This week we are very pleased to introduce Robert Buckley and Jerry Kalarickal, leading experts on housing policy in developing nations. They describe, and explain reasons for, the dramatic shift away from heavy reliance on state provision of housing towards a far more market-orientated approach. Nonetheless, unfettered markets do not solve all the problems, and there can still be a need for carefully designed policy interventions to make the market work better.
The photos are always heart-rending: children playing in open sewers, families crowded into filthy apartments, squatters sheltering in tin-and-cardboard tents. And it could get worse: by some estimates, more than 50 percent of the world's poor people will live in urban areas by 2035. Little wonder that Target 11 of the UN's Millennium Development Goals is improving the lives of 100 million slum dwellers by 2020.
Once, slums were a temporary stage: rural poor people migrated to urban slums in search of work, achieved a better standard of living, and moved up. Today, however, slum dwellers are not recent immigrants from country villages. Many of the 100,000 pavement dwellers in Mumbai, for instance, are second-generation, as are many of the residents of the favelas of Rio de Janeiro. Surveys in India and Brazil find that many slum dwellers are no longer participants in the traditional demographic transition to the middle class.
Though the majority of the world's poor people continue to live in rural areas, poverty is becoming more urban. Most poor people in Brazil, Mexico, and Russia already live in urban areas. In many of India's larger states, the poverty rate is now higher in cities than in rural areas. Urbanization no longer reliably correlates with economic growth and rising incomes.
How to ensure that low-income people have decent housing has concerned policymakers for decades, but the approaches have changed- from intervening in the housing market to letting market mechanisms work on the poor's behalf.
Control and intervention
Under interventionist regimes, governments set standards for housing and often undertook its actual construction. Not only was the housing expensive, but its supply was inelastic, and when demand surged, people were pushed into the unregulated informal sector, with its illegal squatting, substandard buildings, and dangerously high occupancy levels. Demolition of squatters' settlements only worsened people's situations.
Rent controls, which discourage private construction, and other public programs that restricted the housing market and building industry also had the effect of decreasing supply elasticity. "Next to bombing," wrote one researcher in 1977, "rent control seems in many cases to be the most efficient technique so far known for destroying cities." (Lindbeck 1977)
Another constraint was land suitable for residential construction. Wherever the public sector owned and controlled large amounts of serviced land, as in many developing economies, this major input into housing production was less responsive to increases in demand. Consequently, higher demand was accompanied by rising prices.
Markets and incentives
Over the past 20 years, housing policy in developing countries has swung toward a market orientation. Possibly the most important reason is the change in perspective on what constitutes effective governance. There are now twice as many democratic governments in the world as two decades ago, and they are overwhelmingly more decentralized. With the fall of the Soviet Union and the general adoption of market-oriented economic policy in China and India, the central planning approach to housing has largely been discarded.
Moreover, most developing economies now have sophisticated and diversified financial sectors. Formal financial institutions, of course, do not serve the very poor who are self-employed or work in the informal sector and cannot show proof of income- a condition for obtaining credit. The real promise for assisting low-income families with housing finance is emerging through microfinance institutions, whose financial services let poor people improve their own housing conditions.
Many of the new housing policies adopted in response to the continuing migration to the cities enable, rather than control or displace, the private sector, thereby improving the affordability of housing in general.
After the Soviet Union fell, for example, reforms substituted private incentives for public control over housing production, ownership, design, and allocation. India has rewarded states that eliminate rent controls and urban land-market ownership restrictions. China, Chile, Colombia, Malaysia, and Mexico are letting consumers borrow or use public resources to find the housing they want. Housing vouchers, a market-oriented instrument, are the new form of subsidy. And slum dwellers themselves, who by force of circumstances have always been among the most market-oriented of all consumers because they have no other options, have established the Slum Dwellers International Federation to share experiences and approaches. Policymakers in developing areas are increasingly seeking their views on low-income shelter problems.
Cautions and caveats
Not all the changes have been benevolent. Financial crises have led to capital flight and massive mortgage defaults, as in Mexico in the mid-1990s. In some cases, as in Asia in the late 1990s, overheated real estate markets seem to have precipitated these collapses. In the former Soviet bloc, the government privatized individual apartment units, but the fabric of the buildings- roofs, elevators- remained unmanaged, and ambiguous ownership rights to common areas continue to hamper property management.
Governments of developing countries have learned to be cautious in applying sweeping solutions pressed on them by the advocates of free markets. An example is the assertion that clear title to land is the key to productive capitalism. The problem is, the cost of establishing clear title often outweighs any benefit. And in cases involving squatters, granting amnesty for illegal occupation arguably undermines respect for property rights. Many traditional societies have a continuum of degrees of tenure, and formal title- though often a necessary condition for a functioning financial market in the housing sector- may not be the only system.
Researchers also warn against an unconditional attack on rent control. Although it is anathema to most economists, those studying housing markets for the poor have come to have more nuanced opinions.
The research has shown that there is no capitalist panacea. Nevertheless, whereas many old-style interventions exacerbated the housing problems of poor people in developing countries, market-oriented policies by themselves, even without additional resources, can often improve their situations. And increased community involvement can give poor people the capacity to aspire. Circumstances vary widely, and policy must be tailored to local conditions. But where intervention used to be the rule, policymakers are now more inclined to let the market make the decisions.
Views expressed are those of the author. RFF does not take institutional positions on legislative or policy questions.
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This Policy Commentary draws on "Housing Policy in Developing Countries: Conjectures and Refutations," by Robert Buckley and Jerry Kalarickal,The World Bank Research Observer Advance Access, August 4, 2005.
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