BUILDING ECONOMICS AND

SOCIOLOGY

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IX SEMESTER, B.ARCH

Table of Contents
SECTION A: BUILDING ECONOMICS
1. Introduction to economics
1.1 Broad features of economics...................................................5
1.2 Macro and micro economics...................................................10
1.3Money and banking functions..................................................13
1.4Factors of production...............................................................22

2. Land economics
2.1 Land economics: Land as limited resource.............................25
2.2 Land development and conservation.....................................27
2.3 Public policies on land utilization and development...............31
2.4 Theories of land values...........................................................34
2.5 Acts.........................................................................................37

3. Building economics
3.1 Architectural aspects of building economics...........................45
2.2 Rent control and other building acts......................................55
2.3 Economics of high rise buildings............................................60

SECTION B: SOCIOLOGY
4. Man and his environment
4.1 Man and his social environment..............................................63

5. Urbanisation
5.1 Trends and characteristics.......................................................74

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5.2 Dynamics of urban growth, expansion and development.......82

5.3 Urban attitude, values and behaviour....................................86

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5.4 Study......................................................................................90

SECTION A: BUILDING ECONOMICS

1. INTRODUCTION TO BUILDING ECONOMICS

1.1 Broad features of economics
1.2 Macro and micro economics
1.4 Money and banking functions
1.5 Factors of production

1.1 BROAD FEATURES OF ECONOMICS

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Economics is the study of how people and society choose to employ

scarce resources that could have alternative uses in order to produce
various commodities and to distribute them for consumption, now or in
the future, among various persons and groups in society. It is concerned

with the efficient utilisation or management of limited productive

resources for the purpose of maximising human satisfaction of needs; and
economics is a social science, which studies the principles controlling the
alternative applications of limited means in satisfying unlimited wants.
Lionel Robbins in a 1932: "the science which studies human behaviour as
a relationship between ends and scarce means which have alternative
uses."
The above definitions touch on several different themes of economics
including:
a) Scarcity;
b) Choice;
c) Opportunity cost;
d) Specialisation;
e) Exchange;
f) Equity or income distribution; and
g) Economic Systems.
a) Scarcity
Scarcity occurs when commodities used to satisfy people's material wants
are not available in adequate amounts. Scarce commodities are called
economic goods. Commodities that are not scarce are called free
goods. The problem of scarcity is commonly known as the Economic
Problem. It has two aspects: Society's material wants: the material wants
of its citizens and institutions are virtually unlimited or insatiable; and
economic resources: the means for producing goods and services are
limited or scarce. An important question is: "why are commodities
scarce?" They are scarce because the resources used to produce them are
also scarce. These economic resources are land, labour and capital, also
called the factors of production or inputs.
b) Choice
If all things are scarce in comparison to the desire for them, and if people
have a lot of unsatisfied wants, they cannot satisfy all of their wants.
People, therefore, have to make choices. In this case the economic
problem is how best to use resources available to satisfy human wants.
c) Opportunity Cost
Opportunity cost is a direct result of having to make a choice. In making a
choice, people have to sacrifice; this sacrifice is called opportunity cost or
the cost of something given up in terms of alternatives forgone when a
choice is made.

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d) Specialisation
Specialisation results from division of labour, a result of the problem of
scarcity. Its aim is to increase the productivity of labour to produce more
goods and services with a given level of capital. This will in turn increase
the ability of people t o satisfy their material wants.

e) Exchange
Exchange complements specialisation. Any commodities produced must
be bought and sold to help economic growth. There must be a ready
market for those commodities produced otherwise specialisation would be
of no benefit. The principle on which exchange is based is called the Law
of Comparative Advantage. It states that it is beneficial if one
specialises in the production of the commodity in which he/she is more
efficient. International trade is based on this very simple principle.
f) Equity or Income Distribution
Equity is the distribution of income in society and suggesting how poor,
disadvantaged people can be helped without harming the economy.
Evaluating income distribution is a fundamental element of modern
economics.

Traditional economies
Custom and habit forms the cornerstone of the system of solving
the economic problem. It is reinforced by superstition and religious
belief s and is common in some developing countries.

Market economies
There is predominantly private owner ship of economic resources. T
he allocation and distribution of economic resources is determined
by production, sales and purchase decisions taken mainly by firm s
and households through the market forces of demand and supply.

Command economies
This is a centre of all planned economy where most decisions about
the ownership, allocation and distribution of resources are taken by
the central authorities. Firms and households produce according to a
plan drawn up by government bureaucrats. Competitive markets
are not usually allowed to f unction.

Mixed economies
This is where t he economic system is a combination of some or all
of the other three systems. It may include some level of a market

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g) Economic Systems
Another way to combat the problem of scarcity is to organise production
and exchange into an economic system. An economic system has two
elements: the forces of production; and the relations of production. The
forces of production include tools, factories, equipment, production skills,
and the level of knowledge of the labour force, natural resources, and the
general level of technology. The relations of production are the social
relationships between humans, particularly the relationship of each class
of humans to the means of production. The basic types of economic
systems or organisations are usually described as:

economy with a strong central government. There might be shifts in

balance between these two forces.
Economic growth is defined as an increase in an economy's ability to
produce goods and services. Think of an economy as a giant cake. We all
have a slice of the cake to eat, and may be happy with the size of our slice
or not. If the economy grows, we would be able to see the overall size of
the cake increasing.
Whether or not our individual slice grows depends on whether we are able
to share in the growing economy. Even if we do not benefit directly, we
should still be able to see some advantages to the growing economy. This
is because the extra economic growth should produce higher tax
revenues, which can then be spent on public services that should benefit
everyone.
An increase in an economy's ability to produce goods and services,
therefore increasing economic output, is possible under two conditions:
1.

More resources are used in the economy.

2.

Existing resources are used more efficiently.

The first resource is land. Even if you are producing a service, you will
need somewhere to organise your work and do the necessary
administration, such as invoicing your customers and so on.
Manufacturers of a product have an even more pressing need for land, as
they will require a production site or factory location with storage for
supplies and parts. This means using the land resources of an economy.
The next resource labour, it's no good going to all the trouble of
acquiring the location where we'll make the extra goods and services if we
have no labour to carry out the work.
Economic growth is measured in changes in what is called 'gross domestic
product' (GDP). This is a measure of everything that has been produced in
an economy.
Barriers to economic growth
We have seen earlier that the ability to grow an economy depends on
using more resources (land and labour, for example), or on more efficient
use of these resources.

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The correct term for the resources used is: factors of production. There are
four factors of production: land, labour, capital and enterprise. Economic
growth depends on the quality and availability of these factors. If any of
the factors of production suffers from a lack of quality or availability, then
economic growth will not be as great as its potential. So what can cause
these factors of production to be of low quality or unavailable?

Insufficient or contaminated land

Substandard labour supply

Poor technical infrastructure, such as roads and communications

Poor social infrastructure, such as schools or hospitals

Poor industrial infrastructure, such as factories and machinery

Other barriers exist that can hamper countries' ability to grow their
economies. They may be unable to gain access to export markets, due to
the trade policies of other countries. In order to protect their own
domestic producers, many countries block the imports of goods or
services from other parts of the world.
The World Trade Organisation (WTO) is a place where member
governments go to sort out the trade problems they have with each other.
Less developed economies
Less

developed economies tend to be in the early stages of

industrialisation. In fact many less developed economies have little
or no industrial base. People in countries with less developed
economies usually have a low standard of living. Seen more broadly
than just in economic terms, people in these countries also tend to
be ranked in a medium to low position in the Human Development
Index, produced by the UNDP.

Less developed economies are often structured in such a way that

agriculture forms a large part of their overall economy. Small scale or
subsistence farming tends to produce low incomes for the people who
work in these countries. This leads to low effective demand for goods and
services other than those that are central to life.
These economies are often characterised by having low levels of private
investment. This tends to be because people are unable to save much of
their already low incomes. High fertility rates are often seen in less
developed economies. Children often form part of a family's wealth, as
their labour is often seen as essential to the family's survival.

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Insufficient factors of production usually plague less developed

economies. They can lack the ability to improve the social and technical
infrastructure needed to boost their economies and can become stuck in a
cycle of poverty.

The costs of economic growth

One of the main concerns about expanding rates of economic growth
focuses on the effects of congestion, pollution and carbon emissions on
the environment. Economic growth in China and India raises fears that the
resulting environmental damage could have serious impacts on us all.
Other observers say that it is hypocritical for those in the developed world
to preach to those trying to develop their economies.
Another cost of economic growth is the loss of ancient ways of life and
cultures. As countries industrialise, natural resources can be lost as more
land is sought. The loss of huge areas of the Brazilian rainforest to cattleranching is an example of this effect.
Some opponents to the trend towards greater globalisation in industry and
economic development highlight criticisms of economic development that
they see as generating large costs:

The 'one size fits all' view of economic development prevents subtle
differences in the routes chosen to development.

The search for faster economic growth may prevent countries

concentrating on social goals such as care for the elderly or children.

The acceptance of materialism as a general goal in life.

The homogenised global culture that some observers say has arisen.

Reference

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http://www.bized.co.uk/learn/economics/notes/features.htm

1.2 MACRO AND MICRO ECONOMICS:

Macro is derived from the Greek word makros which means large.
Macro economics may be defined as that branch of economic analysis
which studies the behaviour of not one particular unit, but of all the units
combined together. Macro economics is a study of aggregates. It is the
study of the economic system as a whole total production, total
consumption, total savings and total investment. The following are the
fields covered by macro economics:
Theory of Income, Output and Employment with its two
constituents, namely, the theory of consumption function, the
theory of investment function and the theory of business cycles or
economic fluctuations.
Theory of Prices with its constituents of the theories of inflation,
deflation and reflation.
Theory of Economic Growth dealing with the long-run growth of
income, output and employment.
Macro Theory of Distribution dealing with the relative shares of
wages and profits in the total national income.

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The study of macro economics is indispensable as it is the main agent for

formulation and successful execution of government economic policies. It
is also indispensable for the formulation of micro economic models. Macro
economics is based on the belief that economics are subject to laws of
nations, which are interdependent of the internal structure of their
constituents. Since macro economics studies the trends in the business
activities it has strong and direct orientation to public policy both at the
level of debate of great issues of fiscal policy and at the more technical
levels of operation of government agencies, which are shouldering the
responsibility of creating climate for economic stabilization. [1]

Application:
To understand why the overall flow of output and income fluctuates; what
factors lead to the growth in the productive capacity and what are social
and economic cost of economys growth, it is necessary to study the field
of aggregate economics i.e., total output income. Another name for the
aggregate economics is macro economics. The main topics covered under
this branch is study of national income analysis, the statistical
measurement of such aggregate flows as the gross national product
national income, consumption and investment and establishing
systematic relationships, which can explain the change in the aggregates
over time. Thus macro economics concerns the determinants of the
performance of entire economics of nations, groups of nations and the
whole world. [2]

Micro economics may be defined as that branch of economic analysis,

which studies the economic behaviour of the individual unit, maybe a
person, a particular household, or a particular firm, how they function and
how they reach their equilibrium. The branch of economics studies how
households and firms make decisions to allocate limited resources,
typically in markets where goods or services are being bought and sold.
Micro economics examines how these decisions and behaviours affect the
supply and demand for goods and services, which determines prices; and
how prices, in turn, determine the supply and demand of goods and
services. The following are the fields covered by microeconomics:

Theory
theory
costs.
Theory
Theory

of Product pricing with its two constituents, namely, the

of consumer behaviour and the theory of production and
of Factor pricing.
of Economic Welfare.

While the economic study is concerned with the working of only one part
of the economy at a time and effects of a change in some variable on
other are analyzed on the assumption that rest of the economy during
that period is at a standstill; other things remaining the same, it forms a
part of the problems in micro economics.

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The concept may be made clear at the very outset that a separate study
of Macro economics and Micro economics is absolutely necessary because
there may be inherent contradictions between the laws of micro
economics and macro economics. What might be right policy of an

individual, a firm or an industry may not be right for the economic system
as a whole. In fact, the mere aggregation of the laws of behaviour of the
individuals, or firms will not hold good for the study of macro economics
because there are disharmonies between the behaviour of individual units
and the behaviour of economic system as a whole.
Since all modern economies are money economies (i.e., income, wages,
interests, rents, dividends and taxes, etc., are in terms of money), the
economic system can be considered as a system of money flows. The
money flows have their counterpart in real flows of goods and services.
Therefore the working of the economic system can be studied by following
the route through which the money flows or real flow money. [3]
Application:
Price theory is the main tool of microeconomics because the properties of
market supply and demand functions are generally built up from
assumptions about the actions of households or firms. The overall
magnitude of output also affects the composition of output because it may
be seen that during depression when the output falls, the output of
durable goods declines more than non durable goods and more than
services. Profits fall more than wages and the wages fall more than the
interest. Thus economic theory is generally considered to be micro
economic when it is based on assumption about behaviour of the
consumers and the producers or householders and firms the ultimate
decision makers. Analysis of consumption, investment and labour supply
behaviour of a household firm is an example of micro economics. [4]

Reference

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AN INTRODUCTION TO SOCIAL SCIENCE

1. Page no. 333
2. Page no. 331
3. Page no. 329, 330
4. Page no. 332

1.3 MONEY AND BANKING FUNCTIONS:

What is Money??
Money is anything that is generally accepted as payment for goods and
services and repayment of debts. Money is an abstraction, idea or
concept, token instances of which are the physical bills or coins which are
carried and traded.
Money originated as commodity money, but nearly all contemporary
money systems at the national level are fiat money systems. Fiat money is
without value as a physical commodity, and derives its value by being
declared by a government to be legal tender; that is, it must be accepted
as a form of payment within the national boundaries of the country, for
"all debts, public and private". By law, the refusal of a legal tender
(offering) extinguishes the debt in the same way acceptance does.

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The money supply of a country is usually held to consist of currency

(banknotes and coins) and demand deposits or 'bank money' (the balance
held in checking accounts and savings accounts). These demand deposits
usually account for a much larger part of the money supply than currency.
Bank money is intangible and exists only in the form of various bank
records. Despite being intangible, bank money still performs the basic
functions of money, as checks are generally accepted as a form of

payment and as a means of transferring ownership of deposit money.

More generally, the term "price system" is sometimes used to refer to
methods using commodity valuation or money accounting systems. [1]
Functions of money:
1. Money as a Medium of Exchange:
The function of money as a medium of exchange solves all the
difficulties of barter system. There is no necessity for a double
coincidence of wants in the money economy. The man with cow who
wants to purchase cloth need not seek a cloth seller who wants a
cow. He can sell his cow in the market for money and then purchase
cloth with the money obtained.
2. Money as Measure of Value :
In money economy values of all commodities are expressed in terms
of money. Money is like the yard stick of cloth merchant, as yardstick measures all varieties of cloth, money measures the value of
all varieties goods. This function of money makes transactions easy
and also fair.
3. Standard of Deferred Payment :
In a money economy the contracts are made for future payments
terms of money instead of goods and promise to repay the loan in
money. In this way money is the standard of deferred payments.
This function stimulates all kinds of economic activities which
depend on borrowed money.
4. Money as a Store of Value :
Goods cannot be stored because they are perishable. People receive
their incomes in money form and keep their savings in money form
in banks. In this way, money is used to store value of commodities.
5. The essential or primary functions of money are:
a) To serve as medium of exchange.
b) To serve as a measure of value.
The latter two functions are of secondary importance because they;
derived functions. In modern economy, money plays a very important
role. Its disappearance would cause disappearance of the economy itself.
[2]

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Characteristics of money:

The characteristics of what serves as money depend somewhat on the

degree of complexity in the society. A relatively simple economy, with
relatively few goods and services, few producers and consumers, and few
transactions, may be able to function with a form of money that would not
work in a more complex society.
There are some general characteristics that are usually important for
whatever serves as money in a modern economy.
i.

ii.

iii.

First, to serve as an effective medium of exchange, money must be

durable. Repeating our earlier example, we could have chosen to
use apples as money and pay for everything in apples. But problems
arise when the apples rot. Who wants to carry around rotten apples?
Good apples tend to be eaten, and nothing could erode the value of
your money more quickly than having it end up in your stomach.
Second, what serves as money must not be easily reproduced by
people and should be relatively scarce. We could use chestnuts as
money. Theyre relatively scarce and last a long time. But, if we did,
people would start growing chestnut trees, and we wouldnt be able
to control the supply. Soon there would be so many chestnuts in use,
and prices would be bid up so high, that youd need a truck to carry
the chestnuts to pay for bread and milk.
Third, although what serves as money must be relatively scarce (not
rocks, for example), it cant be too scarce. Whatever serves as
money has to be available in sufficient quantity to enable all the
exchanges in our economy to take place. We could use whooping
cranes. But there wouldnt be enough of them to enable all the
exchanges that have to take place. We would very quickly run out of
moneyto say nothing of the poor birds.

iv.

Fourth, money has to be easy to transport. We could use elephants.

But just think of all the problems at pay-day if elephant money was
used to provide your wage or salary. Pocket money would take on a
whole, or should we say whole, new meaning.

v.

And last, money must be divisible into usable quantities or fractions.

Imagine the difficulties you would incur to purchase something that
had a price of 1/50th of an elephant. Not a pleasant thought.

So money needs to be (1) durable, (2) not easily reproduced by people,

(3) relatively scarce, (4) not too scarce, (5) easily transported, and (6)
divisible. But, as we emphasized earlier, the most essential attribute of
anything that serves as money is its acceptability. It must be readily
accepted by people in the economy. [3]
Money Supply:

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In economics, money is a broad term that refers to any financial

instrument that can fulfil the functions of money (detailed above). These

financial instruments together are collectively referred to as the money

supply of an economy. Since the money supply consists of various
financial instruments (usually currency, demand deposits and various
other types of deposits), the amount of money in an economy is measured
by adding together these financial instruments creating a monetary
aggregate. Modern monetary theory distinguishes among different types
of monetary aggregates, using a categorization system that focuses on
the liquidity of the financial instrument used as money. [1]
Market liquidity:
Market liquidity describes how easily an item can be traded for another
item, or into the common currency within an economy. Money is the most
liquid asset because it is universally recognized and accepted as the
common currency. In this way, money gives consumers the freedom to
trade goods and services easily without having to barter.
Liquid financial instruments are easily tradable and have low transaction
costs. There should be no (or minimal) spread between the prices to buy
and sell the instrument being used as money. [1]
Measures of money:
The money supply is the amount of financial instruments within a specific
economy available for purchasing goods or services. The money supply is
usually measured as three escalating categories M1, M2 and M3. The
categories grow in size with M1 being currency (coins and bills) and
checking account deposits. M2 is currency, checking account deposits and
savings account deposits, and M3 is M2 plus time deposits. M1 includes
only the most liquid financial instruments, and M3 relatively illiquid
instruments.
Another measure of money, M0, is also used, although unlike the other
measures, it does not represent actual purchasing power by firms and
households in the economy. M0 is base money, or the amount of money
actually issued by the central bank of a country. It is measured as
currency plus deposits of banks and other institutions at the central bank.
M0 is also the only money that can satisfy the reserve requirements of
commercial banks. [1]

Types of money:

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Currently, most modern monetary systems are based on fiat money.

However, for most of history, almost all money was commodity money,
such as gold and silver coins. As economies developed, commodity money
was eventually replaced by representative money, such as the gold
standard, as traders found the physical transportation of gold and silver

burdensome. Fiat currencies gradually took over in the last hundred years,
especially since the breakup of the Bretton Woods system in the early
1970s.
1. Commodity money

Many items have been used as commodity money such as naturally

scarce precious metals, conch shells, barley, beads etc., as well as
many other things that are thought of as having value. Commodity
money value comes from the commodity out of which it is made.
The commodity itself constitutes the money, and the money is the
commodity. Examples of commodities that have been used as
mediums of exchange include gold, silver, copper, rice, salt,
peppercorns, large stones, decorated belts, shells, alcohol,
cigarettes, cannabis, candy, etc.
2. Fiat money

Fiat money or fiat currency is money whose value is not derived

from any intrinsic value or guarantee that it can be converted into a
valuable commodity (such as gold). Instead, it has value only by
government order (fiat). Usually, the government declares the fiat
currency (typically notes and coins from a central bank) legal
tender, making it unlawful to not accept the fiat currency as a
means of repayment for all debts, public and private.
3. Credit money
Credit money is any claim against a physical or legal person that
can be used for the purchase of goods and services. Credit money
differs from commodity and fiat money in two ways: It is not payable
on demand (although in the case of fiat money, "demand payment"
is a purely symbolic act since all that can be demanded is other
types of fiat currency) and there is some element of risk that the
real value upon fulfilment of the claim will not be equal to real value
expected at the time of purchase.
4. Representative money
In 1875 economist William Stanley Jevons described what he called
"representative money," i.e., money that consists of token coins, or
other physical tokens such as certificates, that can be reliably
exchanged for a fixed quantity of a commodity such as gold or
silver. The value of representative money stands in direct and fixed
relation to the commodity that backs it, while not itself being
composed of that commodity. [1]

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Banks:

A bank is a financial institution licensed by a government. Its primary

activities include borrowing and lending money. Many other financial
activities were allowed over time. For example banks are important
players in financial markets and offer financial services such as
investment funds. In some countries such as Germany, banks have
historically owned major stakes in industrial corporations while in other
countries such as the United States banks are prohibited from owning nonfinancial companies. In Japan, banks are usually the nexus of a cross-share
holding entity known as the zaibatsu. In France, banc assurance is
prevalent, as most banks offer insurance services (and now real estate
services) to their clients. [4]
Functions of a bank:
Banks play an important role in the financial system and the economy. As
a key component of the financial system, banks allocate funds from savers
to borrowers in an efficient manner. They provide specialized financial
services, which reduce the cost of obtaining information about both
savings and borrowing opportunities. These financial services help to
make the overall economy more efficient. Its economic functions can be
described as:
1. Issue of money, in the form of bank note and current accounts
subject to cheque or payment at the customer's order. These claims
on banks can act as money because they are negotiable and/or
repayable on demand, and hence valued at par. They are effectively
transferable by mere delivery, in the case of banknotes, or by
drawing a cheque that the payee may bank or cash.
2. Netting and settlement of payments banks act as both collection
and paying agents for customers, participating in interbank clearing
and settlement systems to collect, present, be presented with, and
pay payment instruments. This enables banks to economize on
reserves held for settlement of payments, since inward and outward
payments offset each other. It also enables the offsetting of
payment flows between geographical areas, reducing the cost of
settlement between them.
3. Credit intermediation banks borrow and lend back-to-back on their
own account as middle men

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4. Credit quality improvement banks lend money to ordinary

commercial and personal borrowers (ordinary credit quality), but are
high quality borrowers. The improvement comes from diversification
of the bank's assets and capital which provides a buffer to absorb
losses without defaulting on its obligations. However, banknotes and
deposits are generally unsecured; if the bank gets into difficulty and
pledges assets as security, to raise the funding it needs to continue
to operate, this puts the note holders and depositors in an
economically subordinated position.

5. Maturity transformation banks borrow more on demand debt and

short term debt, but provide more long term loans. In other words,
they borrow short and lend long. With a stronger credit quality than
most other borrowers, banks can do this by aggregating issues (e.g.
accepting deposits and issuing banknotes) and redemptions (e.g.
withdrawals and redemptions of banknotes), maintaining reserves of
cash, investing in marketable securities that can be readily
converted to cash if needed, and raising replacement funding as
needed from various sources (e.g. wholesale cash markets and
securities markets). [5]
How banks work:
Banks operate by borrowing funds-usually by accepting deposits or by
borrowing in the money markets. Banks borrow from individuals,
businesses, financial institutions, and governments with surplus funds
(savings). They then use those deposits and borrowed funds (liabilities of
the bank) to make loans or to purchase securities (assets of the bank).
Banks make these loans to businesses, other financial institutions,
individuals, and governments (that need the funds for investments or
other purposes). Interest rates provide the price signals for borrowers,
lenders, and banks.
Through the process of taking deposits, making loans, and responding to
interest rate signals, the banking system helps channel funds from savers
to borrowers in an efficient manner. Savers range from an individual with a
$1,000 certificate of deposit to a corporation with millions of dollars in
temporary savings. Banks also service a wide array of borrowers, from an
individual who takes a loan of $100 on a credit card to a major corporation
financing a billion-dollar corporate merger. [5]
Types of banks:
Banking institutions may be roughly classified as follows:
I. Private Banks.
II. Public or chartered banks.
1. Savings banks.
2. Trust companies.
3. Commercial banks.
[(a) State banks, (b) National banks]

[6]

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1. Private Banks

Private banking is, perhaps, the oldest form of banking, and some of the
most powerful banking concerns in the world to-day are private
institutions. They are distinguished from public or incorporated banks in
that they are conducted as individual or partnership enterprises, and that,
until recently they have not been subject generally to the supervision of
the state. The tendency in recent years has been toward public regulation
of private as well as incorporated banks. In several states, private banks
are now forbidden to use a corporate name, or to use the name "bank' or
any similar title. Some states require private bankers to have a minimum
capital, and in a few Eastern states certain classes of private bankers are
required to post a bond. In a few states the banking business is absolutely
denied to unincorporated concerns.
Private Banks perform two principal functions:
(1) As an adjunct to the brokerage business in large cities.
(2) As a means of supplying banking accommodations in small
communities where a state or national bank would not be profitable.
In larger cities their main business is dealing in securities, foreign
exchange and foreign loans. Some of the larger banking houses have been
prominent in recent years in promoting large industrial combinations and
consolidations, and in underwriting stock and bond issues. Generally
speaking, they do not make a practice of discounting commercial paper,
making business loans, and accepting checking deposits as commercial
banks do. In the smaller communities, having only meagre banking
facilities, they do perform this service.
Public or chartered banks are created by the state or Federal Government,
which usually exercises some supervision over them. Savings banks, trust
companies, and state commercial banks are chartered, that is, licensed to
do business, by the several states; national banks are chartered by the
Federal Government, under the terms of the national banking act and its
amendments, and the Federal reserve banks are also chartered by the
Government. In the early days of banking, each bank was created by a
special charter granted by the legislature; now, nearly all the states have
a general incorporation or banking law by complying with the terms of
which a group of men proposing" to establish a bank may set a charter. [7]
2. Savings Banks

2
5

Savings banks are of two general kinds: mutual and stock. The mutual
savings bank has no capital and consequently no stockholders. It is
organized for the exclusive benefit of the depositors. Apart from the
expenses of running the bank, the depositors get all the profit arising from
the investment of their deposits. In the stock savings bank, which has a
capital and stockholders, the profits of the business, over and above the

customary interest to depositors, go to the stockholders as in other types

of banks.
The basic purpose of the savings bank is to encourage thrift and saving. It
provides at once a safe place for the working classes to keep their
savings, and an expert, reliable agency for their investment in the safest
way. The deposits are invested largely in mortgages, bonds, and other
high-grade securities. From the return on these loans or investments,
interest is paid the depositors or credited to their accounts at periodic
intervals, generally twice a year. Most savings banks require depositors to
give notice, varying from two weeks to three months, of intended
withdrawals, except where the amount is small. Primarily the savings bank
serves the wage-earner, not the business man. [8]
3. Trust Companies
The trust company is a comparatively new type of banking institution and
its functions are not yet clearly defined. The earliest trust companies were
organized to carry on life, fidelity and title insurance and the granting of
annuities, but their primary function has been to act as incorporated
trustees, accepting and executing trusts of various kinds. In this capacity
they serve as executors and administrators of estates, as custodians of
funds or properties held in trust, and as guardians of minors. Prior to the
Civil War the trust company attracted very little attention, but since that
time, particularly since about 1875, the increase in the number and the
variety of functions performed by trust companies has been marked. In
connection with their duties as trustees these companies have secured
from the legislatures additional powers authorizing them to carry on other
more or less closely related lines of business, until now they undertake
such a great variety of functions that they have been aptly called the
"department stores of finance."[1]
While it is not possible to draw a sharp line of division between the
function of the trust company and that of the commercial bank, it may be
said that the commercial bank deals in credit and handles active funds,
thus aiding in the creation of wealth, while the trust company deals in
capital and handles funds that are principally inactive, thus conserving
existing wealth. More and more, however, trust companies have assumed
the functions of the commercial bank as well as those of the savings bank
and have engaged in a great variety of financial activities. Many trust
companies, including some of the most influential, have adhered to their
original and essential function of acting as trustees; others make banking
their main business; and still others specialize on the financial side. The
general tendency in recent years seems to have been toward an
expansion of their activities so as to include many or all of these
functions.

2
5

In many trust companies the different kinds of work or activities are

carried on by departments, as, for example, the trust, banking, bond and

safe deposit departments. Some of these departments may be

subdivided; thus, the banking department may be divided into savings
bank and commercial departments; and the larger companies may have
various other departments and divisions, such as mortgage, investment,
transfer, real estate, title insurance and fidelity insurance. Generally
where trust companies carry on trust and a banking business, the two
departments are kept separate, each having its own records, clerks and
handling of funds. [9]
4. Commercial Banks
Commercial banks are classified according to the source of their charters,
into state and national banks. National banks are organized under the
national bank law of 1863 and its amendments. State banks are chartered
by and subject to the supervision of the various states. In some states,
private banks are not differentiated from state banks owing to the fact
that the same regulations and laws apply to both incorporated and
unincorporated banks. So, too, the distinction between state banks and
stock savings banks, and, again, between state banks and trust
companies is not at all marked or uniform under the varying laws of the
different states. In this book, we shall use the term "state bank" in the
sense of a bank of discount and deposit incorporated under state law.
Commercial banks organized under state laws perform their functions in
essentially the same way as national banks. Indeed, there is little to
distinguish them in everyday business, except that national banks bear
the title "national,"1 and that state banks do not issue circulating notes.
Several factors enter into the determination of the relative advantage of
incorporating under state law or the national system. In general, the state
banking laws permit the organization of banks with smaller capital than
under the national system. No national bank may be organized with less
capital than $25,000; while in several states, banks may be started with
as little as $10,000, and, in one state, $5,000. This makes it possible for
small towns to secure the advantage of a bank under state law, which
otherwise might have to do without. Until recently national banks were
forbidden to loan on real estate, while state banks in most of the state's
are permitted to make such loans. Generally, the reserve required of state
banks is lower than under the national system. National banks alone can
profitably issue notes; the issues of state banks are subject to a tax of ten
per cent, which amounts to a prohibition.
There are a few special exceptions to this rule.

2
5

There is little or no justification for the popular opinion that national banks
are safer and sounder than state banks. Most of the states now have
excellent banking laws, which in many instances are modelled upon the
national banking law. The percentage of failures among state banks is only
a trifle higher than among national banks. The soundness of a bank
depends, not upon the authority which issues its charter, but upon the
ability and honesty of its management and supervision. [10]

References:
1. http://en.wikipedia.org/wiki/Money
2. http://www.informationbible.com/FunctionsOfMoney.html
3. http://www.moneyandyouth.cfee.org/en/resources/pdf/moneyfunct.p
df
4. file:///D:/acedamics/ix%20sem/b.e.s/money%20and%20banking
%20concepts/Bank.htm
5. file:///D:/acedamics/ix%20sem/b.e.s/money%20and%20banking
%20concepts/FUNCTION%20OF%20BANK.htm
6. http://chestofbooks.com/finance/banking/Money-And-BankingHoldsworth/Chapter-X-Functions-Of-The-Bank-75-Classification-OfBank.html
7. http://chestofbooks.com/finance/banking/Money-And-BankingHoldsworth/76 Private-Banks.html
8. http://chestofbooks.com/finance/banking/Money-And-BankingHoldsworth/77-Savings-Banks.html
9. http://chestofbooks.com/finance/banking/Money-And-BankingHoldsworth/Chapter-XIX-Trust-Companies-152-Functions.html
10.
http://chestofbooks.com/finance/banking/Money-And-BankingHoldsworth/79-Commercial-Banks.html

1.4 FACTORS OF PRODUCTION:

In economics, factors of production are the resources employed to
produce goods and services. They facilitate production but do not become
part of the product or are significantly transformed by the production
process. The factors are generally divided into four major groups:

Land
Labor
Capital
Enterprise

2
5

Land includes natural resources, such as air, soil, water, minerals,

climate, natural grasslands and woodlands. Labor uses capital on land to
produce wealth. Every tangible good is made up of the raw materials that
come from nature -- and because all people (and other living things) have
material needs for survival, everyone must have access to some land in
order to live. Land is the passive factor in production. To the economist,

therefore, the meaning of `land' is broader than its usual meaning. The
payment for land use and the received income of a land owner is rent.
Below are some of the characteristics of land:
a)
b)
c)
d)
e)

Limited in supply;
No costs of production;
Varies in quality;
Has a wide range of alternative uses;
More productive land is in greater demand.

Labour includes all human resources physical and mental, available for
the production of goods and services. It may be unskilled, semi-skilled, or
skilled, and local labour markets vary in the size and nature of the pool of
labour. The payment for someone else's labor and all income received
from ones own labor is wages.
The supply of labour is the number of hours which people are willing to
work for a given wage-rate over a period - say a year. The supply of labour
will, therefore, depend on the number of workers found multiplied by the
average number of hours worked by each worker. Ability and willingness
to work do not, in themselves, guarantee employment. Job creation
depends on the expansion of the economy. The supply of labour must also
consider the quality of labour and how efficiently the workers do the tasks
given to them. The efficiency of labour depends on education and
knowledge of the work force, motivation, working conditions and social
welfare.
Capital is a man-made resource. The term capital in economics is all
man-made aids to further production. Examples of capital are buildings,
machines and other equipment, which are used in making the goods we
consume. Capital may be considered under various categories: fixed
capital; working or circulating capital; financial capital; social capital;
individual capital; and natural capital including renewable and nonrenewable natural resources.
a) Fixed capital includes machinery, factories, equipment, new
technology, buildings, computers, and other goods that are
designed to increase the productive potential of the economy for
future years.
b) Working capital includes the stocks of finished and semi-finished
goods that will be economically consumed in the near future or will
be made into a finished consumer good in the near future. These are
often called inventories. The phrase "working capital" has also been
used to refer to liquid assets (money) needed for immediate
expenses linked to the production process (to pay salaries, invoices,
taxes, interests...)

2
5

c) Financial capital is simply the amount of money the initiator of the

business has invested in it. "Financial capital" often refers to his or
her net worth tied up in the business (assets minus liabilities).

d) Social capital is the value of network trusting relationships

between individuals in an economy.
e) Individual capital which is inherent in persons, protected by
societies, and trades labor for trust or money. Close parallel
concepts are "talent", "ingenuity", "leadership", "trained bodies", or
"innate skills" that cannot reliably be reproduced by using any
combination of any of the others above.
f) Natural capital which is inherent in ecologies and protected by
communities to support life, e.g. a river which provides farms with
water.
g) Infrastructural capital is non-natural support systems (e.g.
clothing, shelter, roads and personal computers) that minimize need
for new social trust, instruction, and natural resources.

2
5

Enterprise/Entrepreneurship is the risk taking activity that utilizes

land, labour and capital to produce goods or services in the expectation of
a future reward. That reward is called profit in economics. Often these
entrepreneurs are seen as innovators, developing new ways to produce
and new products. In a planned economy, central planners decide how
land, labor, and capital should be used to provide for maximum benefit for
all citizens.

SECTION A: BUILDING ECONOMICS

2. LAND ECONOMICS
2.1

Land economics: Land as limited resource

2.2 Land development and conservation

2.3 Public policies on land utilization and development
2.4 Theories of land values
2.5 Acts

2.1 LAND ECONOMICS: LAND AS LIMITED RESOURCE:

2
5

Land is a natural resource which yields some income and has some
exchange value .Land economics is a branch of the economics which
focuses on the use of land and the role of land in economics. It often
intersects with environmental economics, since land use policies have an
impact on the health of the environment, and many land economics trade
journals focus on the environmental ramifications of land-use around the

world. Specialists in this branch of economics work in a number of places,

from university campuses to public utilities.
Characteristics of Land:
1.
2.
3.
4.
5.
6.

It is natures free gift.

It is fixed in quantity.
It doesnt have any supply value.
It is permanent.
Land lacks mobility in geographical sense.
Land provides infinite variation of degree, fertility and situation so
that no two pieces of land are exactly alike.

The pressure of growing population in developing countries has laid a

heavy burden on the physical resources of the countries. The scarcity of
land and infrastructure facilities has come in the way of housing
development, especially in the urban areas.
High Cost of Urban Land:

The cost of land and its development to provide essential housing

services and other infrastructure facilities has steeply risen and now
accounts for substantial cost of housing construction.
It has become therefore to devise ways and means of effecting
saving in the use of land cost of its development.
At the same time, the quantity of housing and human settlement
that emerges should not be adversely affected. It is therefore,
incumbent on planners to achieve economic physical planning by
application of the latest advances in sciences and technology.
Local planning regulations and building by-laws have a significant
impact on land use planning and cost of land development for
housing.

New developments:
Some basic principles of physical planning to ensure land use economy as
well as economy in cost of development of land which need to be further
researched and studied for practical adoption are:
ECONOMICAL SPACE NORMS:

2
5

Until the economic conditions of the masses improve , minimum space

norms would have to be realistically laid down for built up
accommodations , open spaces and residential densities, so that these are
actually adopted and also progressively improved without adversely
affecting the environmental conditions.

1.
2.
3.
4.

HEALTHFUL HOUSING
COMMUNICATION FACILITIES
ADVANCES IN CONSTRUCTION TECHNOLOGY
COMMUNITY PARTICIPATION

Land itself is a resource like labor or capital, especially when the land
harbors deposits of natural resources like minerals, oil, or timber. It is also
a fixed resource: the amount of available land on Earth is finite, although
land speculation may create situations in which the supply of land cannot
meet the demand. The way in which land is used can have a profound
impact on a local or national economy, whether that use is urban or rural.
Public and private uses of land and their sometimes conflicting needs are
also of interest in land economics.
One of the fields of focus in land economics is the allocation of land. As a
fixed resource, land's value is dictated by its availability, and the
allocation of land resources can play a critical role in how land is treated.
In packed cities, for example, land can be scarce and difficult to obtain,
and it has a correspondingly high price. In rural regions, however, land
may be very inexpensive due to decreased demand. Or, demand for land
which can be used as housing may inflate the prices of farmland, making
it difficult for farmers to buy or retain land for farming use.
Researchers in this field may look at issues like government acquisition of
land to satisfy right of way requirements for roadways and utilities, and
land use policies which force land to remain unoccupied and unused for
large stretches of time. They also look at how land can be made more
profitable, and how land values shift over time in response to a variety of
factors including market pressures and the discovery of natural resources.
The study of land economics is often closely wrapped up in politics,
especially politics on a local scale. Powerful planning commissions and
lobbies may be able to push the nature of land use in their communities,
shaping land use policies and the economics of locally available land in
ways which sometimes surprise economists. Regional and national
governments also play a role in land economics, by establishing policies
which are designed to balance the needs of individuals against the needs
of the government and the population as a whole.

2.2 LAND DEVELOPMENT AND CONSERVATION:

2
5

Land economics is a branch of economics field which focuses on the use

of land and the role of land in economics.

Land itself is a resource like labour or capital, especially when the land
harbours deposits of natural resources. It is also a fixed resource: the
amount of available land on earth is finite, although land speculation may
create situations in which the supply of land cannot meet the demand.
The way in which the land is used can have a profound impact on a local
or national economy, whether that use is urban or rural. Public and private
uses of land and their sometimes conflicting needs are also of interest in
land economics.
One of the fields of focus in land economics is the allocation of land. As a
fixed resource, land values is dictated by its availability, and the
allocation of land resources can play a critical role in how land is treated.
In packed cities, for example, land can be scarce and difficult to obtain,
and it has a correspondingly high price. In rural regions, however, land
may be very inexpensive due to decreased demand. Or, demand for land
which can be used as housing may inflate the prices of farmland, making
it difficult for farmers to buy or retain land for farming use.
Researchers in this field may look at the issues like government
acquisition of land to satisfy right of way requirements for roadways and
utilities, and land use policies which force land to remain unoccupied and
unused for large stretches of time. They also look at how land can be
made more profitable, and land values shift over time in response to a
variety of factors including market pressures and the discovery of natural
resources. [1]
Land development:
Land development refers to altering the landscape in any number of ways
such as:

Changing landforms from a natural or semi-natural state for a

purpose such as agriculture or housing.
Subdividing real estate into lots, typically for the purpose of
building homes.
Developing property or changing its purpose, for example by
converting an unused factory complex into condominiums.

2
5

The conversion of land from one use to another is the generally accepted
definition of land development. [2] This age old process began with ancient
societies organised themselves into tribes, on and claiming land, forming
villages and primitive towns, for the mutual protection and livelihood for
all. The great civilisation of Egypt, Greece and Rome can be traced to

humble beginnings of tribal communities. Their growth in size and

complexity is typical of urban development and unlike what we are
experiencing today. With their complex roadways, aqueducts, commercial
markets and residential areas the ancient problems associated with land
development endeavours- those of adequate transportation, waste
disposal, drainage, water supply, population densities and others posed a
challenge then and continue to require innovative solutions today.
Today the process for finding solutions and developing scenarios for land
use that serve the greater good is systematic one, and is to a large
degree, uniform in principle and practise. The systematic approach to the
land use planning, analysis and engineering is known as land
development design.
Since the early 1950s, the conversion of land to a different use generally
meant a more intense use. The definition formally applied almost
exclusively to residential, commercial, retail, industrial and office uses. It
did not take long however, before city planners and residents alike echoed
to have areas preserved for recreational, educational, social and cultural
activities. In response to this social need the definition of land
development was broadened to include such as converting rural land to
agricultural use constructing major transportation and utility systems, and
even urban and suburban redevelopment projects. Thus, land
development is the conversion of land from one use to another, usually of
great intensity, and is typically applied to a single parcel or group of
parcels and includes supporting uses and infrastructure improvements.
Land development design and consulting constitute the systematic
process of collecting data, studying and understanding the data,
extrapolating the data, and creating on paper the plans for reshaping the
land to yield a land development project that is politically, economically
and environmentally acceptable to the client and the public. Persuasion,
salesmanship and negotiation are all part of each step in the land
development design process. [3]
The steps involved in land development are:
Step1
Feasibility/programming initiates the process with a general review of
proposed program and existing site conditions, with particular emphasis
on identification of environmental, cultural and infrastructure resources.

2
5

Step2

Site analysis determines the allowable use of the site based on local
master plans, codes and ordinances and recommends a course of action
to accomplish the development program with respect to those documents.
Feasibility review and site analysis are usually performed concurrently,
these studies result in a complete site inventory, identify usable site area
and form the foundation of further design efforts through provision of
adequate base mapping and establishment of project goals.
Step3
Conceptual design presents the initial organisation of the development
program.
Step4
Schematic design is a refinement of the initial concept sketches that adds
scale, dimensions and precise testing of specific uses, including building
arrangements and infrastructure systems.
Step5
Final design is the conclusion to the primary design effort. Carried out
predominantly by engineers, preliminary plans are enhanced with a level
of detail sufficient to construct all aspects of the project
Step6
Plan submission and permitting represent the formal regulatory review of
final design (construction) documents by all governing agencies as well as
application for procurement of all necessary site and building permits.
Step7
Construction is the final step in land development process. During
construction the land development consultant is a valuable resource for
both the client and the contractor and is often responsible for stake out,
reviewing submittals, shop drawings and RFIs, certain inspections and
field and formal revisions. [4]

Land Conservation:

2
5

Land is one of the most precious natural resources, the importance of

which in human civilisation needs no elaboration. The total available land
area in the state sets the limits within which the competing human needs
have to be met. The needs of agricultural, industrial, domestic and others

often result in diversion from one use to the other. Diversion of land from
agriculture to non-agriculture uses adversely affects the growth in
agriculture sector. Even the available land is subjected to soil erosion of
varying degrees and degradation problems of different magnitudes. [5]
Land being the major non renewable natural resource is inelastic in
nature. There is lot of pressure on land due to the increasing population
from the agricultural, industrial and housing sectors. On the other hand,
the land is subjected to soil erosion and land degradation problem due to
rain and wind action and faulty cultivation practices resulting in loss of
topsoil, which is the place where all nutrients are available. This leads to
poor yields, uneconomic returns, reservoir sedimentation, and reduction in
storage capacity, and shutdown of hydel power stations, ecological
imbalance, environmental pollution, draughts and floods. Hence the
conservation, development and management of the land resources which
ensures the physical and chemical and biological health of soil profile is of
prime importance.
In a predominantly agricultural system, the objective of improving the
productivity, profitability and prosperity of the farmers and achieving
agricultural development on an ecological sustainable basis can be
attained only when conservation, development and management of the
land resources are assured. [6]
Conservation action provides benefits such as opportunities for active
outdoor recreation, and for the appreciation of landscapes and the historic
heritage.
Public conservation land and other natural areas also contribute other
often overlooked products such as clean water supplies, and the benefits
such as the regulation of the effects of flooding, erosion and climate
change. [7]
References

2
5

1. http://www.wisegeek.com/what-is-land-economics.htm
2. http://en.wikipedia.org/wiki/Land_development - Pg-2
3. Land Development Handbook, Planning, Engineering & Surveying/
Dewberry, Third Edition,Chapter-1- Overview of The Land
Development Process, Pg- 3
4. Part-1- Overview-Pg-1
5. http://www.tn.gov.in/spctenthplan/CH_9_4.PDF
6. http://www.tn.gov.in/spc/annualplan/ap2004-05/ch9_4.pdf
7. http://www.doc.govt.nz/conservation/threats-and-impacts/benefitsof-conservation/economic-impacts/

2.3 PUBLIC POLICIES ON LAND UTILIZATION AND

DEVELOPMENT:
Public policy can be generally defined as the course of action or inaction
taken by governmental entities (the decisions of government) with regard
to a particular issue or set of issues. Other scholars define it as a system
of "courses of action, regulatory measures, laws, and funding priorities
concerning a given topic promulgated by a governmental entity or its
representatives.
"Public policy is commonly embodied "in constitutions, legislative acts,
and judicial decisions." [1]
Urban Land Policy in India:
Land reform measures were initiated in rural India soon after
independence in 1947. Urban Land Reforms were however, slow in
coming. Some public interventions in different form were also made in the
land market, but the first major step aimed at fundamental reforms in the
urban land systems came only in 1976 when a comprehensive land ceiling
legislation took place.
Despite these efforts India lacks a comprehensive Urban Land Policy.
Neither the Government of India nor the State Government has
formulated any such policy. While one may find expressions or intentions
and isolated policy announcements, there has been no consistent Urban
Land Policy formulated on the basis of detailed study of the problems that
are encountered.
Sources of Land Policy:

2
5

The following constitute the vital sources of urban policy matters in India.

Reports/papers
government
Five year Plans
Legislation

(i)

(ii)

(iii)

(iv)

brought

out

by

the

central

or

State

Report of the Committee on Urban land Policy: The first

attempt towards evolving an Urban Land Policy was made when
the Government of India, Ministry of health consisted a
Committee to examine the problems related to urban land Policy
in1963. The report submitted by the committee in 1965 must be
considered as a landmark in the field of urban policy literature in
India. The committee took note of the declining man-land ratio
and considering a comprehensive long policy measures.
Task force on housing and Urban Development: The
planning Commission set up Task forces to evolve a long term
perspective on housing and urban development Issues in 1982.
The task Force on Planning of urban development which
submitted its report in 1983 critically examined, inter alia, the
problems of urban land policies in India. It reviewed the existing
approaches to land policy, especially with reference to Delhi and
called for a new approach to promote efficiency in the allocation
of land and to help the poor in their access to land for Shelter.
National housing Policy: The national Housing policy
document of the government of India (1988) emphasized the
need for the formulation and implementation of a purposeful land
policy in the context of achieving the goal of eradicating
houselessness in the country by the turn of the century. It also
suggested strategies to augment the supply of land, particularly
to meet the housing requirements of the weaker sections.
National commission on Urbanization (1988): An important
step towards understanding the urban problems of the country
was taken by the government of India when it appointed national
commission on urbanization. The Commission in its report
examined the dimensions of urbanization and the issues relating
to the existing urban patterns and policies in India and made
recommendation on the range of policy interventions necessary
to bring about more human and efficient urban seducements. It
identified the failure to anticipate the rising demand for urban
land and ensure an adequate land at affordable prices as possibly
the most disastrous feature of the past four decades of
urbanization in India. Emphasizing the significance of urbanized
land as a vital resource that needs to be generated in sufficient
quantities for appropriate usage. The commission strongly
advocated a realistic land policy to overcome the problems of
shortage of urban land and the rising land prices.

2
5

Five year plan:

The five year plans constitute an important source of state policy on

issues relating to socio economic development in India. While the first two
plans of the central government recognized the need for formulation of
policies relating to urban planning and development, the first serious
effort at laying down a broad policy with regard to urban development was
made while formulating the third five year plan. The plan referred to the
high costs of urban development in rapidly growing urban areas and
proposed measures to control urban land values. The Fourth Five Year Plan
stressed the need of urban land policy and called for action on the
recommendations of the report of the committee on urban land policy of
1965.
The Fifth Five Year Plan is of great significance so far as urban land policy
is concerned. It recognized that, perhaps the most important instrument
necessary for achieving breakthrough in urban development will be the
formulation of Urban Land Policy. In the Sixth Plan the thrust of
urbanization policy was on development of small and medium towns and
achieving balanced distribution of urban population. The Seventh Five Year
Plan called for slowing down the growth of big metropolises and stressed
the need for preparation of regional and sub-regional Urban Development
Plans.
Legislations:
Legislation is a source as well as an instrument of Public Policy. The State
seeks to achieve many of its policy objectives through enactment of laws.
A major difficulty in the articulation of urban land policy is the plethora of
existing legislation and regulation which govern the land market Planning
Commission 1989.These laws relate primarily to land use regulation which
restrict private rights, and direct intervention in the land market to gain
social control of land.
The most important constitutional provision in relation to Urban Land
Policy is article 19(1)(f) which confers on individual the right to property.
The operation of this provision is, however restricted by article 19(5)
which empowers the state to place reasonable restrictions on property
rights in public interest. It is this provision that enables the state to
directly acquire private lands or restricts private rights over land. The
various laws governing the land market passed by the Central and State
government may be classified as follows:

2
5

1. Town
Planning
Legislation
including
Urban
Development Authority Acts: To control the use of land
with a view to regulate its planned growth and
development.

2. Land Acquisition Act: To acquire land for public

purposes.
3. Municipal enactment including building byelaws: To
control building activities.
4. Slum Improvement and Clearance Act: To improve
the living conditions of slum dwellers.
5. Urban Land Ceiling and Development Act: To
improve ceiling limits on land holdings and achieve
equitable distribution of urban land.
Objectives of Urban Land Policy:
The Committee on Urban Land Policy (1965) outlined four basic objectives:
1. Optimum social use of urban land.
2. Supply of adequate quantity of land at reasonable prices.
3. Encouraging community effort for land development and
housing.
4. Preventing concentration of land ownership.
Reference
1. www.wikipedia.org.
2. URBAN LAND POLICY Author : A. RAVINDRA, page no.- 35-39

2.4 THEORIES OF LAND VALUES:

The concept of land value may be classified as the monetary evaluation

of land use. It is dependent on both the present and the future use which ,
in turn , is influenced by the physical and economic characteristics of the
site and the social control of land use ( Clarke , 1965 ). According to
Lichfield (1956), values are created and changed by the same forces that
create and change uses. Clarke has clarified that the value may also
change before any change of use actually takes place. For example, where
the site possesses value for a future use its potential is reflected in the
present price or rent. Value may, therefore, be classified as current
value, i.e., value for the present use or potential value, i.e. value for a
different and usually more valuable use at some future date.

2
5

Land value can be considered in two contexts. One is the market value,
which is the price of a land parcel negotiated at the time of sale of the
parcel, and the other is the assessed value, which is the estimated worth

of the parcel made by a competent private or public assessor (Northam,

1975). The market value of a piece of land may be different from the
assessed value.
The first important work on urban land use values was written by R.M.
Hurd (1901), often regarded as the father of modern land economics. He
adopted the principles put forward by Ricardo for agriculture land to the
urban land.
Alfred Marshall (1916) introduced the concept of location value which is
expressed in the financial advantage derived from the location of the site.
According to him, the site value was equal to the agricultural rental and
the location value. In other words, the urban land value is determined by
adding the location factor to the agricultural land value. One other factor
influencing the value of urban land is the amount of floor space in the
building.
R.M. Haig (1926) introduced the notion of the friction of space i.e.
hindrance to perfect or immediate accessibility, for without such friction
there would be no transport costs and all locations would be perfect. He
tried to establish a three-way relation of rent, transport costs and location
which is independent.
Ratcliff (1949), carrying forward the argument of Haig opined that the
utilization of land was ultimately determined by the relative efficiencies of
the uses in various locations. Efficiency in use is measured by the ability
to pay rent and the use that can extract the greatest return from a given
site will be the successful bidder. [1]
The Valuation Of Real Estate. Theory Of Land Values
Agricultural land has value because of its fertility, that is, its ability to
yield produce for its owners. However, the most fertile land is not always
the most valuable. Proximity to communities and to means of
transportation makes some agricultural land more valuable than other
land, more fertile but also more remote. In cities, towns and villages, land
is of use chiefly for placing buildings upon it. The use to which such
buildings may be put determines the value of the land in relation to the
other land in the community and their use depends to a great extent upon
their location.
Current Financial Crisis, and How Economic Theory should be
taught....

2
5

Yes, the current financial crisis highlights how scholars need to recast the
economic theory that they teach. The key concept that is missing today is
LAND VALUE. Classical economics divided factors of production into three:
land, labor, and capital. Beginning around 1920, scholars conflated land

with capital. This left them totally unprepared to cope with or explain the
crash of 1929. At this time "macro-economics", as we now call it, rose to
the fore. For a time it eclipsed "micro-economics", which had degenerated
into the explanation of the allocation of resources among competing ends.
Gradually, micro-economics came back to be integrated with macro, but in
the
process
land
value
almost
disappeared.
Scholars have "disappeared" land values in two main ways. One is to
conflate them with values of man-made capital, overlooking or trivializing
all differences. One obvious fault in this is that interest rates and land
rents vary inversely.
The other way is simply to trivialize land values as a quantity. This is
based on no respectable quantitative research whatever, and a systematic
ignoring of research showing land values to be a major element of wealth.
When it comes to the dynamics that lead to crises like that of 2008, land
values move in cycles of high amplitude, much higher than the values of
reproducible capital. When values are high and rising they lead to great
excesses of urban sprawl. These excesses fructify vast new areas around
growing cities, resulting in an overhang of "ripening" land that far exceeds
possible demands, resulting in a crash.
As to teaching money and banking, few or no texts recognize that
expanding banks, by taking land under and around speculative
developments, in effect "monetize" those speculative land values. When
the wave of land values ebbs, and debtors default, banks have to
contract, as they are now. Yet economic theorists, and those statesmen
whom they have trained, attend mainly to the froth on the waves, ignoring
the basic wave of land value that drives the cycle.
Another and related fault in theory is to ignore the turnover of capital. In
a boom of land values, capital goes into investments that pay out slowly.
The basis of allocating loans is not marginal productivity, but collateral
security, as perceived by bankers who do not distinguish land from
capital. The loan turnover of banks slows down, because a bank, no
matter how positive its balance sheet, cannot lend much faster than its
debtors repay their loans. The result is to slow down new loans and seize
up
the
system,
as
we
see
today.

2
5

Tax theory is now based on the fallacy that a progressive tax must also be
one that suppresses and distorts incentives. This reflects economists
ignoring the high concentration of the ownership of land, and the positive

incentive effects of taxing land in lieu of work, enterprise, building, and

income-creating investing. [2]
Land value taxation (LVT)
Is an ad valorem tax on the value of land. This ignores buildings,
improvements, and personal property. Because of this, LVT is different
from other property taxes on real estate the combination of land,
buildings, and improvements to land. Every jurisdiction that has a real
estate property tax has an element of land value tax, because land value
contributes to overall property value.
Most taxes distort economic decisions. If labor, buildings, machinery or
plants are taxed, people are dissuaded from constructive and beneficial
activities. The efficiency are penalized due to the excess burden of
taxation. This does not apply to LVT, which is payable regardless of how
well the land is actually used, because the supply of land is inelastic.
Market land rents depend on what tenants are prepared to pay rather than
on the expenses of landlords, and so LVT cannot be passed on to tenants.
The only direct effect of LVT on prices is to lower the market price of land.
In the other way, LVT is often said to be justified for economic reasons
because if it is implemented properly, it will not deter production, distort
market mechanisms or otherwise create deadweight losses the way other
taxes do.
Nobel Prize winner William Vickrey believed that "removing almost all
business taxes, including property taxes on improvements, excepting only
taxes reflecting the marginal social cost of public services rendered to
specific activities, and replacing them with taxes on site values, would
substantially improve the economic efficiency of the jurisdiction." A
correlation between the use of LVT at the expense of traditional property
taxes and greater market efficiency is predicted by economic theory, and
has been observed in practice. [3]

Reference

2
5

1. Alan W. Evans, the Theory of Land Values. Publisher University of

reading department of Economics, 1988.
2. http://chestofbooks.com/real-estate/Real-Estate-PrinciplesPractices/chapter-XIV-the-valuation-of-real-estate-theory-of-landva.html, paragraph 1 and 2.

3. Land value taxation in theory and practice. By Charles theory

Chomley, Robert Leonard Outhwaite. Page no. 76

2.5 ACTS:
Land Use and Building Act (132/1999, amendment 222/2003 included):
General objective of the Act:
The objective of this Act is to ensure that the use of land and water areas
and building activities on them create preconditions for a favourable living
environment and promote ecologically, economically, socially and
culturally sustainable development.
The Act also aims to ensure that everyone has the right to participate in
the preparation process, and that planning is high quality and interactive,
that expertise is comprehensive and that there is open provision of
information on matters being processed.
Objectives in land use planning
The objective in land use planning is to promote the following through
interactive planning and sufficient assessment of impact:
i. a safe, healthy, pleasant, socially functional living and working
environment which provides for the needs of various population
groups, such as children, the elderly and the handicapped;
ii.
economical community structure and land use;
iii.
protection of the beauty of the built environment and of cultural
values;
iv.
biological diversity and other natural values;
v.
environmental protection and prevention of environmental hazards;
vi.
provident use of natural resources;
vii.
functionality of communities and good building;
viii.
economical community building;
ix.
favourable business conditions;
x.
availability of services;
xi.
An appropriate traffic system and, especially, public transport and
non-motorized traffic.
Planning review

2
5

At least once each year, local authorities must draw up a review of all
planning matters that are or will in the near future become pending in the
local authority or the regional council and which are not of minor
importance (planning review). The review briefly explains planning matters
and the stage of processing reached as well as any such decisions and
other actions which have an immediate influence on the basic premises,
objectives, content and implementation of plans.

Planning reviews must be publicized in a manner appropriate for their

purpose.
Objectives of building guidance
The objective of building guidance is to promote:
a) the creation of a good living environment that is socially functional
and aesthetically harmonious, safe and pleasant and serves the
needs of its users;
b) building based on approaches which have sustainable and
economical life-cycle properties and are socially and economically
viable, and create and maintain cultural values;
c) The planned and continuous care and maintenance of the built
environment and building stock.
Areas requiring planning
An area requiring planning is an area the use of which involves needs that
require special measures, such as road, water main or sewer construction
or arranging other areas. Provisions concerning areas requiring planning
also apply to construction where the environmental impact is so
substantial as to require more comprehensive consideration than the
normal permit procedure.
In a legally binding local master plan or building ordinance, local
authorities may also designate areas where, due to their location,
community development requiring planning may be expected, or where
land use planning is warranted by particular environmental values or
hazards, as areas requiring planning. An order in a local master plan or a
building ordinance designating an area as requiring planning may be in
force for a maximum of ten years at a time.
National land use objectives
National land use objectives are decided upon by the Council of State.
National land use objectives may concern matters which have:
a) international or more extensive than regional bearing on local structure,
land use, or the transport or power network;
b) a significant impact on national cultural or natural heritage; or
c) Nationally significant impact on ecological sustainability, the economy of
the local structure, or avoidance of environmental hazards.
When national land use objectives are issued, the general objectives of
this Act and the objectives for land use planning laid down in section 5
must be taken into account.
The Finnish Building Code

2
5

The competent ministry will issue technical and corresponding general

regulations and instructions supplementing this Act, which are published in
the Finnish Building Code. In addition, the ministry is in charge of

harmonizing regulations concerning buildings issued by government

authorities. Furthermore, regulations that concern building but are issued
under other legislation may also be included in the Building Code.
The regulations in the Building Code are binding. Instructions are not
binding, however, and approaches other than those suggested in them
may be applied if they meet the requirements set for building.
The regulations in the Building Code concern the construction of new
buildings. Unless otherwise specifically prescribed by the regulations, they
are applicable to renovation and alteration work only in so far as the type
and extent of the measure and a possible change in use of the building or
part thereof require.
Building restriction
A building restriction is in force in areas designated by the regional plan as
recreation or protection areas or areas for transportation or technical
service networks. The area covered by building restrictions may be
increased or decreased by a special order in the plan.
Land Acquisition (Companies) Rules, 1963:
The difficulties that come in the process of Land Acquisition in India are
immense, given the population density and the type of land use in the
country. This is evident from the fact that the fundamental issue in a
number of top stories in the past few years has been the Process of Land
Acquisition; be it Narmada Bachao Andolan or the recent Nandigram issue.
With number of State Governments demarcating lands as Special
Economic Zones the problem just is going to get worse. The evolution of
Law of Land Acquisition as it exists today in various forms in different
statutes in India has undergone an evolution in the last decade. Originally
the wishes of owners of property were totally irrelevant, but at present,
the law tries to provide various provisions for objections and alternative
remedies in case of inadequacy of compensation.
Exercise of the powers conferred by section 55 of the Land Acquisition Act
1894 (1 of 1894), the Central Government hereby makes the following
rules for the guidance of the State Government and the Officer of the
Central Government and of the State Governments, namely :

2
5

1. Short title and application

a. These rules may be called the Land Acquisition (Companies)
Rules, 1963.
b. These rules shall apply to acquisition of land for all companies
under Part VII of the Act.
2. Definitions
In these rules:
a. Act means the Land Acquisition Act,1894 (1 of 1894); and

2
5

b. Committee means the Land Acquisition Committee constituted

under rule 3
3. Land Acquisition Committee.
a. For the purpose of advising the appropriate Government in
relation to acquisition of land under Part VII of the Act the
appropriate Government shall, by notification in the Official
Gazette, constitute a Committee to be called the Land Acquisition
Committee.
b. The Committee shall consist of:
i. The Secretaries to the Government of the Departments of
Revenue, Agriculture and Industries or such other officers of
each of the said Departments as the appropriate Government
may appoint;
ii. Such other members as the appropriate Government may
appoint for such term as that Government may, by order,
specify; and
iii. The Secretary to the Department or any officer nominated by
him dealing with the purposes for which the company
proposes to acquire the land.
c.The appropriate Government shall appoint one of the members of
the Committee to be its Chairman.
d. The Committee shall regulate its own procedure.
e. It shall be duty of the Committee to advise the appropriate
Government on all matters relating to or arising out of acquisition
of land under Part VII of the Act, on which it is consulted and to
tender its advice within one month from the date on which it is
consulted: provided that the appropriate Government may on a
request being made in this behalf of the Committee and for
sufficient reasons extend the said period to a further period not
exceeding two months.
4. Appropriate Government to be satisfied with regard to
certain matters before initiating acquisition proceedings
a. Whenever a company makes an application to the appropriate
Government for acquisition of any land, that Government shall
direct the Collector to submit a report to it on the following
matters, namely :
i. that the company has made its best endeavour to find out lands
in the locality suitable for the purpose of the acquisition;
ii. that the company has made all reasonable efforts to get such
lands by negotiation with the person interested therein on
payment of reasonable price and such efforts have failed;
iii. that the land proposed to be acquired is suitable for the purpose;
iv. that the area of land proposed to be acquired is not excessive;
v. that the company is in a position to utilise the land
expeditiously; and

vi. Where the land proposed to be acquired is good agricultural land

that no alternative suitable site can be found so as to avoid
acquisition of that land.
b. The Collector shall, after giving the company a reasonable
opportunity, to make any representation in this behalf, hold an
enquiry into the matters referred to in sub-rule (1) and while
holding such enquiry he shall :
i. in any case where the land proposed to be acquired is
agricultural land, consult the Senior Agricultural Officer of the
district whether or not such land is good agricultural land;
ii. determine, having regard to the provisions of sections 23 and 24
of the Act, the approximate amount of compensation likely to
be payable in respect of the land, which, in the opinion of the
Collector, should be acquired for the company; and
iii. Ascertain whether the company offered a reasonable price (not
being less than the compensation so determined), to the
persons interested in the land proposed to be acquired.
Explanation For the purpose of this rule good agricultural
land means any land which, considering the level of
agricultural production and the crop pattern of the area in
which it is situated, is of average or above average
productivity and includes a garden or grove land.
c. As soon as may be after holding the enquiry under sub-rule (2),
the Collector shall submit a report to the appropriate
Government and a copy of the same be forwarded by that
Government to the Committee.
d. No declaration shall be made by the appropriate Government
under section 6 of the Act unless
i. the appropriate Government has consulted the Committee and
has considered the report submitted under this rule and the
report, if any, submitted under section 5A of the Act; and
ii. the agreement under section 41 of the Act has been executed by
the company.

2
5

5. Conditions under which sanction may be given for transfer of

land.
Where a company for which land has been acquired under the Act
applies for the previous sanction of the appropriate Government for
the transfer of that land or any part thereof by sale, gift, and lease or
otherwise, no such sanction shall be given unless:
i. the proposed transfer of land along with dwelling houses,
amenities, buildings or work, if any, is to some other company
or where the company is a co-operative society, such transfer
is to any or all of its members, or

ii. where the land has been acquired for the erection of the

dwelling houses for workmen employed by the company, the

proposed transfer of the land along with dwelling houses, if
any, is to such workmen or their dependent heirs: Provided
that before giving any such sanction the appropriate
Government shall consult the Committee
6. Repeal.
All rules made by the appropriate Government for the guidance of its
officers with respect to acquisition of land for companies under Part
VII of the Act and in force immediately before the commencement of
these rules shall, to the extent of the repugnancy, cease to have
effect.
The Process of Land Acquisition
For the purposes of Land Acquisition Act of proceedings are carried on by
an officer appointed by the government known as Land Acquisition
Collector. The proceeding under the Land Acquisition Collector is of an
administrative nature and not of a judicial or quasi judicial character. When
a government intends to occupy a land in any locality is has to issue a
notification under Section 4 in the official gazette, newspaper and give a
public notice which entitles anyone on behalf of the government to enter
the land for the purposes of digging, taking level, set out boundaries etc.
The notification puts forward the intention of the government to acquire
and entitles government officials to investigate and ascertain weather the
land is suitable for the purpose. The section also makes it mandatory for
the officer or person authorised by the government to give a notice of
seven days signifying his intention to enter any or building or enclosed
court in any locality. This is a mandatory provision of the process of land
acquisition.
An officer or authorised person of the government has to tender payment
for all necessary damage, and dispute all disputes to insufficiency of
amount lie to the collector. Under Section 5(a) any person interested in
land which is notified under section 4 (who is entitled to claim an interest
in compensation) can raise an objection, in writing and in person. The
collector after making inquiry to such objections has to forward the report
to the government whose decision in this respect would be final. After
considering such report made by the collector under section 5(a) the
government may issue a declaration within one year of the notification
under section 4 to acquire land for public purposes or company, this
declaration is a mandatory requirement of the acquisition.

2
5

After the declaration under Section 6, collector has to take order

from the appropriate government weather state or central for the
acquisition of land under section 7. The next step in the process of
acquisition is that collector has to cause land to be marked out, measured
and appropriate plan to be made accurately, unless it is already done.
Requirement of this section deals only with approximation and does not

require exact measurement. An important process that takes place under

this section is demarcation which consists of marking out boundaries of
land to be acquired, either by cutting trenches or fixing marks as posts.
Object is to facilitate measurement and preparation of acquisition plan,
but also let the private persons know what land is being taken. It is to be
done by requiring body that is the government department or company
whichever be the case. Obstruction under Section 8 and Section 4 are
offence punishable with an imprisonment not exceeding one year and with
fine not exceeding fifty rupees.
Section 9 requires the collector to cause a public notice at
convenient places expressing governments intention to take possession of
the land and requiring all persons interested in the land to appear before
him personally and make claims for compensation before him. In affect
this section requires collector to issue two notices one to the locality of
acquisition and other to occupants or people interested in lands to be
acquired, and it is a mandatory requirement.
Next step in the process of acquisition requires a person to deliver
names or information regarding any other person possessing interest in
the land to be acquired and the profits out of the land for the last 3 years.
It also binds the person by requiring him to deliver such information to the
collector my making him liable under sections 175 and 176 of the Indian
Penal Code. The object of this step is to enable the collector to ascertain
the compensation by giving him a vague idea.
The Final set of collectors proceedings involve an enquiry by the
collector into the objections made by the interested persons regarding the
proceedings under section 8 and 9 and making an award to persons
claiming compensation as to the value of land on the date of notification
under section 4. The enquiry involves hearing parties who appear with
respect to the notices, investigate their claims, consider the objections and
take all the information necessary for ascertain the value of the land, and
such an enquiry can be adjourned from time to time as the collector thinks
fit and award is to be made at the end of the enquiry. The award made
must be under the following three heads:

Correct area of land

Amount of compensation he thinks should be given

Apportionment of compensation

2
5

Section 11 makes it obligatory on the part of the collector to safeguard the

interests of all persons interested, even though they might not have
appeared before him. In awarding compensation the Land Acquisition
Collector should look into estimate value of land, give due considerations
to the other specific factors. Value of the property in the neighbourhood
can be used as criteria. The award should be made within 2 years.

References

2
5

1) The Constitution of India

2) List of Statutes
a) THE LAND ACQUISITION ACT, 1894
3) List of Cases Referred
1. Somnawati v. State of Punjab AIR 1963 SC 151.
2. Ratni Devi v. Chief Commissioner Delhi AIR 1975 SC 1699.
3. Bali Malimambu v. State of Gujrat AIR 1978 SC 515.
4. Babu Barkya Thakur v. State of Bombay [1961] 1 SCR 128.
5. Balwant Ramachandran v. Secretary of State ILR 29 Bom 480.
6. Hamabai Framjee v. Secretary of State AIR 1914 PC 20.
7. Amulya Chandra Banerjee v. Corpn of Calcutta AIR 1922 PC 333.
8. Clark v. Nash (1905) Law Co. 1085.
9. Mathurbhai Hirajibhai Patel v. State of Gujrat AIR 1973 Guj 261.
10. Valjibhai Muljibhai Soneji v. State of Bombay AIR 1963 SC 1890.
11. V Doraiswami Pillai and Ors v. Government of Tamil Nadu AIR 1990 Mad
321.
12. Gajamand v. State of Madhya Pradesh AIR 2000 MP 2.
13. Valliammal v. State of Madras AIR 1967 Mad 332.
14. Pran Jivan Jaitha v. State of West Bengal AIR 1974 Cal 210.
15. Jayaram Reddy and Ors. v. The Land Acquisition Officer (1997) 2 MLJ
85.
16. Vellagapudi Kanaka Durga v. District Collector AIR 1971 AP.
17. Dossabhai v. Special Officer, Salsette ILR 36 Bom 599.
18. Revenue Division Officer, Trichinopoly v. Varadachai AIR 1944 Mad 271.
19. Ambyan Menon and Ors. V. State of Kerala AIR 1966 Ker 187.
20. Khub Chand and Ors. v. State of Rajasthan AIR 1907 SC 1074.
21. Narendrajit Singh and Anor. V. State of UP (1970) 1 SCC 125.
22. Raghunath Das v. District Collector of Deccan 11 CLJ 612.
23. Luchmeswar Singh v. Darbhanga Municipality ILR 18 Cal 99.
24. Ponnaira v. Secretary of State AIR 1926 Mad 1099.
25. Luitang v. Deputy Commissioner AIR 1961 Mani 31.
26. Ram Charan v. State of U.P. AIR 1952 ALL 752.
27. Hamabai Famjee v. Secretary of State ILR 39 Bom 279.
28. Province of Bombay v. Khushal Das AIR 1950 SC 222.

SECTION A: BUILDING ECONOMICS

3. BUILDING ECONOMICS
3.1 Architectural aspects of building economics
3.2 Rent control and other building acts
3.3 Economics of high rise buildings

3.1 ARCHITECTURAL ASPECTS OF BUILDING ECONOMICS:

3.1.a Increasing
organization:

building

efficiency

through

proper

space

2
5

Manage space efficiency to decrease occupancy costs and optimize

utilization through accurate chargeback.

Adding space to an existing organizational footprint is not always a readily

available option. The Space Management application helps users improve
space efficiency and evaluate the true costs associated with space usage.
The reports resulting from a space management analysis will reveal how
each square foot or meter of space is being allocated, which can enable a
highly granular chargeback process. This can, in turn, improve
reimbursement rates from third parties who require accurate and
defensible space allocation and occupancy reports. With Space
Management, organizations can easily satisfy these needs and better plan
for current and future space needs across the enterprise.
Benefits
Facilitates improved space efficiency to lower overall occupancy costs
Automates space charge backs to accommodate specific billing and
reporting requirements
Ensures space planning information is always accurate and defensible
by linking drawings with facilities and infrastructure data
Allocates space usage and reports charge backs accurately to minimize
disputes
Generates building performance reports based on IFMA ratios
Increase Space Efficiency to Lower Costs:
Efficient space usage can lower your occupancy cost per square foot or
meter, thereby increasing your organizations profitability. Develop and
integrate intelligent databases and drawings to track the use of space in
your buildings. Flexible methods for collecting and organizing space
information support your specific reporting requirements. Further optimize
space with the optional ARCHIBUS Reservations and Hoteling applications,
which allow you to schedule the use of shared rooms or transient space
based on availability, chargeback rates, amenities, and seating capacity.
Analyze space inventory information by department
Generate space inventories with gross area, rooms, service areas,
vertical penetrations, and more
Create trial layouts to compare space efficiencies of relocation or layout
scenarios.

2
5

Satisfy Reporting Requirements

Easy access to accurate square footage/square meter and usage
information makes it simple to satisfy external reporting requirements. If
your organization relies on third-party funding or reimbursement, the
difference between estimated and actual information can translate into
recovery of millions of dollars. Plus, the applications easy to implement

Chargeback functionality ensures that each department within the

organization is held accountable for its space usage and is appropriately
billed.
Choose from built-in and customizable chargeback methods
Calculate room percentage for recording partial or seasonal facility
usage
Provide summaries of each departments area with
Departmental Room Analysis reports
Defend Your Space Planning Needs:
Space Management includes many tools that make it easy to show why
more space, or a reassignment of space usage, is necessary. Forecast
composite space needs based on headcount, functional usage, and
logistics to help departments understand the influences on occupancy
costs. Run reports based on the specific details that drive strategic
decision-making.
Share facilities and infrastructure information with users in any
organization
Determine space efficiency based on industry standards
Charge departments for the areas they occupy, plus their share of
common areas
Achieve seamless integration with drawing programs, such as industrystandard Autodesk AutoCAD, AutoCAD, Architecture and Revit
Architecture to easily associate space data with floor plans.
Eliminate Space Allocation Disputes
Accurately determine the usable area allocated to each department.
Create benchmarks that determine the amount and type of space required
for each employee or department function. Using objective methods to
assign space helps mitigate fairness concerns associated with allotted
space. Develop occupancy plans and quickly locate vacant space for new
hires, as well.
Prepare occupancy plans, average area per employee reports, and
employee rosters by site and building
Perform charge backs by group, room, employee, or BOMA standards
Add employee designator symbols to drawings using population features

2
5

Analyze Building Performance

Space Management supports the International Facility Management
Associations (IFMA) established conventions for measuring building
efficiency rates by comparing usable areas and rentable areas.
Gain visibility to how much space is devoted to service areas to better
determine ways to increase efficiency rates
Develop the data necessary to generate the Building Performance
report, which documents two important ratios defined by IFMA rentable/usable ratio and the usable/rentable ratio.

3.1.b Construction Methods:

A new generation of innovative concrete products and construction
techniques has been, and is being, developed. New construction
philosophies aim to improve design and construction efficiency, generate
innovation and enhance performance as both client and members of the
project team strive to achieve even greater quality and profitability.
Concrete's range of structural solutions, its thermal efficiency, inherent
fire resistance, acoustic and vibration performance, durability and low
maintenance ensure that concrete can offer best value solutions.

Self compacting concrete

Tunnel form construction

Hybrid concrete construction

Post tensioned construction

Tilt up
Self Compacting Concrete
Self-compacting concrete (SCC) is a relatively new product that sees the
addition of super plasticizer and a stabilizer to the concrete mix to
significantly increase the ease and rate of flow. By its very nature, SCC
does not require vibration. It achieves compaction into every part of the
mould or formwork simply by means of its own weight without any
segregation of the coarse aggregate. Developed in Japan and Continental
Europe, SCC is now being increasingly used where apart from health and
safety benefits it offers faster construction times, increased workability
and ease of flow around heavy reinforcement. Having no need for
vibrating equipment spares workers from exposure to vibration. No
vibration equipment also means quieter construction sites.
SCC is a generic term for mix designs that differ from traditional concretes
at the molecular interface between the cement compounds and the
admixture polymers. The fluidity of SCC ensures a high level of workability
and durability whilst the rapid rate of placement provides an enhanced
surface finish. SCC's high strengths overnight strengths typically reach 3040N/mm2 and 2 day strengths can break the 100N/mm2 barrier enable
easier and more reliable demoulding. SCC is certainly the way forward for
both in-situ and precast concrete construction. The health and safety
benefits and the improved construction and performance results make it a
very attractive solution.

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Tunnel Form
Tunnel form is becoming one of the most common methods of cellular
construction in the UK as its cost effectiveness, productivity and quality
benefits are being realized on a wide range of projects.

Tunnel form is a fast-track method of construction that is well suited to

repetitive cellular projects such as hotels, apartment blocks and student
accommodation. Recognized as being a modern method of construction,
tunnel form simplifies the whole construction process by enabling a
smooth and fast operation that can result in frame costs being reduced by
15 per cent and provide frame programme time savings of 25 per cent.
During the tunnel form construction process, a structural tunnel is created
by pouring concrete into steel formwork to make the floor and walls. Each
24 hours, the formwork is moved so that another tunnel can be formed.
When a storey has been completed, the process is repeated on the next
floor. A strong, monolithic structure is thus constructed that can reach 40
or more storeys in height. The use of high strength concrete ensures fast
construction. Tunnel form creates cells which are 2.4 to 6.6m wide. These
can be easily subdivided to create smaller rooms. Where longer spans (up
to 11m) are required, the tunnel form can be extended using a mid-span
section. The walls can be designed as deep beams and supported at low
level on fin columns to permit car parking. As long as the architect has
chosen or is prepared to work within the constraints of regular wall
alignments, tunnel form is an excellent structural solution.
Hybrid Concrete Construction
Hybrid concrete construction can be described as being 'best of both
worlds'. It marries together the advantages of precast and in-situ concrete
construction with often significant benefits. For example, the adoption of a
hybrid concrete frame instead of a composite steel frame on a shell-and
core office project in central London resulted in construction savings of 29
percent and a 13 percent increase in net let table floor area.

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In terms of costs, in-situ reinforced concrete is commonly viewed as being

the most economic framing option while precast concrete promotes speed
and factory quality. Combining the two as a hybrid frame results in even
greater construction speed , quality and overall economy. Traditional
formwork typically accounts for up to 40 percent of an in-situ frame costs.
These costs can be significantly reduced by increasing the use of precast
concrete which has no on-site formwork requirement. Some HCC
techniques can remove the need for follow-on trades such as ceilings and
finishes. This allows for an even faster programme. HCC also encourages
speed of construction by promoting increased build ability, which should
be a fundamental design objective. HCC is about providing best value. It is
not necessarily about first cost, although this alone can result in hybrid
concrete construction being chosen. Gains from improved build ability on
site soon overtake any material cost differences. Inherent benefits, such

as occupier comfort and increased efficiency, lead to potentially massive

cost benefits in comparison with other structural approaches. For the full
potential of economy, safety, speed, builds ability and performance to be
realized then HCC should be considered at the beginning of the design
process.
Post Tensioned Construction
The use of PT offers several benefits, not least of which is the fact that the
PT floor slabs are generally thinner than an ordinary reinforced concrete
slab. They can also be up to 300mm thinner than a floor in a steel frame.
This minimises the building's height to the extent that this could mean an
extra storey on a ten storey building. The amount of pre-stress can be
adjusted to control deflection, thus enabling the minimum depth of slab to
be used.
PT slabs can economically span further than a reinforced concrete slab.
This in turn reduces the required number of columns and foundations and
increases flexibility for space planning. Flexibility is further enhanced by a
PT slab being able to accommodate irregular grids. In addition to all the
above benefits, PT equals rapid construction. Thin slabs equals less
concrete which equals fewer lorries. There is less reinforcement which
reduces fixing time and early stressing of the concrete allows the
formwork to be struck quickly.
There are two methods of PT:
1. Bonded
2. Unbonded
Objectives:
To present a global perspective on low cost housing technologies
To present the state of the art of the latest innovative technologies for
manufacturing pre cast building components
To disseminate up-to-date information, knowledge and experience on
design, production, certification and application of low cost and
innovative housing materials
To present the country perspective on status of low cost housing
technologies.
To promote and encourage networking and cooperation between
countries of the region, for the adoption of appropriate and affordable
technologies on low-cost housing
To arrange display of innovative & low cost housing materials developed
& promoted by Building Materials & Technology Promotion Council
(BMTPC).

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Abstract:

Many new materials are being developed from polymers, metals, and
ceramics. Industry is beginning to introduce some of these highperformance or new-technology materials in construction and
manufacturing applications because the materials have advantages over
traditional materials like steel, concrete, wood, and aluminium. However,
many high-performance materials have not been used in large-scale
construction projects. Economic and Technical Barriers hinder industry's
aggressive introduction of these new technologies despite their
advantages over traditional materials. The primary economic barrier
preventing the use of new technology material is their high initial cost.
Regardless of how cost effective a material might be over the life cycle of
the project, industry balks at high up-front costs, particularly when the
life-cycle costs of a new material are relatively uncertain. This cost barrier
inhibits construction applications of - and eventually research in - new
materials. Yet the construction industry has many potential applications;
for example, fiber-reinforced polymers (FRPs) and high-performance
concrete and steel are technically viable substitutes for conventional
bridge materials. FRPs are also likely candidates for use in marine
structures and offshore oil rigs. Germany and Japan are leading the world
in FRP use in construction; if U.S. companies are to remain globally
competitive, they too will likely need to introduce new technology
materials in their construction projects. To overcome this cost-based
barrier to the adoption of new materials, the construction industry needs
practical economic methods for evaluating alternative building and
construction materials in a comprehensive and consistent manner.
Modern Methods of Construction
There are many ways in which the concrete industry has embraced
innovation and advocated modern methods of construction. Innovation is
an essential feature that must be present in construction; a definition of
innovation is to exploit existing and develop new technologies.
Concrete Masonry
Modern masonry construction is a tried and tested method long popular in
Britain and Western Europe and responsible for 90% of the new homes
built in the last ten years. High productivity concrete block work allows
construction times to be reduced, with gains in robustness, acoustic
performance, durability and fire resistance.

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Permeable Concrete Paving

Concrete paving blocks are attractive, durable and cost-effective for

landscaping around housing developments. Innovative thinking has turned
concrete paving into a sustainable solution to tackle problems caused by
rainwater runoff from the site. Permeable concrete paving allows
rainwater to drain through the paved surface in a controlled way into the
ground before being released into sewers or water courses. Sustainable
drainage systems (SUDS) incorporating permeable concrete paving and
precast tanks and pipes also allow the capture of water for re-use for nonpotable purposes such as garden watering and toilet flushing.
In-situ Concrete
Ready-mixed concrete is made under factory controlled conditions For
large projects it can be used in systems such as Tunnel Form and in
smaller projects in innovative systems such as Insulating Concrete
Formwork. Todays ready-mixed concrete is a modern construction
material offering factory controlled quality, exact quantities and minimal
waste.
Insulating Concrete Formwork (ICF)
ICF is a building system that provides permanent insulated formwork for
in-situ concrete walls and floors in housing. It consists of twin-walled
expanded polystyrene (EPS) panels or blocks filled with ready-mixed
concrete. The result is a wall structure ready to accept the roof or floor
construction, thermally insulated by the EPS which remains in place, with
a uniform surface ready for the direct application of plasterboard or
proprietary cladding systems.
Modern Concrete Basements
Land availability and quality are declining while its cost has been steadily
increasing. At the same time homeowners wish they could have more
living space for recreation and increased storage. The introduction of a
modern concrete basement offers a better use of land with no overall
change in the height of the building, potential energy savings of 10%, and
increases the value of the property.
3.1.c

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Low Cost Housing is a new concept which deals with effective budgeting
and following of techniques which help in reducing the cost construction
through the use of locally available materials along with improved skills
and technology without sacrificing the strength, performance and life of
the structure. There is huge misconception that low cost housing is
suitable for only sub standard works and they are constructed by utilizing
cheap building materials of low quality. The fact is that Low cost housing is

done by proper management of resources. Economy is also achieved by

postponing finishing works or implementing them in phases.
Building Cost
The building construction cost can be divided into two parts namely:
Building material cost: 65% to 70%
Labour cost: 65% to 70%
Now in low cost housing, building material cost is less because we make
use of the locally available materials and also the labour cost can be
reduced by properly making the time schedule of our work. Cost of
reduction is achieved by selection of more efficient material or by an
improved design.
Areas from where cost can be reduced are:
1) Reduce plinth area by using thinner wall concept.Ex.15 cms thick solid
concrete block wall.
2) Use locally available material in an innovative form like soil cement
blocks in place of burnt brick.
3) Use energy efficiency materials which consume less energy like
concrete block in place of burnt brick.
4) Use environmentally friendly materials which are substitute for
conventional building components like use R.C.C. Door and window frames
in place of wooden frames.
5) Preplan every component of a house and rationalize the design
procedure for reducing the size of the component in the building.
6) By planning each and every component of a house the wastage of
materials due to demolition of the unplanned component of the house can
be avoided.
7) Each component of the house shall be checked whether if its
necessary, if it is not necessary, then that component should not be used.
Cost reduction through adhoc methods

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Foundation
Normally the foundation cost comes to about 10 to 15% of the total
building and usually foundation depth of 3 to 4 ft. is adopted for single or
double store building and also the concrete bed of 6(15 Cms.) is used for
the
foundation
which
could
be
avoided.

It is recommended to adopt a foundation depth of 2 ft. (0.6m) for normal

soil like gravely soil, red soils etc., and use the uncoursed rubble masonry
with the bond stones and good packing. Similarly the foundation width is
rationalized to 2 ft.(0.6m).To avoid cracks formation in foundation the
masonry shall be thoroughly packed with cement mortar of 1:8 boulders
and bond stones at regular intervals.
It is further suggested adopt arch foundation in ordinary soil for effecting
reduction in construction cost up to 40%.This kind of foundation will help
in bridging the loose pockets of soil which occurs along the foundation.
In the case black cotton and other soft soils it is recommend to use under
ream pile foundation which saves about 20 to 25% in cost over the
conventional method of construction.
Plinth
It is suggested to adopt 1 ft. height above ground level for the plinth and
may be constructed with a cement mortar of 1:6. The plinth slab of 4 to 6
which is normally adopted can be avoided and in its place brick on edge
can be used for reducing the cost. By adopting this procedure the cost of
plinth foundation can be reduced by about 35 to 50%.It is necessary to
take precaution of providing impervious blanket like concrete slabs or
stone slabs all round the building for enabling to reduce erosion of soil and
thereby avoiding exposure of foundation surface and crack formation.
Walling
Wall thickness of 6 to 9 is recommended for adoption in the construction
of walls all-round the building and 41/2 for inside walls. It is suggested to
use burnt bricks which are immersed in water for 24 hours and then shall
be used for the walls.
Rat-trap bond wall
It is a cavity wall construction with added advantage of thermal comfort
and reduction in the quantity of bricks required for masonry work. By
adopting this method of bonding of brick masonry compared to traditional
English or Flemish bond masonry, it is possible to reduce in the material
cost of bricks by 25% and about 10to 15% in the masonry cost. By
adopting rat-trap bond method one can create aesthetically pleasing wall
surface and plastering can be avoided.
Concrete block walling

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In view of high energy consumption by burnt brick it is suggested to use

concrete block (block hollow and solid) which consumes about only 1/3 of

the energy of the burnt bricks in its production. By using concrete block
masonry the wall thickness can be reduced from 20 cms to 15 Cms.
Concrete block masonry saves mortar consumption, speedy construction
of wall resulting in higher output of labour, plastering can be avoided
thereby an overall saving of 10 to 25% can be achieved.
Solid cement block technology
It is an alternative method of construction of walls using soil cement
blocks in place of burnt bricks masonry. It is an energy efficient method of
construction where soil mixed with 5% and above cement and pressed in
hand operated machine and cured well and then used in the masonry. This
masonry doesnt require plastering on both sides of the wall. The overall
economy that could be achieved with the soil cement technology is about
15 to 20% compared to conventional method of construction.
Doors and windows
It is suggested not to use wood for doors and windows and in its place
concrete or steel section frames shall be used for achieving saving in cost
up to 30 to 40%.Similiarly for shutters commercially available block
boards, fibre or wooden practical boards etc., shall be used for reducing
the cost by about 25%.By adopting brick jelly work and precast
components effective ventilation could be provided to the building and
also the construction cost could be saved up to 50% over the window
components.
Lintels and chajjas
The traditional R.C.C. lintels which are costly can be replaced by brick
arches for small spans and save construction cost up to 30 to 40% over
the traditional method of construction. By adopting arches of different
shapes a good architectural pleasing appearance can be given to the
external wall surfaces of the brick masonry.
Roofing
Normally 5(12.5 cms) thick R.C.C. slabs is used for roofing of residential
buildings. By adopting rationally designed in-situ construction practices
like filler slab and precast elements the construction cost of roofing can be
reduced by about 20 to 25%.

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Filler
slabs
They are normal RCC slabs where bottom half (tension) concrete portions
are replaced by filler materials such as bricks, tiles, cellular concrete
blocks, etc. These filler materials are so placed as not to compromise

structural strength, result in replacing unwanted and nonfunctional

tension concrete, thus resulting in economy. These are safe, sound and
provide aesthetically pleasing pattern ceilings and also need no plaster.
Jack arch roof/floor
They are easy to construct, save on cement and steel, are more
appropriate in hot climates. These can be constructed using compressed
earth blocks also as alternative to bricks for further economy.
Ferro cement channel/shell unit
Provide an economic solution to RCC slab by providing 30 to 40% cost
reduction on floor/roof unit over RCC slabs without compromising the
strength. These being precast, construction is speedy, economical due to
avoidance of shuttering and facilitates quality control.
Finishing work
The cost of finishing items like sanitary, electricity, painting etc., varies
depending upon the type and quality of products used in the building and
its cost reduction is left to the individual choice and liking.
Conclusion
The above list of suggestion for reducing construction cost is of general
nature and it varies depending upon the nature of the building to be
constructed, budget of the owner, geographical location where the house
is to be constructed, availability of the building material, good
construction management practices etc. However it is necessary that
good planning and design methods shall be adopted by utilizing the
services of an experienced engineer or an architect for supervising the
work, thereby achieving overall cost effectiveness to the extent of 25% in
actual practice.

References
http://www.archibus.com/products/datafiles/Space.pdf
http://www.concretecentre.com/main.asp?page=148
http://www.concretecentre.com/main.asp?page=438
http://www.concretecentre.com/main.asp?page=335
http://www.concretecentre.com/main.asp?page=627
http://www.concretecentre.com/main.asp?page=609
http://www.engineeringcivil.com/low-cost-housing.html

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1.
2.
3.
4.
5.
6.
7.

3.2 RENT CONTROL AND OTHER BUILDING ACTS:

3.2.a All transactions in Indian real estate sector are governed by various
laws enacted by the Central Government of India and respective State
governments. One such law is the RENTAL LAWS. These laws govern the
rental of commercial and residential property and are necessary to
enforce individual civil rights of both landlord and tenant and prevention
of any kind of deceit.
The real estate scene in India is flawed by land market distortions. The
most glaring ones include inflexible zoning, rent and tenancy laws. Zoning
laws, rent controls and protected tenancies have been detrimental to the
healthy rental trends in India. They have put a freeze to land in city
centres that could be otherwise made available for new retail outlets and
flats.
These laws also gloss over operational inefficiencies and scuttle
competition. Tenants residing could not be evicted for a long time and
would not surrender their cheap tenancies on their own volition. The
renovation of buildings could hardly happen. One such act favouring the
rental property market in India is the Rent Control Act.
Rent Control Act
Rent Control Act was an attempt by the Government of India to eliminate
the exploitation of tenants by landlords. Rent legislation tends to providing
payment of fair rent to landlords and protection of tenants against
eviction. But the allowances have been very generous and hence tenants
residing in rental properties in India since 1947 continue to pay rents fixed
then, irrespective of inflation and the realty boom.
The Rent Control Act has led to several adverse situations like languishing
investment in rental housing, withdrawing of existing housing stock from
the rental market, stagnating municipal property tax revenue. The rent
control along with security of tenure has not given any encouragement to
house owners to renovation their houses and most houses as a result
have a worn out look.
Repeal of the Rent Control Act would lead to construction boom and meet
the growing need for housing and aid employment generation. There will
be more rational use of prime locations and will set off a continuous
process of urban renewal.

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In 1992, the Central Government proposed a model rent control

legislation, which was meant for and circulated to all states. The model
Act proposed modification of some of the existing provisions on
inheritance of tenancy and also prescribed a rent level beyond which rent
control could not apply. The New Delhi Rent Control Act that was passed

in 1997 was based on this but failed to be notified due to resistance from
traders who are sitting tenants. Very few states have introduced the
model Act.
The new Maharashtra Rent Control Act, Delhi Rent Control Act,
Tamil Nadu Rent Control Act, Karnataka Rent Control Act all has
provisions for the dispute among the landlords and tenants. Each of the
State Rent Act provides for fixation of Standard Rent as well decree for
possession and provisions that lay down the satisfaction of the Court.
Rental Agreement is an integral part of rental law
Rent or lease of a residential or commercial property in India is subject to
strict Indian laws. A mutual agreement on the terms and conditions of the
rented property by the landlord and the tenant is required. In the present
times, leasing a commercial space in India as opposed to owning
commercial real estate is turning out to be a brilliant move.
Professional legal advice becomes a necessity as there are fewer tenantfriendly laws in the area of commercial leases, and no standard lease
agreements. A lawyers help will be useful for making an informed
decision in negotiating the best deal on a commercial lease as he/she can
research zoning laws and local ordinances and inform you about local real
estate market conditions and customs.
A rental agreement refers to a relationship between the landlord and
the tenant. It is legally binding upon the parties. It may be brief, or it may
have extra conditions or obligations. However, any changes or additions
to a rental agreement should be maintained in writing. The rental
agreement is a Legal Form which has to be completed, signed and dated
by the tenant and landlord. There are leases and rental forms for renting,
leasing and managing residential rental properties. Both the parties must
have access to the document once it is signed.
The landlord should get the agreement registered. The landlord must give
the tenant a duplicate copy of the rental agreement, failing which the
tenant is not obligated to pay rent until the tenant receives a copy of the
rental agreement.
For a lease agreement, the terms of the lessee (tenant) and the lessor
(landlord) when they enter into a lease agreement would include terms
like the term of lease, deposit amount and monthly rentals. The lessor or
the landlord should ensure the premises come back in the right shape in
repossession.
There has been no damage to the tiling, plumbing, flooring or
electrification and the premises are in the proper condition.

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5

No major changes have been incorporated in the premises. If the

lessee has made some changes, which are not acceptable to the
lessor, the latter may ask him to undo the changes.

In the case of leasing of furnished premises, the condition of the

furnishings is in proper condition.

All the electricity and telephone charges have been taken care of till
the specified date by the lessee or tenant at the time of
repossession.

On satisfactory fulfilment of all these aspects, the lesser should offer the
refund the security deposit (if given) to the lessee offering vacant and
peaceful possession of the premises.
In a Tenancy Agreement there is a transfer of interest and it establishes
the non-eviction of the tenant by the owner except on the grounds of
eviction
mentioned
under
the
Rent
Act.
Under the Leave and License Agreement transfer of interest takes place
on permission and the same can be terminated as per the terms of the
agreement. The possession can be demanded back from the licensee. The
label to the agreement could be Leave & License or Tenancy Agreement,
but it is the intention of the party that counts. Documentation of the
commercial lease is also an important rental law procedure.
Conclusion
The rental laws in India need to be revised to protect the owner and
his/her property from the tenant.

Special areas of focus should be on terminating old tenancies,

removing constraints on increase of rentals and empowering owners
in the sense of being able to reclaim their properties without any
court proceedings.

The market forces should be allowed to determine the rental

amounts and the owner must have full protection for his/her
property. This will go a long way in providing security to the landlord
and also reduce the deposit amount required with the lease
agreements.

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If these laws are enacted and strictly enforced, there is every chance that
more investors will want to enter the real estate market to utilize the
rental fees as income. This is especially true for the commercial sector.
The tax laws also need to be revised so that renting of properties becomes
a financially viable option. Amendments in the Rent Acts of several states
are a progressive move.

3.2.b The Government Buildings Act, 1899,ACT No.4 OF 1899, [AS

ON 1956], 3rd February, 1899.
This Act provides for the exemption from the operation of municipal
building laws of certain buildings and lands which are the property, or in
the occupation, of the Government and situate within the limits of a
municipality.
Whereas it is expedient to provide for the exemption from the operation of
municipal building laws of certain buildings and lands which are the
property, or in the occupation, of the Government and situate within the
limits of a municipality.
It is hereby enacted as follows:
1. Short title and extent.
(a) This Act may be called the Government Buildings Act, 1899.
(b) It extends to the whole of India except [the territories which,
immediately before the 1st November, 1956, were comprised in Part B
States]
2. Municipal authority defined.
In this Act the expression "municipal authority" includes a municipal
corporation or a body of municipal commissioners constituted by, or under
the provisions of, any law or enactment for the time being in force.
3. Exemption of certain Government buildings from municipal
laws to regulate the erection, etc., of buildings within
municipalities.

The word Imperial rep. by the A.O.1948.

Subs. by the A.O.1937 for "the Govt.

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5

Nothing contained in any law or enactment for the time being in force to
regulate the erection, re-erection, construction, alteration or maintenance
of buildings within the limits of any municipality shall apply to any building
used or required for the public service or for any public purpose, which is
the property, or in the occupation, of the Government, or which is to be
erected on land which is the property, or in the occupation, of the
Government: provided that, where the erection, re-erection, construction
or material structural alteration of any such building as aforesaid (not
being a building connected with [1] defence, or a building the plan or
construction of which ought, in the opinion of [2]the Government
concerned], to be treated as confidential or secret) is contemplated,
reasonable notice of the proposed work shall be given to the municipal
authority before it is commenced.

4. Objections or suggestions as to erection, etc., of certain

Government buildings within municipalities
(1) In the case of any such building as is mentioned in the last preceding
section (not being a building connected with i) defence or a building the
plan or construction of which ought, in the opinion of ii) the Government
concerned], to be treated as confidential or secret), the municipal
authority, or any person authorized by it in this behalf, may, with the
permission of the State Government previously obtained, but not
otherwise, and subject to any restrictions or conditions which may, by
general or special order, be imposed by the State Government, inspect
the land and building and all plans connected with its erection, reerection, construction or material structural alteration, as the case may
be, and may submit to the State Government a statement in writing of
any objections or suggestions which such municipal authority may deem
fit to make with reference to such erection, re-erection, construction or
material
structural
alteration.
(2) Every objection or suggestion submitted as aforesaid shall be
considered by the State Government, which shall, after such investigation
(if any) as it shall think advisable, pass orders thereon, and the building
referred to therein shall be erected, re-erected, constructed or altered, as
the
case
may
be,
in
accordance
with
such
orders:
Provided that, if the State Government overrules or disregards any such
objection or suggestion as foresaid, it shall give its reasons for so doing in
writing. [3]

The word Imperial rep. by the A.O.1948.

Subs. by the A.O.1937 for "the Govt.

Sub-section (3) rep. by the A.O.1937.

References:

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5

1. www.indianground.com/rentals/rental-laws-in-india.aspx
2. http://www.vakilno1.com/bareacts/Laws/The-Government-BuildingsAct-1899.htm

3.3 ECONOMICS OF HIGH RISE BUILDINGS:

A high-rise is a tall building or structure. Normally, the function of the
building is added, for example high-rise apartment building or high-rise
offices.

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5

High-rise buildings became possible with the invention of the elevator (lift)
and cheaper, more abundant building materials. Buildings between
75 feet (23 m) and 491 feet (150 m) high are, by some standards,
considered high-rises. Buildings taller than 492 feet (150 m) are classified
as skyscrapers. The average height of a level is around 13 feet (4 m) high,
thus a 79 foot (24 m) tall building would comprise 6 floors.

There is a general understanding that construction cost will rise as storey

height increases. This is not universally true for increased number of
storeys. Morton & Jagger (1995) pointed out that some cost factors will
increases and some cost factors will decrease the cost per square metre
as height increases and the significance of these cost factors will change
at different heights. Flanagan and Norman (1999) pointed out that
construction cost generally falls as the number of storeys increases. They
categorize construction cost into four cost components for considering the
number of storeys and the height of the buildings:
(1) Cost items fall as the number of storeys increases, e.g. roofs,
foundation.
(2) Cost items rise as the number of storeys increases, e.g. lift installation,
fire services.
(3) Cost items fall initially and then rise as the number of storeys
increases, e.g. curtain walling.
(4) Cost items unaffected by height, e.g. floor finishes, do
Size of Floor Plate
The size of the floor plate is primarily determined by the users
requirement subject to various statutory constraints. For instance, the
building regulation may stipulate the permitted maximum site coverage
which in effect limits the size of the floor plate in relation to its site area.
The building regulation may also stipulate the maximum travel distance
from the farther point on a floor to a protected stair. The major
considerations behind the economics of floor plates are the lettable (or
rentable) to gross floor ratio and the wall to floor area ratio.
Lease Span
Lease span is the clear distance from the building core to the external
wall. It depends upon
the functional requirement and size of floor plate. Based on the collected
data common lease span is approximately 12m, ranging from 9.80m to
13.89m. The Bank of ChinaTower has the longest lease span of
approximately 17m at its lower floors due to its split core design.
Floor Height
The floor height consists of two aspects; namely, the floor-to-floor height
and floor-to-ceiling height. The minimum floor height may be determined
by the relevant building regulations. As the floor-to-ceiling height ranges
from 2.60m to 2.80m with an average of 2.69m. The difference between
the lowest and highest ceiling height is only 200mm.

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Plan Shape of Building

The geometry of the floor plan has significantly impact upon the interior
space planning, exterior building envelope and structural system.
Generally the simpler and more regular the floor shape, the more easily it
can be adapted to the users needs in terms of space planning. Square
and rectangular floor plans work more efficiently than curved and irregular
shapes.

Service Core
A service core is those parts of a building consisting of the lift shafts, lift
lobbies, staircases, toilets, mechanical and electrical systems, riser-ducts
and plant rooms. The design of a service core can significantly affect the
overall space efficiency of the building, vertical circulation system and
distribution routes of mechanical and electrical system. In many tall
buildings the core structure also acts, either in isolation or in conjunction
with the perimeter frame, as the principal load bearing element for both
the gravity and wind loadings.

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Conclusion
The two main considerations other than economic value are the clients
preference and the statutory requirements on tall buildings. The cost
effect of high-rise buildings concerns the quality and the quantity change
of different building elements. This calls for a sensible choice of the
systems or the type of materials used for a say, a 10-storey building, 20storey building, a 30-storey building and so on, up to a height or number
of storey permitted by the statutory requirements. This study presents a
cost data analysis of
the building elements in respect of the number of storey and height of
seven office buildings which provide an indication of the cost trend and
the cost change for a change of the numbers of storeys and heights.

SECTION B: SOCIOLOGY

4. MAN AND ENVIRONMENT

4.1 Man and his social environment
4.2 Social changes

4.1 MAN AND HIS SOCIAL ENVIRONMENT

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5

In Oxford Advanced Learner's Dictionary, environment is defined as the

nature conditions, example land, air and water in which people, animals
and plants live. On the other hand, it is the surroundings of man, both
physical and social that consists of all the natural laws, principles and

things

made

by

both

nature

and

man.

Types of environment
(i) The Physical Environment - The physical environment refers to the
geographical areas or territory which man occupies. This consists of dry
lands, forests and grasslands, lakes and deserts. Man's physical
environment, to a large extent determines the type of occupation those
living in it are likely to engage in.
(ii) The Social Environment - Since no man is an island, man lives
together as a group or society. This group or society is referred to as
'Man's Social Environment'. Man's real social environment is men. It is the
social environment that conditions human development or behaviour.
Things that mould social behaviour include ideas, beliefs, notions, biases,
presuppositions, etc. The most important part of the overall environment
of man is the social environment. It differs from one nation to another, one
period to another, one class to another, and its influences are outside the
control of any one individual. The social system needs to be remodelled
such that individual success does not conflict with communal welfare. This
can be achieved by encouraging such social traits as altruism, readiness
to cooperate, sympathetic enthusiasm, and so forth, instead of putting a
premium on many anti-social traits such as egoism, cunning, and
insensitivity to human misery.
All in all, differences among mankind are the outcome of nature and
nurture, of heredity and environment. Some are sharp, some are dull.
Nevertheless many apparently dull persons can be restored to normal
intelligence by proper education, regular exercise of the mind, and
facilities for wholesome association. The way to progress lies in a
ceaseless effort to develop our knowledge and intelligence. Such
development is possible only when the mind is kept steady and wellpoised.
How man influences his physical environment:
Man has continued to change his physical environment in order to
improve his living conditions. He has been able to develop and turn many
of the natural conditions to his own advantages, such as in the following
example:

ii.

iii.

Man constructs shelters of various kinds. This comprises shelters for

dwelling, marketing and for other gatherings. He has also
constructed shelters for schools, hospitals, industries etc.
Man builds dams and canals thereby changing the natural
environment. By so doing, he has been able to overcome the
problem caused by lack of rainfall. He also uses the dams as source
of generating electric power.
Barren soils and lands have been made reach by the use of artificial
manure. For instance, the N.P.K. 15.15 fertilizer was discovered and

2
5

i.

manufactured by man to enrich the soil and enhance the production

of
food
for
man's
consumption.
Furthermore, man reclaims marshy and flood lands by means of
drainage. Some lands that would have been rendered useless as a
result of nature, have been reclaimed by man and used for erecting
buildings, construction of roads to link up places necessary for
man's survival, etc. Man has discovered and is still discovering other
means through which he can effectively influence his physical
environment in order to satisfy his unlimited wants, needs and
desires.
How man is influenced by his physical environment:
Man, on the other hand, has been influenced and is still being influenced
by his physical environment in the following ways:
i.
ii.
iii.

iv.

v.

Man sleeps when it is time to sleep and wakes when it is day-light.

He moves about during the day and confines himself at night.
Man, in order to protect himself from rain and sun, builds shelters as
his dwelling place.
Man has been forced by nature to wear clothes in order to protect
himself from cold. Man wears clothes according to the climatic
conditions of his area. For instance, a man in the cold region wears
very thick clothes while a man in the tropics wears light clothes.
When a man lives near lakes, sea or other water bodies, he engages
in fishing to earn a living. For instance, those living in the Riverine
area of Southern Nigeria that is characterized by thick mangrove
forests are engaged in fishing, net making and lumbering.
Man farms where the land is arable. He plants the type of crops that
are favoured, by his soil and climatic conditions of his region. He
keeps live stocks where there is good grass and other favourable
conditions for keeping animals. For example, in Nigeria the
Northerners keep live stock because there is good grass and
extensive pasture lands.

How man influences his social environment:

Man, as a social being influences his social environment through the
following ways:

ii.

iii.

Man lives together in groups or communities and takes advantages

of group work and group living.
He makes rules and regulations in order to guide the behaviour of
people and ensure harmony and tranquillity in the society. A society
without rules and regulations will be filled with mal-adjusted citizens
who will constitute nuisance.
Man, in a bid to satisfy his unlimited wants, produces goods and
services and engages in export and import of such goods and
services. For instance Nigeria exports her petroleum product and
imports cars and some other services to make life more comfortable
for its citizens.

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5

i.

iv.

Man makes music for leisure and happiness. 'All work no play makes
Jack a dull boy'. Therefore, in order to ease-off stress after the day's
work, man engages himself in music production or other avenues of
creating
humour
or
entertainment.
In addition, man in a bid to live exemplary life, founds religion and
religious beliefs. For instance, the Christians worship the supreme
God.
They make effort to obey the commandments of God in other to
inherit His Kingdom. The Moslems practice the Islamic religion
which was founded by Prophet Mohammed. They worship Prophet
Mohammed and observe his commandments. Consequently, the
traditional religion was founded by our forefathers. Those who
practice it make graven images, worship it and observe its rules and
regulations,
etc.

How man is influenced by his social environment:

On the other hand, man has been influenced and is still being influenced
by his social environment in the following ways:

ii.

iii.

He obeys existing laws and customs of his community. Before man

is born, there are already existing rules and customs in his
community. To fit in properly into such community man is bound to
observe them.
Man conforms to the modes of worship in his society. Though, there
is freedom of worship but most of the religions man subscribes to
are already there before he was born.
Man enjoys the pleasure of what exists around his environment,
such as the type of food and drinks that are produced in his
environment. He also adapts himself to the trend of fashion in his
society.
Every society has a language of communication. Therefore, man
speaks the language that is already in use by the people of his
society.
In conclusion, man cannot exist in a vacuum. He lives in an
environment. As such, he interacts with his environment and in the
process of interacting with his environment, the environment
influences him and he, in turn, influences the environment. This
interaction has to a large extent alleviated some of the problems
man was encountering. A typical example is the early men who
were eating their food raw, moving about aimlessly in the forest like
animals. When they started interacting with their environment, they
discovered that when two stones were struck together, fire was
produced to cook their food. They also discovered that they can
cultivate the soil to plant their crops. Hence, they were the first to
discover
agriculture.
Today, as a result of how man influences his environment and vice
versa, man has been able to discover various ways of alleviating

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5

i.

some of the numerous problems he is surrounded with. Examples of

such problems include: communication, transportation, clothing,
shelter, food, medical services, just to mention but a few. The status
of Nigerian families has changed from what it used to be to what it
is today as a result of the above listed factors. Human families will
continue to experience more changes as a result of their unlimited
wants, needs and desires in a bid to make life more enjoyable and
comfortable.) [3]
Social Structure
...social structure is seen as comprising the relationships
themselves, understood as patterns of causal interconnection and
interdependence among agents and their actions, as well as the
positions that they occupy.
...social structure is seen as comprising those cultural or
normative patterns that define the expectations of agents hold
about each other's behaviour and that organize their enduring
relations with each other. [4]
Definitions:

Social structure is a term frequently used in anthropology, sociology

and social theory to refer to enduring relationships or bonds
between individuals or groups of individuals. [1]
Social structure possession of scarce goods. Additionally, in any
society there is a more or less regular division of labour. [2]

The ways in which people within a culture are organized into smaller
groups; each smaller group has its own particular tasks. [2]

Social structure refers to regularities in social life, its application is

inconsistent. For example, the term is sometimes wrongly applied
when other concepts such as custom, tradition, role, or norm would
be more accurate.
Social structure is sometimes defined simply as patterned social
relationsthose regular and repetitive aspects of the interactions
between the members of a given social entity

Karl Marx argued that the economic base substantially determined the
cultural and political superstructure of a society.

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5

A.R. Radcliffe-Brown - social structure a central place in his approach

and connected it to the concept of function. In his view, the components
of the social structure have indispensable functions for one anotherthe
continued existence of the one component is dependent on that of the
othersand for the society as a whole, which is seen as an integrated,

organic entity. Societies demonstrated that the interdependence of

institutions regulated much of social and individual life.
Parsons - social structure was essentially normativethat is, consisting
of institutional patterns of normative culture. Put differently, social
behaviour conforms to norms, values, and rules that direct behaviour in
specific situations. These norms vary according to the positions of the
individual actors: they define different roles, such as various occupational
roles or the roles of husband-father and wife-mother.
Social structure has been identified as:

the relationship of definite entities or groups to each other,

enduring patterns of behaviour by participants in a social system in
relation to each other, and
Institutionalized norms or cognitive frameworks that structure the
actions of actors in the
social system.

Social structure in a general sense, the term can refer to:

entities or groups in definite relation to each other,

relatively enduring patterns of behaviour and relationship within a
society, or

Social institutions and norms becoming embedded into social

systems in such a way that they shape the behaviour of actors
within those social systems.

The notion of social structure as relationships between different entities or

groups or as enduring and relatively stable patterns of relationship
emphasizes the idea that society is grouped into structurally related
groups or sets of roles, with different functions, meanings or purposes.
One example of social structure is the idea of "social stratification", which
refers to the idea that society is separated into different strata (levels),
according to social distinctions such as a race, class, disability or gender.
Social treatment of persons within various social structures can be
understood as related to their background.
Social structure may be seen to influence important social systems
including the economic system, legal system, political system, cultural
system, and others. Family, religion, law, economy and class are all social
structures. The "social system" is the parent system of those various
systems that are embedded in it. Social structures have informed the
study of institutions, culture and agency, social interaction, and history.
Origins and evolution:

2
5

Some believe that social structure is naturally developed. It may be

caused by larger system needs, such as the need for labour,

management, professional and military classes, or by conflicts between

groups, such as competition among political parties or among elites and
masses. Others believe that this structuring is not a result of natural
processes, but is socially constructed. It may be created by the power of
elites who seek to retain their power, or by economic systems that place
emphasis upon competition or cooperation. [4]
Divisions:
Social structure
macrostructure.

can

also

be

divided

into

microstructure

and

Microstructure - is the pattern of relations between most basic elements

of social life, that cannot be further divided and have no social structure of
their own (for example, pattern of relations between individuals in a group
composed of individuals - where individuals have no social structure, or a
structure of organizations as a pattern of relations between social
positions or social roles, where those positions and roles have no structure
by themselves).
Macrostructure - is thus a kind of 'second level' structure, a pattern of
relations between objects that have their own structure (for example, a
political social structure between political parties, as political parties have
their own social structure).
Some types of social structures that modern sociologist differentiate are
Relation structures (in family or larger family-like clan structures),
Communication structures (how information is passed in organizations)
and Sociometric structures (structures of sympathy, antipathy and
indifference in organizations.
Social structure in a general sense, the term can refer to:

entities or groups in definite relation to each other,

relatively enduring patterns of behaviour and relationship within a
society, or

Social institutions and norms becoming embedded into social

systems in such a way that they shape the behaviour of actors
within those social systems.

2
5

The notion of social structure as relationships between different entities or

groups or as enduring and relatively stable patterns of relationship
emphasises the idea that society is grouped into structurally related
groups or sets of roles, with different functions, meanings or purposes.
One example of social structure is the idea of "social stratification", which
refers to the idea that society is separated into different strata (levels),
according to social distinctions such as a race, class, disability or gender.
Social treatment of persons within various social structures can be
understood as related to their background.

Social structure may be seen to influence important social systems

including the economic system, legal system, political system, cultural
system, and others. Family, religion, law, economy and class are all social
structures. The "social system" is the parent system of those various
systems that are embedded in it. Social structures have informed the
study of institutions, culture and agency, social interaction, and history. [4]
Social network:
A social network is a social structure made of individuals (or
organizations) called "nodes," which are tied (connected) by one or more
specific types of interdependency, such as friendship, kinship, financial
exchange, dislike, or relationships of beliefs, knowledge or prestige.
Social network analysis views social relationships in terms of network
theory about nodes and ties. Nodes are the individual actors within the
networks, and ties are the relationships between the actors. The resulting
graph-based structures are often very complex. There can be many kinds
of ties between the nodes. Research in a number of academic fields has
shown that social networks operate on many levels, from families up to
the level of nations, and play a critical role in determining the way
problems are solved, organizations are run, and the degree to which
individuals succeed in achieving their goals.
In its simplest form, a social network is a map of all of the relevant nodes
between all the nodes being studied. The network can also be used to
measure social capital -- the value that an individual gets from the social
network. These concepts are often displayed in a social network diagram,
where nodes are the points and ties are the lines. [5]
Social groups:
A group can be defined as two or more humans that interact with one
another, accept expectations and obligations as members of the group,
and share a common identity. By this definition, society can be viewed as
a large group, though most social groups are considerably smaller.
A true group exhibits some degree of social cohesion and is more than a
simple collection or aggregate of individuals, such as people waiting at a
bus stop. Characteristics shared by members of a group may include
interests, values, ethnic or social background, and kinship ties. According
to Paul Hare, the defining characteristic of a group is social interaction.
"Man can only make progress in cooperative groups."

2
5

A social group consists of two or more people who interact with one
another and who recognize themselves as a distinct social unit. The
definition is simple enough, but it has significant implications. Frequent
interaction leads people to share values and beliefs. This similarity and

the interaction cause them to identify with one another. Identification and
attachment, in turn, stimulate more frequent and intense interaction. Each
group maintains solidarity with all to other groups and other types of
social systems.
Groups are among the most stable and enduring of social units. They are
important both to their members and to the society at large. Through
encouraging regular and predictable behaviour, groups form the
foundation upon which society rests. Thus, a family, a village, a political
party a trade union is all social groups. These, it should be noted are
different from social classes, status groups or crowds, which not only lack
structure but whose members are less aware or even unaware of the
existence of the group. These have been called quasi-groups or groupings.
Nevertheless, the distinction between social groups and quasi-groups is
fluid and variable since quasi-groups very often give rise to social groups,
as for example, social classes give rise to political parties.
Types of groups:
Primary groups are small groups with intimate, kin-based relationships:
families, for example. They commonly last for years. They are small and
display face to face interaction.
Secondary groups, in contrast to primary groups, are large groups
whose relationships are formal and institutional. They may last for years
or may disband after a short time. The formation of primary groups
happens within secondary groups.
Individuals almost universally have a bond toward what are known as
reference groups. These are groups to which the individual conceptually
relates him/her, and from which he/she adopts goals and values as a part
of his/her self identity.
Other types of groups include the following:

Peer group - A peer group is a group of approximately the same

age, social status, and interests. Generally, people are relatively
equal in terms of power when they interact with peers.
Clique - An informal, tight-knit group, usually in a High
School/College setting, that shares common interests. There is an
established yet shifting power structure in most Cliques.

Club - A club is a group, which usually requires one to apply to

become a member. Such clubs may be dedicated to particular
activities, such as sporting clubs.

Household - all individuals who live in the same home, there are
various models in Anglophone culture including the family, blended
families, share housing, and group homes.

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5

Community - A community is a group of people with a commonality

or sometimes a complex net of overlapping commonalities, often but not always - in proximity with one another with some degree of
continuity over time. They often have some organization and
leaders.

Franchise- this is an organization which runs several instances of a

business in many locations.

Gang - A gang is usually an urban group that gathers in a particular

area. It is a group of people that often hang around each other. They
can be like some clubs, but much less formal.

Mob - A mob is usually a group of people that has taken the law into
their own hands. Mobs are usually a group which gather temporarily
for a particular reason.

Posse - A posse was initially an American term for a group of

citizens that had banded together to enforce the law. However, it
can also refer to a street group.

Squad - This is usually a small group, of around 3-8 people, that

would work as a team to accomplish their goals.

Team - similar to a squad, though a team may contain many more

members. A team works in a similar way to a squad.

Groups can also be categorized according to the number of people

present within the group. These categories are defined as follows:

Couple or Pair - 2 people

Few - 3 people

Group - 3 to 5 people

Bunch - 6 to 9 people

Heaps - 10 or more people

Significance:

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5

Territorial and dominance behaviours in humans are so universal and

commonplace that they are simply taken for granted. But these social
behaviours and interactions between human individuals play a special role
in the study of groups: they are necessarily prior to the formation of
groups. The psychological internalization of territorial and dominance
experiences in conscious and unconscious memory are established
through the formation of personal identity, body concept, or self concept.
An adequately functioning individual identity is necessary before an
individual can function in a division of labor (role), and hence, within a
cohesive group. Coming to understand territorial and dominance

behaviours may thus help to clarify the development, functioning, and

productivity of groups.
Development of a group:
If one brings a small collection of strangers together in a restricted space
and environment, provide a common goal, and maybe a few ground rules,
a highly probable course of events will follow. Interaction between
individuals is the basic requirement. At first, individuals will differentially
interact in sets of twos or threes while seeking to interact with those with
whom they share something in common: i.e., interests, skills, and cultural
background. Relationships will develop some stability in these small sets,
in that individuals may temporarily change from one set to another, but
will return to the same pairs or trios rather consistently and resist change.
Particular twosomes and threesomes will stake out their special spots
within the overall space.
Again depending on the common goal, eventually there will be integration
of twosomes and threesomes into larger sets of six or eight, and
corresponding revisions of territory, dominance ranking, and further
differentiation of roles. All of this seldom takes place without some conflict
or disagreement: for example, fighting over the distribution of resources,
the choices of means and different sub goals, the development of what
are appropriate norms, rewards and punishments. Some of these conflicts
will be territorial in nature: i.e., jealousy over roles, or locations, or
favoured relationships. But most will be involved with struggles for status,
ranging from mild protests to serious verbal conflicts and even dangerous
violence.
By analogy to animal behaviour, these behaviours can be termed
territorial behaviours and dominance behaviours. Depending on the
pressure of the common goal and on the various skills of individuals,
differentiations of leadership, dominance, or authority will develop. Once
these relationships solidify, with their defined roles, norms, and sanctions,
a productive group will have been established.
Dispersal and transformation of groups:

2
5

Two or more people in interacting situations will over time develop stable
territorial relationships. As described above, these may or may not
develop into groups. But stable groups can also break up in to several sets
of territorial relationships. There are numerous reasons for stable groups
to malfunction or to disperse, but essentially this is because of loss of
compliance with one or more elements of the definition of group. The two
most common causes of a malfunctioning group are the addition of too
many individuals, and the failure of the leader to enforce a common
purpose, though malfunctions may occur due to a failure of any of the
other elements (i.e., confusions status or of norms).

In a society, there is obvious need for more people to participate in

cooperative endeavours than can be accommodated by a few separate
groups. [6]
Conclusion
Different social groups and structure like industrial, agriculture, cultural,
religious, political and aesthetic etc have evolved and developed during
various stages of development of human civilization, and these social
structures represented mans accumulated cultural resources primarily
based on natural environment.
Human behaviour has been known by his characteristics social
organization, social processes, economy and culture depend upon the
geographical environment. Density and distribution of population, social
differentiation, cultural variations, and character of economy, political,
social, religious organizations and all social phenomena contribute in the
making of the socio sphere. [7]

References

2
5

1. wikipedia.org/wiki/Social_structure
2. www.britannica.com/EBchecked/topic/629641/violence
3. www.nigeriansinamerica.com/articles/3659/2/Mans-Family-And-HisEnvironment---An-Essay-On-The-Issues-Of- The-Society/Page2.html
4. wikipedia.org/wiki/Social structure
5. wikipedia.org/wiki/index.html?curid=325726
6. wikipedia.org/wiki/Social group
7. nos.org/331courseE/L-22%20SOCIETY%20AND
%20ENVIRONMENT.pdf

SECTION B: SOCIOLOGY

5. URBANISATION
5.1 Trends and characteristics
5.2 Dynamics
development

of

urban

growth

expansion

and

5.3 Urban attitude, value and behaviour

2
5

5.4 Study

5.1 TRENDS AND CHARACTERISTICS

Organization
In organization is a social arrangement which pursues collective goals,
which controls its own performance, and which has a boundary separating
it from its environment. The word itself is derived from the Greek word
organon [itself derived from the better-known word ergon - work;
deed - > ergonomics, etc]
In the social sciences, organizations are studied by researchers from
several disciplines, the most common of which are sociology, economics,
political
science,
psychology,
management,
and
organizational
communication. The broad area is commonly referred to as organizational
studies, organizational behaviour or organization analysis. Therefore, a
number of different theories and perspectives exist, some of which are
compatible,
Organization process-related:
(organization as task or action).

an

entity

is

being

(re-)organized

Organization functional: organization as a function of how entities like

businesses or state authorities are used (organization as a permanent
structure).
Organization institutional: an entity is an organization (organization as
an actual purposeful structure within a social context)
Organization in sociology

2
5

In sociology "organization" is understood as planned, coordinated and

purposeful action of human beings to construct or compile a common
tangible or intangible product. This action is usually framed by formal

membership and form (institutional rules). Sociology distinguishes the

term organization into planned formal and unplanned informal
organizations. Sociology analyzes organizations in the first line from an
institutional perspective. In this sense, organization is a permanent
arrangement of elements. These elements and their actions are
determined by rules so that a certain task can be fulfilled through a
system of coordinated division of labor.
An organization is defined by the elements that are part of it (who belongs
to the organization and who does not?), its communication (which
elements communicate and how do they communicate?), its autonomy
(which changes are executed autonomously by the organization or its
elements?), and its rules of action compared to outside events (what
causes an organization to act as a collective actor?).
By coordinated and planned cooperation of the elements, the organization
is able to solve tasks that lie beyond the abilities of the single elements.
The price paid by the elements is the limitation of the degrees of freedom
of the elements. Advantages of organizations are enhancement (more of
the same), addition (combination of different features) and extension.
Disadvantages can be inertness (through co-ordination) and loss of
interaction. [1]

The Smallest Level of Social Organization: Dyads

The dyad is the smallest level of organization that exists. Dyads consist of
two people.

Interaction is very personal and intimate.

require continuing active participation and commitment of both
members

People make up rules during the interaction.

are the most unstable of social groups

A unique feature of dyads is that each individual in the dyad has total veto
power over any aspect of the relationship (Appelbaum and Chambliss,
1997:84).
Groups
A. General Characteristics of Groups

2
5

1. A Group Consists of People Who Interact and Form Social Patterns

A group is at least one person larger than a dyad. It has three or more
people. Groups are different from dyads in that they depend less on the
individual actor for continuity.
2. Increases in Size Equals Loss of Freedom
As the group grows in numbers, the individual freedom of any particular
member is de-emphasized. Furthermore, as the group grows in size, more
emphasis is put on the well-being of the group.
3. Interaction Reaffirms Social Patterns
Groups depend on interaction to affirm and reaffirm social patterns. The
strength of patterns in the group depends on the history of the interaction.
Usually, the longer the group exists, the stronger the bonds become.
4. Groups Contribute to Larger Organization
Social organization at the "formal level" is sufficiently large that
continuous interaction among all actors is impossible. Even in large
organizations interaction between individuals still occurs in small groups.
The interaction of small groups within the frame work of larger
organizations reaffirms the social patterns of the larger social
organizations.
5. Groups Define Reality for the Individual
The group's definition of reality is a pattern that the individual assumes.
The individual forms expectations about the world through group
involvement. One learns within the group what the important issues are
and the guide lines (the rules) that the group expects you to live by.
Formal Organizations
Formal organizations include churches, clubs, schools, armies, colleges,
the IRS, and hospitals.
A. Characteristics of Formal Organizations
Characteristics of formal organizations include:
1. Impersonal interaction among group members.
2. As groups grow in size, they make objectives explicit in writing
(e.g., they become more formal).
3. Formal organizations are created to work toward specified
goals. When they meet goals, the individual moves on.

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5

B. Three Types of Formal Organizations

There are three types of formal organizations according to Amitai Etzioni

(1961).
1. Coercive Organizations
Coercive organizations rely on force to achieve order. Force is necessary
because people tend to resist being a part of the organization. Examples
are prisons and mental hospitals
2. Utilitarian Organizations
Utilitarian organizations see individuals conforming to organization
standards because organizations pay them to be a part of that
organization. Of course, most jobs are utilitarian
3. Normative Organizations
Normative organizations are based on a shared moral commitment.
People conform to the organizations standards out of a positive sense of
obligation. Normative organizations include political parties, religious
organizations, and fraternities. [6]
Bureaucracy
Bureaucracy is the collective organizational structure, procedures,
protocols, and set of regulations in place to manage activity, usually in
large organizations and government. As opposed to adhocracy, it is
represented by standardized procedure (rule-following) that guides the
execution of most or all processes within the body; formal division of
powers; hierarchy; and relationships, intended to anticipate needs and
improve efficiency.

2
5

A bureaucracy traditionally does not create policy but, rather, enacts it.
Law, policy, and regulation normally originate from a leadership, which
creates the bureaucracy to put them into practice. In reality, the
interpretation and execution of policy, etc. can lead to informal influence.
A bureaucracy is directly responsible to the leadership that creates it,
such as a government executive or board of directors. Conversely, the
leadership is usually responsible to an electorate, shareholders,
membership or whoever is intended to benefit. As a matter of practicality,
the bureaucracy is where the individual will interface with an organization
such as a government etc., rather than directly with its leadership.
Generally, larger organizations result in a greater distancing of the
individual from the leadership, which can be consequential or intentional
by design.

Definition- Bureaucracy is a concept in sociology and political science

referring to the way that the administrative execution and
enforcement of legal rules are socially organized. Four structural
concepts are central to any definition of bureaucracy:
1. a well-defined division of administrative labour among persons and
offices,
2. a personnel system with consistent patterns of recruitment and
stable linear careers,
3. a hierarchy among offices, such that the authority and status are
differentially distributed among actors, and
4. Formal and informal networks that connect organizational actors to
one another through flows of information and patterns of
cooperation.
Examples of everyday bureaucracies include governments, armed forces,
corporations, non-governmental organizations (NGOs), intergovernmental
organizations (IGOs), hospitals, courts, ministries, social clubs, sports
leagues, professional associations and academic institutions.
Types of Bureaucratic Agencies:
Production organizations are those in which both outputs and outcomes
are observable.
Procedural organizations are those where outputs can be observed, but
outcomes are unclear or not observable.
Craft organizations are those where outputs are hard to observe, but
outcomes are fairly easy to evaluate.
Coping organizations are those where neither outputs nor outcomes are
observable. [3]
Organizational structures
Main article: Organizational structure

Pyramids or hierarchies
Committees or juries

Matrix organizations

Ecologies

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The study of organizations includes a focus on optimizing organizational

structure. According to management science, most human organizations
fall roughly into four types:

Pyramids or hierarchies
A hierarchy exemplifies an arrangement with a leader who leads leaders.
This arrangement is often associated with bureaucracy. Hierarchies were
satirized in The Peter Principle (1969), a book that introduced
hierarchiology and the saying that "in a hierarchy every employee tends
to rise to his level of incompetence".
Committees or juries
These consist of a group of peers who decide as a group, perhaps by
voting. The difference between a jury and a committee is that the
members of the committee are usually assigned to perform or lead further
actions after the group comes to a decision, whereas members of a jury
come to a decision. In common law countries legal juries render decisions
of guilt, liability and quantify damages; juries are also used in athletic
contests, book awards and similar activities. Sometimes a selection
committee functions like a jury. In the middle Ages juries in continental
Europe were used to determine the law according to consensus amongst
local notables.
Committees are often the most reliable way to make decisions.
Condorcet's jury theorem proved that if the average member votes better
than a roll of dice, then adding more members increases the number of
majorities that can come to a correct vote (however correctness is
defined). The problem is that if the average member is worse than a roll of
dice, the committee's decisions grow worse, not better: Staffing is crucial.
Matrix organization
This organizational type assigns each worker two bosses in two different
hierarchies. One hierarchy is "functional" and assures that each type of
expert in the organization is well-trained, and measured by a boss who is
super-expert in the same field. The other direction is "executive" and tries
to get projects completed using the experts.
Ecologies
This organization has intense competition. Bad parts of the organization
starve. Good ones get more work. Everybody is paid for what they actually
do, and runs a tiny business that has to show a profit, or they are fired.

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Companies who utilize this organization type reflect a rather one-sided

view of what goes on in ecology. It is also the case that a natural
ecosystem has a natural border eco regions do not in general compete
with one another in any way, but are very autonomous.

Organizational Trends
There are five key organizational trends that you should be aware of.
Globalization
Increasingly globalized sales, manufacturing, research, management
Movement from direct exports to having sales offices in different
countries to having manufacturing to all functions spread across the
globe

Increasingly globalized labor market

Due to:
o

reduced cost and improved quality

transportation and communication

of

search for unsaturated markets

exploit regional cost and expertise differences

international

Diversity
Workforce getting more heterogeneous sexually, racially, culturally,
individually, etc.
Source of both innovation and conflict/communication problems

Need to cope with different styles of interaction, dress, presentation,

physical appearance

Due to:
o

changing demographics

globalization of the labor market

Flexible
Organizational systems and processes and people that can respond
differently to different situations
Fewer detailed rules and procedures
Greater autonomy, encouragement for initiative

Customizable employment relationships:

sharing, mommy tracks, pay for skills

Lifetime employability, not lifetime employment

Due to:

telecommuting,

job

differentiated customer needs -- filling them exactly is source

of competitive advantage

increasing diversity in workplace

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increased pace of change in technology and markets

Flat

Fewer levels of management,

Workers empowered to make decisions

Fewer differences in responsibility (not in pay) across levels

Due to:
o

need for speed, which makes it helpful to empower employees

to make decisions, which means fewer managers are needed

changes in information technology mean less need for the

communication and control functions of middle managers

globalization means intensified competition, which increases

the need to cut costs

Networked
Direct communication across unit & firm boundaries, ignoring chain
of command
Cross-unit team structures

Outsourcing & downsizing

Strategic alliances with competitors and others

Now have firms that are your competitors, customers and
collaborators all at the same time

Close coordination among firms (e.g., JIT systems) and information

sharing (open computer systems)

Across the board contact with customers, not just official boundary
spanners

Customization

Decentralization

Due to:
o

new information technologies, especially groupware, clientserver, distributed computing

fast changing customer needs and competitor offerings

more complicated products require better integration of

manufacturing, design, and marketing functions

Here is a diagram linking up all the concepts above.

[2]

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Characteristics of organization
Main characteristics of formal organization

Deliberately planned and created

Concerned with the co-ordination of activities

Hierarchically structured with stated objectives

Based on certain principles such as the specification of tasks

Organization structure is laid down by the top management to

achieve organizational goals.

Organization structure is based on division of

specialization to achieve efficiency in the operations.

The authority and responsibility relationships created by the

organization structure are to be honoured by everyone.

Developed through delegation of authority

Organization structure concentrates on the jobs to be performed

and not the individuals who are to perform jobs.

The organization does not take into consideration the sentiments of

organizational members. [4]

labor

and

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Main characteristics of informal organization

The informal organization is flexible and loosely structured

Relationships may be left undefined

Membership
involvement

Involves two or more people

Informal relationships, groupings & interactions

Repeated contacts but without any conscious joint purpose

Involves the human need to socialize

Includes both friendly and hostile relationships and interactions

Informal association precedes formal organization, as it requires

preliminary (informal) contact and interaction before establishment.

is

spontaneous

and

with

varying

degrees

of

[5]

Reference
1.
2.
3.
4.
5.
6.

http://www.en.wikipedia.org/wiki/sociology
http://www.en.wikipedia.org/wiki/organizational behaviour
http://www.en.wikipedia.org/wiki/organisation
http://www.en.wikipedia.org/wiki/formal organization
http://www.en.wikipedia.org/wiki/informal organization
http://www.delmar.edu/socsci/rlong/intro/org.htm

5.2 DYNAMICS OF URBAN GROWTH, EXPANSION AND

DEVELOPMENT
This study of urban dynamics was undertaken principally because of
discoveries made in modelling the growth process of corporations. It has
become clear that complex systems are counterintuitive. That is, they
give indications that suggest corrective action which will often be
ineffective or even adverse in its results. Very often one finds that the
policies that have been adopted for correcting a difficulty are actually
intensifying it rather than producing a solution.

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Choosing an ineffective or detrimental policy for coping with a complex

system is not a matter of random chance. The intuitive processes will
select the wrong solution much more often than not. A complex systema

class to which a corporation, a city, an economy, or a government belong

behaves in many ways quite the opposite of the simple systems from
which we have gained our experience.
Most of our intuitive responses have been developed in the context of
what are technically called first-order, negative-feedback loops. Such a
simple loop is goal-seeking and has only one important state variable. For
example, warming one's hands beside a stove can be approximated as a
first-order, negative-feedback loop in which the purpose of the process is
to obtain warmth without burning one's hands. The principal state variable
of the loop is the distance from the stove. If one is too close he burns his
hands, if too far away he receives little heat. The intuitive lesson is that
cause and effect are closely related in time and space. Temperature
depends on the distance from the stove. Too much or too little heat is
clearly related to the position of the hands. The relation of cause and
effect is immediate and clear. Similarly, the simple feedback loops that
govern walking, driving a car, or picking things up all train us to find cause
and effect occurring at approximately the same moment and location.
But in complex systems cause and effect are often not closely related in
either time or space. The structure of a complex system is not a simple
feedback loop where one system state dominates the behaviour. The
complex system has a multiplicity of interacting feedback loops. Its
internal rates of flow are controlled by nonlinear relationships. The
complex system is of high order, meaning that there are many system
states (or levels). It usually contains positive-feedback loops describing
growth processes as well as negative, goal-seeking loops. In the complex
system the cause of a difficulty may lie far back in time from the
symptoms, or in a completely different and remote part of the system. In
fact, causes are usually found, not in prior events, but in the structure and
policies of the system.
To make matters still worse, the complex system is even more deceptive
than merely hiding causes. In the complex system, when we look for a
cause near in time and space to a symptom, we usually find what appears
to be a plausible cause. But it is usually not the cause. The complex
system presents apparent causes that are in fact coincident symptoms.
The high degree of time correlation between variables in complex systems
can lead us to make cause-and-effect associations between variables that
are simply moving together as part of the total dynamic behaviour of the
system. Conditioned by our training in simple systems, we apply the same
intuition to complex systems and are led into error. As a result we treat
symptoms, not causes. The outcome lies between ineffective and
detrimental.

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The study of urban dynamics requires tools that allow the exploration of
the
Change phenomenon in time and space. Urban modelling techniques have
been traditionally used to explore issues in urban dynamics, and automata

models like cellular automata and agent based models seem to be a

particularly suitable approach for this kind of study. Therefore, an agent
based model was used in order to unfold the problem of urban growth of
Latin American cities through their dynamics. Agent based models are
based on the understanding that human decision making plays a major
role in urban processes and urban change. Their framework allows
interactions between agents and their landscape to be explicitly
represented. Hence, this kind of model permits the analysis of dynamic
processes that link spatial development with social issues, which is of
fundamental importance when dealing with cases of strong social
differentiation, as is the case of urban dynamics
In peripheral settlements, upgrading occurs simultaneously with the
incorporation of the settlement into the inner city by urban growth. In the
Present study the term upgrading will be used to designate
improvements in the physical conditions of the settlement itself, while the
term recontextualisation will be used to refer to the process of change in
the relative location of the spontaneous settlement. The process can be
generally described as fallows. With the passage of time and with the
provision of minimal public services, squatter settlement can become
stable and substantial neighbourhoods. Because the amount of filtereddown middle-class housing is limited, especially in cities undergoing rapid
growth people simply improve their present homes and neighbourhoods.
The older the squatter settlement, the better and more substantial it is. It
is not uncommon to find entire neighbourhoods of low storied concrete
houses that have evolved during a decade or two from one-room
cardboard shacks. With the gradual addition of paved streets, street light,
planting and many early squatter settlements are now indistinguishable
from neighbourhoods with less checked histories. New squatter settlement
are being added to peripheries so that the poorest quality housing
continues to be located at the edges of city. (Griffin & ford, 1980, page
404)

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The process of upgrading can be either a natural process of improvement

or it can be a result of an upgrading project, which is usually an
intervention by the local by the local government. Even as a natural
process of evolution, there is always a partial plan, since the services are
provided by the local government and not by the inhabitant themselves. It
was on the basis of this evolution, or upgraded process that turner
suggested that spontaneous settlement were housing solution conditions
in low-income housing settlements improve over a period of time and thus
there was no need to demolish spontaneous settlement since they were
part of housing solution. He also argued that slum dwellers preferred the
opportunity to improve and consolidation their existing housing by self

help, as opposed to accepting an institutionalization government strategy

of redevelopment (Turner, 1967). His ideas started a large discussion of
the role of the urban poor and spontaneous settlements, more specially
about whether the settlements were slums of hope or slums of despair.
Peripherisation is defined here then as a kind of growth process
characterized by the expansion of borders of the city through massive
formation of peripheral settlements, which are in most cases, low-income
residential areas. These areas are incorporated into the city by a long
term process of expansion in which some of the low income residential
areas are reconceptualised with in the system and occupied by higher
economic groups while new low income settlement keep emerging on the
periphery. In terms of urban planning policies the peripherisation
phenomenon is seen usually from a static point of view. The focus of
government interventions is still on the local/ housing scale, upgrading
settlement and providing housing tracts for low-income groups. There has
been little focus, either on the dynamic of the process or on the linkage
between the local and global scales, that is , on the overall growth of cities
, which has been as a mere result of a demographic phenomenon. There is
very little research on intra- urban mobility or inner city dynamics. The
most important study was developed by Turner (1968), based on his
experienced of settlements in Peru. Turner proposed a model of intraurban mobility for low-income groups, more specifically, for migrants from
rural areas. According to the modal migrants would follow a two stage
process of initial settlement and subsequent intra-urban relocation in
which they would first live as renters in the inner city and later move as
owner to peripheral settlements. His modal provoked a large discussed
the validity of the modal for different context based on the available
evidence (see Brett 1974; Conway 1985; Conway and Brown, 1980;
Gilbert & Ward, 1982; Kliest & Scheffer, 1981; Lindert, 1992).
GENTRIFICATION

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Gentrification has been seen as a deviation of the filtering process. It

consists essentially of reinvestment in a central urban area, usually one
which has lost value for occupation by a higher economic group. The
reinvestment serves both to revitalize the urban area and to renovate the
housing stock, and might be a private investment as in Britain, or planned
and public ally funded, as in the United States. This process usually
involves some kind of displacement of the lower economic group which
occupies the area. According to Smith (1982, page 141) gentrification as a
process is rendered a chance, extraordinary event, the accidence
outcome of a unique mix of exogenous factors. Its roots are the
devaluation of much inner and central city residential property; the middle
class migration to other neighbourhoods and the suburbs: the 49

accelerated devolution of suburban property, with the influx of working

class tenants and their landlord (Smith, 1979, page 25). Gentrification
has been erroneously understood as a return of people from the suburbs,
but it actually involves migration with in the inner city itself as small,
youthful household, commonly in the pre-child bearing or early
childrearing stages of the family cycle have moved from rented
accommodation to single family owner occupation in the inner city, rather
than seeking a suburban home. (Hamnett, 1984, page 285)
Although many studies of gentrification have been made, the most widely
acknowledged hypothesis is Smiths rent gap theory. (Smith,1979; 1982;
1986).
Smiths theory is essentially focused on the consumer-side of
gentrification, rather than using traditional demand oriented economic
approach. In short, Smith suggests that gentrification occurs in places
where the values of the potential rent are higher than the actual rent (due
to the ages of the building stock and the physical conditions of the
neighbourhood). Gentrification consists of a process of revitalization of an
urban areas and its housing stock, in order to obtain the highest possible
rent in the areas. Smith argues that gentrification is part of a larger
process of uneven development, in which investments in urban areas are
always shifting location in search of higher profits. In Smiths view there is
a cycle of capital investment and disinvestment, which result in devolution
(or depreciation) in specific urban areas, while other areas are being
revitalized and gentrified. Urban systems have been traditionally studied
using modelling techniques. Since the 1960 a number of models have
been developed and, more recently, with advances and popularization of
computer tools, the possibilities for exploring urban systems from this
viewpoint have increased considerably.

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The computer becomes an important research environment in geography

and urbanization in the 1960 and techniques and tools have been
developed ever since. In urban research, the use of automata-based
models, more specifically cellular automata, is replacing traditional
transport and land use modals, shifting the paradigm of urban modals
towards a complexity approach. The idea of structure emerging from a
bottom up process where local action and interactions produce the global
pattern has been widely devolved ever since automata-based models
proved to be useful for a number of different urban applications. Urban
systems have been traditionally analyzed using the systemic approach,
which conceives the city as a system a set of interconnected parts. What
complexity theory introduces to this well known concept is the idea that
instead of studying 60 the phenomenon as a sum of parts, the urban

system as well as other system are seen as result of the interaction of

these parts. This means that not only is the whole more than a sum of
parts, but the whole is different from the sum of parts (Batty, 2000).
From the point of view, complexity theory can be seen as a new systemic
approach, which studies the relation between parts and whole in a
different way, stressing the idea of a structure emerging from a bottom-up
process where local action and interactions produce the global pattern.
One of the highlights of complexity theory is that it offers a new approach
to the study of systems dynamic (Wu, 2002). Dynamics can be more
important than structure (Batty, 2000) since they permit the
understanding of such systems to go beyond description (in static terms)
towards capturing the internal essence of the phenomena of charge.
Hence the identification and exploration of the various surprise-generating
mechanisms governing the behavior of complex systems is an essential
issue, and moreover, a sine qua non for the development of a theory of
complex systems (Casti, 1997).

5.3 URBAN ATTITUDE, VALUE AND BEHAVIOUR

Urbanization Process
Urbanization is defined as the increase in the number of cities and urban
population. Urbanization is not only a demographic movement. Therefore,
when describing urbanization; social, economic and psychological changes
that constitute the demographic movement should be considered. Based
on this, comprehensive definition of urbanization can be made as follows:
Urbanization is a process that leads to the growth of cities due to
industrialization and economic development, and that leads to urbanspecific changes in specialization, labor division and human behaviors.1 In
that way, urbanization is a forced and inevitable demographic movement
and this process should not certainly be neglected.

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In a moving population, the process of acquiring urban characteristics and

isolation from rural life in terms of economic and social aspects starts
together with urbanization. This is a cultural transformation process and
besides the development of urban culture, city dwellers should
psychologically, physically, and behaviourally is in harmony with this
process. In developed countries, urbanization is an old process and it was
formed in parallel with industrialization, technologic reforms, and
infrastructure services, and it still continues. In underdeveloped and
developing countries, this process is more recent and has been rapidly
experienced in a short time. Especially in developing countries among the
problems, which have been faced in the last 30-35 years, are the rapid
increase in population and rapid urbanization. In these countries, annual

increase in average population varies between 2-3%, whereas urban

dwellers have increased from 14% to 50%.
Urbanization involves social drift and social residue concepts that may
explain prevalence of urban mental disorder. Social drift is defined as the
tendency of certain individuals to migrate to certain areas, whereas social
residue expresses residual groups remaining at certain areas after
migration of population. Relative impacts of these concepts depend on
primarily pushing (as a result of poverty in rural areas) or pulling (because
of better job opportunities) immigrants to cities. The forces that cause
people to leave their original areas and to dwell cities are defined as push
and pull effects. Reasons for push to cities are divided into two as the
change and the stagnation factors. Technical unemployment among the
change factors and reduction in useful land areas due to rapid population
increase known as the stagnation factor lead to peoples flowing to cities.
Abandonment of rural areas due to push factors is more difficult and
violent process for immigrants themselves. Among the reasons that pull
people from rural areas to cities (pull urbanization) are better education,
health, employment opportunities and higher life standards. As the factors
that push people from rural areas to cities do not depend on individuals
own preference, these factors threaten and affect persons mental health
more negatively when compared to pull factors. The impacts of such
urbanization are often harmful to mental health.
Effects of Urbanization
Rapid growth of cities due to immigration leads to:
Overcrowding and increase in population with an under-standard life,
Unemployment, poverty,
Crime,
Pollution,
Cultural change, conflict, estrangement, isolation,
Child employment,
Disintegration of families,
Rapid increase in shanty houses, living in poor home environment,
decay in aesthetic structure,
Traffic problems,
Uncertainty of future, and anxiety. Thus, negatively affected mental
health of individuals

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Life-style differences between abandoned areas and destination areas

emerge as a cultural conflict. Common aims with the new living area
disappear, especially during initial periods. An aimless and hopeless lifestyle leads to insensitivity, disinterested and aggressive behaviours.
Eventually, balance and order of the community deteriorates. People live
on their own in accordance with their own rules. Individuals, who come
from rural areas and live away from traditional culture and values, are
influenced by urban way of life, which may include unhealthy, selfish, and
egoistic tendencies. Therefore, immigrant persons may undergo identity

problems. Together with the urbanization process, urban dwellers have

difficulty accepting immigrant people and therefore, adaptation of
immigrants to urban life gets more difficult and is affected more
negatively. Thus, these persons feel refused and stranger to city life.
Difficulty in having relationship, estrangement, and failure in being
attuned in big cities cause increased violent behaviour through isolation
and externalization. Limiting factors in villages and towns, small number
of population, the same social status among persons, close relationships
and neighbourhood provide a common control of relations and social
solidarity. Thus, aggressive behaviours, violent events and crime rates
decrease.
Slum Problem, Violence, and Unemployment
One of the main problems resulting from immigration from rural areas to
urban districts is slum problem. Slum leads to important problems as well.
Especially, they form inadequate environment for children. These negative
conditions may affect children and may provide basis for personalities that
tend to commit crime. In addition, as parents in cities have to work, the
control of family on children attenuates so that children may imitate bad
role models and may join groups that are liable to crime. Thus, these
children may show substance and alcohol abuse, play truant and show
behavioural disorders such as aggressiveness. Houses and buildings with
inadequate housing environment in slums, and problems such as
unemployment, environment, and traffic may result in disharmony.
Discordant structure in slums and maladjusted life-style may cause
intense hate and revenge feelings. Such individuals may express their
hate via violence.8 Intensive disobedience, hostility to parents and
authority, telling lies, burglary, fraud, playing truant, aggressiveness,
fighting, torture, incitement, sexual behaviour disorders, and alcohol and
drug addiction may be seen in aggressive persons. Factors such as
deterioration in economic status and unemployment play an important
role in violent behaviour. The characteristic of population, demographic
movements and social changes have roles in psychosocial aspects of
violence. It is reported that rapid demographic change and economic
development reduce violent behaviour. The young person, as an obscure
unemployed person, comes downtown by the attractiveness of the city.
Lack of family support, being unemployed, social class difference, and
prevalent crime factors in cities make suitable environment for crime. A
low level of economic status in community, even if it is indirect, affects
adaptation to city-life negatively.

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Unemployment and the threat of unemployment may expose an attack

against the social identity and welfare of individuals. The relationship
between unemployment and mental disorder cannot be well understood;
however, unemployment may trigger mental disorder in predisposed
persons. Whatever the conditions, any migration exposes immigrant
people to mental stress. Therefore, there is the possibility that the
balance, which the/an individual made in his/her originally adapted

environment, may mildly or heavily, continuously or discretely deteriorate

in the new environment.10 The balance formed over hundreds of years in
the life of a rural person comes under the risk of decaying through the
immigration to town. A rural individual, who tries to express his /her
personality in town, and to behave independently, however, mostly fails to
obtain what he/she wants and becomes unhappy. Such a failure causes
both psychosocial and economic distress. Lack of harmony resulting from
an isolated life-style in town is accepted as the augmenter of behavioural
diseases. Briefly, rural person has an identity and it is important for him.
Conversely, urban person can be accepted as anybody. [1]

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Conclusion
While demographic data still shows a world population growth one can see
that unbalanced trends are destroying human cohesion and building social
exclusion in cities and regions. MAIN ISSUES STRONG MIGRATION
FLOWS; INCREASE OF DEMAND ON METROPOLITAN AREAS
Another side of the problem is the permanent increase of demand of
nutrients and other resources while most of them are locally becoming
less and less. OTHER ISSUE CONGESTION OF MARKETS, UNEVEN
DISTRIBUTION OF OFFER AND DEMAND, HOMELESS PEOPLE
A third problem lies on technology development with large impacts on
environment, employment, on economy and on social aspects, bringing
UNBALANCED EFFECTS on them, very difficult to deal with.
A fourth question lies on the rapid changes of mentalities and beliefs,
through globalization and the world-wide spread of information, where
most PEOPLE IS LOOSING A SCHEME
OF HUMAN VALUES, getting confused and becoming an easy target for
marginalization, drug addict, crime or suicide!
As a result there is a rapid growth of panic in big cities and metropolitan
areas, destroying their character of a space of an integrated social
relationand bringing instead the walled condominiums and street crime.
ISSUES: SOCIAL CONFLICTS AND CRIME, ATMOSPHERE OF FEAR. [2]
Reference
1. Anatolian Journal of Psychiatry 2008; 9:238-243
a. TOPIC: Impacts of urbanization process on mental health
b. M. Tayfun TURAN, Asl BESIRLI
2. Manuel da Costa Lobo, Problems and solutions of environment and
urbanization in the World,
a. 44th ISOCARP Congress 2008
b. TOPIC: PROBLEMS AND SOLUTIONS OF ENVIROMENT AND
c. URBANIZATION IN THE WORLD
d. HEADING: I THE PROBLEMS OF TODAY.

5.4 STUDY
CHINA GREEN BUILDINGS
http://chinagreenbuildings.blogspot.com
Green Building Economics 101
As promised, todays post will describe the economics of green building
and why green buildings are so much more valuable than their brown

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counterparts. I will follow this up with a post describing how developers

can use these economics to make affordable green housing work

financially.
How to value real estate- DCF basics
The Discounted Cash Flow method and the Direct Capitalization method
are the fundamental tools for valuing real estate investments and I will
use that to inform the discussion today.
The Discounted Cash Flow (DCF) valuation method attempts to account
for all future cash flows from an investment and discount them to a
present value. So to make that more concrete, lets say I buy a building
today. I can assume I will get rent every year for the life of the building,
and also assume that I will have to pay expenses over the same period.
The difference of the rent income and the expenses is my profit. But as
everyone knows, a dollar of profit today is a lot more valuable than a
dollar of profit in the future, so we have to discount the future cash flows
to todays value using the time value of money. We also cant be certain
that we will continue to receive rent in the future, so we should also
discount the future cash flows to reflect this uncertainty.
The DCF is the best theoretical way to value real estate, but it is
somewhat more complex than the direct capitalization method I will focus
on today. Direct capitalization generally captures nearly the entire
important nuance of DCF, but does so in a much easier-to-understand
formula. Therefore, I will focus on capitalization today. The direct
capitalization method involves taking the current net operating income
(NOI) of a building and capitalizing (multiplying it by a large numbergenerally between 10 and 20) to reflect the face that this income will
continue into the future.
So the direct capitalization valuation method works like this:
1. To calculate NOI, we simply add up all of the revenues (rent and
other revenue) and then subtract all of the operating expenses
(management fee, utilities, etc). Its important to note that we only

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5

subtract operating expenses, so we dont subtract things like taxes

or interest payments. Although obviously important, these expenses

dont factor into NOI.

2. We then take the NOI and divide it by a capitalization rate. The

capitalization rate is a percentage that takes into account 3 things:
NOI will continue indefinitely into the future and in many cases grow
over time; future NOI needs to be discounted to todays value;
future NOIs need to be discounted for risk and uncertainty.
Capitalization rates are generally between 5 and 10%, but can be
lower or higher depending on circumstances.

So then, the value of a building is roughly equal to:

Building value = (Revenue-Costs)/Capitalization rate
Other valuation methods
Of course, DCF and direct capitalization are not the only valuation
methodologies. Another extremely useful type of valuation tool is
comparables. Comparables involves taking two or more similar assets and
comparing their values. If, for example, we wanted to value Prosper
Centre, we could use the value of the neighbouring Kerry Centre as a
proxy. For example, Prosper Centre and Kerry Centre should have similar
capitalization rates. Of course wed have to do slight tweaks to account for
variations, for example, but their valuation should be in the same ballpark
(although as I will show Prosper should have a lower cap rate since it's
green and Kerry is not).
Comparables is a very good way of valuing marketable assets, but I will
leave this valuation method aside and focus primarily on DCF today.
Another valuation method often used by real estate developers is simple
payback period. Simple payback period measures how many years it takes
to recoup an investment. One knock on many green systems is that they

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5

have a long payback period. Since many developers usually have a limit

on their desired payback period, say 5 years, they often will not make
investments that have longer investments.
While it may be true that some green building systems have long payback
periods, this totally misses the point in my mind. Simple payback period
makes no sense as a rigorous valuation tool for several reasons. First and
most importantly, payback period has no concept of revenues. For
example, imagine an investment that required $1 today, and then made
no revenues for the first 5 years, but made $1,000,000 in the 6th year. If a
developer were to strictly use the simple payback period with a 5 year
limit, they would miss this clearly profitable investment. This may be an
extreme example, but captures a serious flaw in the simple payback
period method of valuation. For this reason, I do not consider the simple
payback method to be a useful method of valuation. While it generally is
true that investments with short paybacks have good returns, it is not
necessarily true that investments with longer payback periods do not
have

good

returns.

Therefore I will ignore simple payback entirely and focus instead on direct
capitalization

today.

How green building drives increased building value

One more time, direct capitalization works like this:
Building value = (Revenue-Costs)/Capitalization rate
As we can see from this equation, in order to maximize value, we need to
maximize revenue, minimize costs, and minimize the cap rate. Green
building helps do all three of these things, and in turn increases building
value.
(Note: for this discussion, I will assume that we are talking about an office
building, where tenants rent the building on a gross lease, i.e. one
monthly payment from the tenant to the landlord that covers utilities,
maintenance, insurance, and taxes in addition to rent. Other lease
structures, such as triple net, are more common, but the green valuation

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5

issues remain the same. Please email me or use the comments box for

any questions that relate to different lease structures and I will be happy
to respond.)
Reduced costs
The first way green buildings increase building value is through lower
operating

costs.

Obviously, a green building that uses less energy will have lower utility
bills. Since LEED rated buildings on average use 33% less energy than
regular buildings, this means utility costs are about 33% lower. Since
utilities account for ~25 to 30% of an office buildings operating expenses,
this adds up to big value. Smaller water and waste bills also make for
better economics.
Green buildings can also lower other less-obvious expenses. For example,
the Firemans Fund, a leading insurance company, offers lower insurance
rates for LEED certified buildings. Other possible cost saving measures for
green buildings include lower interest rates through green banks
(although again this doesnt affect NOI, only returns to the owner) and
lower

maintenance

costs

thanks

to

smaller

systems

commissioning

and

better

processes.

The result is less operating expenses for green real estate, which means
higher

building

value.

Increased revenues
Green buildings also benefit from higher revenue, primarily through
increased

rents.

Several recent surveys and studies show that green buildings command
higher rents. A study by economists for the Berkeley Program on Housing
and Urban Policy showed that green buildings on average rent for 2-6%
more than their non-green counterparts, after controlling for other
variables like location and building age. This green premium even exists in
China, where a recent JLL report shows that nearly 70% of high-end real

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5

estate tenants are willing to pay more for green real estate.

Why do green buildings command these premium rents? Two reasons

primarily. First, workers in green buildings are more productive than
workers in brown buildings. Thanks to more day lighting, higher air
ventilation rates, improved indoor air quality, and other attributes of green
real estate, occupants of green buildings tend to be more comfortable and
more productive. The US Green Building Council website links to numerous
studies showing that productivity in green buildings is higher. Since green
real estate space is more productive than regular brown space, tenants
are willing to pay more for the productivity benefits. This productivitydriven rent premium for green buildings will continue, as brown buildings
just cannot match the many productivity-boosting benefits of green
buildings.
Second, the supply of green buildings is low relative to demand, meaning
the large and growing number of companies who want to occupy green
space need to pay a premium to get access to the limited supply. This
likely will not persist much longer, since the supply of green buildings will
expand dramatically. However, what we will see then is a switch, whereby
brown buildings actually require a rent discount in order to lure tenants
away from the abundant supply of green buildings. So this will also
guarantee continuing premium rents over brown buildings.
Since higher rents means more NOI, higher rents therefore drive higher
value

for

green

buildings.

Lower cap rate

The capitalization rate is essentially a measure of the future outlook of the
property. This includes both expected growth in NOI as well as the
perceived risk of future NOI. On both accounts, green buildings do better
and

therefore

should

receive

lower

cap

rates.

Lets first look at expected growth of NOI. As more and more companies
demand green real estate and are willing to pay more for the productivity
benefits, I think its safe to say that we can expect rents and NOI at green
buildings to grow faster than those at brown buildings. Or conversely,

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when green building becomes the norm, very few tenants will be willing to

pay the same price for brown real estate, meaning negative rent growth
for many brown properties. The result is still faster NOI growth for green
buildings, and therefore lower cap rates.
Green buildings are also less risky than their brown counterparts. Since
green buildings use more advanced building techniques and are more
likely to satisfy the needs of tomorrows tenants, there is less risk of
functional obsolescence for green buildings. Moreover, thanks to lower
environmental impact, green buildings also face less regulatory risk. The
result? Again, lower cap rates for green buildings.
Green buildings have higher value
So lets take these results and run through a quick thought experiment.
Lets start with a hypothetical building with rent of $1,500,000, expenses
of $500,000 and a cap rate of 10%. Now what happens when we take the
same building but assume its green? Well now rents will be 2-6% higher,
utilities will be 33% lower, and I'll assume the cap rate will be lower by 0.5
- 1%. As we can see from my calculations below, we get a big value
increase.

At the low end, we should expect green buildings to be worth 12% more,
and at the high end, green buildings could be worth as much as 25% more
than their brown counterparts. Of course this is just a hypothetical
example, but the takeaway is clear nonetheless: green buildings are more
valuable.
What does this mean for developers and owners?
For developers, I think this means build green from the start. Even for
developers who build to sell immediately upon completion, green building
is still compelling. The purchaser of the building will have an interest in
owning for the longer-term, and should be willing to pay more for green.

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So even if developers dont believe the 12% valuation premium example

that I laid out above, it seems they can easily get 5+% for all of the
reasons I described. This means as long as that developers can hold the
cost premium for green below this 5%, they will be making more money
than they otherwise would by building brown. If a developer can build
green at 5% but get a 10+% valuation increases, well, now the developer
is

really

doing

well

financially

(not

to

mention

socially

and

environmentally). As more developers start to understand green building

economics, I think building green will become increasingly more profitable
and

eventually

become

the

only

way

to

build.

For owners, I think this means retrofitting to green standards right now. As
my hypothetical calculations showed, the benefits of retrofitting and
getting green certification are huge. Not only will the building benefit from
higher rent, lower operating costs, better corporate image, less risk, etc
etc, but it will most likely pay for itself through immediately increased
building value. For example, if a building owner could perform a large
retrofit on a building for 10% of the building value, the investment would
immediately pay for itself thanks to higher post-retrofit building value.
Although increased building value isnt exactly the same as cash in hand
for the building owner, the increased building value provides significant
security for this investment in energy efficiency and green features.
The bottom line is that green building makes sense for the bottom line. As
more and more developers, owners and tenants realize this, I expect to
see green building become the norm for those who can afford to pay for
the green benefits, particularly those in Class A office buildings, luxury
apartments and international quality industrial facilities. The trick then will
be to figure out how to make green building economics translate into
something that works for those other sectors of the market that Ive been
talking about so much recently. Stay tuned for my next post for some
initial ideas on how to use these green building economics to make green
building affordable- and widespread.

ECONOMIC SURVEY OF THE EUROPEAN UNION 2007: BUILDING

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COMPETITIVE FINANCIAL MARKETS

The following OECD assessment and recommendations summarise

chapter 3 of the Economic survey of the European Union published on 20
September 2007.
Contents
The euro and the Financial Services Action Plan have contributed to
greater integration of financial markets. Indeed, Europe has overtaken the
United States in some segments of global markets. Capital flows are
largely unimpeded and most wholesale markets are well integrated. There
has been less progress at the retail level. Retail banking and mortgage
markets especially are mainly national. Cross-border mergers of financial
institutions can be complex due to government guarantees, ownership
arrangements, tax issues and resistance by supervisors, although the
Commission has improved the rules in this area by limiting supervisors
discretion. Approval for selling products across borders can be lengthy
because they must be tailor-made to cater for national laws on investor
and customer protection. In mortgage markets, one option would be to go
for full mutual recognition (which implies that the judicial process of the
lenders country would apply) since well-informed customers should be
able to decide which product is best for them. However, since consumer
safeguards are highly valued in some countries, another way forward may
be harmonisation of the most important protections and mutual
recognition for the rest. Fragmented payments infrastructure has also
been holding back a pan-European banking market, and the industry will
need to work quickly to ensure that the Singe Euro Payments Area (SEPA)
is up and running on time in 2010. In this respect, the recent agreement
by Council and the Parliament on the legal underpinnings of SEPA will
help.

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Financial market indicators

Per cent of GDP2 2006

1. EU22 (excluding Czech Republic, Portugal and Slovak Republic) for

panels A, B, D and EU15 for panel C; euro area-10 (excluding Finland
Portugal)
for
panels
A,
B,
D.
2. Except for share trading this is in per cent of equity market
capitalisation.
Source: World Federation of Exchanges, Focus, January 2007; BIS,
Quarterly Review, December 2006; IMF, World Economic Outlook,
September 2006.
Stronger corporate finance markets would help European companies

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Enhanced corporate finance markets would give European firms greater

access to capital. By one estimate, a fully integrated financial market
could lower the cost of capital by 50 basis points. The MiFID directive,
which creates an EU passport for securities, should be a major step
towards integrated securities markets, but member states should not
unravel the benefits of harmonised rules by adding on their own
provisions. The revamp of investment fund regulations that is underway
should also improve corporate finance. European funds are small because
it is difficult and costly to offer products and merge funds across borders.
The Community should opt for full mutual recognition of investment funds,
with a simplification of notifications, and eliminate restrictions on the
types of assets that can be included, create a framework for cross-border

mergers and revise the simplified prospectus. Lastly, member states

should reassess the way they have implemented the takeover directive
because they have produced a more restricted market for corporate
control that hampers the further integration of capital markets.

Listed companies with a blocking minority of at least 25 per cent

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Source: M. Goergen, M. Martynova and L. Renneboog (2005),Corporate

Governance Convergence: Evidence from Takeover Regulation Reforms in
Europe, Oxford Review of Economic Policy, Vol. 21, No. 2.

ECONOMIC SURVEY OF ICELAND 2009: THE FINANCIAL AND

ECONOMIC CRISIS
www.oecd.org,www.worldbank.org
The following OECD assessment and recommendations summarise
chapter 1 of the Economic Survey of Iceland published on 2
September 2009.
Contents
Iceland has plunged into its deepest economic recession in decades after
succumbing to a widespread financing crisis and a collapse of domestic
demand. The meltdown of Icelandic banks unfolded against the backdrop
of faltering global capital markets, which reached a climax in September
2008 with the failure of Lehman Brothers. By the fourth quarter of last
year, almost all OECD countries were experiencing sharp declines in real
GDP and world trade was plummeting. After years of rapid expansion, the
economic situation in Iceland also turned for the worse when the countrys
three main banks collapsed, capital markets seized up and financial
relations with foreign countries were shut down. While Iceland is in part a
victim of the international crisis, its severe plight largely results from a
recent history of ineffective bank supervision, exceptionally aggressive
banks and inadequate macroeconomic policies. The government has
devised a medium-term adjustment programme to restore policy credibility
and economic growth, which is being implemented in the context of an IMF
Stand By Arrangement. The origins of Icelands severe banking and
macroeconomic difficulties and policies for a sustainable recovery are
discussed in this Economic Survey.

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5

The collapse of Icelands three main banks caused a deep crisis

A banking crisis of extreme severity is unfolding in Iceland. After five years
of brisk expansion, the countrys three main banks, representing 85% of
the banking system, all collapsed during the same week in October 2008.
The failure of Icelands banks was not an isolated event: in most other
OECD countries, banks also came under severe stress following the sudden
meltdown of global capital markets. But Icelandic banks were particularly
vulnerable to such a shock because their very aggressive strategies had
exposed them to massive equity market risk, and they had relied heavily
on precarious sources of funding. Upon their failure, the three banks were
put into receivership and new banks were formed to enable the domestic
payment system to continue to function smoothly. Complex negotiations
between the new banks and the creditors of the old banks were needed to
reach a final settlement. With hindsight, it appears that the Icelandic
financial supervisory authorities had become overwhelmed by the
complexity of the national banking system, and had been unable to stop
their expansion. In addition, there was a lack of a macro prudential

framework that would have reacted to unsustainable developments in

credit, leverage and risk. By the end, the size of the banks far exceeded
the limited capacity of the Icelandic authorities to rescue them. Although
the size of the banking sector has been reduced substantially, there is still
a need to rethink the regulatory and supervisory framework.
The recession is set to be deeper than in most other OECD countries
A direct consequence of the crisis is that Iceland has entered a deep
recession. The economy had already started to weaken in the first half of
2008 and, following the failure of the banks, the contraction in all
components of domestic demand deepened markedly. The retrenchment
of domestic demand is already much greater than in other OECD countries.
Deep cuts in employment and working time were made, pushing up the
unemployment rate sharply from 2.5% in the third quarter of 2008 to 7.1%
by the first quarter of 2009. A sharp drop in the exchange rate of the krna
caused inflation to soar initially, although it had slowed to 11.6% by May
2009 as the effects of the depreciation eased and depressed economic
conditions weighed on firms pricing power. Wages have adjusted quickly
to the crisis, falling by 6 per cent in real terms in the year to April 2009,
with the fall being much more marked in the private than the public
sector. On the basis of announced macroeconomic policies (see below), the
OECD projects a deep recession this year, with GDP shrinking by around
7%, and a gradual recovery beginning next year assuming that large
energy related projects get underway as planned. The unemployment rate
is projected to rise to a peak of 10% in 2010 while inflation should fall to
around 2 per cent.
A Stand By Arrangement was agreed with the IMF
Faced with an unprecedented crisis, the Icelandic authorities turned to the
IMF for help and agreed to a programme supported by a Stand By
Arrangement. In the near term, the programme seeks to prevent a further
sharp depreciation of the krna to reduce the risk of adverse balancesheet effects, which arise notably from the high shares of foreignexchange denominated and inflation-indexed debt in the economy. To this
end, the programme foresees a tight monetary policy to make krna
assets more attractive and exchange controls to be maintained on the
capital account. Beyond this immediate goal, the programme seeks to
restore the smooth operation of the banking system. It also calls for strong
fiscal consolidation to ensure medium-term sustainability. The Stand By
Arrangement envisages access to official financing, from the IMF and other
sources, of about US$ 5 billion.

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Icelands banks pursued highly risky strategies that doomed them:

The financial collapse largely results from the banks risky strategies. After
the completion of banking privatization in 2003, the new owners set the
banks on a path of international expansion and greater risk taking. Global
financial market conditions were favourable at the time, enabling the

banks to finance their expansion cheaply, mainly through wholesale

markets. They grew quickly, increasing their consolidated assets to the
equivalent of 880% of Icelandic GDP by the end of 2007, a very large
amount by any standard. As they expanded, the banks increasingly made
loans to a few Icelandic investment companies, typically controlled by the
main shareholders of the banks, which were taking equity stakes in foreign
firms. To finance these loans, the banks borrowed in foreign capital
markets, increasing Icelands net external debt by 142 percentage points
of GDP over the four years to end 2007. This strategy indirectly exposed
the banks to equity market risk. In the wake of the global financial
meltdown in September 2008, fear about the solvency of the three
Icelandic banks became widespread, effectively shutting them off from the
wholesale markets and preventing the refinancing of maturing obligations.
As the banks were far too big to be recapitalised by the government, the
Financial Supervisory Authority (FME) had no choice but to place them all
into receivership.
Ratio of bank assets to GDP(1)

1. Assets of domestically registered banks as at December - excludes

assets
of
foreign
subsidiaries.
2. Consolidated assets of the three largest banks - includes foreign
subsidiaries
assets.
3. Data for the assets of domestically registered banks (excluding foreign
subsidiaries
assets)
are
only
available
from
July
2007.
Source: Central Banks of the countries shown.

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International investment position

End of year, as per cent of GDP

1. Net external debt is residents' debt claims or non-

residents debt claims on residents.

2. Net external equity is residents equity assets (i.e.,

foreign direct investment and portfolio investments in

shares) abroad net of non-residents' equity assets in
Iceland.
3. The international Investment Position (IIP) is the sum of
net external debt and net external equity asset positions.
Source: Central Bank of Iceland, Monetary Bulletin, 2009-2.
To restrain the build-up of systemic risks, macro- and micro-prudential
supervision must interact
The expansion of the banks entailed a major build up of systemic risk in
Icelands financial system all of them had significant exposures to the
same risk factors: reduced liquidity in global bond markets, a decline in
equity markets and exchange-rate depreciation. In addition to these risks,
domestic bank lending underpinned an asset price boom in Iceland,
increasing risks further. Finally, the banks grew to be too big for the
Iceland government to rescue. Banking in these circumstances became
very dangerous when the global financial crisis deepened. To restrain the
build-up of systemic risks in the future, macro-prudential supervision
needs a legal basis to restrain bank behaviour, such as through
countercyclical capital adequacy requirements. To implement this reform
effectively, it may be necessary to merge the Central Bank of Iceland, the
macro-prudential supervisor, and the FME, the micro prudential supervisor,
or at least bring them under the same administrative umbrella (as in
Finland and Ireland), as planned.

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Bank supervisors need to lay down tougher rules and apply them more
strictly
Although it will take some time to fully understand the causes of the

financial crisis, some light was shed by studies commissioned by the

authorities. The report of the former Finnish supervisor, Mr. Jnnri, notes
that the first big mistake made was to allow local investor groups (with
major expansion plans) to gain controlling stakes in the banks when they
were privatised. The FME was not satisfied with this decision, which it
considers to have been political, but acquiesced after lengthy
deliberations. The report also points to a variety of practices that would
have been considered elsewhere as inconsistent with basic banking
regulation. Although banks seemed well capitalised, evidence suggests the
capital was of poor quality, sometimes coming from connected parties. The
banks had large exposures to investment groups and to each other (via
shareholdings), implying a high degree of common vulnerability. While
banking regulations were largely transposed from the European Union,
Icelands supervisors were unable to keep up with the complexity and size
of the system as it grew rapidly and applied rules in an excessively
legalistic manner. In the future, Icelands supervisors should not allow the
banking sector to become so complex and so large that they cannot
effectively fulfil their supervisory duties. Also, bank supervisors should lay
down tougher rules and, subsequently, apply stricter practice on large
exposures, connected lending and quality of owners, using discretionary
best judgement when necessary.
The Depositors and Investors Guarantee Fund needs to be reformed
An important cross-border banking issue raised by the financial crisis was
that national deposit guarantee systems may not have enough resources
to honour the minimum EU deposit guarantee obligations. The government
was obliged to stand behind Icelands Depositors and Investors
Guarantee Fund (DIGF) to enable it to meet these obligations, thus
exposing Icelandic taxpayers to a large cost. While this issue goes beyond
Iceland and would involve reforms of EU wide practices, the Icelandic
authorities should review and improve the deposit guarantee system,
closely following the developments within the EU, to protect the taxpayer
from new large costs.

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5

Economic recovery requires restoring the smooth functioning of the

banking system
Following the banking collapse, the authorities decided to create three new
banks by transferring the domestic deposits and claims on residents
previously held by the old banks, thus effectively separating domestic from
foreign operations. While this preserved the functioning of the domestic
payment system, the new banks have no capital and there is considerable
uncertainty about the value of their assets and liabilities. Once the
compensation instruments between the new and old banks have been
issued, the government will recapitalise the new banks, which will enable
them to provide more normal financial intermediation services. To
eliminate uncertainties about the strength of the balance sheets of the
new banks, the government should move low-quality domestic assets into
an asset management company, which will dispose them over time. In

addition, there is evidence that the banks remain oversized for the
Icelandic markets, thus weakening their profitability. The banks should be
streamlined to make them profitable, including by merger if necessary
(provided that this does not undermine competition in banking services).
All of these measures would help to prepare the banks for full privatisation
within the next few years. To facilitate privatisation, foreign direct
investment into the Icelandic banking system should be encouraged. Other
small countries, such as New Zealand, have found that having a banking
system that consists almost entirely of well run fully-owned subsidiaries of
foreign banks works well and has been particularly advantageous during
this period of global financial turmoil.
A start to removing capital controls should be made as soon as feasible
Iceland has imposed capital controls to prevent disorderly outflows from
causing a fall in the external value of the krna, especially outflows of non
resident investors large holdings of krna-denominated securities, which
would have driven many un-hedged firms and some households into
bankruptcy. As well, by disallowing investments abroad, the capital
controls in effect forced domestic creditors to lend to domestic borrowers,
thus sharply reducing the risk premium and lowering market interest rates.
Nonetheless, lifting capital controls should start as soon as this can be
done safely, to normalize relations with foreign markets and allow firms to
tap financial sources abroad. The authorities plan to lift the capital controls
gradually once a medium-term fiscal consolidation plan is well in train, the
banking sector has been put back on its feet and there are sufficient
international reserves. According to available information, some 20% of
household debt was denominated in foreign currency in September 2008
and was not hedged while 50% of corporate borrowers with foreigncurrency denominated debt do not have foreign currency earnings.
Macroeconomic policy faces challenging times
Monetary and fiscal policy challenges have grown hugely. Formulating an
exit strategy from the temporary regime of capital controls and high
interest rates is a major task. The lack of satisfactory monetary policy
outcomes under different regimes in past years points to the limitations of
an independent monetary policy in a very small, open country like Iceland,
particularly in the context of large capital inflows associated with global
carry trade transactions. Moreover, the crisis has imposed a very high
budgetary cost. The large fiscal deficits need to be reduced and eventually
eliminated and the rising national debt will need to be turned around.

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5

If it were to become an EU member, Iceland would be advised to seek

entry into the euro area as soon as possible, so as to reap the economic
benefits.

Icelands monetary policy credibility has been seriously damaged by the

financial crisis. Even before the crisis, unsatisfactory inflation outcomes
had already undermined the credibility of the monetary framework and,
consequently, inflation expectations were poorly anchored. Rebuilding
credibility is likely to take time and, even then, maintaining it might be
very difficult. In the meantime, risk premiums on krna assets will remain
high. In view of these considerations, the best way forward for Iceland
would be to seek entry into the euro area, which would require accession
to the European Union. Iceland would thereby participate in the credibility
of euro-area monetary policy, which would be a stabilising influence and
would lower interest rate premia. Lower real interest rates would reduce
the governments debt servicing costs, ease balance-sheet adjustment for
the private sector and lower the cost of capital to the private sector. The
sharing of a common currency would reinforce trade linkages with other
euro-area economies and would likely increase the synchronicity of the
business cycle. On the other hand, Iceland would lose the option of
exchange rate adjustments following idiosyncratic shocks. This
consideration may be less important for Iceland than for other countries
because its economy is already very flexible. Nevertheless, such a
consideration points to the need to maintain and even increase flexibility
in labour and product markets. Achieving the macroeconomic conditions
for euro adoption low inflation, stable exchange rate and low deficits and
debt will pose a difficult policy challenge in the years ahead but would in
any case be an important ingredient in securing the necessary
macroeconomic stabilisation following the crisis. The authorities need to
be steadfast in using macroeconomic policy instruments to achieve these
goals.

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5

Volatility of inflation(1)

1. Measured as the standard deviation of year-on-year

percentage change of monthly consumer price index.
2. Source: OECD, Main Economic Indicators.
In the near term, monetary policy should aim at a level of inflation
consistent with euro-area entry

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5

Euro area entry is, however, some time off, even under the most optimistic
circumstances. For the time being, monetary policy should remain geared
towards supporting the krna and protecting the balance sheets of
unhedged borrowers. Exchange rate stability is the main goal of the capital
controls, but since capital controls do not work perfectly, monetary policy
needs to maintain a relatively strict stance. Until concerns about
disorderly capital outflows diminish, monetary policy should stay focussed
on maintaining exchange rate stability, which may limit the scope for
further reductions in the interest rate. Once the capital account has been
liberalised, a managed exchange rate regime will be increasingly difficult
to implement. The authorities should thus adopt an inflation-targeting
framework geared to meeting the Maastricht Treaty inflation criteria,
which would imply switching from the official CPI to the internationallycomparable harmonised CPI (HICP). To improve the functioning of the

monetary framework, the Central Banks credibility should be improved. A

good start has been made in this regard with recent reforms to
communication policy and to the governance structure of the Central
Bank, including the appointment of a Monetary Policy Committee with both
internal and external members, coming with adequate credentials, to take
interest rate decisions. It is also crucial that the conduct of monetary
policy be more decisive than in the past and that the government fully
respects the Central Banks independence.
Required fiscal consolidation measures should continue to be implemented
The financial collapse has increased government debt. With the recession
and rising debt servicing costs, the public deficit is projected to be above
10% of GDP in 2009, adding to the public debt burden. A considerable
fiscal consolidation is therefore required to put public finances back on a
sustainable path and to pave the road for a successful euro-area entry. The
deficit should be reduced vigorously in the coming years, with the goal of
reaching balance. This path is consistent with that called for in the IMF
Stand By Arrangement. Both tax increases and spending cuts will be
needed, although the former are easier to introduce immediately. The
starting point for the tax increases should be to reverse tax cuts
implemented over the boom years, which Iceland can no longer afford.
This would involve increases in the personal income tax and lifting the
reduced rate of VAT. Just undoing the past tax cuts is unlikely to yield
enough revenue. In choosing other measures, priority should be given to
those that are less harmful to economic growth, such as broadening tax
bases, or that promote sustainable development, such as introducing a
carbon tax. The government should also increase unemployment
insurance contributions to a level that would be expected to balance the
funds accounts over the economic cycle, as planned.

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5

The planned fiscal consolidation will necessarily also involve substantial

measures to contain expenditures. Expenditures that expanded rapidly in
recent years are good areas to look at for savings. Government wages
often outpaced those in the private sector, as the then booming financial
sector raised the demand for more skilled workers. With retention no
longer a problem, government wages should be frozen or even cut in
nominal terms, implying significant declines in real terms, at least in 2009.
For the same reason, public investment, which rose at an annual average
rate close to 10% over 2003 07, should also be scaled back as much as
possible, as is already planned. Budget expenditure growth ceilings must
also be respected, in contrast to what has happened in the past. To this
end, the role of the National Audit Office in the monitoring of the budget
should be strengthened. Advice on the macroeconomic consequences of
fiscal policy decisions should be further enhanced.

A number of public programmes could be reformed to reduce costs while

still achieving the same outcomes. Above all, as discussed in the special
chapter of the 2008 OECD Economic Survey, there are several options for
enhancing spending efficiency in the health sector. The cost of running
hospitals, which accounts for a high share of health care spending, could
be reduced by introducing cost sharing and by rapidly implementing
activity-based funding arrangements that reward productivity. Analysis in
the 2006 OECD Economic Survey identified significant savings in
education expenditures, which could be made from reducing the average
duration of upper secondary school toward international standards and, as
planned, by consolidating the higher education sector. Municipalities,
which are responsible for pre-school and primary education, are also facing
pressure to cut in these areas as their revenues have fallen and their
access to external financing sources is limited. Teacher to student ratios,
which are high by international comparison, should be reduced. More
generally, there is still scope to achieve economies through greater
consolidation of municipalities. The crisis also provides an opportunity to
reduce support to agriculture, which is the highest in the OECD.
Input efficiency of the health system

Source: World Bank, World Development Indicators database; FAO,

Faostat database.

2
5

Input efficiency of the education system

Source: World Bank, World Development Indicators database; FAO,

Faostat database.
Structural reforms in other areas would also contribute to laying out the
foundations for a sustainable recovery

2
5

While macroeconomic policy currently runs high on the policy agenda, this
should not obviate the need to conduct growth-friendly structural reforms,
notably in the labour market and the product market. The labour market is
flexible overall with high participation rates, ease of entry for migrants,
strong work incentives and unemployment benefits of short duration by
international standards. With Iceland being confronted for the first time in
recent history with a massive increase in unemployment, it will be
important to avoid introducing policies that would undermine the good
functioning of the labour market, such as higher replacement rates and
longer duration for unemployment benefits, as this would contribute to a
rise in long-term unemployment. Another strength of the Icelandic labour
market is that real wages are highly flexible, thus helping to smooth
economic adjustment in the face of shocks. Real wage cuts have in the
past come in the form of consumer price inflation exceeding the growth of
nominal wages. If Iceland joins the euro area, nominal wage flexibility will
become more important as a mechanism for adjusting to asymmetric
shocks. Although the product markets generally function well, several
areas need attention, as indicated in past OECD Surveys. The energy
sector is dominated by the state-owned National Power Company and
should be opened to foreign investment. In the mortgage market,
although the Housing Finance Fund is currently an element of stability,
policy makers might have to reassess its role as it benefits from a
government guarantee that prevents fair competition and distorts the
allocation of resources. More generally, experience of euro-area countries
underlines the need for greater flexibility throughout the economy if
adjustments to shocks are to occur smoothly and contribute to sustainable
growth and high living standards.

ECONOMIC SURVEY OF RUSSIA 2009:

RENEWED GROWTH: KEY CHALLENGES

STABILISATION

AND

www.oecd.org,www.worldbank.org
The following OECD assessment and recommendations summarise
chapter 1 of the Economic Survey of Russia published on 15 July 2009.
Contents
Between the financial crisis which struck Russia in August 1998 and the
global crisis which broke out in earnest in September 2008, Russia had the
strongest decade of growth in its history, with real GDP nearly doubling.
This strong increase in output, coupled with the vigorous real appreciation
of the rouble, driven mainly by the surge in energy and raw material
prices, meant that nominal GDP measured in US dollars rose almost 7-fold
during that period, more than in any other major country. A wide range of
other economic and social indicators also saw dramatic improvements
during those ten years. Total factor productivity grew strongly, real wages
soared, and unemployment and poverty rates fell sharply. Strong current
account surpluses, combined with a swing in the private capital account
from large net outflows to even larger net inflows, pushed international
reserves to nearly USD 600 billion, behind only China and Japan. The
transformation of the government finances was particularly marked. After
defaulting on part of its debt in 1998, the federal government ran a string
of surpluses and almost extinguished public debt while building up foreign
assets amounting to 13% of GDP by end-2008. The picture for inflation was
more mixed, but for most of the past decade inflation was on a trend
decline, falling from 85% in late-1998 to single digits by mid-2007. At that
time, a combination of surging international food and energy prices and
very rapid money supply growth in Russia pushed inflation back up to
15%, before it began to fall again in late-2008 as energy and commodity
prices collapsed and money supply growth came to a sudden halt.

2
5

Real GDP growth was strong for a decade

Source: OECD calculations based on Federal Service for State Statistics.

While stronger macroeconomic policies and structural reforms both
contributed importantly to the good economic performance through mid2008, a good deal of the impetus to growth came from transitory factors,
as was outlined in the 2006 Economic Survey of Russia. Initially, there was
the 50% real depreciation of the rouble at the time of the 1998 crisis,
which sparked a recovery driven by import substitution and facilitated by
substantial underutilisation of capital, allowing rapid growth to occur
without high rates of investment. Then, both during 1999-2000 and to an
even greater extent from 2003 to mid-2008, the terms of trade improved
sharply, driven mainly by a rising oil price. The loosening of conditions in
international capital markets, with declining spreads for emerging market
borrowers and rising net inflows combined with low interest rates in
advanced countries, gave a further impulse to the strong increase in
domestic demand in Russia.

2
5

The contribution of transitory factors to growth in recent years increasingly

raised questions about the sustainability of the expansion, particularly as
some of the favourable factors (such as oil prices and the compression of
borrowing spreads for emerging markets) exceeded or approached record
levels. Although investment grew robustly, it remained low
in relation to GDP compared with other rapidly catching-up economies, and
the economy began to show signs of overheating as capacity utilisation
rates rose and labour shortages emerged. Real GDP growth was
increasingly driven by booming domestic demand, while the balance of
payments and the government budget both became increasingly reliant on
oil, with non-oil current account and fiscal deficits rising steadily. There is
wide agreement, including within the government, that a shift to a new
more self-sustaining growth model is needed. The governments Russia
2020 growth strategy, which aims for innovation-driven growth and
reduced reliance on the production of raw materials, was developed in
2008 while oil prices were still high and rising, but the crisis struck before
that strategy could even begin to be translated into concrete policy

actions. It is therefore important to return to the structural reform agenda

both within the context of anti-crisis measures and beyond.
Why did the global crisis hit Russia so hard?
The continuation of rapid growth had certainly become increasingly
vulnerable to a decline in oil and gas prices, but a normal oil price
downturn would probably have been consistent with merely a growth
slowdown rather than the severe recession which is now under way. The
size and speed of the decline in oil prices that began in July 2008 were
greater than any previous episode, and the effects were exacerbated by
similarly extreme falls in the prices of other export commodities. Financial
turmoil, including the disruption of emerging market access to
international capital markets, was also exceptionally severe. At the same
time, world demand collapsed in the last quarter of 2008, dramatically
shrinking world trade, which hit the volume as well as the price of Russian
exports of metals and natural gas. The impact of these external shocks on
the Russian economy was aggravated by domestic vulnerabilities,
including fragile confidence in domestic banks and the currency.
The impact of the crisis was sudden and large

1. Estimated on the basis of data on change of physical volume of

production in agriculture, mining and quarrying, manufacturing, electricity,
gas and water supply, construction, transportation, wholesale and retail
trade.
Source: Federal Service for State Statistics, Institute for the Economy in
Transition, Ministry of Economic Development and VTB Europe.

2
5

The strategy for Russia in tackling such a big economic crisis needs to be
broad-based, including a range of fiscal and monetary policy measures to
support aggregate demand and maintain the functioning of the banking

system. As in other countries, policymakers in Russia should seek

measures that maximise the immediate demand effect; minimize
distortions; protect macroeconomic stability and fiscal sustainability via a
clear exit strategy from stimulus measures; and, where possible, yield
longer-term efficiency gains while achieving short-term demand
management goals. Designing a response that best conforms to these
principles, including finding the right balance where there are trade-offs
between them, is the overarching near-term policy challenge.
What has been the policy reaction to date, and how should it evolve?
The authorities reaction to the onset of the crisis was broadly in line with
that of many OECD economies, although the response in Russia was
unusually rapid and large, reflecting in part the substantial resources
available to the authorities after years of fiscal and balance of payments
surpluses. Liquidity and capital were provided to the banking system,
deposit insurance limits were increased, and a number of expansionary
fiscal measures were announced. All told, quantifiable announcements in
the first months of the crisis were equivalent to about 13% of GDP. These
measures were initially thought to be more than adequate to address the
consequences for Russia of the global financial crisis, but it has become
increasingly clear that Russia is facing a deeper and longer downturn than
was imagined a few months ago. As the stock of available resources has
dwindled while the cost of some initial measures has risen (notably the
combination of limiting depreciation of the rouble while providing ample
liquidity to banks) new measures are being more carefully weighed,
especially with respect to possible risks to fiscal sustainability.
Demand-support measures will be less effective to the extent that the
financial system is not operating smoothly. This implies that maintaining
the functioning of the banking system is of prime importance. While
liquidity shortages did trigger turmoil at the onset of the global crisis, the
main threat to credit growth now appears to be solvency problems, arising
from the declining capacity of borrowers to repay bank loans. Banks risk
breaching regulatory capital requirements if, as expected, the downturn
brings an upsurge in non-performing loans. Such capital shortages can
force deleveraging as banks shrink their balance sheets to meet capital
adequacy requirements. Banks may also be unwilling to lend as credit risks
on new lending rise in an environment of negative real GDP growth both
domestically and abroad. The challenge is to maintain capital adequacy
and prevent a sharp curtailing of lending flows financing new activities,
while minimising moral hazard and the cost to taxpayers.

2
5

Just as monetary conditions during the period of strengthening oil prices

were too easy, as balance of payments strength fed through to money
supply growth via the central banks exchange rate-oriented monetary
policy, so they risk becoming too tight in a context of falling oil prices and
capital outflows. Intervention to support the rouble in the months following

the onset of the crisis meant sharply falling reserves, and this was
accompanied by a large fall in M2 since September 2008. Real interest
rates are becoming positive for the first time in years just as aggregate
demand is collapsing due to adverse external shocks. In addition, the
resistance to depreciation delayed a compensatory stimulus for non-oil
tradable when the oil price fell. The stepwise widening of the exchange
rate band allowed some breathing space for firms with heavy foreign
currency liabilities and possibly prevented a sharper weakening of
confidence in the rouble and, thus, a run on deposits. But the costs were
heavy, as expectations of further depreciation encouraged capital flight.
The central banks communication policy should foster the recognition that
the real exchange rate eventually has to move in line with large swings in
fundamentals such as oil prices. This episode revealed the weakness in the
monetary policy framework and illustrated that holding to a fixed
exchange rate or managing a float for an extended period is difficult, as
serious conflicts with fundamentals are likely to arise sooner or later,
particularly in a commodity-dependent economy.
The main short-term challenge for fiscal policy is to maximise the fiscal
multiplier while managing moral hazard and risks to long-term fiscal
sustainability. The former tends to suggest expenditure measures, possibly
in the form of transfers to low-income households or lower levels of
government, rather than general tax cuts. Temporary measures, such as
one-off transfers or temporary tax rebates, can be one effective way of
maximising the short-term demand impact. Measures those are hard to
reverse, such as raising entitlements or cutting tax rates, could undermine
long-term sustainability. The current crisis is increasingly looking like a
more extended downturn than originally foreseen, which may make
infrastructure spending more attractive than otherwise, particularly since
there is evidence that the fiscal multiplier is highest for such spending. The
threat to fiscal sustainability would appear to be less of a problem in
Russia than in many OECD countries, given low levels of gross public debt
and substantial public financial assets. Nonetheless, the federal deficit will
be very large in 2009, and is likely to remain at high levels for several
years. Moreover, Russia faces underlying negative demographic trends
and particularly serious environmental degradation problems, which could
entail major fiscal costs in the future. As in other countries, therefore, it
will be important for Russia to set its stimulus efforts in a medium-term
context that credibly charts a return to a sustainable public debt path.

2
5

Looking beyond the crisis, how can a better growth model be put in place?
At some point the crisis will end, and oil prices will probably recover sooner
rather than later. In the medium term, Russia will face the challenge of
putting in place a healthier model for sustained catch-up growth. This
should be one based on innovation, investment, the accumulation of
human capital and coherent implementation of the rule of law within a well
regulated and competition-enhancing market economy, rather than one
largely driven by strong but temporary improvements in the terms of trade

and the increasing reliance on state corporations with inadequate

governance structures as well as ad hoc support of selected banks and
corporations. To this end, there is considerable scope for major progress in
a wide range of areas. For example, education performance is mediocre;
the healthcare system is deficient in a number of respects; innovation
policy does not get the most from Russias considerable potential;
administrative reform is needed to improve the efficiency of the public
service; and some important prices, notably for natural gas, remain
distorted, making the economy more energy-intensive than it should be.
Many of these topics have been addressed in past Economic Surveys, and
remain valid. Particular challenges discussed in this Survey include
macroeconomic management, including the priorities for monetary and
fiscal policy, the development of the banking system, and product market
regulation reforms to widen the scope for competition.
The following OECD assessment and recommendations summarise
chapter 2 of the Economic Survey of Russia published on 15
July 2009.
Contents
After defaulting on part of its debt in 1998, the federal government ran a
string of surpluses and almost extinguished public debt while building up
foreign assets amounting to 13% of GDP by end-2008.
Years of large surpluses reduced public debt to low levels

Source: Federal Service for State Statistics, Central Bank of Russia and
Ministry of Finance of the Russian Federation.

2
5

The authorities reaction to the onset of the crisis was broadly in line with
that of many OECD economies, although the response in Russia was
unusually rapid and large, reflecting in part the substantial resources

available to the authorities after years of fiscal and balance of payments

surpluses. Liquidity and capital were provided to the banking system,
deposit insurance limits were increased, and a number of expansionary
fiscal measures were announced. All told, quantifiable announcements in
the first months of the crisis were equivalent to about 13% of GDP. These
measures were initially thought to be more than adequate to address the
consequences for Russia of the global financial crisis, but it has become
increasingly clear that Russia is facing a deeper and longer downturn than
was imagined a few months ago. As the stock of available resources has
dwindled while the cost of some initial measures has risen (notably the
combination of limiting depreciation of the rouble while providing ample
liquidity to banks) new measures are being more carefully weighed,
especially with respect to possible risks to fiscal sustainability.
The main short-term challenge for fiscal policy is to maximise the fiscal
multiplier while managing moral hazard and risks to long-term fiscal
sustainability. The former tends to suggest expenditure measures,
possibly in the form of transfers to low-income households or lower levels
of government, rather than general tax cuts. Temporary measures, such
as one-off transfers or temporary tax rebates, can be one effective way of
maximising the short-term demand impact. Measures those are hard to
reverse, such as raising entitlements or cutting tax rates, could undermine
long-term sustainability. The current crisis is increasingly looking like a
more extended downturn than originally foreseen, which may make
infrastructure spending more attractive than otherwise, particularly since
there is evidence that the fiscal multiplier is highest for such spending.
The threat to fiscal sustainability would appear to be less of a problem in
Russia than in many OECD countries, given low levels of gross public debt
and substantial public financial assets. Nonetheless, the federal deficit will
be very large in 2009, and is likely to remain at high levels for several
years. Moreover, Russia faces underlying negative demographic trends
and particularly serious environmental degradation problems, which could
entail major fiscal costs in the future. As in other countries, therefore, it
will be important for Russia to set its stimulus efforts in a medium-term
context that credibly charts a return to a sustainable public debt path.

2
5

Reorienting monetary policy to achieving inflation objectives implies that

insulating the economy from large fluctuations in oil prices will largely fall
to fiscal policy, especially as regards the mechanisms for taxing and
saving oil. During the recent period of high oil prices reserves of about
13% of GDP were accumulated in two funds, one to smooth oil-pricedependent revenue fluctuations and the other to provide for a stream of
income to boost long-term national welfare. In periods of oil price
weakness, allowing the lower prices to be reflected in larger non-oil
deficits financed by running down the Reserve Fund will offset part of the
pressure for depreciation. Using fiscal policy to lean against real exchange
rate pressures arising from oil price swings helps to insulate the non-oil
economy from such swings and is welcome.

Russia has made major improvements to the structure of its taxation and
to tax collection. Tax bases have been broadened, rates cut, and
compliance improved. Nonetheless, scope remains for further reform that
could speed up convergence to advanced country income levels. Oil and
gas taxation should be adjusted to capture economic rents without
harming incentives for exploration and development. In particular, export
taxes on crude oil and oil products should be removed in the medium
term. The government should address problems with VAT refunds directly,
rather than bow to demands to cut rates, given that VAT is a relatively
efficient tax. Russia has scope to increase the revenue share of property
taxes, which OECD research suggests is the least growth-unfriendly form
of taxation. Corporate profit tax, which is found to be particularly harmful
for growth performance, is already at low levels after the most recent cut
to 20% but, subject to satisfactory overall revenue collection, further
reductions should not be ruled out. Economic efficiency would also
suggest exploring ways of reducing the comparatively high tax wedge,
which again is relatively growth-unfriendly. Apart from the possibility to
further improve economic efficiency, considerable scope also remains to
alleviate poverty, which despite some progress during the recent episode
with exceptionally high growth is still far more prevalent than in OECD
countries. This may require more redistribution than can be achieved at
the moment with a flat tax rate for personal income, a regressive unified
social tax and relatively low real estate and wealth taxation. This issue will
be dealt with in the forthcoming OECD Labour Market and Social Policy
Review.
The following OECD assessment and recommendations summarise
chapter 3 of the Economic Survey of Russia published on 15
July 2009.

2
5

Contents
Just as monetary conditions during the period of strengthening oil prices
were too easy, as balance of payments strength fed through to money
supply growth via the central banks exchange rate-oriented monetary
policy, so they risk becoming too tight in a context of falling oil prices and
capital outflows. Intervention to support the rouble in the months
following the onset of the crisis meant sharply falling reserves, and this
was accompanied by a large fall in M2 since September 2008. Real
interest rates are becoming positive for the first time in years just as
aggregate demand is collapsing due to adverse external shocks. In
addition, the resistance to depreciation delayed a compensatory stimulus
for non-oil tradable when the oil price fell. The stepwise widening of the
exchange rate band allowed some breathing space for firms with heavy
foreign currency liabilities and possibly prevented a sharper weakening of
confidence in the rouble and, thus, a run on deposits. But the costs were
heavy, as expectations of further depreciation encouraged capital flight.
The central banks communication policy should foster the recognition

that the real exchange rate eventually has to move in line with large
swings in fundamentals such as oil prices. This episode revealed the
weakness in the monetary policy framework and illustrated that holding to
a fixed exchange rate or managing a float for an extended period is
difficult, as serious conflicts with fundamentals are likely to arise sooner or
later, particularly in a commodity-dependent economy.

The plummeting oil price caused the quasi-fixed exchange rate

regime
to be suspended

Source: OECD calculations based on Central Bank of Russia.

2
5

The central banks welcome intention to shift over time to an inflationtargeting regime would address the tensions which have beset monetary
policy in recent years. Inflation targeting has proved a successful
framework for a wide range of countries, including those with a high
degree of commodity dependence. Also, it has often worked well even
when some factors, advanced as pre-conditions for making the transition
to inflation targeting, have not been fulfilled. Nonetheless, there is a good

case in Russia for taking a gradual approach to such a transition, as

certain important conditions, some of which go beyond technical
preparations on the part of the central bank, requiring political support,
remain unfulfilled. Too little is yet known about the ability to forecast
inflation and the response of inflation to changes in policy interest rates.
To that end, the Central Bank of Russias recently introduced quarterly
inflation reports, which are a welcome innovation, should be improved to
become less descriptive and more analytical. Also, inflation targeting
would undoubtedly work better if Russia had deeper financial markets and
greater central bank independence. The unexpected return to budget
deficits should be used to issue more domestic government debt,
providing banks with more paper for refinancing and establishing a
benchmark for the financial sector.

Single-digit inflation is one condition that should probably be met

before
adopting inflation targeting

2
5

Source: IMF and OECD estimates.

The following OECD assessment and recommendations summarise
chapter 4 of the Economic Survey of Russia published on 15
July 2009.

Contents
The authorities reaction to the onset of the crisis was broadly in line with
that of many OECD economies, although the response in Russia was
unusually rapid and large, reflecting in part the substantial resources
available to the authorities after years of fiscal and balance of payments
surpluses. Liquidity and capital were provided to the banking system,
deposit insurance limits were increased, and a number of expansionary
fiscal measures were announced. All told, quantifiable announcements in
the first months of the crisis were equivalent to about 13% of GDP. These
measures were initially thought to be more than adequate to address the
consequences for Russia of the global financial crisis, but it has become
increasingly clear that Russia is facing a deeper and longer downturn than
was imagined a few months ago. As the stock of available resources has
dwindled while the cost of some initial measures has risen (notably the
combination of limiting depreciation of the rouble while providing ample
liquidity to banks) new measures are being more carefully weighed,
especially with respect to possible risks to fiscal sustainability.
Demand-support measures will be less effective to the extent that the
financial system is not operating smoothly. This implies that maintaining
the functioning of the banking system is of prime importance. While
liquidity shortages did trigger turmoil at the onset of the global crisis, the
main threat to credit growth now appears to be solvency problems, arising
from the declining capacity of borrowers to repay bank loans. Banks risk
breaching regulatory capital requirements if, as expected, the downturn
brings an upsurge in non-performing loans. Such capital shortages can
force deleveraging as banks shrink their balance sheets to meet capital
adequacy requirements. Banks may also be unwilling to lend as credit
risks on new lending rise in an environment of negative real GDP growth
both domestically and abroad. The challenge is to maintain capital
adequacy and prevent a sharp curtailing of lending flows financing new
activities, while minimising moral hazard and the cost to taxpayers.

2
5

Russias banking sector has suffered repeated crises since the start of
transition. Policy makers face two broad regulatory challenges in seeking
to improve the stability of the banking system: to converge on existing
best practice as regards the implementation of prudential supervision and
(a challenge shared with many other countries) to address defects in bank
regulation which amplify economic cycles and give insufficient weight to
liquidity considerations. In the cyclical upswing Russian banks on average
maintained but did not increase capital cushions above the minimum
standard, and many therefore risk falling below the minimum as loan
losses rise as a result of the recession, unless new capital can be found.
As in OECD countries, there is a need for a more macro-prudential
approach to financial supervision, which takes more account of systemic
risks, in addition to focusing on bank-specific ones. Capital requirements
and/or provisioning rules should be made counter-cyclical and capital

requirements should be allowed to vary across banks to reflect each

banks contribution to systemic risk. In addition, stress tests should
include assessments of shocks which hit across the banking system. There
will be ongoing efforts to reform international rules to strengthen existing
supervision approaches, and Russia should actively participate in these
discussions while proceeding with own reforms to bolster financial market
stability.
Russias financial system, despite its recent rapid expansion, is still
relatively underdeveloped, leaving considerable scope for financial
deepening to contribute to long-term growth. A number of reforms would
contribute to such deepening. First, although Russia has many banks,
competition overall is weak, especially at the regional level. Consolidation
of the sector would help, as this would lift more banks above a minimum
efficient scale, which is necessary to contribute to effective competition.
Over the long term, competition and efficiency would be improved by
streamlining the states involvement in the sector. Here, as with stateowned enterprises in other sectors, policy goals are mixed with
commercial ones, mandates are unclear, and institutions with sub-optimal
corporate governance arrangements are given major roles. Beyond being
boosted by competition, banking efficiency would benefit from
improvements in the rule of law, faster convergence to international
financial reporting standards, and measures to lengthen the effective
duration of bank liabilities (notably, repeal of the Civil Code provision that
allows withdrawal of all household deposits on demand regardless of their
contractual term).

2
5

There are still many banks, most of which are very small
End of period

Source: Central Bank of Russia.

The largest banks are state-owned

Source: Central Bank of Russia and OECD calculations.

The following OECD assessment and recommendations summarise
chapter 5 of the Economic Survey of Russia published on 15
July 2009.
Contents
The OECDs product market regulation (PMR) indicator for Russia reveals
that, despite liberalisation in some areas, such regulation is, on average,
highly restrictive. The overall level of regulation is significantly higher and
restricts competition to a greater extent than in any OECD
country - including the emerging market economies within the OECD area.
All three of the high-level sub-components of the overall PMR index are
high in Russia relative to comparator countries, although there is
considerable regulatory heterogeneity in lower-level sub-components.

2
5

Product market regulation in Russia is more restrictive than in

any OECD member

Note: Index scale of 0-6 from least to most restrictive.

Source: OECD.

2
5

Reflecting the legacy of the Soviet era as well as the backlash after the
chaotic early years of transition to a new system, state control in the
Russian economy is extensive, via both direct state ownership and control
over economic activity. State-owned enterprises are found across a wide
range of sectors and often occupy a dominant position in their industry.
Furthermore, there is a pervasive blurring of the line between the public
and private sectors, arising not only from the extensive role of stateowned enterprises but also by close ties between government (at all
levels) and major private firms. One reflection of this phenomenon is the
unusually important role of current or former politicians and senior
bureaucrats in business, which gives rise to multiple, distorting and costly
conflicts of interest. Recent initiatives to strengthen the obligations for
politicians and senior bureaucrats to publicise their incomes and financial
assets are welcome. The special-status state corporations, most of which
were established recently, are exempt from some reporting and
monitoring obligations. These exemptions should be removed.
Furthermore, the extent of the problems posed by the unclear governance
of these institutions, which are neither under full political surveillance nor
privately owned, should be carefully monitored. The PMR indicators also
signal a high level of government involvement in the private business
sector. In part, this reflects a prevalence of command-and-control-type
regulation. Significant benefits in terms of economic performance could be
yielded by reducing political interference in the operation of state-owned
enterprises (SOEs) and private sector firms. This should include separating
the activities with non-commercial policy objectives of SOEs and
consolidating them to the relevant government department; improving
standards of transparency and disclosure in SOEs; imposing an effective
firewall between public and private professional activities to avoid
conflicts of interest; disposing of golden shares in SOEs and private firms;
increasing the independence and accountability of government
representatives and accelerating appointments of independent and
accountable directors on SOE Boards; revitalising privatisation (once SOE
corporate governance has been improved); reducing the list of strategic

firms and sectors; and using regulatory alternatives to command-andcontrol regulation and direct intervention.

State control stands out as accounting for the high overall score

1. Czech Republic, Hungary, Korea, Mexico, Poland, Turkey.

2. Austria, Belgium, Finland, France, Germany, Italy, Luxembourg,
Netherlands, Portugal, Spain.
Note: Index scale of 0-6 from least to most restrictive.
Source: OECD.

2
5

Russia performs well in some regulatory areas related to barriers to

entrepreneurship, including regulatory and administrative opacity and the
system of licensing and permits. However, the administrative burden that
the government places on entrepreneurs starting a new business, whether
they are corporations or sole traders, is still very high and acts as an
obstacle to new entry. This could be indicative of more widespread
inefficiencies in government administration and reflect ongoing difficulties
in reforming the public administration, creating new regulatory institutions
and implementing market-orientated forms of regulation. Many measures
could be taken to reduce barriers to entrepreneurship and increase
competition, including: further public administration reform and cutting
red tape; increasing the transparency and accountability of public
administration; carrying out Regulatory Impact Analysis to assess
significant new regulatory proposals; breaking the dependence of regional
governments on a limited number of local firms for revenue raising;
providing for more vigorous and uniform implementation of competition
law; minimising uncertainty and the need for subjective decision making
within the government administration so as to reduce corruption

opportunities; and continuing work to make network industries more

competitive, with stronger regulation.

2
5

Russias average import tariff rate is somewhat higher than in most other
middle-income countries and significantly higher than in OECD countries.
Further, despite the implementation of a programme to simplify the rate
structure in 2000-01, the dispersion in tariffs has actually increased since
the beginning of the 2000s, indicating a less uniform structure. Lowering
tariff protection and tariff dispersion to OECD levels would be both
beneficial for economic performance and helpful in speeding Russias
accession to the World Trade Organisation (WTO), which has been under
negotiation for more than 15 years. WTO membership would in turn
exercise some leverage for making more progress with competitionenhancing reforms. As to foreign direct investment (FDI), inflows have,
until recently, been robust, but barriers to foreign ownership are
estimated to be high in Russia compared to OECD countries. In part, this
reflects the enactment in May 2008 of the law on strategic industries,
which defines 42 sectors in which control by foreign investors requires
prior authorisation from a government commission. Although this law
increases transparency and is less ad hoc than the previous regime, its
sectored coverage is broader and notification delays longer than OECDrecommended practice. The emergence of large state-controlled
conglomerates with dominant market positions also acts as a barrier to
FDI inflows. The scope for foreign investors to acquire equity in these
conglomerates or participate in government procurement contracts in the
sectors they occupy is strictly limited. Beyond explicit barriers to FDI, the
overall regulatory environment in Russia is perhaps the most significant
impediment to greater inflows of FDI. The government should increase the
openness and predictability of the foreign investment regime, review the
list of strategic sectors and ensure a level playing-field between domestic
and foreign firms with respect to government procurement and access to
subsidies.

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