Tuesday, August 29, 2006

Economic development and the (hack hack cough wheeze) environment

The Financial Times reports today that Hong Kong government officials are admitting that air pollution is hurting the city's economic prospects. (Earlier this month, Forbes Magazine and a few other newspapers noted that a number of hedge funds and smaller investment firms had already debarked for Singapore over air quality concerns.) The key quote comes from Victor fung, chairman of the government-backed Greater Pearl River Delta Business Council:
Up to a year ago [pollution] really hadn't hit our pocketbook. But now people are not coming to Hong Kong to take a job because their kid has asthma."
I find this interesting for several reasons. First, while it is clear that quality of life has a certain monetary value, it's unusual to observe environmental pollution, as a single component of quality of life, actually have a measurable effect on an economy. Usually, there are just too many other factors—employment, crime, schools, the number of economic activities and opportunities involved, geography, the weather—to be able to isolate air pollution as an economic harm. For example, São Paulo and Mexico City certainly may have pollution problems that effect economic growth. But they also have enormous kidnapping and murder problems, too. Blaming all of their development issues on environmental issues is problematic, to say the least.

Hong Kong may be special in this regard because (1) other factors (schools, crime, infrastructure, weather, even political freedom) are largely controlled for, at least vis-à-vis its chief competitor, Singapore; (2) it is small, so there is no escaping the air pollution problem by moving out to the 'burbs, and even a small effect on the local economy can be measured; and (3) it is first and foremost a financial center.

This last point is critical. While Hong Kong is also a shipping center and closely linked to Chinese manufacturing centers in Guangzhou, Hong Kong's wealth comes mostly from taking a cut of the vast sums of money that flow through the territory. When compared with banking, shipping and manufacturing are low-margin businesses. In today's world, finance is also the least geographically bound of industries. Stock exchanges are electronic, and buying and selling shares can be done at any time, day or night, anywhere. This means that financial firms can very easily pull up stakes and move to greener pastures (in this case, maybe literally). Hedge funds perhaps are the easiest to move, as they tend to be firms, with the least need for physical infrastructure. But now, it appears, larger firms are also following suit.

But while finance is particularly mobile, other industries—even old-fashioned bricks-and-mortar manufacturing—are also increasingly mobile. Even real estate and physical-capital intensive manufacturing industries now pick up stakes and move to cheaper or better locales, when profitable. For these industries, of course, "human capital" does not command nearly the premium it does with financial firms, but for some manufacturers and service firms, this may be changing.

What does this mean for the economics of environmentalism? Probably not much for those regions and countries with little in the way of human capital and otherwise dependent on manufacturing industries. But, in the United States, at least, cities now appear to be competing over attracting the "creative classes" and various "knowledge-based industries" as keys to urban development. Hong Kong's experience may provide ammunition to those arguing that a clean environment plays a role in a building a strong economy.


SmoothB said...

First of all, I would have titled it: "Tiebout Strikes Again, Bitches!!" But maybe that's just me.

Second, Florida's stuff about the creative classes is just plain wankery. Sometimes literally -- gays and rock bands? Whatever. You of all people should want to nip in the, er, bud the self-congratulatory myth of a bunch of creative bobo actor-designer-homeopathic-whatever dipshits that they of all people are the ones driving economic growth. As Robin Hanson says, when they call him a particularly creative scholar they aren't complimenting him -- they're saying he'll have a hard time getting tenure at a good school or paid a lot of money. It's the accountants and the chemists and the computer scientists who drive productivity. Or as Dilbert http://www.dilbert.com/comics/dilbert/archive/dilbert-20060801.html would point out, it's because jobs make you do things you wouldn't otherwise do that they have to pay you.

Third, I totally agree that cities compete over quality of life. It's odd that this might be a point of contention. But I don't think there's any evidence that environmental stuff builds a strong economy. Even Florida isn't making that claim. Those "creative" (wait, is that a joke about modern accounting?) people are going to go somewhere -- that's totally zero sum. It's not like roads or the Internet or education or whatever -- the environment isn't capital. It's a good. People with money value goods. They might value stadiums, but no one with two brain cells to rub together would actually maintain that stadiums actually produce value. (They might be value, but that's a different matter.)

SmoothB said...

yes, I know many politicians say stadiums create economic growth. Note my qualifier.

Thundercheese said...

*cough* None of this matters. The Rapture is coming. Soon. Look busy.

M.D. Fatwa said...

Hey, enough hating on the Richard Florida stuff! If you want to computer and accounting geeks in this world, you need the gays, hippies and rock loser homeopaths to attract them. Who's going to do their hair? Some dude from the UAW Local 4401? I don't think so. Who's going to sell them their beet greens at the farmer's market? Well, farmers, obviously. But if it's a gay farmer, you get those cool golden and "peppermint" beets like you get in California. Us high-value knowledge workers care about that kinda stuff.

SmoothB said...

If there's a differential between cities, maybe one city will fall behind; but if peppermint haircuts or whatever else is hip with you granola-lovers this week ceased to exist, geeks would continue to be geeks.

M.D. Fatwa said...

Not so. Net utility would decrease. Also, as I explained in my discussion of banning exploding laptops from airplanes, a lack of peppermint haircuts, etc. would make me grumpy. And when I'm grumpy, rather than do work, I sit and complain about it on blog postings. Hence, the GDP falls.

SmoothB said...

Sure, maybe having your peppermint beets makes you happy and so a lack of competition decreases total utility. (Or maybe not -- what if I hate the fact that you have them? Nobody likes beets. You should grow something everybody does like. You should grow candy.) But it doesn't change productivity -- hence my distinction between capital and consumption goods.

As for happiness creating productivity, well, there's an income effect too. By making you unhappy we're encouraging you to want to work harder so as to get more money so you can get more of that nancy-boy hair gel you like so much.

SmoothB said...

PS Anyone who gets both pop-culture quotes in the last comment ... well, needs to watch less television.

M.D. Fatwa said...

Yeah, yeah. Lawyer=vampire=hair gel nancy-boy. I get it already.

Nonetheless, you could (conceivably) have an increase in productivity if (and this is where it becomes a stretch), by having a plethora of peppermint beet farmers markets and gay hairstylists, you attract a critical mass of people in the same field, and that critical mass led to a positive network effect. You see that positive network effect in Silicon Valley, the Biotech Triangle in North Carolina, and even in Detroit (though automanufacturing is no longer considered a hip industry). Cities and countries around the world are trying to create these high-tech "clusters" as a way of boosting a particular industry (think Shenzhen in China and the Hsinchu Science Park in Taiwan). In reality, of course, "naturally occuring" clusters result from things like local universities (Silicon Valley and the Biotech Triangle) or some geographical feature (Detroit, with access to steel factories, shipping and railroad). But, if you were a mayor today and you wanted to create a high-tech cluster near your own town, you might do it with crunchy granola type attractions. And, if only you were doing it, you could create a cluster and thereby increase productivity. But, of course, the reality is that everyone is doing it, so the question is where this cluster is going to be, not whether it is going to be.