ISET Economist Blog

The World's Tallest Skyscraper
Friday, 10 February, 2012

From Eurasianet:

The Azerbaijani developer Avesta plans to stick the 1,110-meter-high (about 3,642- feet-high) building on a chain of artificial islands off Azerbaijan's Caspian Sea shore. Completion date: by 2019. The tower -- named, not surprisingly, "Tower of Azerbaijan" -- is expected to house hotels and business centers.

While it is unclear whether this project will ever be realized, it certainly shows that Azerbaijan has huge ambitions. Comparisons to Dubai come to mind, as a city with attention-grabbing architectural projects. More importantly, Dubai might serve as a role model of a place that claims to have successfully diversified away from oil.

But this might not be the end of the story, as Eurasianet also comments that,

One British investment bank, though, recently warned against skyscraper mania. Barclays Capital found an unhealthy correlation between construction of the world’s tallest buildings and financial crisis. Such projects, the Bank argues, come in the middle of a brewing economic meltdown and represent a widespread misallocation of capital.

Fortunately for Azerbaijan and any other skyscraper builders, such an unhealthy correlation does not seem to exist, at least if one believes this recent study by three economists at Rutgers University. Contrary to Barclay's capital and common perceptions, they find that height and economic booms are only weakly correlated, and that building height is not a predictor of coming economic bust.

Of course, one might also ask what the point of building the tallest skyscraper in the world is. One could argue that this is an expensive folly, given that building costs increase disproportionally with building height. On the other side, firms are willing to pay higher office rents in taller buildings – offsetting the higher construction costs. There are two reasons to do so. One, firms that rely heavily on face-to-face interactions might be more productive if all employees are clustered in one building. Second, the prestige associated with being in a tall building might generate a reputation effect for firms. A study by Dutch economists sheds light on this question. While both effects are important, the reputation effect is much more substantial for the very tallest buildings.

Of course, in the context of the Tower of Azerbaijan or other very tall skyscrapers, this does not even include the reputation effect that will accrue to the country. A costly project for sure, but not a harbinger of an economic bust either.

The views and analysis in this article belong solely to the author(s) and do not necessarily reflect the views of the international School of Economics at TSU (ISET) or ISET Policty Institute.