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Monday, November 5, 2007

Real Estate and Economic Development: a response

One of my recent posts, "Bulls, Bears & Fools" received a comment from an Anonymous person a couple of days ago that I thought I would share and respond to here in a post. The comment was as follows:
"You put up some good points but has a number of weakness, for e.g. promotion of real estate growth is not good for economic development, it might increase economic growth but does not produce any economic end of the day in real terms such development is useless....there are many other weaknesses in your arguments from a Development Economics standpoint however i dont the time required to talk about them here and plus shower free knowledge in a blog, how brilliant it might be" [sic]
My response is as follows.

Thanks for the comment, Anonymous. There may well be many weaknesses with some of my points, the lack of hard data being my primary weakness. I always hope readers will point out weaknesses and challenge me as you have done.

While your points were slightly besides the point of my original post, please allow me to address your main (and only) point that real estate is (a) “not good for economic development”, and (b) “does not produce any economic output” while somehow “increases economic growth” (to use your own words).

Your first point is perhaps just barely debatable (if not academic), and your second point is, besides being contradictory, not consistent with reality or facts. In fact, you couldn’t be more wrong if you tried.

Real estate basically encompasses land and any permanent fixtures on land. Real estate development encompasses trading and developing land and permanent fixtures on land (including residential, industrial, and commercial properties). In short, this would include companies involved in: labor, construction, brokering, property sales and management, architecture, financial services and investments, appraisal, etc., not to mention all the people and businesses that need a roof over their heads to live and trade under (e.g., retailers, transporters, hotels, restaurants, government, banks, hospitals, etc., etc., etc.)

From a “Development Economics standpoint” (to again use your words), real estate is one of the prime indicators of economic growth, investment, and output. In fact, you will be hard pressed to find a more tangible investment or indicator for economic development and/or output. In fact, in most nations (developed or underdeveloped) a significant portion of national wealth is in the form of real estate. There is also a strong positive link between the health of the real estate market and the overall job market.

And in the Bangladeshi context specifically, where increasing urbanization is taxing our urban centers beyond the point of tolerance for city dwellers (traffic, load shedding, crime, pollution, etc.), I would argue that real estate development in underdeveloped rural areas of Bangladesh is vital to our future social and economic stability as a nation (of course, concurrent with infrastructure development like roads, electricity, and so forth).

Or perhaps I can convince you with some evidence which I gathered online in just under 2 minutes of Googling.

According to the Bangladesh Bureau of Statistics (BBS), the real estate/renting sector was estimated to contribute Tk. 349,151,000,000 (34915.1 crores) to Bangladesh’s GDP in 2006-7, or 7.74% of total GDP, and growing at 3.77% per annum. By the way, that didn’t include the construction sector which was estimated to perhaps contribute another Tk. 367,701,000,000 (36770.1 crores) to GDP, or about 8.5% of total GDP. To put it another way, at the current exchange rate, those two sectors alone could contribute around USD $10.69 billion directly to our GDP. Or in yet another way, over 15% of our total GDP.

And to put it in yet another and final way, I wonder if the laborers who toil on construction sites all over Bangladesh would agree with you that real estate produces no “economic output”? Or the bank employees who process and issue mortgages? Or the ready-made garments industry that needs to build factories?

If you are working with an alternative definition or understanding of “economic output” or “economic development”, I would strongly encourage you to add to your comments and help us stimulate further debate. I might have misconstrued or misunderstood your comments.

To bring this all back to the original point of my original post: we should be more concerned about the state of “real” economic activity (e.g., real estate) rather than the volatility and probable bubble in the stock market (which is, again, more an indication of returns on financial capital and speculation than “real” economic output). And therefore by extension, our policy makers and economic advisers should focus on policy that stimulates “real” investment in sectors like real estate, rather than try and influence the stock market. Of course, the private sector in the form of Bangladeshi corporates will have to take a leadership position in concert with the public sector.

Perhaps you’ve also seen the recent news in the American economy regarding the subprime lending/mortgage crisis.

It’s regrettable that you didn’t have the time to “shower” us with your “free knowledge” or elaborate your points further in your comments. That’s what will keep this blog from becoming, in fact, quite "brilliant". In the meantime, I humbly suggest you study economic development and investment a little bit further, and then use your knowledge to contribute to our economic development.

Kind regards,
(bengalfoam at gmail dot com)


Anonymous said...

Seems to me my little words has cost you some good night sleep. Sorry for that mate seems to have hurt your ego quite a bit.

I dont need to show off my Development Economic Credentials here and plus waste my arguments in a blog.

You idea of Economics must be from a BBA angle (a mish mash of various business subjects with concerntration of Western theories and no development economics)looking forward to a MBA ...mistakes are again apparent in your views: Industrialization aka building industries does not fall under real estate (sorry big time fallacy)......industrialization produces output not real estate...successful industrialization is expected to have a positive impact on the targeted population in the form of higher living standards (in short)...higher income from industrialization is supposed to drive the real estate sector not the other way round like u are bantering here....lets now talk about bangladeshi real estate market: was was this growth based on? 2 things: black money & remittances, what was produced: residential properties causing inflation in short & creating shopping complexes with half empty shops selling all imported goods (wow very helpful for economic growth LOL) this economicgrowth worth it at the cost of increased exports or economic-self sufficiency, in short this is what to the ultra defensive Mr bengal foam and neutrals visiting this blog...sorry for just touching on this imperative points in terms of economic development as i dont have as much time as mr foam of writing journal articles in a blog not visited by less than 100 people in a month....subsequently the DSE is a better place to promote in terms of promoting long run economic growth especially helping firms raise capital and thereby raise output as well....Conclusion: The highly qualified financial advisers of your country are correct in their estimations in promoting the DSE at the cost of real estate (N.B. real estate is not industrialization), if you have any idea what the purpose of a stock market. Also I am not here for enforcing my views on other unlike you that can be understood by your extremely defensive stance. Students of BBA has the right to argue about development economics however wrong they might be (its a free society we live in after all) like the overtly knowledge guard of a fruit juice factory once said "dont consume the fruit juices being produced from my factory, they are all adultered, I have been working here for the last twenty years but have yet not seen a single fruit going inside the factory"

Admin said...

Dear Anon. Thanks for your participation. Excellent exchange of points of view is going on, we as readers, are enjoying this developing debate.

I just wanted to chip in where you assumed the probable number of monthly visitors to this blog. If you are interested, I can give access to you to Google Analytics for this blog. You need to send me your email address to view the reports. As of now, the daily unique visitor number is 100, monthly unique visitor number is around 3500-4000 and growing. Thanks.

bengal*foam said...

Dear Anon,

Thanks (again)for not wasting your “arguments” on this blog…again.

By that I mean, you don’t seem to have any arguments. Given the quickness with which you replied to my response, I would guess you’re just a troll trying to bait us. But in the true spirit of debate, let me provide what I hope is a gentlemanly rejoinder that will also be of interest to a wider readership.

1. Since you’re so good at identifying fallacies, here’s one for your collection: attacking the source of an argument rather than the substance of an argument is a type of logical fallacy known as an ad hominem argument. As such, who cares if I’m a BBA looking forward to an MBA (for the record, I am not), or studying to become a clown in the circus? Or that my ideas are, as you say, “Western”. Share your “non-Western” ideas with us, please. Surely I can’t be wrong just because of that? I’m even ready to concede that perhaps your Econ Development or finance credentials are superior to mine. But your “arguments” certainly are not. In fact, they’re barely coherent in places.

2. I never equated real estate and real estate services with industrialization. Not even close on that one, I’m afraid.

3. Real estate produces output (employment, income, etc). Or you could say it is output. I demonstrated that it’s 15% of GDP. Doesn’t the P in GDP stand for ‘product’? Maybe that’s just one of my mish-mash Western notions. Nowhere do I argue that real estate drives industrialization. But I could have quite reasonably. For example, developing land into an export processing zone (EPZ) can attract industry, workers, associated services, and thus develop a local economy. Whether it’s Bangladesh or Silicon Valley, there’s a way to argue that real estate development can drive industrialization. In fact, my first response linked to research that proved just that.

4. Your point about real estate in Bangladesh driving inflation is fair, valid, and probably true…but actually it’s my original point from my original post: real investments (e.g. real estate) affect the “real” economy much more than stock price movements and speculation on the returns of financial capital. The stock market is not the economy. Say that to yourself a few times. Maybe you could use a BBA degree to understand that a little better.

5. Those imported goods in the shopping malls that you mock so casually, actually drive economic growth by providing profits for local importers, shippers, dock workers, and local shop owners (because consumers demand them, remember it’s a free society as you yourself said), all of whom in turn employ local employees who make wages from those profits. In addition, retail sales like those help increase the velocity of money, which is one indicator of a healthy economy. “LOL” indeed.

6. Whether a 100 people or a 1,000,000 visit this blog, your arguments are still weak (at best) or not consistent with reality (at worst). And your assumption on how many people visit this blog was just another one of your mistakes.

7. You propose using a stock market like the DSE to promote “long run economic growth”. Dude, maybe you should really consider getting a BBA! Seriously. The stock market is not the economy. It’s not a yardstick for the economy. Say it a few more times. This idea is too laughable to even consider. While it’s true that firms use capital markets to fund expansion and thereby could theoretically increase output, what percentage and what kind of firms in Bangladesh do you think have access to capital markets (stocks and bonds)? Very few large ones. The majority of future economic growth and employment in Bangladesh will probably come from micro, small and medium enterprises (MSMEs), just like many modern developed economies. Generally, the windfall from stock market movements are restricted and enjoyed by a very small minority of the population. Or you could look at our largest and most successful private corporate organization, Grameenphone; they haven’t even floated stock in Bangladesh yet. So again, my main point that policy makers should focus on creating a suitable business environment to increase real investment rather than try and influence the direction of the stock market remains. I’m not saying that the government should not try and make the capital markets more accessible and stable (most of our securities regulation is archaic and outdated and in need of updating for example), I’m just saying that stimulating the “real” economy is a higher priority. You can begin by reading this article:

8. My stance is not "extremely defensive", but it does logically defend against your ad hominem attacks. I happen to take this stuff seriously. With all due respect, I don’t particularly care about your credentials (and you shouldn’t care about mine); I only care about your arguments. I’m waiting for you to make some and provide some data and evidence like I tried to. These posts of mine take half an hour at most for me to write so don’t you go worrying about my sleep or ego. It’s sweet of you to care so much, but rest assured you’re quite distant from ever impacting both of them.

9. Let me also conclude with an anecdote. I had an Econ Development professor who once relayed the following story (he was not “Western”, in case you were worried). A chemist, physicist, and economist are stranded on a desert island with nothing but a crate of tuna fish cans. They start to discuss how to open the cans. The chemist begins by proposing they put the cans in the ocean so that the salt water would erode the tin. The physicist disagrees and proposes they leave the cans in the sun until they burst open. They both turn to the economist who says, “Let’s assume we have a can opener and continue our analysis from there.” Your assumptions, claims, and leaps of logic remind me of this story.

10. I’m not your mate, mate. You also assume I'm male, I might not be.


Nahid Mahmud said...

I honestly agree with the fact that the attack should be directed at arguments, not at persons, his/her qualifications, background, or peripheral issues such as number of blog visitors.

Anonymous said...
This comment has been removed by a blog administrator.
bengal*foam said...

[Comment spam removed; not material comments]

Anonymous said...

The real estate "sector" in Bangladesh is a bit of a lawless joke.

What do you find so commendable about the fact that these people have hijacked public land?

What do you find commendable about the fact that "growth" is taking place without any regard for utilities or public services?

Where do you think the water for example will come for a 20-storey "bohutol" building in a few years' time?

Have you ever taken a walk through Niketon? In a decade, they have not even managed to put together a single paved road because while the RE walas are happy to rake in the cash, they are less willing to provide any kind of public goods.

You need RE, of course. But you need regulation of course. I am surprised at your rule about no discussion of politics. How you can have a meaningful discussion about business practices in a hyper-corrupt country like Bangladesh where politicians and businessmen sleep together in the same bed is a bit of a mystery to me.

True development which you seem to espouse doesn't come from blind adulation of businesses and businesspeople. As one commenter said, it is indeed BBA-think. It's a far more holistic approach that BD needs to take, but alas you won't hear that argument from the peddlers of soap and the sellers of mobiles who think they're taking the country to some new Jerusalem.


bengal*foam said...

Thanks for the comment, Anon2.

I’m not arguing that the real estate sector, or any other sector, is commendable or non-commendable. My point simply is that there is a difference between stimulating “real” investments and trying to affect speculative trading of paper stocks.

As such, I am arguing that the government should take action to make the RE sector, and other “real” investment areas, less of a “lawless joke” (as you put it) and to take more account of utilities, public services, and regulation that serves the wider public interest.

However, I disagree with your broad characterization of the entire RE sector as being people who have hijacked public land. I don’t have evidence, but I suspect it’s not true that all involved in RE are hijackers of public land. I could be wrong.

I find your other points a little contradictory. On one hand you chastise the private sector (like “RE-wallahs”) for not providing public goods, while at the same time you warn against private sector business-oriented BBA-think fueling “true” development.

Although I believe Niketon is private property and falls outside the jurisdiction of the government land authority, Rajuk, it’s generally not the responsibility of the private sector to provide public goods, especially from the goodness of their hearts. It’s the responsibility of the government or public sector. So in the case of Niketon, it’s probably the responsibility of the RE-wallahs to build proper access roads yet it hasn’t happened. Maybe they are legally bound to do so, but they are not being held accountable. I am arguing that proper regulation and enforcement of the regulation is what the government should prioritize (obviously, that’s their job). I would also argue that it is in the commercial interests of the RE-wallahs because it makes their property more valuable.

I also genuinely believe that the private sector would be better at providing water, electricity, and other public utilities. This point is certainly debatable. But I don’t believe in blind adulation of businessmen or business (or blind anything for that matter), and neither do I distinguish between “true” development and “false” development. For me, development is by definition a good thing, and therefore development that comes at the cost of violating the public interest cannot be called development at all. If the holistic approach you mention is something similar to public-private partnerships, I would be more inclined to agree with you, although PPP is tricky and also has disadvantages. If you want soap peddlers and other businesses to contribute to overall development in a more holistic manner, you have to align private sector motives with public sector objectives if you want it to be sustainable and “true”. But you would probably have more success allying with them rather than excluding them.

Lastly, our no-politics rule is more about preventing arguments degenerating into ad hominem or personal attacks based purely on political allegiances and so forth. You are certainly free to criticize the corrupt practices of businesspeople (in fact, we would encourage you to do so) and discuss in general their links to the political establishment. Businessmen have always been in bed with politicians, since time immemorial. In some countries like Bangladesh they do it behind closed doors, in others they do it in the open (lobbyists, etc.) You can debate the relevant policies of various political stripes and how they relate to corporate Bangladesh. But you can’t argue that one policy is better than the other just because it comes from a particular political party. Again, you can attack the argument but not the source of the argument. I hope that’s a little clearer. This is not a blog about politics. That’s our content guideline which we reserve the right to enforce as administrators of this site.

Thanks for reading and participating.


Didarul said...

The debate is helping us to get something 'Mufte'! Keep roaring!
We want a lot of things FREE!

Anonymous said...

Nice writings :)