Sometimes an item’s cost does not correspond with its level of usefulness. It’s a burden that could happen to anyone with anything, particularly investments. There is a name for this predicament and that is a ‘white elephant.’ While it certainly sounds unusual, when you think about it, it’s no less strange sounding than a black swan.
By properly understanding the term’s origin and looking at real-world examples, this phrase will make much more sense.
Origin of the term
Incidentally, the ‘white elephant’ term derives from Asia. It mainly comes from the sacred white elephants belonging to Southeast Asian monarchs in Burma, Laos, and Cambodia. The white elephant icon also has roots in Thailand, formerly known as Siam. These elephants are extremely rare and during ancient times, they were seen as holy. As such, they were automatically given as gifts to the reigning monarch. The affluence expected of someone owning these creatures of great stature was monumental.
According to the story, the monarch would give the white elephant as a gift of fortune. Whether that fortune is good or bad would be up in the air. Should he like the recipient, then he would provide a gift in the form of land along with the elephant. Doing so will help pay for the cost of the elephant. However, if he did not like you, then he would not include land. This in turn would transform the gift into a money pit.
The animals were sacred and there were laws in place to protect them from labour. Because of this, receiving a white elephant as a gift from a monarch was a blessing. At the same time, though, it was a curse. A blessing because the animal was divine and a sign of the monarch’s favour. A curse because the recipient now has an expensive-to-maintain animal on their hands. He could not give it away, nor could he put it to practical use.
Over in the western side of the world, the term refers to a costly burden that fails to meet expectations. The first usage was way back in the 1600s and it would become mainstream in the 1800s.
What does it mean?
A white elephant is basically something whose upkeep cost does not correlate with its value or usefulness. Looking at it from an investment angle, it refers to an expensive asset, property, or business. One that costs so much to operate and maintain that it is very hard to generate a profit from it.
White elephants are quite a taxing possession. When you apply it to investments, it usually describes anything with an overly expensive maintenance budget. Moreover, it characterizes something that is unprofitable and impossible to sell. Put simply, white elephant is what you call unsatisfactory investments that are far more troublesome than they are worth.
According to “The Simple Economics of White Elephants” by Juan-Jos´e Ganuza and Gerard Llobet:
“It is important to notice that our definition of white elephants is restricted to those projects for which proper ex-ante information acquisition was optimal but it did not occur. This is in contrast with the way they are typically interpreted, where evaluation of projects … is carried out ex-post. The presence of uncertainty inevitably implies that for some projects the costs will never be recovered but this does not imply a bad upfront project selection.”
Understanding the details
Over the years, the term would go on to associate with real estate. There are times when it also connects with the alleged “Asian growth model.” China – mirroring similar Japanese endeavors of the past – creates rapid economic growth by way of funneling money into state-led infrastructure investments. In addition, they put lots of money towards export expansion. Various steps were taken, like subsidizing manufacturers, maintaining low interest rates, and pegging exchange rates. Doing so makes domestic goods cheaper to purchase from overseas and also makes imports expensive.
Pricey mercantilism policies would deliver on the booms, as well as a dependency on constant investment. With time, a surplus of expenditures results in capital misallocation and an array of asset bubbles.
According to economists, roughly 45% of Chinese gross domestic product (GDP) derives from investment. This is a comparatively larger figure than that of more developed economies. Additionally, skeptics are often quick to note that almost half of that investment is wasted on white elephant projects. Pretty much anything that ends up generating zero returns. Such projects of this kind include ghost cities.
To reiterate an earlier point, white elephants are a common occurrence in the world of real estate. There are three noteworthy examples of this: the Empire State Building, the T-Mobile Center, and the Ryugyong Hotel.
The Empire State Building
This icon of New York City is a 102-story skyscraper located in Midtown Manhattan. For all its popularity nowadays, that was not always the case. The building was actually not that profitable until the 1950s; more than 20 years following its completion. Built during the Great Depression, the building has never technically been an office building. This is in spite of the initial plans being primarily for that purpose.
The rent of the building in 2006 was merely $37 per square foot. As you can imagine, this is significantly below midtown the average New York rental rate of $48 per square foot. Regardless of that, the vacancy rates would still remain at 18%.
The T-Mobile Center
A more recent example of a white elephant is the T-Mobile Center of Kansas City. Formerly the Sprint Center, this multi-purpose arena doors would open in 2007 and host an Elton John concert as its first event. Over the years, it would host various sporting events, including numerous basketball tournaments.
At a cost of approximately $300 million, the T-Mobile Center’s original intent was to house a major sports anchor team. At one point, Kansas City did enter discussions with both National Basketball Association and National Hockey League teams. However, up until this point, none of them have come to an agreement on arena relocation.
The Ryugyong Hotel
Another notable white elephant is the Ryugyong Hotel in Pyongyang, North Korea. This hotel stands 105 stories tall and functions as a skyscraper in the shape of a pyramid. The original plan for this structure was to hold five revolving restaurants and over 3,000 hotel rooms.
The start of construction on the tallest structure in North Korea would begin in 1987. However, in 1992, there was a halt in the plans due to a severe lack of funds. It wasn’t until 2008 when building work would finally continue. The grand opening was aiming to take place in 2012, which was the centenary of Kim Il-Sung’s birth. As of 2019, the building is amazingly still unfinished, earning it the nickname the “hotel of doom.” Moreover, it has the admittedly questionable title of the tallest unfinished building in the whole world.