Last week I was visiting Rio and I had a blast when Brazil was granted the 2014 world cup. Of course, after some short spree of happiness, my Venezuelan genes started to kick in, and started to complain. In particular, I started whining about how expensive Rio was, and was going to get. Students in front of me said “so, is it because the exchange rate is appreciated?”.
“Wow!” I responded, “The issue is that Rio failed the Crane test, so that can’t be the reason”.
Immediately all the students started searching in their heads for all the papers written by authors Crane, Krane, Crain, Qranne, and whatever combination you can imagine that could remotely sound as crane; when I said,
“No, not a person. Construction cranes! The crane test.”.
They looked quite confused. Roughly as confused you are looking now. But the crane test is perhaps one of the most powerful policy tools available to human kind. Some people say that I invented it, but I know I didn’t. In any case, I do use it a lot, and I am kind of the promoter.
The crane test consists of the following: every time I am driving from the airport to the city I count the number of tall buildings and the number of tall cranes. I take the ratio. If this ratio is close to one, the exchange rate is appreciated.
The counting is not very scientific. First, what is a tall building? Well, it changes from city to city. By looking at the skyline you can clearly see how many jut or stand out. The average building depends on geological characteristics, and country income; and every city has its own tall buildings. Usually, just by driving around you can count them. Second, by counting the number of tall cranes and divide it by the number of tall buildings we have an easy measure of the non-tradable expansion in the city – and therefore, a magnificent measure of the real exchange rate. The measure does not have to be exact. I remember in Oslo I got more than 2 cranes for every tall building. I know you can make mistakes counting but at those orders of magnitude the mistakes are irrelevant.
In Rio, there are very few cranes. I mean, there were some cranes for the stadiums, but truly, no significant number of them. The students actually thought about it and agreed with me. They said, however, that in Sao Paolo the crane test will indicate a real exchange rate appreciation.
I thought that there is an interesting opportunity here. Lets use this blog to report the crane test in each city in Latin America (every month), and then we compare it to measures of the real exchange rate issued by the IMF. We’ll collect the data from the blog, and then report statistics about the countries. I think it might be interesting. Lets see how many responses we get for this plead, and then we’ll continue. IMPORTANTLY: when reporting report the number of tall buildings and number of cranes. We can compute the ratio…
Finally, I know the crane test is the perfect measure, so we will be truly evaluating the IMF’s data and the big mac. The worst that can happen is that we find a great correlation and produce a better measure.
Furthermore, now that Brazil was awarded the 2014 world cup (CONGRATULATIONS by the way) they need the roads, trains, transportation, stadiums, housing, etc. We can predict a lot of expenditures on non-tradables in the years to come, which should appreciate the exchange rate, and should show up in cranes…. Lets the counting begin!