How cities can make their own wealth

After World War I, Havana emerged as one of the planet’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. But as David Lubin recalls in his book “Dance of the Trillions,” the party ended abruptly before the year ended, due largely to American interestrate hikes that drew liquidity back into the US. Cuba’s 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 $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 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, 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.

There is good reason to believe that many countries face serious risks. According to the International Monetary Fund (IMF), more than 45 percent of low-income countries are either in or near debt distress. And the creditratings agency Moody’s notes that many of the countries that 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 such as China. According to the IMF, the world’s public assets are worth at least twice global gross domestic product (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 its 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 do not 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. 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 such as Singapore and Hong Kong, which at one point were just as poor as many of the cities in developing Asia today, and 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 risky than most cities today.

At the time, few expected Singapore to survive let alone prosper. Its 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 publicwealth 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’s 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 fiscal limitations, found a way to build a subway and railway system the size of New York’s without using a single tax dollar: It developed the real estate adjacent to its stations.

Depending on outside capital carries serious risks, especially when it can quickly flee, as Cuba learned the hard way. Leveraging existing public assets can strengthen government finances, boost debt sustainability and enhance credit worthiness, bolstering economic development in the longer term. It should not take a crisis to spur governments to pursue this course.