Thursday, January 12, 2012

Unleash Tiebout forces

Unleash Tiebout forces by Sauvik Chakraverti

EDITORIAL, TNN Apr 4, 2002, 01.46am IST The Economic Times

A survey carried out by this newspaper has ranked hyderabad as the cheapest indian city to live in, and mumbai the most expensive. delhi follows a close second. What this means is that your salary goes further in hyderabad than anywhere else: on the same salary, if you live in mumbai, your monthly expenditure goes up by a whopping 87 per cent. Therefore, salaries are necessarily higher in mumbai. If this continues, the city will get outcompeted eventually by market forces. Goods manufactured in mumbai will cost more than goods made in hyderabad. When cities compete, and when citizens 'vote with their feet', a phenomenon occurs which economists call the tiebout effect. charles tiebout had solved the 'public goods' question in a rather unique manner. He said that if mobility could be assumed, then, cities and towns would compete with each other on the basis of public goods provided and their costs as measured by taxes. People will flock to cities where taxes are low, and where public goods are excellent. They will abandon cities where taxes are high and where public goods are not provided adequately. It is this competition, and not local democracy, that will yield functioning municipalities. In the indian context, the depressing truth is that public goods are undersupplied everywhere. mumbai is so expensive only because of high housing costs. This is because of archaic land laws like the land ceiling act and rent control act as well as undersupply of a critical public good: roads. With good roads into the surrounds, more land would be colonised, and prices would fall. This is already happening in delhi. With accretions to the available stock of housing occurring in noida and gurgaon, real estate values in posh south delhi have collapsed by 40 per cent in the last two years. Of course, even in delhi, if roads to satellite towns were excellent, prices would have crashed further. This is the line indian cities and towns must pursue. The focus must be on functioning, competitive municipal organisations. They must treat citizens as customers. in this scenario, those cities that provide the best services and quality of life at the lowest cost will see more 'customers' — and hence more development. Bad cities will gradually see decline, as businesses, factories and people shift out. The greatest benefit of this approach is that we, the citizens, will no longer be viewed as a 'population problem'. We will be viewed as customers.