Saturday, September 28, 2013

Durable Capital and Progress: The Case of Mumbai's Collapsing Buildings

A horrible accident has taken place in Mumbai India as a building has collapsed and many people have died.  In the NY Times article I read about this tragedy, it stressed that the building was old (built before 1950), I would like to talk about the quality of capital in cities experiencing sharp economic growth and the economics of vintage effects.

Point #1:  Due to engineering progress and regulatory codes, new cohorts of durables ranging from cars, televisions, computers, homes, buildings are of higher quality than older cohorts.   Put simply, a 2013 Model Year vehicle is a better car than a 1978 Model year vehicle was back in the year 1978.  So note that I'm not talking about aging.  Aging and the wear and tear brought about by aging only exacerbates the fact that at any point in time, new buildings are of higher quality than older buildings.

Point #2:  Buildings can live on for more than 100 years.  Walk along Park Avenue in NYC between 65th and 90th street.  This is a very wealthy street, the 15 to 20 story buildings are already 80 years old and could live on for another 100 years if they are maintained and regulation limits replacing them with taller buildings.

As Mumbai, India grows richer, a large % of its building stock is the old cruddy stuff.  There is a mismatch between who the city is today and the structures that persist.  Whether those who live and work in the old buildings are aware of the risks they face remains an open question.  Dora Costa and I have documented that as nations grow richer their willingness to pay for safety increases sharply.    Our work suggests that Mumbai would benefit from knocking down many of these buildings and replacing them with better newer, taller buildings.  Of course there would be transition costs.