Three years back, the State Government of Andhra Pradesh unveiled an ambitious program (Indiramma Housing) to build 75 lakh houses, to ensure "housing for all" by 2008. The Government of India has a similar program to provide "Shelter for All" by 2012. I am inclined to believe that such programs, which seek to saturate a particular benefit, are invariably supply driven and not dictated by demand conditions, and therefore do not result in the most efficient allocation of scarce welfare resources. Besides, it can potentially bring about numerous incentive distortions with adverse long term consequences.
These housing programs seek to provide housing for all urban and rural poor, through a mix of subsidy and soft loan from banks, apart from a small beneficiary contribution. It is based on the premise that home ownership is one of the fundamental requirements for economic welfare and social empowerment, and is a basic right of all citizens. I feel this assumption may be mistaken for several reasons.
For a start, urban areas which have been the main engine of economic growth globally and responsible for a major share of the reduction in poverty levels, are characterized by home rentiership as opposed to ownership.
Labour mobility, both within and between states and nations, has many economic benefits. It has been proved from numerous studies that own home ownership anchors people to geographical locations, and prevents them from making the most productive and optimal use of their skills. Contrary to conventional wisdom in development policy making, labour migration should be encouraged, as it enables people to search out the most suitable and appropriate livelihood opportunities for themsleves.
This becomes all the more important given increasing evidence that a substantial share of poverty reduction in India over the past couple of decades have resulted from migration towards urban centers. A new home owner, with its financial obligations, is surely less likely to migrate in search of better opportunities. In other words, the house becomes a constraint on the economic empowerment of the individual.
Not only does it lower the economic prospects of the rural (and urban) poor, reduced labour mobility also limits the availability of cheap (and unskilled) labour which has played a critical role in sustaining the services intensive urban economic growth engine. Any limits placed on labor mobility therefore has the effect of inefficiently allocating resources and depressing economic growth.
This becomes all the more evident in urban areas, where renting has long been common practice. There are large numbers of people who migrate from the countryside after the crop harvest to work as laborers or petty traders in industrial and urban centers, to return back as the next cropping season beckons. Home ownership, with its attendant financial and other obligations becomes a dead weight loss for these people in pursuit of their livelihoods.
The beneficiary contributions and bank loan repayment obligations place substantial strains on the household budgets. The supply driven nature of the program means that people are forced into taking up these financial commitments. Most often, they have to forego other more important and urgent needs and obligations to meet these new commitments.
In any case, such government housing are invariably of questionable quality. Apart from the invetable results of contractor driven construction programs (though, the beneficiary is theoretically responsible for construction, the local contractor effectively manages the construction of the houses), the shoe-string unit costs (arising from a need to cover as many people as possible with the limited resources) ensure that the quality of these houses leaves a lot to be desired.
3 comments:
I am sorry.. even though i agree your basic premise that this product is primarily supply driven and is therefore like a costly misfitting shoe that only looks good on the shelf, i really disagree with your secondary premise on which you have actually based your whole argument.. which is that of reduction in mobility due to housing and of the economic problems it creates.. i think you are thinking from a largely urban point of view and a middle to rich class urban even at that..
first of all.. please do understand that nobody is forcing these people to take these loans. Nobody forces a loan on a person because it is supposed to be repayed.
secondly to assume that the poor are entirely silly to avail of a loan just because it is available is too far fetched in all practicality.. a person who understands the economic value of his mobility would not make such an ill conceived decision..
thirdly.. you have to understand that a large chunk of the migrates are seasonal or are people who have parts of their family still living behind them.. and therefore even though a person might want to stay mobile he might both need and be able to honor these loans..
and i think it is a little barbaric a premise to not provide the poor shelter just to be able to provide cheap labor to the industry.. it is to a large extent unfettered free-marketeerism or better still opposite end protectionism.. to protect the interests of the poor..
and just so you will ponder upon it.. there is a HUGE demand for housing finance products among the poor the world over.. you could visit the websites of organizations like Habitat for Humanity, Ashoka, IASC, SKDRDP etc.. the problem is that the way these products are designed does not match the demands of the sector and these plans fail..
and i agree with you on that this program too suffers from the problem of less than sufficient help that leaves him no better in the end (most of these beneficiaries use supplementary credit to complete their homes).. i don't know when it would be time when the government would come out of the "maximum bang for the buck" mentality and actually invest in adding some value to the lives of people even if a smaller number.
i apologize for the inordinately long comment..
thanks for those perceptive comments. I had made those observations in the specific context of such programs in India, in both rural and urban areas, and from the experience of having administered such programs in both urban and rural areas in fairly big scale.
to reply to the points raised by you.
1. while not literally forced down people, they are neither demand driven. the loan is taken because government is giving it to every other person in the village without a house, and not because the beneficiary really needs it. there are several points that testify to this - though the beneficiary is given the subsidy and loan and is expected to complete it, in most cases it ends up being constructed by the department with limited involvement of the beneficiary (and it is not as though the officials of the government agency want to construct it so as to knock away a share in the unit cost); a large number of houses remain incomplete at various stages even months after construction starts and it becomes a major challenge for the district administration to complete them;
2. the decision to avail such loans are, in a significant number of cases, driven by other considerations - everyone else is taking the loan; there is also the moral hazard of a possible future waiver that comes with any loan scheme etc
3. we make a presumption here again - he might need and be able to honor these loans. both (or either) these are not necessarily true. i am concerned with such situations (not being demand-driven)
and further, these housing programs, by their defined and mission mode approach, create other problems. Since every one who wants it have to take it now, those who may not need a house now (for whatever reasons - wedding, child's education, migration etc) are robbed off the freedom to make the choice and become reluctant beneficiaries. Similar is the case with unit cost and unit size, both of which are fixed by the government.
organizations like the ones mentioned have addressed these problems by structuring loans more flexibly and i have encountered many of the same organizations mentioned during work over the years. but i have only one thing to say about them - it is one thing constructing 10,000 houses and totally another thing to construct 1 million houses.
in fact, such organizations (and academics) could contribute more to the effective implementation of such programs and the larger issue of housing for the poor by studying (say RCTs) the impact of the numerous government housing programs on important social and demographic issues like mobility, livelihoods, children's education, etc. to the best of my knowledge, there is limited literature available on this for empirically validating specific policy suggestions/alternatives to the existing government housing models.
hmm.. those were interesting rebuttals frankly unexpected.
now given that you have the benefit of having worked in administering these schemes.. i should tread my ground carefully..
and still
to your first point.. even though i agree that there is an induced incentive to people to take these loans.. still for there to be an induced demand.. there has to be a precursor original demand.. plus i am of the belief (and please correct me if you have facts pointing otherwise) that there is a size-able proportion of rural and both urban slum populace that is in need of housing and has a fundamental demand for it.. the dismally low home ownership in the country should point to that.. now the reason most of these people are taking these loans is because
a) these people do not have options, the traditional finance is too risk averse to fill the gap and the 10,000 strong NGO/MFIs are unable to scale up under the present subsidy environment
b) and i agree with you that there is a widespread environment of expectation among the poor due to such large scale subsidy programs and the easy availability (or should i say profusion?) of such loan schemes which have little risk even if the borrower is unable to repay the loan that makes it so much the easier to act on these induced incentives.
the unit cost and the unit size are big problems with the govt in this context that the govt needs to understand. i believe that it is important to understand that giving half a million people substantial improvement in the life standard can be better than giving one million sub-standard improvements..
and i agree with you on the last point.. i think organizations and academics have a good opportunity here.. myself am a graduate student of economics at IGIDR and have been working this past summer on a Housing Mic-Fin project in NABARD which is planning to enter the market.
P.S.: what are RTCs?
P.P.S.: in my last comment it was supposed to have read.. "it is to a large extent unfettered free-marketeerism or better still opposite end protectionism.. to protect the interests of the ultra-rich.."
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