Suffocating Bureaucracy & Failed Institutions

Commentary, Frontier Centre, Housing Affordability, Property Rights (historic), Saskatchewan, Uncategorized

The real reason for the collapse of embryonic civil society in Egypt appears to be poorly understood.

Within this excellent article in the UK The Telegraph , by the Editor of The Spectator  Fraser Nelson “It is capitalism, not democracy, that the Arab world needs most”  ( h/t Australian Institute of Public AffairsHey… what did I miss? newsletter ) , the real reasons for this failure are explained.

The Arab Uprising was about freedom … not necessarily democracy … as Mr Nelson explains …

“But the Arab Spring was a demand for freedom, not necessarily democracy – and the distinction between the two is crucial. Take, for example, the case of Mohammed Bouazizi, who started this chain of events by burning himself alive on a Tunisian street market two years ago. As his family attest, he had no interest in politics. The freedom he wanted was the right to buy and sell, and to build his business without having to pay bribes to the police or fear having his goods confiscated at random. If he was a martyr to anything, it was to capitalism.”

"All this has been established by Hernando de Soto, a Peruvian economist, who travelled to Egypt to investigate the causes of the Arab Spring. His team of researchers found that Bouazizi had inspired 60 similar cases of self-immolation, including five in Egypt, almost all of which had been overlooked by the press.”

“Bouazizi killed himself after police confiscated all his fruit and a pair of second-hand electronic scales. This was all he had. He was a gifted trader; he had hoped to save enough money to buy a car and grow his business. On the face of it, losing some fruit and a £100 pair of scales seems like an odd basis for suicide. But having made enemies of the police, Bouazizi realised he would not be allowed to trade again. His family say he felt his life had ended and that, if he died for any cause, it should be that the poor should be able to buy and sell.”

“For most of the developing world, no such right exists. In theory, everyone is protected by law. But in practice, the process of acquiring a legal licence is so riddled with bribery and bureaucracy that only a small minority can afford to go through with it. To de Soto, this explains much of world poverty… Step out of the door of the Nile Hilton, he says, and you are not leaving behind the world of internet, ice machines and antibiotics. The poor have access to all of these things if they really want it. What you are leaving behind is the world of legally enforceable transactions of property rights. These traders do not really break the law – the law breaks them.”

Mr Nelson concludes by stating …

“A few weeks ago, de Soto told the US Congress that the West has fundamentally misread the Arab Spring and is missing a massive opportunity. Bouazizi, and the five Egyptians who self-immolated, spoke for 380 million Arabs who lack property rights or any legal protection. This applies to Britain: if we were to become champions of these people, and demand the extension of property rights in return for our foreign aid, it could be the most effective anti-poverty strategy ever devised. And it might make us millions of new friends in the Arab world.”

As an aside … the British would be well advised to sort out their own housing shambles first. When that is accomplished, they would then be in a position to advise the Arabs.

Mr Nelson continues …

“This is not a new idea, but the revival of an old one. As Margaret Thatcher once put it, “being democratic is not enough – a majority cannot turn what is wrong into right”. Freedom, she said, depends on the strength of the institutions: law and order, a free press, the police and an army that serves the government rather than supervises it. History is proving her right – in Russia, Afghanistan, Iraq and now in Egypt. The façade of democracy can be horribly deceptive; it is the strength of institutions that decides if nations rise or fall.”

While unnecessary suffering and poverty is of course deeper in the developing world, it is by no means confined to it. Weak governance, suffocating bureaucracy and institutional failure in the developed world see to that.

Let’s consider housing, and too,  the failed top-down  non-recovery of earthquake struck Christchurch, New Zealand.

Late January every year, the Annual Demographia International Housing Affordability Survey is released. It assesses the “housing health” of major urban markets throughout what is loosely termed the Anglo world.

If housing exceeds 3.0 times annual household income, requiring mortgage loads exceeding about 2.5 times annual household income, it is a sure sign of weak governance,  suffocating bureaucracy and institutional failure at the local level.

This cannot be tolerated, as local institutional failure is no excuse for denying people the basic human right to affordable housing and triggering hugely destructive housing bubbles.

A normal and affordable housing market, where local institutions with enabling bureaucracies are functioning properly is defined as follows …

“For metropolitan areas to rate as 'affordable' and ensure that housing bubbles are not triggered, housing prices should not exceed three times gross annual household earnings. To allow this to occur, new starter housing of an acceptable quality to the purchasers, with associated commercial and industrial development, must be allowed to be provided on the urban fringes at 2.5 times the gross annual median household income of that urban market (refer Demographia Survey Schedules for guidance).”

“The critically important Development Ratios for this new fringe starter housing, should be 17 – 23% serviced lot / section cost – the balance the actual housing construction.”

“Ideally through a normal building cycle, the Median Multiple should move from a Floor Multiple of 2.3, through a Swing Multiple of 2.5 to a Ceiling Multiple of 2.7 – to ensure maximum stability and optimal medium and long term performance of the residential construction sector.”

This has been well known since soon after World War 2, when the creators of the modern residential construction production industry, Bill and Alfred Levitt , supplied new starter houses for $US8,000 to young families with (single earner) annual household incomes of $US3,800 … 2.1 times their annual income.

These 80 square metre homes on 700 square metre sections / lots at a cost of $US8,000, were in house area terms just $US100 per square metre all up (serviced section and house construction).

A truly remarkable entrepreneurial feat.

Particularly when one considers the massive material shortages following World War 2 … and also … that the modern container industry had not been created by the outstanding freight entrepreneur Malcom McLean by that stage. This allowed much cheaper product to be purchased throughout the world, with minimal transportation costs.

The “Levitt method” spread like wildfire throughout the rest of the developed world at the time.

“Special interests”, such as the protectionists within the property sector, were not amused of course and went out of their way to politicise house-building. They detested the Levitts.

Their objective was simply to control the local politicians and  markets to shut out the competition.

The US National Association of Homebuilders (NAHB) 1959 "Community Planning" Video illustrates how the game was played. Superficial “sugar-coated” propaganda, where in reality the “community consultation” is a sham.

Other industry associations throughout the developed world were also captured by the industry protections, who had massive financial incentives to protect the politically artificially created values of their land and property holdings.

The golden rule – those with the gold make the rules. That is … if we let them.

The artificial land values created by strangulation zoning can be huge … raising the raw urban fringe land values from just a few thousand dollars per hectare to one, two and three million plus dollars per hectare.

Therefore, controlling and / or buying off local politicians and their institutions, is a cheap price to pay for “protecting” these artificially inflated land values and shutting out the competition.

The wider public interest is of no interest to them whatsoever … although they do their best to suck in the gullible, by dressing it up with deliberately deceptive language and concepts.

A recent example of this, is in Auckland New Zealand, as reported by Anne Gibson Property Editor of the NZ Herald … “Land bought in 1995 for $890,000 – owner will sell for $112 million" . Mrs Gibson then interviewed Auckland Mayor Len Brown (a lawyer by training … elementary urban economics is beyond his comprehension) on this and associated matters … Len Brown: Auckland's Unitary Pla Interviewn (NZ Herald Video) .

Properly, new starter housing should be provided on the fringes of the New Zealand metros for about NZ1,000 per square metre or less all up (serviced section and construction), as the Andrew Atkins THE REAL DEAL poster clearly illustrates.

In other words, about $NZ150,000 for a 150 square metre new home … $NZ200,000 for a 200 square metre new home … and so forth.

With housing grossly artificially inflated in value at about 7.0 times household earnings in Auckland and Christchurch, New Zealand, new fringe starter housing costs $NZ3,500+ per square metre in the former and $NZ2,500+ per square metre all up in the latter.

Because of the local suffocating bureaucracies and institutional failure, Christchurch cannot afford to recover from its earthquake destruction. People are fleeing elsewhere in the understandable “flight to affordability”… splattering the City all over the Canterbury Plains.

Some 80% of the major Australian metros are now more affordable than Christchurch and Auckland ( refer Demographia Survey Schedules).

The North American cities struck by natural disasters, such as New Orleans, Joplin, Tuscaloosa and just recently Oklahoma City, can afford to recover. Their housing is normal  at or below 3.5 times annual household incomes (refer ).

The consenting rates for new residential builds in Christchurch have been woeful, with up to late last year, the consenting rate being just slightly above normal replacement levels.

Nowhere near where it should be for a normal recovery.

On a population basis until late last year, there had been in excess of 5 times the residential consenting in the adjoining Counties of Waimakariri and Selwyn.

The gap had widened recently, as David Killick, Feature Writer of the local The Press explained within … David Killick Calls for New Christchurch Leadership .

The “institutional failure” with respect to Christchurch had started years earlier … from the time of the forced Local Government amalgamation back in 1989. The history is provided within the hyperlinked articles of  … Christchurch: The Way Forward .

Updated information of the non-recovery of Christchurch are explained within … Christchurch: the Political Shambles and Christchurch Council Irresponsible On Housing Issues .

It is heartening however, that increasing numbers of economists are beginning to wake up to the serious issue of “institutional failure”.

Hernando de Soto has been right all along.

The Scot, Harvard University Professor of Economic History Niall Ferguson (his  website) recently released book …  The Great Degeneration: How Institutions Decay and Economies Die … deals with the issue of “institutional failure”. Professor Ferguson outlined the issue within a recent Wall Street Journal article … How America Lost Its Way … and mid 2011 with  a TED TALK (Video) …  The 6 killer apps of prosperity .

So the evidence is crystal clear. Institutional failure must not be tolerated.

They are paid to serve us. Not the reverse.