity effects of such investments.   In the case of China’s cities, I have written about the impact of subways on Beijing’s urban form and in the future I will post my new China bullet trains paper once it has been accepted for publication.   For those who are interested in “Why Nations Fail”, the Economist piece has a fascinating paragraph that I reproduce below the fold.

Acemoglu and Robinson would not be surprised by the following quote from the Economist.

“In fact, the land is still owned by the government. But the conspiracy theory that Mumbai is essentially a stitch-up by the rich is not propounded only by drunk cold-callers and men of the cloth. It may be the most widely held belief in the city. Its grandest iteration is that the city’s elite has deliberately sabotaged its transport infrastructure to enrich themselves. The argument goes like this: better transport would lower the scarcity premium on land and property in downtown Mumbai, hurting builders’ profits, and in turn curbing the flow of bribes to India’s political parties.

The idea that the rich control the city’s fate was fuelled by a battle in 2005-08 between Mukesh Ambani, India’s richest man, and his estranged brother, Anil, over a tender to build the trans-harbour link. After a legal tussle Anil undercut his brother by bidding for a concession of nine years and 11 months. The tender process was eventually abandoned.”

So, the rich own the downtown land and know that transportation improvements (such as bridges and highways) would reduce the scarcity value of their downtown land.  They thus limit new transport infrastructure that would speed up and modernize the city.

To an economist, the question here arises of the “system of cities”.  If Mumbai’s quality of life deteriorates because of wasteful commuting then a rival city nearby that does not engage in such inefficient policies could have an edge in the competition for capital and labor.  As households Tiebout “vote with their feet” and move to this other city, this would discipline the Mumbai elites to provide public goods.  I recognize that if Mumbai has unique positive agglomeration effects then this competitive effect could take a long time.

What I find really interesting here is that the elites gain from injuring the city’s quality of life. In the case of China’s cities, Siqi Zheng and I have argued that the apartment owners gain from improvements in the city’s quality of life because this is capitalized into resale prices.  The downtowns in China’s major cities feature government functions and cultural amenities so they are “consumer cities” whose prices are unlikely to be threatened by transport innovations.   Look at how high land prices are in downtown San Fran, Boston, Chicago and Manhattan.    When there are significant consumer amenities downtown, transport innovations can make the downtown land more valuable because there are more visitors coming in for the day (i.e Westchester to Manhattan theater trips).


Author: Matthew E. Kahn

Professor of Economics at UCLA.

10 thoughts on “Mega-Infrastructure Projects in LDC Cities”

  1. In your first paragraph you mention “I’m more interested in the long term quality of life and productivity effects of such investments.” In that vein, you may want to look at the long term effects of such projects in the USA. A few examples that could provide a wealth of data to be assessed:

    Hoover Dam
    Rural Electrification Administration
    Interstate Highway System

  2. If I recall correctly, the hydroelectric dams built by the US federal government on the Colombia river (at a time when the Pacific NW was more sparsely settled) created a surplus of electrical power, which dramatically reduced the cost of aluminum smelting, which in turn enabled the development of the modern aircraft industry.

    1. Don’t forget Hanford Reach and all that goes with it, including lower quality of life for everything flooded by the dams.

      1. Yes, governments can make things worse for everyone, as well as better.
        Of course, so can private interests: I mourn the poisoning of the Clark Fork just as I mourn Hanford.

        I think that in the very long term, we’d have been better off to keep the Columbia salmon runs and forgo the electricity and aluminum and aircraft; but in the short term, it seems undeniable that the Bonneville and Dalles dams constituted a huge economic stimulus, with both regional and national effect.

        1. Of course, so can private interests: I mourn the poisoning of the Clark Fork just as I mourn Hanford.

          Or the upper Sacramento. Nevertheless, I agree that scale and time periods and projects for one purpose are problematic. 20/20 hindsight, though.

  3. The link among these different kinds of behaviors by elites is twofold: first, is the infrastructure in question also used by the elite in the same way as everyone else? If not, then the elites gain by artificially-created scarcities (for everyone else) without paying a significant price. If you have a heliport on your house, you don’t really have to worry about traffic, for example. Second, the different behaviors speak to different kinds of scarcities. If you benefit, for example, from people coming to the urban core where your holdings are, it behooves you to act in ways that maintain a relative scarcity of cultural/business/etc attractions outside urban cores and of urban cores themselves. (Hence sterile, disconnected suburbs.) Oh, and, given the enormous cost of entry to the urban-core market (typically only ever supported by governments) it’s pretty obvious that any properly-functioning set of elites can engage in price signalling that will limit the number of new entrants to the market to whatever level they choose. (If supermarkets can do it in Econ 101…)

    But what really strikes me here is Matthew’s casual acceptance of the notion that capitalist elites have a clear path to increased personal and group wealth by screwing over everyone else. He is hardly the person I would have thought to hear proclaiming “Marx was right.”

  4. There seems a classic economist mistake being made here of relying on a faulty premised model: residents of Mumbai are assumed to be able to “vote with their feet”, thereby creating a positive competitive dynamic. Yet how real of an option, rational or otherwise is this for what portion of Mumbaites?

  5. In Karachi, I met a lot of people, residents of an upper-middle class neighborhood, who believed that their running water, which had not worked for years, had not been repaired because the relevant authorities had been paid off by the deliverers of bottled water. I have no reason to believe that they are mistaken, since there are lots of even wilder sorts of corruption in Pakistan that are well documented.

  6. “What I find really interesting here is that the elites gain from injuring the city’s quality of life.”

    What I find really interesting here is that the elites gain from injuring the planet’s ecological resiliency and the quality of life endured by billions. And that they have trained an entire cast of priests, known as economists, who chant incessantly their mumbled visions and prayers that it continue and increase.

    1. So JMG, what are you saying here? You don’t think the health of the planet can be measured on a linear scale of monetary value?

      What are you, come kind of communist? Next thing you’ll be spouting that left-wing propaganda about some guy named Pareto and his screwy ideas.

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