Case Analysis: Fiat and Fairness – Why China can build cities overnight and India cannot

Case Analysis: Fiat and Fairness – Why China can build cities overnight and India cannot

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Fiat and Fairness
Why China Can Build Cities Overnight and India Cannot

E xc e r p t e d fro m

Billions of Entrepreneurs:
How China and India are Reshaping Their Futures—and Yours
By

Tarun Khanna

Harvard Business Press
Boston, Massachusetts

ISBN-13: 978-1-4221-8058-7

8050BC

This document is authorized for use only by Yucheng Liu in Comparative Policy Process taught by Simone Bunse, Georgetown University from September 2015 to February 2016.

For the exclusive use of Y. Liu, 2015.

Copyright 2008 Harvard Business School Publishing Corporation
All rights reserved
Printed in the United States of America
This chapter was originally published as chapter 4 of Billions of Entrepreneurs:
How China and India are Reshaping Their Futures—and Yours,
copyright 2007 Harvard Business School Publishing Corporation.
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This document is authorized for use only by Yucheng Liu in Comparative Policy Process taught by Simone Bunse, Georgetown University from September 2015 to February 2016.

For the exclusive use of Y. Liu, 2015.

Chapter Four

Fiat and Fairness
Why China Can Build Cities Overnight and India Cannot

Shanghai and Mumbai are the respective commercial capitals of China and
India. Each city features a stretch of waterfront—the Bund in Shanghai and
Marine Drive in Mumbai—as the defining architectural feature of the urban
landscape. Old colonial buildings, remnants of a bygone era, ring each waterfront. Beyond their crescent-shaped waterfronts, however, the two cities
could not be more different. A comparison of their origins and development
reveals the opposing sets of priorities China and India hold regarding public
and private property rights. Different priorities led to different policies
that shaped the different physical environments in which billions of people
now live. As with statecraft and access to information, an understanding of
property rights in China and India is as crucial for Westerners as it is for the
Chinese and Indians who wish to work together.
Visitors to Shanghai are immediately struck by the gleaming district of
Pudong, which has emerged in just over a decade as the highlight of the
city’s strategy to accommodate its eighteen billion residents. Pudong was
mainly farmland until 1990 when the Chinese government decided to set up
a Special Economic Zone there. Today Pudong epitomizes the government’s
massive effort to rebrand Shanghai from the Paris of the East, as the city was
once known, to its Manhattan. Pudong now boasts more skyscrapers than
Manhattan, and some say that its Lujiazui financial district, host to several
hundred multinationals, puts London’s Canary Wharf to shame. Pudong
has become a “must see” phenomenon. Its landmarks, the Jin Mao Tower,
1

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Oriental Pearl TV, the Broadcast Tower, and Shanghai Maglev Line, among
others, are modern marvels.
How did this happen? First, the idea of creating Pudong was not a matter of
public debate but came from the very top of the CCP hierarchy, more specifically, from Deng Xiaoping himself. Such an “agreement” would be harder to
reach in a heterogeneous society like India where leaders who represent a multitude of ethnic, religious, and socioeconomic interests, are often at odds on all
public policy matters. Second, even if there had been opposition to the idea, it
would have been difficult to publicize without a free press or other organs of
civil society independent of the Party. Nor could the judiciary, also beholden
to the Party, have adjudicated disputes fairly. But perhaps most importantly,
once the decision had been made in Beijing, virtually nothing could have
prevented the Chinese government from carrying out its agenda.
In contrast, the prestige of Mumbai’s nouveau riche Cuffe Parade development has been marred by the presence of Machimaar Village, a malodorous,
albeit colorful, fishing community that has shared real estate with skyscraper’s
upscale homes for some thirty years. During that time any city politicians or
administrators daring to suggest a redevelopment plan that would clear Macchimaar Village or any other shantytowns in Mumbai have been ensnared in
political turmoil. A vicious cycle of slum clearance and rebuilding has gone on
for decades. If a political party legitimizes a certain slum one year, the other
party outlaws it the next election cycle. As a result, slum dwellers and average Mumbaikaars (residents of Mumbai) alike suffer. Clearly the city can make
no tangible gains under its paralytic politic system.
Pudong is a visible example of what the CCP’s fiat authority can accomplish. With public infrastructure projects ongoing throughout the nation,
China has shown that, at least in the early stages, a country can have economic growth without embracing individual property rights. But can the
rights of the state permanently trump those of individuals? To what extent
can national development be an altar on which personal freedoms are sacrificed? Are those who decry the loss of personal freedom too easily silenced?
Or is it a worthwhile bargain to gain material wealth at the cost of submitting to the control of a political authority that gets things done? Mumbai’s
mess illustrates how private rights and public interests can collide. Is it right
for a nation to invariably err on the side of individual rights, even at severe
costs to the public?
But this is not all. No sensible planner could interpret Mumbai’s situation as
a mere result of theoretical debates about public versus private interests. Institutional inefficiency—resulting from well-intentioned constraints on the government, like the free press, judicial processes, and civil society—has checked
and balanced India into paralysis. Are private rights truly protected? In India,
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one never knows whether the rich or the poor, the foreign or the local, the
administrator or the politician will win a battle of disputed property rights.

Pudong: Why the Chinese Can Build Cities Overnight
Pudong was always just a river away from Nanjing Road, the commercial
center of old Shanghai. But an old Chinese saying reflected the lack of regard most people had for this marshy farmland: “One would rather have a
bed in Puxi [west of the river] than a house in Pudong.” This is no longer
true. Today there are five tunnels and five bridges connecting Puxi to
Pudong, with many more links planned.
The city’s development journey started in the mid-1980’s with a proposal by
Chinese American architect Lin Tongyan, but the plan stalled until Deng
Xiaoping launched his famous Southern Tour in 1992, an effort to allay postTiananmen fears and recommit China to economic reforms. For Deng, a consummate bridge player, Shanghai was a key card in his plan to develop China.1
In April 1990 the Chinese government designated Pudong as the “dragon head”
to lead the development of all coastal cities in the larger Yangtze Delta area.
Beijing’s political will was matched by its generous financial commitments—
grants, low-interest loans, and relocation expenses for affected factories and
their workers.2 Unusually, Beijing also let Pudong retain revenues above those
usually allowed. Further, as a measure of how important it was to Beijing,
Pudong received an elevated status in the government hierarchy. Asked if
Pudong was part of Shanghai, the deputy director of the Pudong Academy of
Development, Wang Guoxing, said that although they had hoped to be independent of the Shanghai municipal government and to deal with the central
government directly, they had failed. Yet Pudong attained, and still retains, a
higher status than other districts of Greater Shanghai.
Zhu Rongji, then Shanghai’s mayor, was told to attract foreign governments and international financial institutions able to supplement the project’s
funding by providing long-term, low-interest loans. To accomplish this, Zhu
was given unprecedented powers and became known as the “one-chop man”
for his dedication to cutting the red tape in the city’s approval processes. In
1996 Lujiazui was selected as the first district in China where foreign banks
could conduct business in local currency. Of course foreign banks had to
commit to Lujiazui if they wanted a license.3
Meanwhile, state-owned development companies were admonished to
think of innovative ways of financing their parts of the Pudong project. The
municipal authorities created a land market by selling rights only land use
to approved development companies. This served as collateral to get loans.
The government gained revenues from the resulting real estate developments
f i at a n d fa i r n e s s

3

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by charging transaction fees and real estate taxes. A host of incentives were
offered to make Pudong the destination of choice for foreigners, including reduced income taxes for Sino-foreign joint ventures, tax exemptions for foreign
investments in infrastructure in the first five profit-making years, and a 50 percent tax reduction for five years after that.4 The Shanghai municipal government even granted residency permits to anyone from outside Shanghai who
bought an apartment in Pudong worth at least Rmb 500,000 ($60,200).
The result? Today, Pudong’s economic output nearly equals the total output of Shanghai ten years ago, and from an area of thirty square kilometers
in 1990 the district burgeoned to 100 square kilometers by 2004. During the
same period Pudong’s GDP rose from RMB 6 billion ($1.1 billion) to RMB
140 billion ($17 billion). More than nine thousand foreign companies entered
Pudong, including more than 180 Fortune 500 companies, and the Lujiazui
financial district alone hosted 150 Chinese and foreign financial organizations. This success is infectious; for example, the city of Jiading, northwest
of Shanghai, is trying to develop an auto specialty corridor. Despite a 26 billion
RMB ($3.1 billion) price tag, the governments of Shanghai and Jaiding are intent on building a state-of-the art stadium to lure Formula One racing. Do
they hope to break even with the venture? That concern seems to have been
lost in the rush to acquire this Western symbol of prosperity.
What about Pudong’s three hundred thousand displaced farmers? Under the
Sunshine Relocation Policy they were methodically and incrementally moved
to previously prepared accommodations and received some cash compensation
based on the acreage they lost. Although not large sums by today’s standards,
they were considered significant a decade ago. Many young farmers took jobs
in Pudong’s new factories and moved their families out of the district. The
older farmers took on miscellaneous jobs. Many of them became local officials,
entrepreneurs, or salaried workers in nearby factories. Observers pointed out
that most displaced farmers were better off, even if they became janitors in the
offices built on what had been their land. Finally, the plan identified distressed
households in need of government assistance. In the case of Pudong, where relocation methods were exemplary, it’s hard to find much dissent. This is not
true for other development-related moves in China that I discuss later.

Machimaar Village and Street People with Cell Phones: Why
Mumbai Cannot Be Shanghai
The fishermen were here first . . . when Bombay was a dumbbell-shaped island
tapering, at the center, to a narrow shining strand beyond which could be seen
the finest and largest natural harbor in Asia.
—Midnight’s Children, Salman Rushdie5

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In the 1960s and 1970s Cuffe Parade, at the southernmost tip of Bombay,
was the destination for the nouveau riche in India. Manicured apartment
complexes were inhabited by the city’s socially prominent, while upscale
bakeries, selling French bread and lemon tarts, sat between the skyscrapers.
But an eyesore encroached on this luxurious landscape. The fisherfolk of
Machimaar Village displayed hundreds of square feet of prawns and fish in
sidewalk stalls beside the hovels they called homes, commandeering what
could have been a prime beach for the glitterati.
It is somewhat embarrassing to remember the many days I walked past
Machimmar Village on my way to my daily tennis games. Dressed in tennis
whites, I was blissfully oblivious to the vast disparity between my life of privilege and the poverty of the mothers I passed along the way carrying baskets
of fish and squirming naked children. How preposterous it was that a poor
village could coexist with Bombay’s premier real estate and that it could be
only a matter of time, at least in my mind, before one of them (read Machimaar Village) would have to go. Yet nearly three decades later, both Cuffe
Parade and Machimaar Village are unchanged. While Cuffe Parade remains
one of the country’s most expensive real estates, home to the rich and famous, thousands of fisherfolk still make their living by casting their nets
from Macchimaar Village into the waters of the Arabian Sea.
In 2007 I reenacted my boyhood stroll past the fishing village. Ramnath, a
wizened sixty-year-old, claimed to have lived in the village for forty years, and
had retired, sort of. His son still fished daily, his wife took the catch to the
local market, and he helped out by cleaning and drying the fish. Although
Ramnath’s family earned just Rs. 10,000 per month (about $250), they managed to make ends meet. How? As part of the “informal sector” they paid no
taxes, they ate what they caught, they paid no rent for their makeshift home,
and they put nothing aside for a future that seemed impossibly utopian to
plan for given their day-to-day existence.
“Why don’t you move away?” I asked Ramnath.6
“Why would we? We have the best view in the city!” he replied. Indeed,
they overlooked the same seashore and cityscape as some of the best-heeled
citizens of Mumbai. “And,” he added, tongue-firmly-in-cheek, “we have the
Ambanis as our neighbors.” The Ambani family is India’s first family of the
nouveau riche. Its founder, Dhirubhai, built a fortune in petrochemicals, and
his two heirs, Mukesh and Anil, independently launched their own multibillion-dollar business conglomerates. During my conversation with Ramnath
we were joined by a young mother named Usha, carrying a baby on her hip.
“This is a great place,” she told me. “I hope I can

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settle here. I’m moving
here from a coastal village in Maharashtra where things are pretty bad. I
hope I can get into the dhandha.” Dhandha is Hindi for “trade” and refers to
the fishing trade.
f i at a n d fa i r n e s s 5

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I asked, “Don’t the rich people try to move you out?”
“Not anymore,” replied Ramnath. “At election time people come around
pretending to do things. But we can’t trust anyone. If they offer us something, I’m sure they’ll not follow through once election season is over, and
then where would we be?”
These descendants of the Koli tribe (koli in Marathi, the local language,
means both spider and fisherman; both capture their prey with nets) were
exactly the way I remembered them two decades ago. Time has stood still in
Machimaar Village. Indeed, the Koli have witnessed the handing of Mumbai
from the Gujarat Sultans to the Portuguese, and then from the Portuguese
to the British in the form of the dowry of Catherine of Braganza to Charles
II, and finally from the British to independent Indians.
How is it that the Kolis have not been removed as part of some urban renewal scheme, as they surely would have been in China? Historically Indian
law has protected their habitat as a matter of principle. In the 1990s the
Supreme Court restricted land reclamation and the removal of fisherfolk
when it implemented Coastal Regulatory Zones. Justice Jeevan Reddy of the
Supreme Court, while upholding the Monsoon Trawl Ban, expressed the
court’s view of development:
. . . public interest cannot be determined only by looking at the quantum of
fish caught in a year. . . . The government is perfectly justified in saying
that it is under obligation to protect the economic interest of the traditional
fisherpeople and to ensure that they are not deprived of their slender means
of livelihood. Whether one calls it distributive justice or development with
a human face, the ultimate truth is that the object of all development is
the human being. There can be no development for the sake of development.
Priorities ought not be inverted nor true perspective lost in the quest for
more production.7
The law spells it out: “the object of all development is the human being.”
Unlike China, where laws allowed Pudong to be built overnight, India puts a
priority on “development with a human face.” True, Cuffe Parade’s wealthy
residence associations have periodically urged the city government to demolish the shanties. Occasionally demolitions follow such entreaties, but the
ramshackle homes are always rebuilt. Although the rich could force their
politicians’ hands and bribe their way to a fish-free nirvana, the reality is that
the rich rarely vote. In contrast the residents of Machimaar Village do vote,
and the politicians, the ultimate homo economicus, respond to those votes by
protecting the property rights of the poor. Further, the symbolism of uprooting a poor fisherwoman to cater to elites enjoying Cuffe Parade’s posh facilities would generate political heat in socialist India.
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For the exclusive use of Y. Liu, 2015.

Machimaar Village’s saga is not an isolated one. Whenever I drive from
the airport toward South Mumbai, to Cuffe Parade, I pass Dharavi on the
right-hand side, a 175 hectare of swampy land that is home to nearly one
million people and is reportedly Asia’s largest slum. The stench emanating
from the open sewers is unbearable, yet the inhabitants of Dharavi manage
a vibrant, informal economy that generates $500 million in goods and services annually. Schools, clinics, shops, and bakeries gainfully employ thousands of people in the Dharavi slum. Gods and politicians are everywhere;
temples and mosques easily coexist, and pockets of the slum are divided
among strongholds of various political parties and slumlords who lay down
the law, mafia style. Like Machimaar Village, Dharavi is a landmark, a symbol, even a force of nature.
Successive governments have tried to redevelop Dharavi by converting
parts of the slum into legal properties. The catch, of course, is that the slum
dwellers are not recognized or given legal status and therefore have no right to
the properties. Rather than fight the move in the courts, the disenfranchised often simply pick up and reestablish down the street, carrying television sets, bicycles, motorcycles, cell phones, and reconstructing their makeshift structures.
As if to underscore the enormous differences between Indian and Chinese
urban reform, in 2003 the management consulting firm McKinsey and Company published Vision Mumbai, a report that laid out a to-do list for the
“Shanghaization” of Mumbai. One of McKinsey’s face-lift suggestions was
amending government regulations to allow the construction of taller skyscrapers,8 a move that undoubtedly would have entailed clearing several
slums where 50 percent of Mumbai’s population made their homes. No
sooner was the report issued than it became a lightning rod for criticism from
environmentalists, former bureaucrats, academics, and activists. The media
suggested that the only redeeming feature of Vision Mumbai was that it was
prepared gratis by a firm known for its exorbitant rates. The fiery reaction
to the report demonstrated that for most Indians, changing infrastructure
for the sake of national development was an abstract and unwelcome concept. The people could not embrace massive change when it conflicted
with personal well-being, and no leader emerged with the political imagination needed to make the case for public interest.
These attitudes are not changing. In 2005 Vilasrao Deshmukh, the chief
minister of the state of Maharashtra (of which Mumbai is the capital),
embarked on a grand project to rid “akha Mumbai” (in Marathi, the local
language, “all of Mumbai”) of slums. Bulldozers demolished twenty-five
hundred shanties and displaced about a million people. Then Deshmukh
was put in his place. He received a phone call from Sonia Gandhi, the national president of the Congress Party and reputedly the power behind
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Prime Minister Manmohan Singh, asking him to back off. He did. Another
Congress Party member stated, “Mumbai can never be Shanghai,” and it
became politically suicidal to use the term Shanghaization in India.
So how does urban renewal happen in India? One thriving example can be
found south of Delhi, where in the last two decades farmland has given way to
urban development. Here, a private-sector entrepreneur has achieved—albeit
much more slowly—what the state achieved in Shanghai. K. P. Singh, the head
of Delhi’s DLF Group, has transformed fragmented holdings of agricultural
land into a modern metropolis.
DLF is arguably India’s leading real estate development company, and K. P.
has built DLF into a real estate and construction group with revenues of about
Rs. 150 billion ($35 billion) and, in 2007 a market capitalization greater than
$30 billion. He is now one of the world’s wealthiest men.9 Equally extraordinary
is K. P.’s transformation of vast acres of undeveloped land into one of the most
modern places in India, Gurgaon. This city bordering south Delhi is now famous for its sleek office towers, shopping malls, multiplexes with state-of-the-art
projection systems, upscale homes and condominiums, and even a world-class
golf course. How did K. P. accomplish this in India’s paralytic political climate?
I spoke with him at his office in the DLF Building, located in the heart of
Delhi’s business district. In the manner of a headmaster chiding his young
tutelage, he said, “A lot of you young people don’t know that DLF has been
around for many years. You think Gurgaon just sprung up from nowhere.
Raghuvendra Singh started DLF in 1946, before partition.”
I told K. P. that twenty years ago my parents moved south of Delhi to
what was then the village of Gurgaon. Friends and family derided the move
saying, “There’s nothing there. You’re moving to the sticks.” Now it’s a
bustling community, a desirable address. K. P.’s eyes glistened. “Most of
South Delhi was developed by DLF. People don’t know that.”
That afternoon in his office, I learned just how far back K. P.’s history with
DLF stretched. In 1954, he married the eldest daughter of DLF’s founder,
Raghuvendra Singh. He explained how his association with the family business coincided with India’s changing land policies, reminding me that in
1957 the government passed the Delhi Development Act, making land development a concern of the state. K. P. waved his hand dismissively. “The socialist way of thinking came into play in the early 1960s. You see, in the first ten
years after independence the urban development policy was very good—
DLF was doing well. There were major incentives to private developers, and
most of South Delhi was developed then.” He shook his head. “But since
1961, there was a socialist shift and a total elimination of private sectors in
urban development. This was the start of a plethora of fly-by-night developers operating under state patronage. Of course state patronage is a loosely
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defined term. Sixty percent of Delhi is unauthorized.” Throughout the
1960s DLF made few gains. When K. P. joined the company in 1971, it was
ripe for change.
In the sixties, DLF receded. We just did not want to do business under these
circumstances. But then, in 1971, wanting to do something new, I joined DLF.
Hungry for business, I started to lobby the government and build alliances. It
has taken me thirty years. During Rajiv’s [Prime Minister Rajiv Gandhi] time
things started to look up. Rajiv saw the potential to business when the state
got out of the business of being in business. Under him things started to
change on the policy front, and I had already started to acquire land. So the
timing was good.
You know these three and a half thousand acres on which DLF sits? The
government did not just hand it to me and say “go build.” I began acquiring
the land in the late 1970s. I negotiated day and night with seven hundred families who each owned four or five acres of land. Remember we are talking
about a heterogeneous society. If brothers owning land were hostile to one another, we had to negotiate with them; if the daughter had a stake and lived in
a village a hundred miles out of Delhi, we had to get her on board. To earn
their trust, I dressed like a farmer, went to their houses evening after evening,
when the farmers come home from the day’s work. I had to make sure we got
the records straightened.
K. P. Singh sighed, as if still recovering from the effort of those negotiations. I thought about farmers in northern India, the very people who use the
tractors made by Mahindra and Mahindra. Unlike the American hobbyist
who buys a brand-new vehicle, the Indian farmer typically has a tractor that
is in disrepair, second- or thirdhand, polluting, and noisy. In my mind’s eye I
saw the farmer perched on his tractor, his skin dry and parched from
spending all day in the sun, dressed in a turban and loose-fitting garments.
“You see, assemblage of land remains the biggest problem in developing
it,” K. P. explained. “Unlike in other countries, I can’t run a bull-dozer over
the occupants. If one of them goes to court, I’ll be in litigation for the rest
of my life.”
“Were you ever in court?” I asked. “And how did you convince the farmers?”
I thought of the women on the farms, the saris they wear draped over their
heads as protection from the sun as they haul bricks on a construction site,
work in the fields, of course carry babies on their hips, prepare meals, and care
for the home. I thought of their dignity, the colored bangles on their arms, nose
rings and earrings, and I wondered if it had been difficult for K. P. to convince
them to give up their land. K. P. leaned back in his chair, smiling with pride, to
tell me he’d acquired most of DLF land without any major litigation, and on
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credit. “I took a loan from one farmer and then promptly used it to buy additional land. The farmers became my bankers and I became the bank for them.
It was literally all about trust. At the end of each month, my guys would
deliver the interest to these farmers personally. That kind of thing doesn’t happen nowadays.”
This, I thought, was truly incredible. Much like contemporary U.S. businesses that consolidate so-called fragmented industries, K. P. bought out the
farmers to do things with the large properties that an individual farmer
could not. Today DLF continues to operate in much the same way. Brokers
sometimes represent unknown buyers and sellers, and often brokers don’t
know one another’s identities. That way K. P. can buy land at less than what
it’s worth. The full market value of the land is high because of government
distortions that constrict effective land supply: the Urban Land (Ceiling and
Regulation) Act,10 rent control, a very high stamp duty preventing efficient
property transfers, and blocks of sarkaari zameen (government institutions
holding prime real estate) that cannot be used for anything.
DLF’s story is portrayed throughout India as a massive entrepreneurial
feat. But some people question India’s big developers, claiming that they
profit unduly from the opacity of the land market and are complicit in perpetuating such opacity. As Pratap Bhanu Mehta, a leading political scientist
in India, says, “No one quite knows how the large builders acquire land from
the government. No detailed public records exist. How can some builders
who are supposedly bankrupt continue to live in such affluence? There is
widespread suspicion of a nexus made of the mafia, the media, builders, and
politicians. What is good however is that the judiciary does poke holes
through this once in a while.”
It is important, however, to keep efficiency and accountability conceptually distinct. The Chinese government is efficient, even if not accountable
and transparent. A privately held company, as DLF was until recently, is not
accountable either, at least in the sense of a public corporation, but it does
get the job done. In India the DLFs must compensate for a state that resists
development for fear of treading on individual property rights.

The Power of Rivers
Yet another challenge both China and India face is tapping into the power of
their rivers. The Yangtze River in China and the Narmada River in India have
been mythologized for centuries by poets and writers in their respective
countries. The Yangtze, which originates in the Qinghai-Tibetan Plateau,
also known as the Roof of the World, runs 6,380 kilometers eastward across
mainland China before it pours into the East China Sea, passing through
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land inhabited by four hundred million people. The Narmada River, which
rises on Amarkantak Hill in the state of Madhya Pradesh, passes through the
Marble Rocks at Jabalpur and the valley between the Vindhya and Satpura
ranges, and continues through the states of Madhya Pradesh, Maharashtra,
and Gujarat. Finally, eight hundred miles later the Narmada pours into the
Arabian Sea at the Bharuch District of Guj

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