Leasing like a state, or: public housing is development policy

From the article:

By 2050, around 950 million people in Africa will move to the cities. They will need places to live, which do not yet exist.

A recent piece in The Economist on Africa’s housing shortage does a good job at laying out the fundamental issues. The UN estimates that 70% of the buildings that will be needed are not yet built. Lack of capital markets means no mortgages, but a lack of formal jobs means no paystubs to verify those mortgages anyway. A common practice for homeowners, who are unable to borrow, is to build what they can with the cash on hand. The many half-finished buildings that you see along the road in Kenya, rebars jutting out of the bare concrete, are the stark evidence of this market failure.

Naturally, The Economist lists a number of market-based solutions, like startups using machine learning to pinpoint creditworthy borrowers and new financial wizardry to make interest rates more affordable. But, remarkably, there is no mention of public housing as a part of the solution.

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It’s often forgotten that in two of the four East Asian Tigers—Hong Kong and Singapore—public housing formed a central part of development strategy. During the halcyon days of rapid growth in the 1950s and 1960s, both places faced extreme housing shortages, as workers flooded in to take factory jobs. Singapore attracted migrants from around Southeast Asia, causing rapid growth in the kampongs (informal settlements). Migration was even more acute problem in Hong Kong, where a massive influx of refugees fleeing the Communist Revolution led to the proliferation of slums and shantytowns. The problems of these now-disappeared settlements—low-quality materials; overpriced rents; overcrowding; inconsistent public services—will seem sadly familiar to modern students of development.

One oft-tried solution to this problem is to do nothing about it. The British in Hong Kong, characteristically, tried this for a time. Then, in 1953, a deadly fire swept through the Shek Kip Mei shantytown, leaving 53,000 people homeless.1

This crisis demanded a large-scale response. The colonial government quickly began construction of homes to shelter survivors of the fire, which formed the nucleus of what became the Hong Kong Housing Authority in 1972. Similar concerns about kampong conditions in Singapore prompted the creation of the famous Housing and Development Board (HDB) in 1960.

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It’s worth reminding ourselves, then, that public housing in Hong Kong and Singapore got its start in a largely developing context. And it cannot be a coincidence that two of the greatest export manufacturing-cum-urban development success stories of the past hundred years happened to occur next to enormous public housing programs.

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But you don’t need to look to just historical East Asia for an example of large-scale housing and development strategy. It’s likely no coincidence that Ethiopia, which is pursuing perhaps the most serious industrial policy in sub-Saharan Africa, boasts the most ambitious housing policy as well.

Dubbed the Integrated Housing Development Programme (IHDP), Ethiopia’s public housing initiative set a goal of building 400,000 housing units in 2006. Apartments are sold at below-market rates (subsidized by the government) to winners of a random lottery, who have to pay a 20% down payment at purchase. Around half of the population of Addis Ababa has applied for the lottery, which speaks to the enormous pent-up demand for housing.

The Ethiopian program is far from perfect. Like government programs everywhere, it has over-promised and under-delivered: as of 2022, around 200,000 of the promised 400,000 units had been built. Some people have been stuck on the waiting-list for as long as 17 years. Even for the winners, there are unintended consequences—the lottery system randomly scatters winners across the city, disconnecting them from their family and friends, which can cause profound social, economic, and psychological harms.

But some of the the early returns are more encouraging. My friend Daniel Agness’s job market paper, coauthored with Tigabu Getahun, cleverly uses the housing lottery as a random experiment. They find that, in households that win the lottery, heads-of-household are 8 percentage points more likely to be employed in the formal sector, pointing (one hopes) towards some complementarity between the housing program and Ethiopia’s foreign manufacturing push. Even more encouragingly, the children of lottery winners are significantly more likely to be in school, and to complete secondary and tertiary education. There may be long-run, multi-generational benefits to decent housing that are not captured in standard economic models.

And, of course, nothing says that public housing has to randomly scatter families to the four winds! Future public housing programs, in Africa and elsewhere, can correct Ethiopia’s mistakes, while learning from the example of its ambition.