Havana, Cuba–Stagnation Doesn’t Preserve Cities, Nor Does Wealth Destroy Them

[My second in a two-part series on Havana, Cuba. Here’s the first article.]

Havana, Cuba

Before taking my trip to Havana, one thing that I was curious about was how a half-century of Communism had affected the built fabric. While there are obvious disadvantages to economic stagnation, I figured that it would have at least created a charming-looking city. There are, after all, a handful of U.S. cities, and numerous European ones, that have resisted growth, modernization, and the automobile, only to remain quaint and historic. But it didn’t take even a 10-minute cab ride from the airport to realize that my assumption about Havana had been naïve—even if it is still held by many of the city’s blissfully uncurious tourists.

In fact, very little about Havana has been “preserved.”  Instead, everything in the city is merely old, and because little gets produced, nothing is replaced. This applies to the automobiles, furniture, hand tools, manufacturing equipment—and most certainly the buildings. Collectively, this stagnation has destroyed the look of the city, with a physical blight that stretches nearly every block from downtown to the outer slums.

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If I could define in one statement what Havana looks like, after four days of extensively biking and walking through, I’d call it the Latin American Detroit. It was a once-great city that declined because of bad policies, and its pervasive ruination serves as a constant reminder of this. The houses themselves, while large and ornate, are almost uniformly inadequate by U.S. standards. If they have not crumbled to the ground altogether, many are caving in. The foundations are crooked, full of holes, and marred by broken windows and doors. Because of Havana’s European roots, stucco is a common material, but on most buildings is falling off, or in some cases has disappeared. Almost every building has dirt and grime, while some are covered in it.

And this is for Havana’s nice parts. Once I began biking out of the central neighborhoods and into the slums, I found that symbols of past wealth disappeared altogether, and were replaced with what in the U.S. would be considered shacks. These structures were usually patched up with knotted wood, metal scraps, and thatching. One gentlemen who lived in the poor neighborhood of Cerro, and who I spoke with at length, described his area as akin to a Brazilian favela—which I found believable. The two pictures I took below were from his front porch, and mirrored the aesthetic of such areas.

So what is it like to live and work in these buildings? As one might expect, the outside decay permeates to the inside. The best access I got was through a 24-year-old working-class woman named Indira. I met Indira on my first night in Havana when stopping to ask directions, and after noticing that she spoke good English, took her to dinner. We became friends, and she invited me into her downtown apartment, where she lived with her mother and father-in-law. The apartment was roughly 150 square feet—far smaller than a typical New York City micro-unit. Because it had a high ceiling, the family had built a horizontal wooden floorboard halfway up the wall that served as the second floor, and built a makeshift staircase leading up. This upstairs “room” was for the mother and father-in-law, while Indira lived in the main room below, sleeping crammed against the kitchen.

Even in such a small space, there were numerous malfunctions. There was no hot water, either for cooking or showering. In fact, the shower did not even work, meaning that the family instead took scrub baths. Because the toilet didn’t flush, they had to pour water into it each time after use to accelerate the draining. The built-in wooden floorboard was clearly sagging under the weight of the upstairs furniture, raising concerns that it would one day collapse. As for the actual roof—it had been crumbling for years, and was fixed recently by a neighborhood handyman. To pay for the work, the family had to spend over a year saving up $150.

 

The main story of Indira's apartment.

The main story of Indira’s apartment.

 

The second story, upheld by a wood board

The second story, upheld by a wooden board

 

Public Infrastructure

Just as peoples’ private houses were crumbling, so too was the public infrastructure—again, much like Detroit. The public spaces, while well-used, were typically full of trash, overgrown weeds, and broken objects. Many parks, for example, were defined more by concrete than grassland. Streets, if they were even completely paved, were filled with potholes and had such poor drainage that, after it rained, they would gather huge puddles.

A water-less pool

A water-less pool

 

I wasn’t able in my short time there to analyze the underground infrastructure. But if it is like everything else in Havana, I would assume that it, too, is crumbling. For example, contrary to what tourist brochures say, Havana’s tap water is considered undrinkable by locals, and I was routinely offered bottled water to avoid catching chlorida.

Indeed, the substandard nature of Havana’s built entities were so common that after awhile I stopped noticing. For example, when I attended a rainy futbol match at a renowned Havana stadium, I sat underneath a roof that leaked constantly, getting soaked alongside other fans. Can anyone imagine this being tolerated at a U.S. arena? When I used bathrooms even in nice establishments, I would find that there often weren’t toilet seats, door locks, or (you guessed it) toilet paper. Schoolyards had swimming pools without water and basketball hoops without rims. And on it went.

This is how life is in Havana. And I soon realized, given this, how buffoonish it would have been to go around looking for examples of “historic preservation.” Such preservation is an aesthetic notion from the First World, driven by those who are willing to pay more to retrofit attractive old housing. But in a city of extreme poverty, preservation is the pragmatic steps people take to prevent their roofs from caving in.

a public park...

and a public waterfront

So How Does Havana Compare To…San Francisco?

Have you ever read an article that was so hilariously wrong that you wanted to pick your laptop up and chuck it across the room? This was my reaction to one article I read several days after returning from Havana, with the city’s horrific conditions still on my mind. On June 8, MarketWatch.com published an article by columnist Therese Poletti called “New Tech Money Is Destroying The Streets Of San Francisco.” Poletti explained that a flood of wealthy executives were moving into San Francisco, buying old homes, and altering the interiors.

It is now hard to find a Victorian home for sale that has not been gutted, its architectural details stripped and tossed. And owners or developers — looking to sell at a premium in the frenzied real estate market to “techies with cash” — hope to appeal to the tastes (or lack thereof) of current buyers, by turning once-charming homes with detailed woodwork, built-ins and art glass, into clones of Apple’s minimalist retail stores.

This trend has been developing for several years, but it seems far more prevalent today, with construction sites sprouting across the Bay Area and especially in San Francisco. And in addition to the remodeling frenzy, older buildings appear to be disappearing at a scary pace.

Before even addressing Poletti’s point, let me just set the record straight: San Francisco is not being “destroyed.” I can testify from having lived there in 2012, and visiting several times more, that the city is an architectural gem that has largely stayed in character since being rebuilt after the 1906 earthquake. Much of the city—including almost the entire northeast portion—is an oasis of historic Italianate, Queen Anne, Craftsman, and Art Deco construction. These buildings roll along the hills flanked by clean, well-paved streets, and small, impeccably-landscaped yards. From a purely aesthetic standpoint, San Francisco surpasses any other major U.S. city, and perhaps any European one.

The reason for this is two-fold. San Francisco has expansive historic preservation laws that make it difficult or illegal to alter thousands of structures. Compelling arguments have been made that the city takes this preservationist impulse too far, to the detriment of adding new housing supply–although such laws help maintain its unique character. But the other factor—to which Poletti seems oblivious—is that the city has a large professional class with the financial wherewithal to maintain these homes.

I would argue that this second factor, more than the first, has preserved San Francisco. You could put a historic overlay designation across Detroit, and it wouldn’t change much. The Motor City suffers from decay because it has undergone six decades of depopulation, and this has left no one around to preserve its own large historic stock. But the Bay Area has been flooded with capital during this period, and this has strengthened its culture of preservation. Maintaining a historic home, after all, can be an expensive endeavor that requires ripping out floorboards, replacing pipes, and other structural changes. It is usually done by educated, well-off households who have either the money to fund repairs, or the time to dedicate sweat equity. Perhaps not every family preserves their homes precisely to Poletti’s specifications, and I don’t blame them, since it is difficult to live in a floor plan that was laid out a century ago. But she should not miss the broader point, which is that San Francisco has remained as it is because of the demographics it attracts.

Instead, she claims that these groups are “destroying” the city. She is thus spouting the same myth that is advanced about historic preservation by urban progressives, who seem to think that wealth and gentrification works against preservation. But a fair-minded look at U.S. cities demonstrates the opposite. If one looks at America’s most notable historic neighborhoods–the Back Bay in Boston; Capitol Hill in DC; the French Quarter in New Orleans; much of northern San Francisco; much of Manhattan and northern Brooklyn; downtown Savannah; and downtown Charleston–a unifying feature is that they have great residential wealth. Meanwhile, there are numerous cities—Baltimore, Philadelphia, Detroit, St. Louis, Cleveland—that have a similar number of historic structures. But many of them sit hollowed-out because of decline.

The same could be said when comparing Havana with Poletti’s San Francisco. Both cities have similar architecture and planning, but their differing economic histories have led to opposite preservationist destinies. Wealthy and growing San Francisco is a city where thousands of structures remain in superb shape, and where people grieve over minor alterations. Havana’s system has produced a crumbling city where the desire for preservation gets lost in a sea of basic needs. If Poletti really wants to see a “destroyed” city, she should visit the latter.

a public housing complex from the outside...

a public housing complex from the outside…

 

and from the inside.

and from the inside.

 

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Interview with Alain Bertaud

alainAlain Bertaud is probably the most interesting urbanist you’ve haven’t heard about. He is a senior researcher at the NYU Stern Urbanization Project next to names such as Paul Romer and Solly Angel. Bertaud used to be the lead urbanist at the World Bank, and Ed Glaeser has said that everything he knows about land use restrictions in developing countries he has learned from Alain. Bertaud has also worked as a consultant and/or resident urbanist in cities such as Bangkok, San Salvador, Port-au-Prince, Sana’a, New York, Paris, Tlemcen and Chandigarh.

Our Brazilian collaborator Anthony Ling, editor of Caos Planejado, met Bertaud at the NYU DRI conference last year entitled “Cities and Development: Urban Determinants of Success”, who gave us the following interview:

AL: You are currently writing a book tentatively titled “Order Without Design”, which in some way relates to the title of our website, “Planned Chaos”. What do you mean by the title of your next book – what should readers expect of it?

AB: “Order without design” is a quotation from Hayek that he uses in a different context in “The Fatal Conceit”: “Order generated without design can far outstrip plans men consciously contrive”. In the context of cities it means that cities themselves are mostly self generated by simple rules and norms applied to immediate neighbors but with overall design concept designed by one person or a group of designers. The spatial structure of large cities is a mix of top-down design and spontaneous order created by markets. Spontaneous order appears in the absence of a designer’s intervention when markets and norms regulate relationships between immediate neighbors.  Most evolving natural structures, from coral reefs to starlings’ swarms, are created by spontaneous order. The objective of my book is to show that top-down design should be reduced to a minimum and much more room should be given to spontaneous order.

AL: Brasilia is almost a national token for urban planning, in this case with design. On top of that, its strict modernist “Plano Piloto” was landmarked only thirty years after being built, becoming probably the youngest city considered a heritage site. Today it suffers a lot of criticism from Brazilian urban planners, who usually take a stance against modernist urbanism. Many of them point out the lack of mobility as the main problem: the automobile is almost a requirement to live in Brasilia, as urban and architectural form limits access to pedestrians and public transit. There is a lot to say about Brasilia, but could you summarize your view on it? Do you think urban mobility its biggest problem or are there bigger problems with a planned city?

AB: I have written several articles on Brasilia, in particular: “Brasilia spatial structure: Between the Cult of Design and Markets” presented at a seminar in Brasilia in 2010.

I think the problem with Brasilia is the design process itself and the lack of markets. While buildings and apartments can be sold, the land belongs to the government and is therefore not subject to market forces that could recycle it to respond to changing conditions. The transport problem is only one aspect of it.  The idea from the start to design a city as a finished product is a terrible mistake. Incredibly arrogant.

I wrote also an earlier paper on Brasilia, Johannesburg and Moscow titled “The Cost of Utopia” that summarizes my views on government designed cities. It is not that a better designer would have done a better job, it is the concept of design without market feedbacks from the users themselves that become a permanent flaw that cannot be corrected by more design.

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“The land use of Curitiba is designed to make BRT viable, not to transport people to their job in a minimum time.” (Photo by mariordo59 @ Flickr)

AL: In both Brazilian and international urban planning literature, Curitiba is frequently referred to as a “green city” practicing “sustainable urbanism”, in large part due to the introduction of the BRT (Bus Rapid Transport) system. However, BRTs are being built in Brazilian cities gradually showing a number of problems: the system centralizes transit on a single operator – which frequently fails to deliver – and previously scattered routes are designed into a single fixed infrastructure. Are the several Brazilian cities currently building BRTs doing the right thing? And from what you have seen does Curitiba deserve its title as an international reference of urban planning?

AB: I think that the people who managed Curitiba in the last 30 years had many good ideas, for instance recycling water to irrigate public parks. Even the concept of BRT is interesting while limited in its application. However, Curitiba’s original sin has been to design an urban land use that will make a preselected transport system work, instead of looking at the land use and trying to find a transport system that would increase mobility. The land use of Curitiba is designed to make BRT viable, not to transport people to their job in a minimum time.

The idea, of course, that one mode of transport could solve the mobility problems of all its inhabitants for ever is also wrong. I think that BRTs being installed now in many very large and dense cities of Asia are creating more problems for their future and are in reality reducing mobility. See my paper on Danang (Vietnam) and the unfortunate plan for a BRT.

Of course fantastic public relations is one of the major achievements of Curitiba. No city has spend as much on it. At the Istanbul second Habitat conference in June 3–14, 1996 , the Curitiba municipality exhibited an entire BRT bus and bus station shipped from Curitiba to Istanbul!

AL: Rio de Janeiro gives us some of the most striking views of urban inequality: Leblon and Ipanema, two of the most expensive neighbourhoods in the country, are surrounded by favelas, the poor informal communities that usually occupy public land but lack public infrastructure. What do you think is the best way to help the lives of residents of these communities through urban policy? Is land formalization a good solution?

AB: I think that the favelas are not there by chance. The denser they are the more demand it indicates for their location.  They should be made permanent. The first step is to provide infrastructure, water supply, sewer and storm drainage and a convenient way to go up and down. The need to provide formal tenure depends on the country. Establishing a formal cadaster is long and costly. Sometime an informal tenure works well. In Indonesian kampongs one year water bill (which has an address) serves as tenure a document and allows the transfer of title with very little discount compared to cadaster registered tenure. If an informal tenure title allows real estate transactions and is recognized by the state then formal tenure is not necessary. What is important is for the state to recognize the rights of residents, whether they are renters or owners. Being next to expensive neighborhoods is an advantage for the poor residents. More formal jobs are available nearby and probably a better access to high level primary infrastructure.

AL: Brazilian cities are gradually enforcing a “progressive property tax” on unnocupied real estate: owners of empty buildings or lots pay higher taxes the longer they remain unoccupied. A frequent reason given by urbanists who defend this policy is that the owner of this real estate would be failing to deliver the “social function of property” (a concept established in our legislation) by devaluing adjacent properties and restricting access to housing in order to profit by real estate speculation. Are you in favor of this kind of progressive progressive tax? In what scenarios might it be applicable?

AB: I think that urban land should pay a property tax “ad valorem”. Buildings should not be taxed.  An empty lot fully served by urban infrastructure should pay a tax to cover the amortization of primary infrastructure networks and road maintenance.  Empty lots should therefore pay the same tax as a built lot, but just based on its land value.  Rents from built property should pay a tax as part of the income tax of the recipient of the rent.  The decision to build on an empty lot should left to the owner. Sometime it is an advantage to society when land owners delay construction as they may build a structure that is more responsive to demand. William Fischel documented well this apparent paradox. I do not see the point of a progressive property tax.

AL: What cities – or periods of development within a city – do you consider your favorite examples of good urban policy?

AB: Hong Kong has many very positive aspects. In particular because they try to maximize land values by having land use regulations that reflect demand. Shenzhen also has some impressive achievement. I like more and more Indonesian land use policy, Surabaya in particular. None of these cities are perfect models, all of them have some bizarre regulations that are detrimental to the welfare of their inhabitants, but in general they are doing well.

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“Hong Kong has many very positive aspects. In particular because they try to maximize land values by having land use regulations that reflect demand.” (Photo by cyalex @ Flickr)

AL: A large part of your work explains how city planning, the attempt to control the apparent chaos of our urban environment, leads to negative unintended consequences, many times being the source of problems cities face today. Being so, what should be the role of urbanists in urban policy and working with city governments?

AB: Urbanists have a very important role to play in city development, but they are not playing it. They usually adopt unmeasurable slogans like “smart growth”, “sustainability”, “livable cities”.  Do not use slogans, use measurable indicators and indicate what action will be taken to  move these indicators in a given direction.

  • Objectives: They should concentrate their effort in insuring mobility and housing affordability as a city develop.
  • Monitoring changes in indicators: They should develop and monitor indicators, for instance, average commuting travel time. Here is a reference to an interactive data base providing the number of jobs accessible from any area of Buenos Aires using transit cars or bicycles. Planners should also monitor changes in land prices, housing prices and household incomes. They should identify the affordable type of housing by income groups and current housing consumption per group. Monitor land and housing supply: how many ha develop every year, how many building permits are given, how long does take to obtain a building permit. Monitor pollution.
  • Action: Infrastructure – Plan road development to insure a steady supply of land and reduce travel time (reducing distance travelled is not a good proxy for travel time). Regulations – audit regulations and remove all regulations whose objective is unknown or has been forgotten. Submit any land use regulations to cost test: what impact has this regulation of land development and floor area cost. Change regulations to allow all income groups to have legal access to land and housing. Take any action related to changes in indicators mentioned before, for instance, increase land supply if land prices are climbing too fast compared to income.

AL: In your opinion, what are three essential books an urban planner or a city enthusiast should read in order to understand how cities work and thrive?

AB: Read a lot, any type of book. For planners who have been trained traditionally (like myself) without much understanding of urban economics, read books on urban economics, Jan Brueckner “Lectures on Urban Economics” for instance. But best of all, walk around cities for hours and look around, and ask yourself “why is this building there? Why was it build that way?” nothing in a city is random or haphazard. A palnner needs to understand why a city is the way it is. Here is a link on my methodology to understand how cities work from a blog from Jon Stewart from NYU.

The benefits of the market in both infrastructure and urbanism

el-on-wabash-2

Alain Bertaud, a senior research scholar at the Urbanization Project, has had a long career in urban planning, and many of his writings have a market urbanist flavor. He is currently working a book called Order Without Design, and last year he published an excerpt from that book called “The Formation of Urban Spatial Structures: Market vs. Design.” In the article he offers a compelling case for letting the market determine building sizes and uses, but he argues that infrastructure provision must be left to the state. I agreed wholeheartedly with the first portion of his paper, but find that his arguments for the market in land use contradict his arguments for the state in infrastructure.

Bertaud eloquently explains the knowledge problem facing urban planners who seek to regulate efficient land use patterns. Because economic growth is such a complex process that’s dynamic over time, he explains that top-down design will fail to keep up with changing land use needs to the detriment of economic growth. He cites Hartford, Connecticut as an example. The city developed a large insurance industry, but as it became profitable for American insurance companies to outsource clerical work abroad, fewer Connecticut residents find employment in the industry. However, in a futile effort to maintain jobs, urban planners have refused to update land use regulations to permit new employment opportunities. Rather than succeeding in keeping historical sources of employment in place, urban planners have prevented economic diversity that can hedge against a downturn in a specific industry.

Bertaud describes price mechanism that allows the market to identify land’s highest value use:

Markets …  recycle obsolete land use quasi-automatically through rising and falling prices. This constant land recycling is usually very positive for the longterm welfare of the urban population. In the short term, changes in  land use and in the spatial concentration of employment are disorienting and alarming for workers and firms alike. Responding to the disruptions caused by land use changes, local governments are often tempted to intervene in order to slow down the rate of change and to prevent the recycling of obsolete land use. However, the long-range effects of maintaining obsolete land use through regulations are disastrous for future employment levels and for the general welfare of urban dwellers.

While Bertaud waxes romantic about the power of the market in allocating land use and supporting economic growth, he makes two primary arguments for why the private sector cannot provide road networks. First, he asserts that private sector is incapable of assembling the necessary rights-of-way to build major thoroughfares.  Second, he makes an externality argument. He says that because roads can improve accessibility and increase land values, it’s “impractical to allocate and to recover its cost from beneficiaries since not only road users but also landowners benefit from better accessibility.”

To the first point, it’s false that the private sector is incapable of constructing a road network beyond local access streets. In fact, several major roads in the United States have been financed, constructed, and maintained by private companies that collected tolls. By constructing these roads in existing easements, these companies didn’t need to resort to eminent domain. Private U.S. companies built turnpikes in an era when road building was much less efficient than it is today, and more importantly tolls had to be collected by humans in tollbooths, rather than electronically, requiring more overhead than a toll system would today. Turnpike companies sought investments from landowners near the road who stood to gain from road construction, demonstrating that mutually beneficial exchange can happen even in the face of the externalities that Bertaud describes. Aside from roads, private enterprise has historically provided canals, streetcars, and elevated rails demonstrating the powerful incentive that people have for identifying opportunities for cooperation even when the benefits to buying and selling a good aren’t fully captured by the consumer and producer. Bertaud points out that, unlike regulators, the price system can effectively make tradeoffs between land uses. Similarly, the price system could determine resource allocation between different types of transportation, but instead this role is delegated to “designers” in developed countries today.

History demonstrates that privately built and financed roads are in fact possible, but Bertaud is likely correct that they would not be possible in developed countries today because government infrastructure spending and regulations have largely crowded out private investment in the industry. Those who assume that roads must be built by the government rely on market failure arguments to assert that the private sector fails to produce the efficient amount of infrastructure. Bertaud writes, “to build an effective, citywide circulation network, a city needs to connect privately-built roads, linking various neighborhoods and allowing travel speeds consistent with the efficient functioning of labor markets.”

It’s possible that the free market would fail to reach some optimum level of travel speed as identified by technocrats, but it’s key to note that government’s infrastructure building record is rife with failures. The political process results in bridges to nowhere and costly mixed-traffic streetcars. Robert Caro provides a detailed account of Robert Moses’ trangressions against the people of New York for the cause of his infrastructure building mania, but neighborhoods across the country were irreparably damaged by highways with relatively little recognition of the damage wrought by government road building. Unlike state road designers who can raze entire neighborhoods for the sake of infrastructure, privately built roads would not likely be built through densely populated neighborhoods.

Government infrastructure planning is subject to many of the same problems that Bertaud points out plague government land use planning. If neither the market nor government can reliably provide the “efficient” amount of infrastructure in the right places, which sector does it better is an open question that won’t be answered without developed countries’ governments drastically curtailing their involvement in infrastructure. Those who argue that the market cannot provide the level of infrastructure deemed efficient by econ 101 models make an unfair comparison to idealized models of how the public sector provides infrastructure rather than looking at the infrastructure that government actually delivers. Infrastructure provision presents private sector challenges because it isn’t bought and sold according to the textbook example of perfect competition. But starting with the assumption that government can identify and execute an optimal infrastructure plan whitewashes publicly provided infrastructure failures.

Thanks to Anthony Ling for pointing out the article.

How Hong Kong Pulls Off Transit Oriented Development

Integrating rail and property development is the cornerstone of the MTR’s success. In the U.S., coordination between transit authorities and developers tends to be mediocre at best. In Hong Kong, however, the MTR is both the transit authority as well as the property owner, and this makes all the difference.

Coordination Problem

Most attempts at transit-oriented development in the U.S. involve multi-party negotiations. The agency responsible for the transportation system haggles with different developers interested in undertaking projects along the line. Instead of implementing a unified plan, the transit agency has to negotiate specific agreements with each developer. And, because the priorities of the transit agency and the developers are never perfectly aligned, development agreements become subject to second-best compromises. Further, any disputes that arise once significant capital has been committed are costly to resolve.

This arrangement makes leveraging land values difficult as well. Developers frequently get tax breaks as an incentive to undertake projects. Whether abatements on property tax or straight-forward rate reductions, tax incentives typically preclude the use of land values to help fund transit. And, even without special incentives, major property owners who stand to benefit from proximity to a transit system have every reason to resist tax increases of any kind if there’s a chance of free-riding.

Kowloon_Station

The MTR, on the other hand, uses the integrated rail-property development  approach which combines the two roles of landlord and transit developer. The MTR owns the right-of-way as well as the surrounding properties. This removes the necessity of extended negotiations, having to settle for second best solutions, and the potential downside of disagreements partway through a project.

By combining the functions of landlord and transit developer, the MTR is also able to internalize land values. The rail line drives up the value of the MTR’s properties and that value covers the capital costs of the MTR’s rail lines.

Coase On Mass Trasnit

In 1937, the economist Ronald Coase asked why, if market exchange is such a good way to allocate resources, do firms even exist?

The short answer? Transaction costs.

Participating in a market comes with a price, and in some instances, the cost of participation is more than it’s worth. When transaction costs are too high, firms avoid them by internalizing specific functions and allocating resources at the discretion of management. This is not unlike the way in which socialist command economies deployed resources, albeit on a much smaller scale, and within an organization that’s actually responsive to external price information.

In many industries, falling transaction costs have brought about a wave of decentralization, supplanting the old paradigm of Fordist vertical integration. Younger companies now specialize in a narrower range of core competencies and outsource the rest. Apple, for example, is really a design firm that uses a global network of manufacturing and logistics partners to get its products into consumer hands.

In the case of transit development, however, transaction costs remain high. Technological innovation hasn’t made construction much less capital intensive or shortened time horizons for investment. This means that the costs of coordinating transit and property development mentioned above have remained persistent. What the integrated rail-property development model suggests in theory, and the MTR demonstrates in practice, is that a little centralization could bypass these costs entirely. To paraphrase Coase, there’s a price to pay for using prices; and in the case of transit development, that price may still be far too high.

Part 2 of 2 covering the policies and institutions behind mass transit in Hong Kong

Why No One Drives to Work in Hong Kong

Need to get 4 million people to the office every day? Hong Kong has you covered.

The Mass Transit Railway (MTR) is a rail system in the city of Hong Kong, currently managed by the Mass Transit Railway Corporation Limited (MTRL). The system opened in 1979 and now operates over 135 miles of track as well as more than 152 stations in Hong Kong. The average trip costs somewhere between .50 cents and $3 USD, and the system makes back 186% of its operational costs on fares alone.

Hong Kong Metro

Much of the system’s success can be attributed to urban density. Denser development means people live, work, and play in smaller geographic areas, meaning that more people are travelling between a fewer number of points. This is a huge plus for a fixed-route system like a railway. The MTR, however, hasn’t been a passive beneficiary of its environment.

The MTR owns real estate around each station in the system and integrates rail and property planning so that the development of one supports the development of the other.

Construction around each MTR station is incredibly dense, so it can put as many potential riders as close to a station as possible. Over 41% of the population in Hong Kong (2.78 million people) lives within a half-mile of a station. Additionally, the company’s real estate strategy emphasizes walkability; some residents of MTR owned properties can walk from their homes to a station entrance without ever even going outdoors. Clustering potential riders around each station–and making sure passengers have an easy time getting there–helps support high levels of ridership.

While fares cover the costs of operations, it’s really property development that pays for maintenance and expansion. The rail line, in turn, increases the property values of parcels adjacent to each station. This augments the land rents which are siphoned off to cover capital costs.

Ultimately, building effective mass transit is all about embedding the system within a friendly urban environment. High-density, mixed-use development is a must, but so is the ability to leverage land values as a means to finance capital investment and outlays.

Part 1 of 2 covering the policies and institutions behind mass transit in Hong Kong

The importance of driverless trains

Vancouver's driverless Skytrain

Vancouver’s driverless Skytrain

As Honolulu is making progress on its driverless elevated rail system under construction, Washington, DC is finally beginning to return to computer operation on its red line after a 2009 crash brought an end to reliance on the computerized system. While the move in DC will facilitate smoother driving and braking, WMATA still relies on train operators in the cabs, forgoing the cost-saving opportunity that driverless systems provide. It’s difficult to overstate the importance of driverless trains in the effort to bring U.S. transit operations down to a reasonable price.

Driverless systems currently operate successfully in cities from Vancouver to Algiers, and the world’s most financially successful intracity transit systems in Hong Kong and Tokyo have embraced the technology. In spite of WMATA’s high profile accident that happened while the trains were computer-operated, a well-designed driverless system is actually safer than human operated one. Driverless systems offer a better ride quality, stay on time, and face a lower marginal cost of extending service hours.

Labor costs make up huge shares of U.S. transit systems. In DC, for example, personnel costs make up 70% of the agency’s operating budget. In 2010, WMATA spent $38 million on the salaries of 611 train operators, and this does not include their retirement and health benefits. In New York, personnel costs make up $8.5 billion of the agency’s $11.5 billion operating costs, and in Chicago labor takes up 73% of CTA’s operating expenses. Obviously not all transit workers jobs can be automated (all of these systems have more bus drivers than train operators) and some operating costs would rise under a driverless system. But taking steps toward reducing labor — that comes at a premium in high-cost-of-living cities where transit is most important — is crucial for reducing transit’s operating costs and making transit systems financially sustainable.

In all sorts of industries automation reduces the cost of goods and services, but transit systems face particularly high returns on automation because several institutional factors inflate their high personnel costs. As Stephen and Alon have explained, union work rules play a role in driving transit costs by requiring eight-hour shifts. Transit agencies face peak demand during the morning and evening rush hours. If transit agencies were run on a for-profit basis, they would staff more bus drivers and  train operators during these times of peak demand and fewer during the work day and night time. However, transit unions’ work rules make it impossible to staff according to demand.

In addition to the premium that transit agencies guarantee their employees through relatively high wages and union work rules, their pensions and benefits make up a large part of their employment costs, and these costs are not transparent. For example, BART, with its high profile strikes this summer, reports a $187 million unfunded pension liability. This means that future operating costs will have to rise to cover benefits accrued in the past. Transit agencies’ pension liabilities are based on their discount rate assumption with 7.5% or higher being typical. If these agencies’ pension funds fail to realize compound annual returns greater than or equal to their assumed discount rates, their pension liabilities will actually be higher than what they report.

A City Lab post posits that mainland cities are unlikely to follow Honolulu’s driverless lead because converting existing trains to driverless would be prohibitively costly. But a commenter on her post points out that the change to a driverless system would be a capital cost, typically covered by the federal government. What better use for the Federal Transit Administration’s Core Capacity dollars than making the transition to driverless trains in large systems? Moving to a driverless system could create a virtuous cycle better service increasing ridership, begetting further service improvements. While making the transition to a driverless system entails short-term political and financing challenges, maintaining bloated operating expenses year after year is an unacceptable outcome.

During BART’s infamous strikes over the summer, a San Francisco tech entrepreneur quipped“Get ‘em back to work, pay them whatever they want, and then figure out how to automate their jobs so this doesn’t happen again.” His sentiment may come off as cold-hearted, but transit agencies should have one mission: providing adequate transit service at a reasonable cost. Their mission should not be to provide well-paying jobs to workers who might not be able to earn such high wages and benefits in the private sector. While the transition to driverless would be difficult for transit workers and agencies, in the long-run the advantages of substituting relatively inexpensive capital for expensive labor are too high to ignore.

 

Culs de sac for safety?

"Evil cul-de-sac" flickr user rleong101

“Evil cul-de-sac” flickr user rleong101

At Cato At Liberty, Randall O’Toole provides a list of recommendations for reversing Rust Belt urban decline in response to a study on the topic from the Lincoln Land Institute. He focuses on policies to improve public service provision and deregulation, but he also makes a surprising recommendation that declining cities should “reduce crime by doing things like changing the gridded city streets that planners love into cul de sacs so that criminals have fewer escape routes.” This recommendation is surprising because it would require significant tax payer resources, a critique O’Toole holds against those from the Lincoln Land Institute. Short of building large barricades, it’s inconceivable how a city with an existing grid of streets would even go about turning its grid into culs de sac without extensive use of eminent domain and other disruptive policies.

O’Toole is correct that the grid owes its origins to authoritarian regimes and that today it’s embraced by city planners in the Smart Growth and New Urbanist schools. But while culs de sac may have originally appeared in organically developed networks of streets, today’s culs de sac promoted by traffic engineers are hardly a free market outcome. As Daniel Nairn has written, the public maintenance of what are essentially shared driveways “smacks of socialism in its most extreme form.”

Some studies have found that culs de sac experience less crime relative to nearby through streets, perhaps in part because they draw less traffic. However, it’s far from clear that a pattern of suburban streets makes a city safer than it would be would be with greater street connectivity. Some studies find that street connectivity correlates with greater social capital. O’Toole’s promotion of social engineering through culs de sac to create a localized drop in crime at the expense of a city’s residents’ social capital is not a clear win. If a pattern of culs de sac streets reduces a city’s social capital, it could increase overall crime rates.

O’Toole also makes a smart land use recommendation, suggesting that struggling Rust Belt cities can reduce regulation to foster development. He writes:

Reduce regulation, including zoning rules, so property owners can engage in urban renewal without government subsidies or top-down planning. Historic preservation ordinances may sound cool, but they are one of the biggest obstructions to private redevelopment.

It makes sense for cities like Detroit to reduce or eliminate their zoning and permitting requirements, allowing as many new businesses as possible to take advantage of the their inexpensive prices. Interestingly, this recommendation for deregulation in the Rust Belt directly contradicts his past writings on deregulatory upzoning in other cities. O’Toole’s native Portland has seen deregulation allowing denser development, and in this case he advocates preserving neighborhood character over allowing the market to drive development styles. I’m glad to see he’s changed his tune to support deregulation.

Urban Development in Charter Cities

In light of approval in Honduras for three new charter cities (REDs), much has been written recently on their potential to improve economic development. Economist Paul Romer makes a compelling case for the potential of charter cities, asserting that countries with institutions that impede economic growth can benefit by designating small areas with rules that permit free trade.

Despite the promise of REDs, designating new areas for urban economic zones may pose some challenges that haven’t been addressed elsewhere. Cities almost always grow through spontaneous orders in locations that emerge through human migration. Cities are a product of human action, not of human design. Older cities grew through their accessibility to trade and natural resources. More recently, towns have become cities as they have become centers for specific industries. This process happens not with top-down planning, but rather as the market process leads individuals to move to specific places, resulting in the urbanization patterns that we see. In the case of Honduras’ REDs, however, the locations were selected by the state.

Unlike the approved sites for REDs in Honduras, Hong Kong and Singapore (models of charter cities) were not greenfields before they became charter cities. Since becoming models of charter cities, both islands’ populations have exploded, but some level of development existed before British rule, and the British did not set out to create large cities. Rather than being planned, the success of these two islands was an accident, in which good institutions in fortunate locations have facilitated enormous economic growth. In contrast, all of the infrastructure and design for the REDs will be built from scratch, at first by one company, MKG, until other investors and individuals move to the city. In a sense, city construction may have to begin before there is demand for it. MKG has pledged $15 million to begin building infrastructure, a small amount in the scheme of city-building, but as of now it’s unclear where future investment will come from, and whether it will be centralized within a few large firms or dispersed.

Greenfield development for charter cities is absolutely key; otherwise, they would coerce people to adopt new rules, eliminating the choice and voluntarism that Paul Romer explains is essential for charter cities to succeed, not to mention potentially leading to violent conflicts. However one firm starting a city in a greenfield will face enormous knowledge problems in beginning to build a city from scratch. The magnitude of this challenge will depend on how much development is required of the few initial, large investors before attracting significant numbers of entrepreneurs. I don’t think either the investors or Paul Romer support top-down city design, but this is a necessary aspect of starting a new city in a government-designated location.

Some towns have been started with charters in greenfields previously, in the American colonies, for example, but none of these were founded with the intent of becoming large cities. Those that grew did so spontaneously because of their advantages over other cities. I don’t think that a state-selected greenfield location will prevent success in REDs or other charter cities, but I do think it bears acknowedgment that starting a city from the top down will create an added challenge. Assuming success, however, REDs will provide a fascinating case study in modern urban development under free markets. Here’s hoping the charter doesn’t include height limits or parking requirements.