Evolution of Housing Policy in the Developing World

Recently I gave a lecture to an undergraduate international development class at York University. It’s probably worth a post, so I wrote up the notes from the lecture into a blog post. Enjoy (though it’s a long one).

The discussion begins by setting the a context and describe trends in urbanization around the world. The key question to explore is “Why are people moving to cities?” followed by the major housing issues as they’ve been addressed in the international development regime, particularly driven by the World Bank. This involves the exploration of housing through a few different approaches or stages:

  • First the initial push/pull factors and the development of informal housing;
  • The first wave of policy responses through the provision of public housing;
  • The second wave of policy responses, the site-and-servicing approach; and
  • Finally, the third wave of policy responses, the land titling approach.

Let’s consider overall trends in urbanization. One of the key statistic thrown around is that, as of 2007, half the world’s population lives in urban areas (UN). In context, 200 years ago, less than 5% of the world’s population lived in cities. By 1900, this figure had raised to 14%. The driving force behind urbanization has consisted of a primary push and a primary pull factor:

  • Industrialization has created many employment opportunities in urban areas; and
  • At the same time, the potential economic opportunities in rural areas have declined.

Over the last 20 or 30 years, this has led to rapid population growth in cities globally.

un-pop-forecast

In the developed world, most countries are fully urbanized, and the developing world has rapidly been catching up:

  • At a high level, countries in Africa have urbanized at the slowest rate, from roughly 15% in 1950 to 40% in 2014;
  • Countries in Asia were just under 20% urban in 1950 and are nearly 50% urban in 2014;
  • Countries in Latin America and the Caribbean were 40% urbanized in 1950 and 80% urbanized in 2014;
  • For comparison, North America is 80% urbanized, Europe 73% and Oceania 70%.

un-urbanization-rates

Over the next 30 years, nearly all the growth in global population, or 2-billion-plus people, is expected to occur in urban areas in the developing world.

Cities are also growing much larger. At the start of the 20th Century, 16 cities, mostly in industrialized nations, contained a million or more people. Today, almost 400 cities have more than a million people and 70% of which are in developing countries. Furthermore, “megacities”, or the number of cities with more than 10 million people, have also been growing rapidly. To give you a sense of scale, the three largest megacities by urban area are:

megacities

Each of these cities has roughly the population of Canada (image source: Tokyo, Sao Paulo, Chongching)

In developed countries, urbanization followed directly with industrialization and people moved to cities directly based on economic demand. However, the correlation between urbanization and rising per capita incomes in developed economies was found to be absent in some developing countries, particularly those in Sub-Saharan Africa. Urbanization without growth characterized many Sub-Saharan African countries in the 1990s, creating a new type of housing demand in a much more urbanized, if poorer, world. The main drivers of this urbanization without growth have been extreme rural poverty, natural disasters, and civil wars. Though the majority of the world’s poor people continue to live in rural areas, poverty is rapidly becoming an urban phenomenon. Simply put, more people moved to cities than local economics and city services to could handle, which has had consequences for housing

At the rates that many cities have grown, public sector agencies have been unable to provide enough housing fast enough. Through the course of the 20th Century, housing for the urban poor has generally come in two forms:

  • Public housing, or housing units provided by the government; and
  • Spontaneous housing, otherwise called shanty towns, favelas, katchi abaadis, slums and many different names.

The formal private sector is generally not in the business of providing low-income housing unless it is through state subsidies. The informal private sector works through spontaneous housing.

An important component affecting housing across the developing world has been the influence of major donor and development institutions, in particular The World Bank. The World Bank didn’t really dive into housing issues until around the 1970s, though. Prior to the 1970s, the Bank’s focus was on providing small-scale assistance mainly towards income-producing infrastructure, such as ports and power plants. Since it entered low-income housing projects in developing countries in 1972 the World Bank has exerted a powerful influence in the development of housing theory and policy. So, who provided housing for the urban poor during up until this period? Well it was largely the driven by the governments of the countries themselves.

Traditional public housing provided by many government agencies are still out of the reach of many of the poorest residents of these cities. Historically, public housing has mainly been used to house families in the lower-middle class. Rents alone are often too high for low-income households. Government housing generally led to the displacement of urban residents from their usual location (usually with access to employment or community services). Housing projects were often located on the fringes of cities, away from the major employment centres. Residents had to be able to afford to commute to work.

How governments in developing countries approached the provision of public housing prior to the World Bank’s liberalization policies was reflective of the heavy focus on state sponsored welfare following World War 2. For most countries, the housing policy was a standalone public sector process completely independent of the private sector. That is, public, or affordable housing was to be provided through the state. This push for public housing was part of a very large urban renewal process in many countries, including in North America, where large tower blocks of affordable housing, such as Toronto’s Regent Park, were built. From 1950 to 1972, the dominant public policy in low-income housing was based upon the state’s role as provider of public housing in the form of permanent construction units, often apartments. Well into the 1980s, the countries that made up the former Soviet Union as well as Argentina, China, India, the Republic of Korea, Mexico, and many African countries had very active public housing programs. Under the stronger state policies of many countries aligned with the former Soviet Union, the state actively discouraged the production of private sector housing. The central planning approach to housing policy was largely abandoned with the fall of the Soviet Union in 1989 and a shift to market-oriented economic policy in China and India in the 1990s.

HK Public Housing

Public Housing in Hong Kong (image source)

China is the exception amongst developing and emerging economies that is still building public housing at a mass scale using a top-down approach. However, the results are mixed. According to the UN, China built 36 million subsidized units by 2011, though they were only accessible for 20% of their targeted users. Many of these units are in “ghost cities”, major urban developments undertaken that never saw the demand anticipated and are currently mostly empty. The UN reports that there are nearly 65 million empty units in China, which amounts to 20% of the country’s housing stock.

Why was publicly subsidized houses too expensive for the poorest members? Large-scale affordable housing projects undertaken by developing country governments have often required capital financing by international donor organizations. The concept behind the development loans was that residents, having a proper legal home, would be able to access better employment opportunities and higher incomes. However, the anticipated increases in employment and income for the poorest members did not materialize, resulting in public housing being out of reach for the lowest-income brackets. As a result, the state produced expensive and heavily subsidized housing that could meet only a fraction of demand. Due to the cost of building and operating public housing, either the buildings were entirely occupied by those in the lower-middle income brackets or became overcrowded with a greater number of residents per unit than had been planned for. In a broader sense, public housing was a standard approach in industrialized countries and it was transplanted without much thought about differing contexts into developing countries. The underlying assumptions of public housing were driven by the hope that, in developing countries, it would be more affordable, effective, and eventually eliminate unsanitary conditions and town planners’ perceived disorder in squatter settlement.

Those who cannot afford to enter into formal housing rely on the informal market: squatter settlements, spontaneous housing, or slums. As a result, many international development agencies have focused on those living in slums.

How is a slum defined? A simple definition used by UNHABITAT is “a heavily populated urban area characterized by substandard housing and squalor”. A more recent, operational definition used for policy response defines a slum as an area that meets the following characteristics:

  • Inadequate access to safe water;
  • Inadequate access to sanitation and other infrastructure;
  • Poor structural quality of housing;
  • Overcrowding; and
  • Insecure residential status.

As opposed to state sponsored public housing, housing provided in the slums is generally outside the purview of the state and the broader real estate market, called the informal sector. The term “informal sector” refers to activities in an economy that are neither taxed, regulated or monitored by any form of government. The concept was initially developed to describe black or grey market activities in developing countries. Today the informal sector provides most of the housing in developing country cities:

  • 60-70% of urban housing in Zambia;
  • up to 90% in Ghana;
  • 70% in Lima; and
  • 80% of new housing in Caracas

Such housing usually has at least some of the characteristics that UN-Habitat uses to define slums; poor physical condition, overcrowding, poor access to services, and poor access to employment opportunities. Beyond traditional notions of slums, spontaneous housing also extends to people who are homeless or live in very unexpected areas. An example is Cairo’s largest cemetery, the City of the Dead, home to an estimated half a million people or more (add image from Wikipedia and Khalil Hamra / AP).

Recently, housing in the City of the Dead has included apartment blocks, and many units have access to water and electricity, a medical centre, post office and schools. Some of the biggest slums in the world are also large enough to warrant being defined as cities in their own right (at least by Canadian standards).

World Economic Forum’s list of the five largest slums in the world are:

Largest Slums

World’s largest slum communities (image source)

In addition to size, slums settlements are also incredibly dense. Dharavi, in Mumbai, has 10 times the population density of Manhattan.

Let’s discuss some broad issues and misconceptions about slums or spontaneous housing. The initial responses to slums by urban development experts in developing countries was predicated on the “modernization” theory or “benign neglect” interpretation of slums:

  • Slums are a transitory phenomenon characteristic of fast-growing economies and they progressively give way to formal housing as economic growth trickles down; and
  • Slum dwellers, or their children, eventually move into formal housing within the city, so that the benefits of migration into the slum get passed along from generation to generation.

The basic concept was, slums could be neglected, as the market would eventually help people find their way out. These concepts are derived from the fact that slums were a distinctive feature of European and US cities during the Industrial Revolution. Today, large slum settlements have disappeared in most advanced economies, but it is far from clear how comparable these historical examples are to the situations faced in the developing world.

Developing country slums, however, have come out of differing conditions and have taken different paths. Slums have not been temporary. Many slums in developing countries have remained for decades and millions of households find themselves trapped for generations. Some slums are in countries experiencing rapid economic growth, such as China, but many slums are located in countries with slow or stagnant growth. In 2003, UN-Habitat found that:

  • 41% of Kolkata slum dwellers had lived in slums for over 30 years, and more than 70 percent had lived in slums for over 15 years; and
  • In a case study of Bangkok slums, 60 percent of individuals were reportedly born in the same slum.

The prevalence of slums is highest in sub-Saharan Africa, where slum dwellers represent 62 percent of the urban population. In Kibera, Kenya, data suggest that living conditions have either deteriorated or at best stagnated over the 1999–2009 period, a period during which the economy as a whole grew at 3.5 percent per annum. Between 2003 and 2007, 15% of slum residents moved locations. Of these, only 22% moved to a non-slum area. The rest either moved to another slum, moved within the same slum, or moved back to rural Kenya. Despite variations across these settlements, common issues of lack of adequate living space, insufficient public goods provision, and the poor quality of basic amenities are consistent and which lead to extremely poor health and low levels of human capital.

I’ve touched briefly on international development policy in relation to housing. Let’s go over how the current policies specific to slums evolved. Until the 1970s, the prevailing approach was of slum clearance or benign neglect. By the 1970s, it became clear that neither would address the continuous expansion of slums. Slum inhabitants were not being pulled away by improved economic prospects nor being pushed away from the less-desirable aspects of unregulated slum living. The thinking on slums changed to being considered an affordable option for the urban poor. Although housing is sub-standard it plays a crucial role by proving shelter at low-cost to the urban poor. The theoretical basis of the current thinking came from a British architect named John F.C. Turner based on his experiences working on slum-upgrading projects in Peru in the 1950s and 1960s. Turner established his theory on housing development in the book Freedom to Build: Dweller Control of the Housing Process, which was first published in 1972. Turner’s approach, called “aided self-help”, became the basis of housing policy moving forward, including sites-and-services and land tenure-ship. Aided self-help sought to shift the concept of housing from the provision of a good to a process: “housing as a verb”. It re-conceptualized the nature of housing from ‘shelter’ and physical ‘human settlements’ to include the ‘economic’, the ‘social’, the ‘environmental’, and the ‘urban’ as important components of housing. Within these settlements the residents’ capacity to address their housing needs already existed and the solution, therefore, was that public assistance could be used to build on the strengths of the informal housing sector rather than to replace it. Turner proposed that providing only basic services and shelter allowed poor families to expand their units over time as their savings and resources permitted and to use their own labor to maintain and increase their wealth. This approach focused on the importance of such details as the kind of housing units that poor people could afford without subsidies. Under this “aided self-help” paradigm, the World Bank and other policy planners reoriented their policies towards a “slum upgrading” approach.

Two concurrent approaches under the aided self-help model were slum upgrading and sites-and-services. Under slum upgrading models, international development and public assistance was mobilized to provide necessary infrastructure and services within the slums.

An example was the Orangi Pilot Project. Orangi Town, in Karachi, Pakistan, is considered one of the largest, if not the largest, squatter settlement in Asia. Population is estimated at 4 million, though official figures only count 700,000. Not all of Orangi Town is defined as a slum, though overall it is classified as a low-income area. Originated in the Indo-Pakistan split in 1947; the area grew far too rapidly for government response and by 1950, the Government of Pakistan was giving people permission to settle ad-hoc without any services or infrastructure. Today it is a legally recognized as a district by the municipality of Karachi, composed of 13 neighbourhoods (though official response to the demand for infrastructure has been slow). Property and land were initially traded informally with no legal recognition or representation; in the 1970s a system of land titling was introduced to provide better tenure security. Without adequate government support, local groups began organizing and building their own services and housing, creating a micro-economy in the process. The Town is well-known for the Orangi Pilot Project, the highlight of which was a community organized and financed sewage system. Today the community sanitation network covers 90% of the settlement and is completely maintained by the residents.

Orangi

Orangi Pilot Project (image source)

The sites-and-services model was a little different, middle-road between slum upgrading and public housing. The key components provided under a site-and-services model were minimal – a parcel of land, exterior walls, a roof and access to electricity and water. One of the most successful approaches to the site-and-services model actually happened very recently: Quinta Monroy in Chile, 2003.

Quinta Before

Quinta After

Quinta Monroy housing project by Elemental (image source)

In 2002, the Chilean Government contracted a design firm, Elemental, to help them design a housing project for residents of an illegal squatter settlement. The residents were strongly opposed to being housed in a public housing project. In order to house all the families in the same location within the limits of the public housing subsidy offered to the families, Elemental designed what they call “half-a-house”. Instead of building a sub-standard house with all the necessary fixtures, Elemental designed liveable standard houses with only the necessary infrastructure needed for the families to start living there. Using the same philosophy as John Turner, the idea was that the families would upgrade over the years as they needed. These are only some of the success stories. However, there were many problems as these housing concepts were rolled out.

According to much of the literature, early efforts starting in the 1970s to upgrade urban slums have been only partially successful. From the 1970s to 1990s, the World Bank participated in approximately 116 slum-upgrading and site-and-services schemes in 55 countries. The projects were successful in so far as they demonstrated the feasibility of implementing low-cost provisions. The slum-upgrading projects saw greater success than the sites-and-services projects because they delivered much needed services to where the urban poor lived. In contrast, early efforts towards the sites-and-services model turned out to be a lower cost public housing program and, once again, could not address the needs of the very poor. What was missing was a broader link to the housing market and the legal protections of the formal economy.

Now, about the economics of slums. I mentioned briefly the informal sector for housing. That applies to employment as well. I can’t go into too much detail but, suffice it to say, the informal economy in slums is fairly significant. As an example, the estimated value of the goods and services produced in Dharavi exceeds $1 billion. These aren’t goods produced just for residents, they include goods that are exported as well and contribute to India’s economy.

Housing, though informal and low-quality, is also not free. Landownership in informal settlements is a complicated affair. Studies of homeownership and tenureship in Kibera shows that 92% of the households are rent-paying tenants and 8% are owner-occupiers. Of these, 6% claim they own both their house and their land, while 2% say they own the structure but not the land. It’s important to note the difference between the land-owner and the “structure” owner; they’re not always the same person. Owning and renting out structures can be immensely profitable: in Nairobi, studies have reported that annual returns on the housing in slums could be as high as 131%. One study found that 57% of landlords in Nairobi slums were public employees – 41% were government officers and 16% were The remaining 42% were absentee landlords. Connections between the slumlords and local administration have created an informal system of allocation building rights that has become an important source of political patronage. Rents are not cheap. Most households in Kibera live in poverty and figures of average rents showed residents paid approximately 1/3 of their monthly earnings towards rent. The rest went towards food. Data collected in 2004 showed that slum residents paid at least US$31 million in rents, a figure which exceeded the entire City of Nairobi’s annual budget for the year. This informal rental market, albeit distorted, appears to follow many of the rules that apply in ‘‘formal’’ real estate markets—rents vary with house size, quality, infrastructure access, and location. What is missing the formal title or tenureship and requisite protections that legal homeownership.

The experiences with housing in the poorest urban settlements showed that, without the legal protections of the formal economy, life in the slum became a form of poverty trap for most residents. The reasoning was that without formal titles, residents lack the incentives to improve the quality of their homes. As well, due to overcrowding and low marginal returns from small upgrading investments, it may not be rational for slum dwellers to finance investments in housing or infrastructure. Finally, the high rent premiums discussed earlier may not leave much in the way of savings for the residents to invest towards improvements.

In 2000, the Peruvian economist Hernando de Soto published The Mystery of Capital, which argued that secure tenureship through land titles is the reason capitalism has produced a productive economic system in the west and not in developing countries. His argument followed that legal ownership of the land would provide the collateral necessary to engage the urban poor into the formal housing and banking system. The argument for land titling was based on the positive experiences of developing countries and development agencies on providing formality of tenure for rural lands. It also fit well within the aided-self-help model proposed by Turner, of which security of tenure was an important component. Finally, it fit well within the development framework of the World Bank, which, through the 1990s, had shifted its focus from project-by-project support to link housing to the wider urban economy, reimagining the role of development as the idea of ‘enablement’.

Enablement is defined as providing the legislative, institutional, and financial framework whereby entrepreneurship in the private sector, in communities, and among individuals can effectively develop the urban housing sector. The World Bank sought to use housing to develop both the housing sector and the urban economy as vehicles for promoting general economic growth and productivity. In the past 20 years, national governments and the World Bank implemented urban land titling projects in more than 18 African, Asian, and Latin American countries. So, how successful has the land titling approach been?

A few studies have since been conducted to look at the impact of urban land titling on housing investment decisions:

  • In Peru, studies found that land titling increases the rate of housing renovations (by about two-thirds), and showed that titling increased household labor supply (by 10 to 15%) by freeing resources that were previously used to protect household assets; and
  • A study in Argentina showed that the allocation of formal land titles in Buenos Aires led to increased investments and education amongst households who benefited from the titling.

The Argentina case is very interesting though. In 1981, a group of 1,800 families occupied an area of land in the outskirts of Buenos Aires, Argentina. An expropriation law was subsequently passed, ordering the transfer of the land from the original owners to the state in exchange for a monetary compensation. The purpose of the law was to entitle the land to the squatters. The law divided the area’s residents into two groups:

  • One group was granted land titles after the original landowners were compensated by the government; and
  • One group remained on untitled land due to the original owners refusing government compensation.

It created a natural experiment to test the effects of land titles on two samples from the same group of people. The results? Residents did invest more in improving their houses. The titled parcels also had smaller household sizes and the children of residents in the titled parcels showed higher educational attainment. However, it seemed to have very little effect on the households’ access to credit or of the employment opportunities available.

Other studies, referencing projects in Afghanistan, Cambodia, Egypt, India, and Rwanda, showed that land titling projects may have decreased tenure security because they allowed for lawfully enforced evictions.  These studies argue that land titling may benefit the “slumlords” (whose informal ownership rights are often well-recognized locally) and hurt, at the bottom of the pyramid, the slum renters, either in the form of outright evictions or increased rents in the titled area.

The underlying reason for this contradiction lay in the initial assumption behind land titling, that land rights were weakly enforced in slums. A study of on urban land titling in Indonesia addressed this issue and found that tenure security is not a dichotomous concept.

In a West Java, Indonesia, settlement, various land titling schemes launched by the government in the 1980s and 1990s had resulted in a system of land tenureship with 3 levels:

  • Formal land tenure: Dwellers with formal tenure have a property title to their land;
  • Semi-formal tenure: Do not have legal tenureship, but have access to formalizing their tenureship through a legacy traditional law, and so had some level of tenure security;
  • Informal tenure: Dwellers in this category therefore have no legal basis for their tenure.

The study found that there was a more significant difference between household investment levels of the formal and informal dwellers, while the difference between household investment between formal and semi-formal dwellers was marginal. The overall conclusion was that the perception of tenure security was as important to the residents as actual legal tenure.

The debate about housing tenureship has shifted to how tenure security can be enhanced, and whether it ‘‘follows’’ rather than ‘‘leads’’ investment. In Jordan and Kenya, there have been cases where residents invested in making their homes more permanent as a strategy for securing their tenure. Tenure is also related to infrastructure access. Because government agencies see slums as temporary or illegal, they are reluctant to invest in extending public services. Infrastructure investment therefore signals ‘‘acceptance’’ or implicit recognition of informal settlements by government. Tenure is also affected by a neighbourhood’s condition and its location. Neighbourhoods with better conditions—public amenities (e.g., parks, schools), safety, layouts that permit access— are likely to be associated with greater tenure security. The location matters as well—for instance, slums on hazardous sites as well as those in prime locations are more likely to be slated for demolition, even by governments that otherwise support slum improvements.

In the end, the land titling process suffers from a range of practical problems that reduce their potential for gain. First, titling is can be a costly The process can has the potential for protracted legal troubles because of contradictory claims of ownership. Even when a formal financial sector is functioning, many who live in informal housing are often self-employed or work in the informal sector, so it is difficult for them to show proof of income. In the end, it is safe to assume that land titles can be a necessary component of a fully functional housing market, but may not be the precondition required to, on their own, resolve the problem of housing in the developing world.

In this post I’ve explored some of the underlying causes of urbanization, key issues in housing for the urban poor and some attempts taken by the international development community to help alleviate these housing issues. Overall lessons in the literature from countries that have managed to address the growth of slums showed that a responsible approach relies on a combination of instruments, including:

  • Efforts to increase the transparency and efficiency of land markets;
  • To improve local governance;
  • To increase public investments; and
  • To increase the supply of cheap housing.

In recent years, governments have also begun to recognize the importance of community involvement and social capital to leverage resources. As a result, governments, donors and development organizations are moving beyond the top-down technocratic approaches of the early experiences with shelter projects towards a more community-based perspective. Moving forward, the importance of a sustainable means of financing housing investments is growing. Though no clear solutions have so far been brought forward, one area of promise is in the slowly growing field of microfinance. Housing loans account for the largest single asset in the portfolio of one of the largest and most successful microfinance institutions, Grameen Bank of Bangladesh. It remains to be seen how these measures will work out on a broader scale.

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