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Natural Hazards, UnNatural Disasters: The Economics of Effective Prevention
they typically live in slums that mushroom on vacant land, much of it owned by the state and central government (directly or indirectly, such as the sewage authority or railways). Worse, the slum’s garbage is dumped in adjoining drainage ditches that become clogged; so rains result in floods that the poor drown in. These lands were set aside for good reasons (drainage, flood overflows), but it is difficult to prevent squatters and almost impossible to evict them. The Indian Slum Areas (Improvement and Clearance) Act of 1954 is a central government law that the city and state have no stomach to enforce. Slum dwellers pay thugs “rent” or “protection money,” and the thugs buy off the local constables with a bribe, deliver electoral votes to grateful politicians, and intimidate rival candidates seeking change. Under these circumstances, suggestions to strengthen or enforce the building code to prevent buildings from collapsing during the heavy monsoon rains would likely hurt those it is trying to help.
Improving individuals’ decisions: What can governments do? Get land and real estate markets to work
This can go a long way to inducing people to locate in appropriate areas and undertake prevention. Markets cannot work when transactions are taxed at prohibitive rates. A city should raise revenue with a low tax rate on a wide base; but its administration should be simple. And although a tax on property values has much merit, ascertaining appropriate values requires a functioning property market, and perhaps even changes to central government taxation. An ad valorem tax on property value not only raises revenue without misallocating resources but also provides the incentive to put land to its best use. The most appropriate economic density of urban development would then follow. Taiwan, China; Hong Kong SAR, China; and Singapore became major commercial centers in large part because much of their fiscal revenues are from taxing land values (World Bank 2008). Hong Kong SAR, China, therefore did not tax trade and commerce heavily, and other cities such as Johannesburg and Sydney tax real estate only through land values. Some cities in Pennsylvania have a two-rate system, with land values taxed at a higher rate than improvements (buildings). Property taxes account for up to 30 percent of local revenues in many European countries. It will not be easy to remove the panoply of distortions, because many now benefit vested interests. Nor is knowing what to change first obvious. Such issues are outside the scope of this report; but even if such changes were made and people responded promptly (a fear of reversal may slow the response, especially because the politician’s successor is not bound), a measureable improvement in building quality can take years. New construction is a small fraction of the existing building stock in established cities, and if a building lasted 50 years, only 2 percent would be replaced in any year.