July 16, 2018

The Editor Speaks: Too much development all at once is not good

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Colin WilsonwebOur Premier Alden McLaughlin has warned Cayman’s economy could overheat if there is too much development all at once.

Is he correct?

He is if the infrastructure is not in place.

“You can have too much of a good thing” – Something that is good in smaller quantities can become bad in bigger quantities (that’s when it becomes “too much”).

It can be a bad thing if too much development is likened to an economic bubble. This is when “asset prices appear to be based on implausible or inconsistent views about the future” – Krugman, Paul (9 May 2013). “Bernanke, Blower of Bubbles?”. New York Times. Retrieved 10 May 2013.

And with all this talk about spending more on the economy if the infrastructure is not there we really will overheat.

Firm commitments and decisions on the airport expansion, especially , the Cruise Ship terminal and the George Town landfill are all long overdue.

We are being given or soon to be given expert advice that is costing us thousands and hopefully will be non-partisan advice but will we be prone to short-termism?

I have not heard much about the vital agreement I referred to above – “infrastructure”.

In a 2013 paper by Dieter Helm of he asked the question, “what sort of infrastructure as a whole is required to underpin the future economy?”

And who wants to pay for infrastructure?

in a recent article “Why is Britain so bad at infrastructure?” she correctly said:

Here’s the normal practice for evaluating such projects these days. To decide whether a project should get the green light, economists add up the cost of a project, and the expected benefits over the entire future, and then compare the two figures, discounting each by an appropriate rate to reflect the greater value of a pound (or dollar) now than a pound tomorrow. It is simple in principle, but extremely difficult in practice.

Decisions about which discount rate should be used can lead to large variations in expected future benefits. Arguably, for an infrastructure project intended to last for two or three future generations, a very low rate should be used. Working out construction costs ought to be easy because these are incurred in the near future, but there is a notorious optimism bias in estimating costs. Many mega-projects end up costing multiples of the original estimates (as ’s work has shown).

Hardest of all is thinking about the benefits.

So we should take the premier’s warning seriously.

However, I have to ask this question.

Is not enough development executed immediately far worse?

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