Ménage à Detroit: Poor Financial Housekeeping as Limited State Failure
The concept of city corporation insolvency (known is municipal bankruptcy in America) is not a new one; it traces its roots back to the financial failure of Roman periphery towns which were dissolved and nearly-instantly “privatised” by a cadre of creditors. Town bankruptcies, often due to competition from nearby trading posts or failures of important harvests, were a key feature of the European landscape from Gaulish farming communities west of the Rhine to Germanic outposts north of the Danube. The first municipality to fail financially in England was probably Aire, which was forced to auction its commons (its purchase from the chancery courts sitting in contemplation of title allowed local noblemen to merge it with the surrounding pastures, creating an area we know today as Leeds).
Upon the invention of the corporation (here by corporation I mean the corpus corporate in the general sense, rather than a trading company limited by shares), arguably the most important invention in human history since the wheel and until the transistor, cities became increasingly organised as corporations. The idea of a city as a corporation continues to the present day, with municipal corporations being the common form of urban organisation in common law jurisdictions. Some private corporations (corporations limited by shares) control cities or city-sized areas, examples including the Jebel Ali zone in Dubai and the Harbour District in Hong Kong. The concept that cities could be completely corporatised (having shareholders rather than voters) is not far away.
But let's return to bankruptcy: Next on the chopping block is Detroit. What can be done when (not if, but when) Detroit slips into the largest bankruptcy in American history? Can its assets be privatised successfully? How would these municipal assets be valued in an auction environment? Who are the likely buyers?
Contrary to the oversimplified popular narrative, the city’s woes do not simply stem from the American auto industry’s struggles. The city of 700,000 where there are a dozen unemployed people for every person with a four-year university degree (2010) struggles for a variety of reasons, many of them inextricably intertwined with one another. People are understandably unwilling to buy homes in neighbourhoods where vacant houses are the norm. Investors are understandably wary to buy bonds issued by a city whose corruption is legendary and whose mayor was sent to prison last week. Teachers are understandably hard to attract in a city where academic achievement is interrupted by funding cuts, security concerns, and massive failures of the area’s transportation infrastructure. Workers are understandably reluctant to take jobs in Detroit when similar jobs with better pay, better housing, and better schools can be had in many other places with the same skills.
The story of Detroit is also a story of the failure of development, ingenuity, and turnaround management. The track record here is grim. There has never been a major English or American city that has slid into bankruptcy and recovered. Not one. So Detroit has both a chance to be the first and a likelihood of being yet another limping, mortally-wounded town – America’s Blackpool. But the approach to Detroit must recognise failures on a more global scale. The US and UK have not created great cities from dire circumstances. In fact, the US and UK aid programmes (which have a dubious record of spendthrift behaviour and fleeting accountability) have spent more than seven Marshall Plans worth of money in Africa with essentially zero results. What do I mean by zero results?
I mean not a single Fortune 100 company was started in Africa. I mean not a single major global bank originated in Africa. Amazon, Google, Microsoft… these companies did not start in Africa. The African landscape features not one leading research university, nor one leading research hospital. Despite more distinct wars than any other continent during the Twentieth Century, even African militaries remain poorly-disciplined, underequipped, and badly marshalled. That African nations slip into insolvency about as often as poorly-attended-but-overinsured churches mysteriously catch fire should not be terribly surprising.
Not a single billionaire has emerged from sub-Saharan Africa in the last ten years whose wealth did not originate at least in part from the exploitation of natural resources or, worse, the exploitation of fellow Africans – in fact, the entire continent of Africa has only thirteen billionaires, and more than half of them are in Egypt. By contrast, the Wan Chai neighbourhood of Hong Kong, which is smaller than London’s Regent’s Park, has between 35 and 39 billionaires (depending upon which lists you use and whether you look at the 2012 or 2013 wealth rankings).
If the West actually believes in building places like Africa, it should first learn to rebuild its Detroits, Pittsburghs, Blackpools, Coventrys, and so on. The concept that graft, corruption, and suboptimal industrial output are somehow unique to Africa is ignorant of the facts, convenient to the worst dictatorships, and out of step with what we’ve learned in the past fifty years. To propose that we can build from scratch what we cannot repair from ruin is a bold claim and hardly credible.
Bankruptcy is one construct – perhaps the bankruptcy in Detroit, an economy roughly the size of Malawi’s, can be instructive when it comes to development policy. But bankruptcy is a financial symptom and a legal salve, not a solution. Serious structural work on the dynamics of bankruptcy and excused debt hasn’t been done on the municipal or city-state level since the Long Parliament. It’s long overdue. The Age of Empire avoided these questions because financiers bore the risks of expansion, but today the losses and shortfalls involved are too great for private actors to bear.
State entities – whether countries, counties, or cities – fail in stages and sorts, not in wholesale collapses. We must push toward an understanding of what happens when states fail financially but not functionally. Bankruptcy provides a rough hierarchy for creditors, but does not provide a sufficient “get well” plan for debtors. Only if we gain a better understanding of what financial state failure looks like and how it can be remedied will we be able to repair the wounds without killing the patient.
