Urban Inequality and Neighborhood Avoidanceism

Data from the seventh national census show that in the last decade, the population has further concentrated in large cities, and the population siphoning effect in first-tier cities is obvious, with net population inflows reaching 7.12 million and 5.97 million in Shenzhen and Guangzhou, respectively. 16 cities have reached the 10 million population level in 2020, of which Xi’an, Zhengzhou, Hangzhou, Dongguan, Qingdao, and Changsha are newcomers. In addition, Foshan, Ningbo, Hefei and Nanjing are quasi-million population big cities with rapid population growth in recent years.

Urban Inequality and Neighborhood Avoidanceism

Urbanization is the hallmark of civilization in modern societies. However, the process of urbanization may lead to competition for public resources and challenges in the distribution of urban land, education, housing, health care and public transportation. If public resources are not properly allocated and used efficiently, “big city diseases” may arise, such as high property prices, slums, industrial hollowing out, traffic congestion, rampant crime, and urban decay.

This paper discusses the survival of big cities from the perspective of neighborhoodism.

  1. Urban Inequality

In the 1950s and 1960s, there was a wave of affirmative action in the U.S. There were affirmative action movements for race, consumption, women, and environmental protection, as well as an affirmative action movement for the distribution of public resources in cities. At that time, urban pollution was a prominent problem, and a large number of people opposed the construction of public facilities such as garbage plants, sewage treatment plants, and substations near their homes, with the slogan “NIMBY” (Not In My Back Yard). This problem is called “neighborhood avoidance” or “neighborhood effect”.

Neighborhood avoidance is easily understood as a populist movement. In fact, it is essentially a problem of public resource allocation, in which everyone seeks the benefits of public resources while making others pay the costs. In the beginning, those in control of public resources in cities implemented discriminatory policies by trying to build garbage plants and sewage treatment plants near black neighborhoods and civilian areas. This was a form of neighborhood avoidanceism. The egalitarians returned the favor by opposing construction near their own homes and also tried to build these facilities in white neighborhoods, in rich neighborhoods. This is also a form of neighborhood avoidanceism.

Neighborhood avoidanceism exposes the problem that those in control of public resources implement discriminatory policies that are harmful to urban development. For example, they restrict the population of the city and do not want the city they live in to be too crowded. Specific methods include limiting population migration, restricting school enrollment, pushing up housing prices in the core, and so on. Another example is that urban population policies are skewed toward the highly educated, raising the educational level of the “neighbors”. This is a kind of neighborhood avoidanceism.

Under such restrictive and discriminatory policies, workers with low education levels face a dilemma: they seem to be free to enter the city, but they are not citizens of the city; they work for the city and pay taxes, but they cannot enjoy the public resources such as schools built by taxes. As a result, some large cities with populations in the 10 million range still have low levels of urbanization. The core of urbanization is the urbanization of people, who can enjoy the fruits of urban civilization equally.

Land is the basis of urban survival. As the population concentrates in cities, urban land becomes a scarce resource and the competition for urban land becomes more and more intense. Land avoidanceism has become the core problem of cities.

In my previous article, I used French classical political economist Richard Cantillon’s “land determinism” to analyze the real estate problem. In his famous “Introduction to the Nature of Commerce,” Cantillon states, “The landowner determines the population and the market price of a country.” [1]

There was a proverb in Europe during the city-state era, “My vassal’s vassal is not my vassal.” It illustrates the absolute dominance of the direct controller of the land over the territory. The landowner to whom Cantillon refers is none other than the lord of the city-state in a closed economy. The lord has a monopoly on the land, and how the land is organized for production, such as how much grain is grown, how many grapes are planted, and how big the hunting grounds are, determines how many people can be fed on the land, and also determines the price of food on the land. He gave many examples, such as ancient China, where a large amount of land was used to produce grain rather than for hunting or growing luxury products. This allowed ancient China to produce a lot of food to feed a large population. In ancient Europe, however, the situation was mixed, with lords in some places being so extravagant that they planted large amounts of land for grapes and grazing, thus depopulating the city-state and leaving the serfs with little to eat.

In a city, the landowner plans 50% of the land as an ecological reserve for trees and flowers, 20% for factories, business and commercial buildings, 20% for roads, schools, hospitals, parks, municipal offices and other public facilities, and the last 10% for housing. With 2 million housing units planned on this small amount of residential land, the city can only accommodate 8 million people, based on an average of 4 people per unit. However, the city has a population of 20 million, which means that another 12 million people can only live in dense areas such as factory dormitories and urban villages.

The land distribution in this city is a typical neighbor-avoidance. The 8 million people who have residential housing can enjoy a forest city with green mountains and water, as well as quality degree houses and hospitals. In this way, the quality of life, property appreciation and competitiveness of the next generation are guaranteed. Urban planners have placed a large amount of industrial land away from the prosperous and wealthy areas to attract factory owners to invest. In addition, 12 million people live in urban villages and factory dormitories, adjacent to factories. The massive factories and workers pay a constant stream of taxes for the city, and the taxes provide the city with better public welfare.

In recent years, urban (spatial) economics has begun to focus on this issue. Krugman, who studies spatial economics, argues that neighborhood avoidanceism, in the form of neighborhood housing controls, stifles national economic growth by turning thriving metropolitan areas into castles that keep out low-skilled and low-educated people. U.S. economists Hsieh, Moretti argue that if housing were unregulated, the U.S. economy would be much larger and large agglomerations would expand further as people with lower skill levels in currently economically stagnant areas would move to these large agglomerations. Economists Ganong, Shoag found that if not for restrictive housing regulations in boom areas, interstate income convergence would have increased by at least 10% since 1980. 2]

Taken together, policies that restrict immigration, household registration, land, home and car ownership affect the free flow of people, reduce the efficient allocation of labor, land, and public resources, and exacerbate urban inequality and the polarization between rich and poor. Free circulation of people, especially rural-urban migration, can reduce unemployment in rural and backward areas, raise the average income of households, and reduce the gap between rich and poor. However, neighborhood avoidanceism keeps putting various obstacles to this path.

Urban congestion is often the result of land avoidanceism. Open a map and look at the density of buildings in some large cities, where large concentrations of people are placed in certain areas on the outskirts of the city. It is clear from this that land adjacencyism is at the root of urban road and rail congestion. Restricting license plates, nominally to solve the congestion problem, is actually another kind of neighborhood avoidanceism.

The restrictive policies of neighborhoodism create urban inequalities, and the only way to solve them is to abolish them. In their article “Housing, Urban Growth and Inequality,” Andrés Rodríguez Posse and Michael Stoper, professors of economic geography at the London School of Economics, cite spatial economics: “The only local policy that has the potential to make a difference is to break down the barriers to migration from backward areas to major metropolitan areas in response to the current dilemma of fragmentation and inequality ” and that “breaking down neighborhoodism will allow people in other areas excluded by high housing prices and low accessibility in prosperous areas to prosper” [2]. However, the two professors argue that the main barrier to migration to prosperous areas is not housing, but the composition of skills that will not urban labor demand.

Many argue similarly to these two professors that competition in cities is eliminating the poor and low-skilled, leaving behind the high-income and elite. However, this view conflates free competition with the discriminatory public policies of neighborhood avoidanceism. Public policy in cities should give a fair chance to compete, whether rich or poor.

Guangzhou is a relatively under-planned city compared to (relatively) the north, but it is also a more pro-people city. Guangzhou, such as the Hakchon area, embraces the rich and the mansions, as well as the low-income people and the urban villages. A city with less blind intervention from power is a city that looks more chaotic, but a city that is more inclusive, free and harbors wealth for the common man. Of course, I do not deny the role of land arrangement and urban planning, as will be discussed below.

  1. Real Estate Bubble

Real estate is part of a city’s wealth, but if a city’s wealth is based on real estate, then it is a dangerous city.

A real estate bubble is a city’s “nuclear bomb”. Most financial crises in the last 100 years or so have been associated with real estate bubbles. The main reason is that a lot of financial assets are built on city real estate. Tokyo in 1990, Hong Kong in 1997, and New York in 2008 all suffered historic real estate bubble crises. Once the real estate bubble is formed, for the middle class, the house is a nominal wealth, but a real debt. The bursting of the real estate bubble hit the urban middle class the hardest, and even destroyed the future consumption of urban families.

How is the real estate bubble formed?

The more people move to cities, the tighter the supply of land in cities, and the more land and real estate prices continue to rise. However, this is a normal price increase and cannot be defined as a real estate bubble. There are two major tools for the creation of real estate bubbles: one is loose monetary liquidity; the other is tight land liquidity.

The stimulation of real estate by easy money and credit is obvious, but the impact of land policy on real estate bubbles is often overlooked. Extensive research by U.S. economists has shown that boom metropolitan areas have ample incentive to implement restrictive land policies that drive up real estate prices.

This is where neighborhood avoidance in boom areas comes into play.

Some might question that neighborhood avoidanceism should lower urban housing prices by crowding out large numbers of people and lowering demand for housing. However, the opposite is true. This is because the decline in demand for housing purchases is accompanied by a decline in housing supply at a much greater rate.

The prosperous and affluent areas of the city have serious neighborhoodism in land planning. Citizens of wealthy areas or urban land planners find ways to devote surrounding land to large municipal parks, opera houses, concert halls, and fancy schools in order to reduce the supply of commercial housing, thus ensuring the scarcity of housing as well as maintaining high prices.

In April 2019 the California State Senate passed Bill 4, which seeks to curb land-neighborhoodism from driving up urban housing prices. The bill states, “Restrictive land use policies can drive up housing prices. Studies have found that in California, housing prices are higher and rising faster in jurisdictions with stricter land use controls; in some cities, each additional planning measure increases housing prices by nearly 5 percent …… Restrictive land use policies discourage residents from moving to areas with higher productivity and higher wages, which hurts economic growth.” [2]

Hong Kong’s land-neighborhoodism is a classic case in point. Hong Kong is the city with the highest home ownership pressure in the world, the highest housing prices in the world, and poor living conditions, with only 16 square meters of housing per capita. Why are house prices so high in Hong Kong? There are two main reasons: First, the monetary system and monetary policy. The second is the restrictive land system.

Hong Kong uses a linked exchange rate system, which is a fixed exchange rate system pegged to the US dollar. When the US dollar is easing, Hong Kong follows suit to ensure that the Hong Kong dollar is pegged to the US dollar. In times of big dollar easing, the Hong Kong Monetary Authority buys large amounts of dollars in the foreign exchange market, thus releasing a corresponding size of Hong Kong dollars, and the currency over-issuance in turn drives up housing prices. Of course, this is not to say that Hong Kong’s foreign exchange system is bad; the problem lies mainly in the Federal Reserve’s easing policy.

The restrictive land system has not only exacerbated Hong Kong’s real estate bubble, but also led to poor living conditions in Hong Kong. In my article “Property Market, How Should It Be Regulated? article, I analyzed the land system in Hong Kong. Before 1997, land in Hong Kong was owned by the British Crown. After 1997, it was owned by the Hong Kong government. The Hong Kong government adopts a lease system and grants land use rights through auctions and tenders, and the term of newly granted land is 50 years. Therefore, the land market in Hong Kong is not a free market, but is monopolized by the Hong Kong government, which is almost the sole supplier of land. This also determines that the real estate market in Hong Kong is not a completely liberalized market.

The rise in property prices in Hong Kong began in 1985. At the end of 1984, in order to prevent the British from selling Hong Kong’s land for cash before the handover, the British and Chinese governments agreed that “new land grants would be limited to 50 hectares per year (excluding public housing sites)”. 50 hectares is equivalent to the size of a large property development. The market was seriously oversupplied, and money rushed in, and prices soared until they peaked just before the 1997 Asian financial crisis.

The Hong Kong government played a major role in the housing price bubble feast. The minimal supply of land pushed up house prices and, more importantly, the supply of land became the object of a game of neighborism. When Hong Kong’s housing prices collapsed during the Asian financial crisis, the Hong Kong government’s attempt to launch the “85,000” housing target was blocked by some consortium forces. They held environmentalism hostage to prevent country park development and land reclamation. Why? Because increasing the housing supply could lead to a further decline in property prices. Many people say that Hong Kong’s real estate market is controlled by consortia, why is it controlled by consortia? Let’s go back in time, Hong Kong has such a small supply of land in a year, and this land is developed by a small number of large property developers, who naturally control the supply of new housing.

In fact, the Hong Kong government is the real land-neutralist. The Hong Kong government relies heavily on land finance and tends to reduce the supply of land to drive up prices. After 1997, the Hong Kong government not only did not take the initiative to increase, but also reduced the supply of land. From 2002 to 2010, Hong Kong’s annual average residential land supply was only 5 hectares, which is lower than the 50 hectares before the handover. Why?

To reduce the blow of the Asian financial crisis on the fiscal deficit, the Hong Kong government took the initiative to reduce land supply to boost the property market and solve the deficit problem. Hong Kong’s land- and property-related revenue in 2017 was $244.7 billion, accounting for about 43% of the Hong Kong government’s total revenue of $573.1 billion that year, of which $128 billion was from land concessions. In addition, real estate is the cornerstone of Hong Kong’s finance, and the higher the price of the property market, the greater the financial assets.

The Hong Kong government continued to reduce land supply, and the Hong Kong property market rose all the way after bottoming out in 2003. From 1986 to 2017, the average price of private housing on Hong Kong Island, Kowloon and the New Territories rose 20 times, 20 times and 14 times respectively, with average annual growth of 10%, 10% and 9%.

The Hong Kong government holds the land supply, but land use in Hong Kong is extremely low, at 25%. Another 75% of Hong Kong’s land is in the countryside and islands, which together account for over 38% of Hong Kong’s total land area and are explicitly prohibited from development in the name of environmental protection. The ratio of residential land to the entire city area in Hong Kong is only 8%, much lower than the more than 50% in New York, London and Tokyo. However, mainland cities still need to understand one statistic: the public housing and subsidized housing provided by the Hong Kong government covers 49% of Hong Kong households.

It is important to note that there are also outstanding cases of state-owned land systems and government supply of land. Take Singapore, for example, where over 80% of land is in the hands of the government, which has compulsory land acquisition powers. Singapore has made good use of state-owned land to build over 1 million HDB flats cumulatively, with 80% of its households living in government-provided HDB flats. Currently, Singapore has a homeownership rate of over 90%, the highest in the world.

In both the United States and China, the lower the urban land use rate, the higher the housing prices; the lower the proportion of residential land, the higher the housing prices. The two cities with the highest housing prices in China are Hong Kong and Shenzhen, which also have the lowest proportion of residential land use in China at 8% and 11% respectively; they are also the cities with the lowest living space per capita at 16 and 19.7 square feet respectively.

In a city, building heights are directly proportional to land prices. City building heights tend to be normally distributed, with high buildings in the core decreasing in order toward the periphery; land prices also decrease in order. The price of land is controlled by the land monopolist, and the less land is supplied, the higher the price of land and the higher the building height.

In a city, building height is directly proportional to commuting costs. A city will not expand indefinitely because there is a limit to the scale effect of a city. The cost of commuting and the cost of living in the core are a set of marginal substitution relationships. When the marginal cost of commuting is greater than the marginal cost of living in the core, the city’s boundaries are suspended and either the core continues to build tall buildings to expand its living space, or satellite cities or polycentric cities are developed. And the city develops public roads and rail transportation, which can reduce the cost of commuting, widen the boundaries of the city, and suppress the height of urban buildings. This is the logic of German economist von Tünen’s locational theory [3].

Shenzhen Saige building shaking reminds the world that when a city has a skyscraper race, we need to think about two questions: first, is it a lack of land supply, resulting in rising real estate prices and core area buildings extending up to the sky; second, is it a lack of public roads and rail transportation, resulting in long commuting times in the city and hindering the scale effect and boundary expansion of the city.

  1. Hollowing out of industries

Industrial hollowing out is a false proposition in the free market. A city that does not develop industry and develops finance, tourism, Internet, biomedical and other industries cannot be considered as industrial hollowing out. The migration of industries is a result of free competition.

There are two kinds of real industrial hollowing out: one is an old industrial town like Detroit, which, after bad urban governance and distorted globalization elimination, is finally reduced to a city in the Rust Belt with no leading industry; the other is an industrial migration made by the neighbor-avoidanceists, which leads to the decline of the city’s leading industry. I will mainly discuss the second one here.

Neighborhood avoidanceists not only reject foreign populations, but also reject industries, especially high-energy-consuming factories and low-end manufacturing. The central areas of New York, London, and Hong Kong were once industrial areas, but now they have all become financial and business districts. The de-industrialization of a city has the result of free market competition and the influence of land-neighborhoodism.

Take Hong Kong and Singapore as examples. Hong Kong and Singapore industrialized almost simultaneously, and both cities took over the manufacturing transfer from the United States and Japan, mainly in garments, textiles, electronics, and toys. By the 1970s, both Hong Kong and Singapore’s industrial output accounted for more than 30% of the total value of their economies. However, starting in the mid-1980s, Hong Kong’s share of industrial output declined rapidly, falling below 5% by 2000 and is now negligible. In contrast, Singapore’s share of industrial output rose in the 1980s and remained at 30% of industrial output in 2006, and is still about 25% today. What is this level? Shenzhen’s share of industrial output is 37%, Shanghai’s 25%, Beijing’s 18%, and New York, Paris and Tokyo are all below 10%. Not only is the percentage high, the volume is not small, with industrial output reaching about 600 billion RMB in 2019.

What does Singapore’s manufacturing industry rely on? Singapore started with textiles and garments in the 1960s, and developed shipbuilding and ship repair, oil refining and chemical industries during the oil crisis in the 1970s. By the 1980s, textiles and garments were gradually phased out, and the electronics industry was upgraded in the direction of semiconductors.

Today, Singapore has formed four major manufacturing industries: oil refining and chemical, semiconductor, biomedical, and precision manufacturing. Among them, refining and chemical industries account for 40% of the total industrial output. Singapore is the world’s largest manufacturer of jack-up oil rigs, with a sole share of 70% of the world’s market. Singapore’s semiconductor technology is quite competitive in the world, with over 300 semiconductor companies, including 40 IC design companies and 14 silicon fabs. Singapore’s biomedical as well as medical device technologies are well developed. Precision engineering is the key to support Singapore’s manufacturing. Singapore has more than 2,700 precision engineering companies, which provide design solutions, process technology and precision machinery for Singapore’s semiconductor chips, medical devices, and oil exploration drills, as well as 10% of the world’s refrigeration compressor market, 30% of the hearing aid market, and 70% of the semiconductor lead soldering machine market.

Hong Kong has risen rapidly to the top ranks of Asia in finance, shipping, international logistics and knowledge services while manufacturing has moved to the mainland. I should note that Hong Kong has been quite outstanding in achieving this level of success with a population of over 7 million and a land area of 1,106 square kilometers. The inward relocation of Hong Kong’s manufacturing industry, and the rise of finance-related industries, has a clear result of free competition. As competition in cities intensifies, the industrialization and specialized division of labor in cities becomes more and more obvious. A city may not need manufacturing, or even high-end manufacturing, but a city cluster or global industrial chain must have high-end manufacturing. Therefore, we need to look at the industrial migration of cities from the perspective of city clusters or globalization.

Hong Kong is backed by the Pearl River Delta, and the transfer of Hong Kong’s garments, textiles and electronics to the mainland is actually an inevitability, and neighbor-avoidanceism only plays an accelerating role. The problem, however, is that neighbor-avoidanceism constitutes a blow to the upgrading of Hong Kong manufacturing. Why? From the late 80s to the late 90s, land-neighborhoodism pushed Hong Kong’s property prices up rapidly and the financial industry then rose. In this decade, the impact of foreign trade from the mainland on Hong Kong was not yet so great, but Hong Kong missed the good opportunities of semiconductors and biomedicine. Richard Li tried to invest in the information industry in Hong Kong, but Hong Kong’s technological iteration was quickly swept away by the flood of real estate and finance.

Looking at the entire Bay Area city cluster, Hong Kong missed the manufacturing upgrade back then, and now the Bay Area city cluster has lost its leader in aligning with international technology. Of course, we can’t put all the blame on Hong Kong, but we just need to be wary of the stifling of industrial upgrading by urban neighborhoodism: low-end manufacturing migrated out, and high-end manufacturing did not develop. The city has developed to a certain scale, and land adjacencyism tends to favor finance, culture, tourism, foreign trade, shipping, and knowledge service industries, welcoming the headquarters of multinational companies, central enterprises, innovation headquarters, and financial headquarters, while driving away manufacturing factories and workers. The headquarters economy can bring bright figures, but we have to pay more attention to the real manufacturing and core technology behind it.

Compared to Singapore, logically rather than in terms of results, Hong Kong’s land adjacency has hurt Hong Kong’s industrial structure and manufacturing technology upgrade. From a national perspective, Singapore has no urban cluster base and must develop a certain amount of manufacturing, especially high-end manufacturing. But from a globalization perspective, Singapore has gained a comparative advantage in competing in the international market, eliminating the garment, textile and electronics industries, while forming four major high-end manufacturing industries.

Singapore is a much less involuted and more international city. The rational arrangement of state-owned land and the HDB system solved the problem of land-neighborhoodism and avoided internal consumption killing the industrial structure; at the same time, the huge international market reinforced competition, division of labor and technological upgrading. This is the logic of Smith’s theorem [4].

Industry is the “container” of advanced technology in the world today. A city can have no manufacturing industry, but a city cluster, a country or a globalized market cannot have no manufacturing industry, especially high-end manufacturing. In the past years, the de-industrialization in Europe and America has brought many misunderstandings. The United States, Germany, and Japan completed industrialization in 1955, 1965, 1972, and 1995, respectively, and today the proportion of industrial output is 18%, 26%, 29%, and 32%, respectively. Among them, German manufacturing is the most stable, the last 30 years, the proportion of German manufacturing output to the total economic output has been stable at about 23%.

Let’s look at the situation in China, which is basically industrialized today and will only be fully industrialized by 2035. However, the rate of de-industrialization in China is accelerating, with the share of industrial output in the economy sliding from a peak of 42% in 2006 to 33.3% in 2016. in 2019, the share of manufacturing in the economy has fallen to 27.17%.

Urban neighborhoodism is good at driving out backward industries and capacity, at creating urban real estate bubbles and wealth inequality, but not at fostering advanced industries and technologies. Because technological innovation is the opposite of the logic of neighborhood avoidanceism, the migration of urban industries and technological advancement is a competitive process of superiority and talent growth. Technological innovation comes from fair education, free competition and a tolerant environment.

Lewis Mumford, the famous American urban planning theorist and “the last humanist”, wrote in his magnificent book “The History of Urban Development” that “the main function of the city is to transform force into form, power into culture, decay into living artistic images, and biological reproduction into social innovation. …… The city is the organ of human love, and thus the optimal urban economic model should be caring for people and enchanting them.” [5]

References.

[1] Introduction to the Nature of Business, Richard Cantillon, translated by Yu Yongding and Xu Shouguan, The Commercial Press.

[2] Housing, Urban Growth and Inequality, Andrés Rodríguez Posse, Michael Stoper, translated by Rui-Min Wang, Comparative 2021, 2nd series.

[3] The relationship of the isolated state to agriculture and the national economy, John von Durnen, translated by Wu Hengkang, Commercial Press.

[4] The Wealth of Nations, Adam Smith, translated by Xie Zonglin and Li Huaxia, Central Compilation and Translation Press.

[5] History of Urban Development: Origins, Evolution and Prospects, Lewis Mumford, translated by Song Junling and Ni Wenyan, China Construction Industry Press.

This article is from WeChat public number: Zhi Ben She (ID: zhibenshe0-1), author: President Qing He

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/urban-inequality-and-neighborhood-avoidanceism/
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