After World War I ended, Havana emerged as one of the world’s most vibrant cities. During the first half of 1920, rising sugar prices and a favorable global environment meant that credit and finance were flowing into Cuba, fueling the so-called Dance of the Millions. But, as David Lubin recalls in his book Dance of the Trillions, the party ended abruptly before the year was over, owing largely to US interest-rate hikes, which drew liquidity back into the United States. The Cuban sugar industry never recovered.
With US credit to non-bank borrowers in developing countries having more than doubled since the 2008 global financial crisis – reaching US$3.7 trillion at the end of 2017 – Cuba’s experience should serve as a warning. But, for developing countries today, there is an additional complication: global finance is increasingly governed not by the Washington Consensus, which encourages transparency and adherence to rules that apply to all, but rather by an opaque and biased “Beijing Consensus.”
China is now the world’s second-largest national economy and the leading supplier of credit to emerging markets globally, having filled the gap left by retreating Western creditors. The terms of this lending are so murky that only China has information about the volume, maturity, and cost of outstanding loans, which are issued on a bilateral basis, often for political or strategic reasons. As a result, assessing debt sustainability is more difficult than ever.
But there is good reason to believe that many countries face serious risks. According to the International Monetary Fund, more than 45 percent of low-income countries are either in or near debt distress. And the credit-ratings agency Moody’s notes that many of the countries China has chosen to participate in its infrastructure-focused Belt and Road Initiative are among the world’s financially insecure.
Countries do not need to be at the mercy of major lenders like China. According to the IMF, the world’s public assets are worth at least twice global GDP. Instead of neglecting those assets, as most governments do today, countries should be using them to generate value.
Most governments own airports, harbors, metro systems, and utilities, not to mention far more real estate than people generally realize. For example, Boston’s financial statements indicate that the city has a negative net worth. But Boston’s total real-estate assets are actually worth almost 40 times their book value, because they are reported at their historic cost. In other words, the city has massive amounts of hidden wealth.
And Boston is hardly unique. Public real estate is often worth around 100 percent of the GDP of a given jurisdiction, the equivalent of a quarter of the total value of the real-estate market. Governments simply don’t realize this, implying massive opportunity costs.
With professional and politically independent management, a city could, it can reasonably be assumed, earn a 3 percent yield on its commercial assets. This would amount to an income many times more than Boston’s current capital plan. In fact, for many economies, professional management of public assets could generate more revenues annually than corporate taxes, drastically increasing the amount of funding available for infrastructure investment.
This approach is proven not least by Asian cities like Singapore and Hong Kong, which at one point were just as poor as many of the cities in developing Asia today, and certainly much less affluent than Havana in the past. It is worth remembering that when Singapore achieved independence in the late 1960s, it was hardly a very promising place. In fact, it was more dangerous and riskier than most cities today.
At the time, few expected Singapore to survive, let alone prosper. Singapore’s first prime minister, Lee Kuan Yew, is often quoted as having said (as early as 1957) that the idea of a potentially independent Singapore was a “political, economic, and geographical absurdity.”
Yet it has managed to thrive, thanks partly to its unorthodox decision to unlock its public wealth by incorporating portfolios of assets into public-wealth funds, making professional managers responsible for public commercial assets.
Temasek and GIC, the holding companies set up by the government, have used appropriate governance tools borrowed from the private sector to fund Singapore’s economic development. HDB, Singapore’s housing fund, has provided almost 80 percent of the city-state’s citizens with public housing.
Likewise, in the 1990s, economic malaise and high unemployment impelled Copenhagen’s leaders to get creative, consolidating the city’s old harbor area, as well as a former military garrison on the city outskirts, in a professionally managed public wealth fund. Beyond transforming the city’s harbor district into a highly desirable area, the fund enabled the government to build a transit system, all without dipping into tax revenues.
Similarly, Hong Kong, acutely aware of its own fiscal limitations, found a way to build a subway and railway system the size of New York City’s without using a single tax dollar: it developed the real estate adjacent to its stations.
There is no question that depending on outside capital carries serious risks, especially when that capital can quickly flee, as Cuba learned the hard way. Leveraging existing public assets, however, can strengthen government finances, boost debt sustainability, and enhance credit worthiness, bolstering economic development in the longer term. It shouldn’t take a crisis to spur governments to pursue this course.
Copyright: Project Syndicate
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