Urban Development

Paul Krugman’s September 6 article in the New York Times (How Did Economists Get It So Wrong?) is a humbling warning to the economics profession against the pitfalls of intellectual complacence. It challenges the profession to re-examine the validity of its existing knowledge particularly in relation to globalization and the workings of local and global financial markets.

Granted that economists have to face up to the unpalatable fact that our theoretical apparatus falls far short both as descriptions of how economies function and as prescriptions of how they can be made to function better. The crisis has exposed the limits of economic knowledge. According to Krugman: “The vision that emerge as the profession rethinks its foundations may not be all that clear; it certainly won’t be neat; but one can hope that it will have the virtue of being at least partly right.”

In this process of reappraising existing economic knowledge, there is a real risk of going overboard and wrong the right knowledge. Using the global economic crisis as an excuse, there are emerging tendencies to reject tested economic wisdoms in areas such as the role of foreign capital and trade policy in economic development.

One school of thought that is attempting to rise from the ashes is known as (old) Structural Economics.

The recently elected government has recently announced an ambitious goal of eliminating slums in India in its most recent five year plan. Will this be a possibility? If you ask the construction companies, the answer is yes. A number of entrepreneurs and enterprises have embarked on new initiatives to provide affordable housing called such as Tata and its construction of Shubh Griha north of Mumbai.

With the increased rate of economic growth over the last few years, housing developers have tended to focus on the higher end luxury developments causing property prices to soar; I was astounded that luxury apartment homes in Mumbai cost the same as they do in New York and London. As demand for these properties have fallen due to the global financial crisis and increased interest rates, the focus on lower cost housing has increased due to a larger market coupled with acute shortages of housing in urban India.

Much in the same way the Ford Model T revolutionized transportation in the United States and the Volkswagen Beetle did in Germany, the Tata Nano (small in Gujarati) seeks to do the same for India and the rest of the developing world, with millions still seeking to realize dreams of four wheel mobility. Will the Nano become a resounding success and revolutionize the concept and accessibility of the car, or will it cause increased problems and growing pains in its mission to provide transportation to the broader public?

With a price starting at $2,200 dollars including taxes and fees, the Nano significantly undercuts the current cheapest car in India by almost half and may open the door to aspiring drivers around the world as the most affordable automobile in history (when accounting for inflation). The market potential is seemingly unlimited as only 0.7% of Indians owned automobiles in 2007.

However, economic development has already caused an explosion in the number of motor vehicles perpetuating increased fatalities due to accidents, standstill traffic, and smog filled cityscapes.

Its founder, Ratan Tata says that his inspiration is derived from poignantly watching the way entire families are transported on motorcycles complete with a rider, passenger, along with two children hanging onto the back. He noted the terrible toll in road deaths involving two-wheelers and called for a safer four-wheeled vehicle that will transport families in a dignified manner.

Only about one-quarter of households living in developing countries have any form of financial savings with formal banking institutions. Even in countries that have experienced substantial development over the last decade or two, this statistic remains stuck stubbornly at a level that would not be acceptable for any other measure of socio-economic development: 10% in Kenya, 20% in Macedonia, 25% in Mexico, 32% in Bangladesh.