Tuesday, 27 August 2013

Agglomeration

There's a fascinating article in The Daily Mail about a massive open market in Ukraine somewhere which consists of thousands of old shipping containers which were bought for a song. There appears to be electricity laid on, the containers are laid out in neat rows ("streets"), there are bus services from the nearest towns... and that's about it.

The rents the traders pay seem to be sky-high, but what are they paying for? They are paying for the passing trade, the 150,000 people who turn up every day looking to buy (or sell) stuff. And what attracts those people? All the other traders.

So each trader is contributing in some small way towards making this an attractive place to go shopping (benefitting the other traders) and is equally benefitting from the presence of all the other traders. Overall, there is a gain to be made by trading from there - you lose a few roubles hryvnii to your competitors (or have to price very keenly) but you gain many more by being near them. This is "agglomeration" in its purest form.

So what moral justification is there for the traders between them to be paying a million dollars every month to somebody who basically owns a few big fields? Apparently government tax collectors and inspectors are unwelcome there, which makes the place even more attractive, but if the Ukraine government wants to collect tax from the market, the easiest thing to do is just take it from the land owner who appears to do little but collect the rents.

If he refuses to cough up, the government can just set up its own market a few miles down the road, shut down the existing one and change the bus routes. The government then declares the new market to be a "tax free zone" and charges rents (the least-bad form of taxation) accordingly.

From the look of it, it won't be too difficult to make the new market more attractive than the old one (wider "streets", public toilets, better layout, chuck in a kids' playground or something etc).

15 comments:

Kj said...

if the Ukraine government wants to collect tax from the market, the easiest thing to do is just take it from the land owner who appears to do little but collect the rents.

That's assuming the Ukraine government works. Most likely, the person/group who collects these rents, are not your average investors, and are probably not going to give up on something that seems to rake in a billion or two in rents p.a., without making things uncomfortable...
Amazing place though.

Bayard said...

It all depends on a) whether the gangsters who run the show are part of or are in cahoots with the government or the civil service (seems pretty likely) and b) who has the support of the army.

Kj said...

B: Proper gangsters don't need armies. They need you to know that you will comply or you and your family gets it. Far more efficient than armies.

Bayard said...

"Proper gangsters don't need armies."

No, but they need to know that the army isn't going to interfere with their methods of keeping people in line.

Mark Wadsworth said...

Kj, B, the whole Ukraine government might well be corrupt on a practical level.

When I say "government" I assume a group of democratically appointed people chosen by a well-informed electorate in order to make a few collective decisions for the benefit of the nation as a whole and who prevent monopolies arising who don't take bribes or indulge in rent-seeking themselves etc.

On that level, the UK government is just as corrupt as we imagine Ukraine government to be.

Kj said...

MW: That's far too simplistic.
1. Do you have more security for life and property in the UK than the Ukraine? Do you have more freedom of movement, expression*, all that shit?
2. Would a 170 hectare site of trade, in a large city, supposedly turning over 20mn $ a year been able to operate without control and license by the UK government?

*I know, it's not what it used to be, but still.

Kj said...

20 mn $ a day that is.

Mark Wadsworth said...

Kj, point taken.

James Higham said...

They are paying for the passing trade, the 150,000 people who turn up every day looking to buy (or sell) stuff. And what attracts those people? All the other traders.

Similar where I lived. Those Russkies and Ukrainians are a bit different.

Mark Wadsworth said...

JH, do you mean different from each other or from us Western Europeans?

Surely it is the same everywhere - retail rents are highest where the most shops are, be that middle of town or out-of-town shopping centre*. There is nothing magical about the land, it is where the shops are that matters. That's agglomeration.

* And why shopping mall owners are always so keen to get a couple of "flagship tenants" like M&S or John Lewis in, for free if necessary, because once they are there, everybody else tags along in their wake and the thing becomes self-sustaining.

Sooner or later even M&S or John Lewis are happy to pay rent.

Bayard said...

Kj your point 1: The answer is yes, but it's not really relevant. Mark isn't saying the UK gov't is as bad as the Ukraine one, he is saying that on the specific points he gives, it could be as corrupt.

Bayard said...
This comment has been removed by the author.
Kj said...

B: fair enough. But rent-seeking, politicians acting in their own interests, and the maintenance of the system of private property in land rents, is not specifically a UK trait. It certainly excels at it, but it's irrelevant in comparison to explaining the workings of many of the countries in the former USSR. I'd take your rent-seeking, lying politicians over that any day.

adamcollyer said...

The currency in Ukraine is not roubles but grivnii (or hryvnii if you speak Ukrainian rather than Russian).

I guess this is an extreme example, but it is similar to the markets to be found in any Ukrainian city, and indeed to our own car boot sales.

All of which has no bearing at all on the point of your post of course!

Mark Wadsworth said...

AC, thanks, I have updated accordingly.

And yes, maybe this is a glorified car boot sale, but if you had a car boot sale with 150,000 customers, no doubt people would be happy to pay a hundred quid for a pitch for a day.