Sujit,
Very thought provoking question! Hope we have an economist in the group who answers this question.
Would like to hazard the following guess (though I am not an expert in these matters):-
The answer could vary in each case - but in general, we can say that, a huge amount of money goes in to the pockets of developers and infrastructure builders, who get paid disproportionately (by both - owners and governments), during the "development" phase, in the hope of a stream of future returns. Naturally, the owners / governments raise long term loans to meet this expenditure.
This in effect compels both owners/ city governments to depend on future income streams to pay off the loans raised. When future income streams dwindle or get cut-off (e.g. in a recession) or when income doesn't cover loan repayments plus burgeoning costs (e.g. due to a bloated and overpaid bureaucracy like what is alleged in case of Chicago), city governments / owners become insolvent.
When this happens to a business (or an individual) nobody is alarmed. When it happens to a city government (like in case of Detroit or now Chicago), it is a disaster that attracts headlines!
In short, the root cause behind a city's failure is likely to be economic (or indirectly, political - if political compulsion has led to unnecessary gambles) : be it either a slowdown/reversal in the city's economy and/or financial mismanagement by the city's government or both.
I am not a finance expert, but one could imagine that the developers/infrastructure builders in turn would have raised long term loans and in case they don't get paid outright (but over time, via leases or toll-roads) upfront, they might end up bearing the brunt of the downturn too...
Viewed in the above context, over-development could end up being a curse not a boon w.r.t. the long-term viability of a city, esp. if the bet (that the investment will pay back via future prosperity) does not pay off. A case in point is the debate between BRT vs. Overground Metro vs. Underground metro in Pune. Has anyone (PMC, State Govt, Central govt) looked at the investment / return equation behind these investments??
Now fast forward by extending the scenario with a city like Chicago, to an entire country like India over the next few decades - if the massive upcoming investment in cities (existing ones or the new, "smart cities") that everyone is upbeat about, does not lead to a commensurate future income streams to either the local govts. or to the central govt. since it is going to fund these adventures, the country's economy as a whole would suffer as the central govt. will need to print money to fund the shortfall. Are financial planners in the govt./industry modelling future scenarios while announcing schemes like JNNURM or Smart Cities?
Request experts among the group to comment...
best regards,
Anil Risbud