It might be tempting to dismiss such lists as relevant only to a precious few. After all, the whole point is to measure the allowances needed for a Western banker, marketing executive or journalist to maintain a certain lifestyle when moving abroad. But there’s a bit more to it than that. Cities move up and down the lists due to changing prices at home, or currency movements. To the extent that inflation and exchange rates reflect national strength, these surveys are, in fact, a telling barometer of the balance of economic power. So lately they’ve offered a window on the rise of China, the recovery of South Korea and the competitive balance between the United States and Europe.
To fashion these lists, researchers collect local price data for cities and then translate them into dollar terms for comparison. Inflation in South Korea is low, but the won climbed 27 percent against the dollar in five years, in tandem with Korean exports, pushing Seoul to a tie at the top of the Mercer list and marking the country’s recovery from the crisis of the late 1990s. When the dollar plunged against the euro in 2003 and 2004, European capitals became sharply more expensive for American expats. Recently the dollar has regained a bit of strength, and U.S. cities like Los Angeles have climbed the lists.
The fall of Tokyo was a long time coming. The Japanese economy has been slowing, even hitting bouts of deflation, since the bubble years. But it was coming off such a high that its decline in the rankings unfolded slowly. Of course, Tokyo prices can still seem outrageous to a visitor: A muskmelon at a high-end fruit shop costs about ¥20,000 ($175) and tickets to an Italian opera fetch nearly ¥57,000 ($500). But over time, locals are seeing dramatic change: one 42-year-old Japanese shipping manager notes that the three-bedroom apartment he bought in a Tokyo suburb 10 years ago cost him $435,000. Now, he says, such condos go for 20 percent less.
While secondary cities may be growing faster in population terms, these lists also mark the limits of globalization. The tops of the surveys are still dominated by national capitals, as in Norway or Iceland, where the money tends to concentrate. As Asia and Eastern Europe open wider to investment and foreigners take the bait, incoming expats there, too, vie with locals for a limited amount of topflight housing. They are also often followed by imports of international goods and services, which can drive up local prices. Soaring rents and the proliferation of luxury shops are what drove Moscow, for example, to the top of Mercer’s list this year.
In fact, the increasing adventurousness of foreign money flows is reshaping the maps of Asia and Eastern Europe. Chinese cities are rising on the Mercer list, and Chinese second cities like Shenzhen, Tianjin and Nanjing are narrowing the cost gap with Beijing and Shanghai, in part because the renminbi is now pegged to a basket of currencies, not just the weakened dollar. Mercer says clients looking to build a factory in Eastern Europe are asking for data from off the beaten path. Places of interest include Ziar, Slovakia, and Varna, Bulgaria, in part because relative prices there are not yet rising for expats.
The recent commodities boom is quickly reflected in the city rankings. Countries that supply copper, oil or other minerals saw their currencies strengthen as China and others bid for their exports. That’s why ECA International, a global organization of human-resources executives, ranks Luanda as the most expensive city in the world (excluding rent), followed by Reykjavik, Kinshasa and Oslo. Demand for copper launched Lusaka, Zambia, from 144th place to 32nd, though that could turn fast now that commodity prices are easing, says Ian Ridgewell, commercial director of ECA. “Within 12 months, all the usual suspects will be back up there,” he says.
Sometimes cities are artificially expensive or cheap by government fiat. This may not reflect economic reality, but it has a real impact for investors. In 1991 Tehran briefly topped the Economist Intelligence Unit’s list, but fell fast after Iran quit propping up its currency against the dollar. It can happen with taxes and price controls, too. In Seoul, a tax of nearly 60 percent has pushed gas prices to $1.70 per liter, while subsidies in populist Venezuela make fuel affordable for all, including rich expats.
Often, expats and locals run in circles so different that the foreigners endure their own pockets of inflation. The unrest around the oilfields in Nigeria has jacked up the cost to multinationals for bodyguards and home security. In Seoul, as there are not many midrange hotels, most foreign visitors end up in expensive five- or six-star hotels. Decent restaurant dinners easily exceed $100 per head, while ordinary meals for locals start at about $6.
Perhaps the clearest distinction is in Moscow housing prices. Native Muscovites were given their own state-owned apartments free of charge in a 1992 privatization scheme, meaning that the vast majority of residents neither pay rent nor have a mortgage. However, out-of-towners and Russians who want more luxurious apartments must choose from a relatively small supply. A basic 70-square-meter apartment goes for about $3,000 a month, with luxury palaces going for 10 times that and more. One Moscow expat, American coffee importer David Garrett, bought an apartment in central Moscow two years ago for $270,000. It is now worth $800,000, outperforming his business revenue by a factor of two.
In some cases these rankings reflect the reality for permanent residents as well. Scandinavian countries simply are expensive, thanks largely to a nanny state that provides education, health care and employment security in exchange for high taxes. In Oslo, alcohol taxes mean friends gather at home for drinks before going to a bar or restaurant, where a beer tops $10. Switzerland, Iceland and Japan pay the price of having to import almost everything, and will always be expensive.
In some of the rising cities, prices climb because luxury options from cosmetics to fancy meals are becoming available for the first time. In China, for example, ECA believes this phenomenon helps explain why the price gap between the major metropolises and second cities has narrowed from 30 percent to 20 percent over the last four years, and could reach 10 percent over the next four years for cities near Shanghai. “We have higher-quality choices now,” says Wang Shi, a Maybelline sales attendant at the Parkson department store in downtown Tianjin, a city of 10 million. But there is a trade-off. Ou Yang, a graduating senior at Tianjin University, says the $125 a month in spending money his parents give him allowed for some splurging when he first enrolled in 2002, but no more.
More open markets seem to be having the opposite effect in Eastern Europe, where the prospect of joining the European Union drove up currencies–and rankings–not long ago. Luxury items that were once imported are now being made locally, bringing prices down. This has been aggravated by their currencies’ falling against the dollar. Mercer found that Prague, Warsaw and Budapest all fell sharply in the rankings this time.
The rankings also build on the idea that a global elite is emerging, made up of similar people with similar tastes, regardless of nationality. Mercer senior researcher Anna Krotova searches through national consumption data to find items in heavy demand among members of this new global class, and includes on that list big apartments, maids, cognac, frequent taxi rides, and international schools. To prevent particular national tastes in food and consumer goods from skewing the results (Brits like marmite, Americans like peanut butter, no one else likes either) researchers try to focus on universal staples like a kilo of bread or a can of tomatoes.
Still, in searching for a true measure of the global elite, small changes in one’s assumptions can lead to big differences in the results. For example, while Chinese cities are rising on the Mercer list, they are falling on one put out by the EIU, which says more open markets and rising competition from big retail chains are restraining prices for expats. Either way, the rankings offer an interesting snapshot of how the global economy works. And they counsel against moving to Luanda any time soon.
