The cities of developing countries are growing rapidly. How can economists design urban policy to raise the living standards of urban households?
This episode of VoxDevTalks is the second in a mini-series of podcast episodes covering the BREAD-IGC virtual PhD-level course on urban economics.
In this episode of VoxDevTalks, Tim Phillips speaks to Vernon Henderson and Maisy Wong about the pace of land renewal in developing countries and policies to address housing shortages and slum upgrading.
Land renewal is happening far faster in developing countries than developed countries
Cities in developing countries are growing rapidly, experiencing population growth rates of 3-4%, coupled with rising incomes. This surge is driving a critical need for urban densification and increased investment in infrastructure. For example, in the 11 years leading up to 2015, approximately 35% of buildings in central Nairobi were demolished and redeveloped, in contrast to the average of just 5-6% in developed nations.
Can research from developed countries’ cities be helpful?
The economic principles shaping cities in both developed and developing countries are fundamentally similar, yet the contexts differ in two areas:
- Institutions: Many low- and middle-income countries (LMICs) face challenges due to weaker institutions, which often lead to resource misallocation and difficulties for local governments in generating revenue.
- City density: Cities in developing countries are significantly denser than those in wealthier nations. In developed countries, it's uncommon to find urban areas with densities exceeding 20,000 people per square kilometre, while in sub-Saharan Africa and Southeast Asia, about 20% of the population lives at this density.
Research from Paris and New York still holds relevance as it can teach us about how cities work, including how to induce positive spillovers or minimise congestion. However, context matters a lot.
City planners and economic researchers can learn from each other
City planners and economic researchers often operate in separate spheres with limited overlap. Planners focus on large-scale externalities, tackling questions like designing transportation systems and enhancing the aesthetics of urban spaces, areas that economists typically do not prioritise in their research. Interaction generally occurs ex post with economists often analysing and critiquing urban planning decisions only once outcomes are visible. Greater collaboration between the two disciplines could help prevent these issues, offering an integrated approach to urban challenges and better aligning with students' research expectations.
‘It is upon us, how we do research and how we create knowledge, to be more integrated. There is a lot we can learn from each other.’
Data in urban economics
In many developing cities, limited data availability pushes researchers to rely on alternative sources, such as satellite imagery, aerial data, online price listings or cell phone data. Recent advances in machine learning have significantly enhanced the utility of these big data sources, enabling more detailed and accurate insights into urban dynamics.
Fieldwork is often essential for conducting surveys, yet urban settings present unique challenges. Local governments frequently hold property rights over data, requiring researchers to build relationships with these authorities to gain access. Additionally, urban residents are often away from home, complicating data collection efforts.
Further challenges exist when attempting to track individuals over time or ensuring that informal workers are captured when using administrative data.
Colonialism and city design
Pre-colonialism, many LMICs had established urban planning practices. However, when foreign powers began to colonise many of these countries, they often concentrated on selected small areas within a city. This resulted in a fragmented and uneven urban landscapes.
The World Bank introduced the Sites and Services programme in the second half of 20th century which developed planned neighbourhoods and issued land titles or sold plots just outside the city centre at discounted prices. Their aim was to help provide housing for low-income households. Vernon Henderson notes that these programmes were successful in certain respects, though they may have been less effective at actually providing low-income individuals with housing.
Those who initially acquired these plots often sold them at a premium, driven by rising demand from the middle class. This helped to support the growing middle class in these countries whom the market could not otherwise serve due to weak institutional frameworks. Although programmes of this form generally ended around 30 years ago, national governments have often taken control of such policies to try and meet the ongoing demand for housing. While these plots were originally considered too distant from city centres, they are now increasingly sought after as the city expands.
Why do islands of bad housing prevail?
These often prevail due to issues over land ownership and titles. Vernon Henderson highlights the historical context behind the slums in Kibera, which has effectively "frozen" the land, preventing development despite broader institutional improvements elsewhere in the city.
The persistence of slums and the challenges of redevelopment are complex issues that mirror discussions around gentrification in developed countries. When slum redevelopment happens haphazardly or is left entirely to market forces, then some slum residents end up evicted or displaced without compensation. This can have bad outcomes for the current and the next generation.
The Kampung Improvement Programme in Jakarta
Slum upgrading in Indonesia can be traced back to the 1920s when the Dutch were trying to improve slums that were next to Dutch settlements. The Kampung Improvement Programme (KIP) was introduced by the government in 1969 and lasted for around 15 years covering five million residents and 25% of the city’s land. The slum upgrading programme focused on improving various aspects of the slums and provided a guarantee against eviction, offering residents greater security, potentially encouraging their own housing investments.
Maisy Wong’s research on KIP compares upgraded neighbourhoods with others, feeding into a broader debate about whether policymakers should focus on slum upgrading programmes or on new development projects like the Sites and Services programme of the World Bank. The study, examining outcomes 40 years after KIP was introduced, found that upgraded areas generally have lower land values, shorter building heights and greater informality. Slums that did not undergo upgrading have seen formalisation and therefore experienced a reversal of market value between the two neighbourhoods in the long-run. Most of this effect however is concentrated within the Central Business District (CBD).
Quantifying welfare gains or losses as a result of slum upgrading policies
At the end of her research with Mariaflavia Harari, Maisie Wong performs a welfare exercise to quantify what would happen to total welfare and inequality if KIP and non-KIP neighbourhoods were made the same. This change would result in a welfare gain of 3.3%, though high-skilled workers would benefit disproportionately at the expense of low-skilled workers. As housing formalises in the Central Business District (CBD), high-skilled workers would move closer to the city centre, generating additional agglomeration benefits for the entire city. However, this shift would reduce informal housing options, likely displacing low-skilled, informal workers to areas outside the centre. Adjusting zoning policies and allowing for taller buildings could mitigate these welfare losses for low-skilled workers.
‘The political issue is [about] the will to help these people that you are displacing. That’s not just a developing country issue, it’s the same issue in the US with urban renewal in the 1960s.’
It is critical to consider the political aspect of this problem given that those most likely to be displaced as a result of these policies are a segment of the population that has weaker political rights and political representation.
How economics can help improvements in city planning
Vernon Henderson discusses collaborative work with local partners in Tanzania demonstrating how economic research can inform and shape effective city planning policies. For example, research likely influenced decisions about plot sizes in a new greenfield programme. This involves engaging not only with high-level politicians but also with bureaucrats, providing them with tailored evidence that aligns with the specific needs and context of the area.
‘I think that land is one of the key resources and economics is about how we can use the market to promote a more equitable allocation of land. It also affects where people live and work. It’s where we put housing, where we put infrastructure. There needs to be more research as this is a very important topic.'
Vernon Henderson and Maisy Wong conclude with advice for young researchers, emphasising the importance of understanding the local context by spending time in these cities and reading about them. A valuable approach is to start with the economic models based on developed countries and explore what changes when key assumptions, especially around institutions and government funding, are relaxed. The hope is that this research can address pressing policy questions and contribute to solutions for housing shortages among low- and middle-income households, environmental challenges and housing finance issues.
References
Harari, M., & Wong, M. (2024). Slum Upgrading and Long-run Urban Development: Evidence from Indonesia. University of Pennsylvania.