Basic needs and the informal sector

HABITATIN7-L. Vol. 9. No. 314. pp. 299-316, Printed in Great Britain.

1985

0197-3975185 $3.00 + 0.00 Per~amon Press Ltd.

Basic Needs and the Informal Sector* The Case of Low-Income

Housing in Developing Countries

S.V. SETHURAMAN Technology and Employment Branch, International Labour Office, 4 route des Morillons, CH-1211 Genkve 22, Switzerland

Virtually all projections suggest that the urban population in the Third World countries will expand at an alarming rate in the coming years, thus calling for special emphasis on policy and action on the urban front.’ A disturbing feature of this trend is the proliferation of slums and squatter settlements. The proportion of city population living in them seems quite substantial already in the 197Os, as can be seen from Table 1. Between a quarter and half the city population in many developing countries seem to live under appalling conditions, lacking the minimum infrastructure and basic amenities. With projected trends in urban population, further deterioration through ‘squatterisation’ seems inevitable - unless of course effective remedial measures are undertaken immediately. The population of such settlements is expected to rise by over 1000 millions in 20 years, by the end of the year 2000.2 If however one looks at the urban population lacking not only basic shelter and support services but also such basic need items as minimal nutrition and education then the rejected addition appears to be smaller - about 600 million by the year 2000.-1: That poor housing and living conditions in the Third World cities are but a reflection of poverty or the lack of adequate purchasing power among the households concerned is self-evident. (Work of the IL0 World Employment Programme has long been concerned with those issues - e.g. see Appendix 1.) Income inequality measured in terms of Gini coefficient is generally higher in urban than in rural areas of developing countries.4 Also the proportion of *This paper is copyright, International Labour Organisation, and is reproduced by kind permission. Originally published by the International Labour Office, January 1985, as a restricted Research Working Paper. (Working papers are preliminary material circulated to stimulate discussion and critical comments.) 0 1985 International Labour Organisation, Geneva. As a Research Working Paper for the World Employment Programme, the views expressed are those of the author and do not necessarily reflect those of ILO. The designations employed in IL0 publications, which are in conformity with United Nations practice, and the presentation of material therein do not imply the expression of any opinion whatsoever on the part of the International Labour Office concerning the legal status of any country or territory or of its authorities, or concerning the delimitation of its frontiers. The responsibility for opinions expressed in signed articles, studies and other contributions rests solely with their authors, and publication does not constitute an endorsement by the International Labour Office of the opinions expressed in them. ‘See, UNFPA International Conference on Population and the Urban Future-Documents, Rome, Italy, l-4 September 1980. ‘UNCHS-HABITAT Infrastructure in Slums and in Rural Settlements, Nairobi, October 1981. ‘Edward Jaycox “The Bank and Urban Poverty”, Finance and Development, Vol. 15, No. a, p. 10, September 1978. 4Van Ginneken, W. and Park, J.G. (Editors) Generafing Internationally Comparable Income Distribution Estimates, ILO, Geneva, 1984.

299

300

population (or households) living below the poverty line is quite substantial.” It is also a well established fact that the poor derive most of their incomes from labour, the only income-generating asset at their disposal. Since the poor in the Third World cannot afford to remain idle for too long. there is generally very little ‘open’ unemployment among them. Most of the poor tend to be underemployed, however one interprets the term. A number of household Insofar as improvement in urban living surveys confirm these conclusions. conditions depends on the individual’s (or household’s) capacity to pay, it is evident that a strategy to improve housing in urban areas cannot be divorced from the goal of employment and income generation. But since provision of shelter is itself an activity calling for substantial labour input, one wonders if it is not possible to promote both housing and employment goals simultaneously through a common strategy. The importance

of the construction

sector in developing

countries

Income generated in the construction sector in developing countries has been placed at 3-6% of the GDP.” Housing alone is estimated to account for a third of this figure, some 80% of which is supposed to originate through informal construction activities.’ In terms of gross fixed capital formation, the construction sector as a whole is estimated to account for over 400/o.’ Employment in the construction sector can be broadly classified into three groups: employment through on-site-jobs requiring a variety of professional skills as well as those with little or no skills; employment off-site including such jobs as land surveyors, draughtsmen and so on; and employment in the production of building materials, including processing and extraction. In addition, of course, there arc a variety of jobs in support activities such as marketing and distribution of construction materials and equipment. One estimate suggests that total employment generated in construction and related subsidiary activities in developing countries may be of the order of 10% of the economically active population.” To the extent that informal sector employment is not counted, this is evidently an underestimate.

HOUSING

NEEDS OF THE URBAN

POOR:

TOWARDS

AN ESTIMATE

The idea of using construction as a lead sector in stimulating development is not new. Following Lauchlin Currie’s advice, experiments were carried out with some success in Colombia during the 1970s. But in the context of housing for the urban poor, it is not clear whether a strategy to augment and improve shelter and related services can also simultaneously contribute to the employment and incomes of the poor. The question has been considered in several debates in recent years.“’ If such a strategy exists, how much additional urban employment can be created in the developing countries ? Under what conditions can it be implemented? To answer the former, of course, one would normally project the demand for low-income housing (services) based on projections of household income and population and elasticity of demand, and given the construction technology, derive therefrom the magnitude of additional employment. This approach is however less meaningful if poor households are unable to translate their needs into effective demand for such services owing to their low level of income. To the extent that the strategy of low-income housing itself contributes to a rise in incomes of the urban poor, what is more pertinent to consider is the projected ‘needs’ of the urban poor in terms of shelter and related services; and then to examine the employment and income implications of a strategy to meet those needs to see if the resulting incomes can sustain a level of demand comparable to the projected needs. In other words, can supply of basic shelter and related services create its own demand?

Measuring the housing needs of the urban poor Employment being a derivative of the type of construction, the concept of lowincome housing needs clarification. First, employment is critically dependent on the kind of dwelling unit under discussion, e.g. whether it consists of singlestorey structures or high-rise buildings. Second, the standard or quality of construction is an important factor in determining the employment content. Third, there is a problem in defining shelter: for instance, does it include just the walls and a roof or also other related services as well? As a World Bank document points out, “more than just a roof overhead, it [shelter] requires a series of services that are an integral part of the specific location and dwelling”.” Given the focus on the urban poor, and given that most of them lack even the basic minimum, it is perhaps reasonable to assume that the goal is to provide minimum acceptable standard of housing. Needless to add, such a standard will vary from country to country, depending on cultural and geographical factors as well as the standard of living, resource endowments and the like. Although it is possible to set a physical standard based on normative considerations (e.g. in terms of square metres of floor area per household), the main weakness of such an approach is that it is exogenously determined and imposed and hence may not necessarily relate to the level of income of the household, availability of space and other similar factors. It therefore seems more logical to determine the needs in relative terms. For instance, one might propose that the goal of a housing strategy should be to ensure that all urban households consume a level of housing and related services which, at a minimum, are comparable to that already being consumed by households at the threshhold of poverty. In other words, households below the poverty line should be able to spend on housing and related services at least as much as those already on the poverty line. Since the poverty line is a relative measure varying with the country in question, it follows that the minimum acceptable standard of housing will also vary between countries. “‘German Foundation for International Development making in urban developmenr, June 1983. “World Bank. Shelter. Poverty and basic needs series.

Housing and employment: Washington

D.C..

The key area for decision-

p. 1. September

1980.

It follows from the above that low-income housing, for the purposes of this paper, is not defined in terms of certain physical characteristics of tither the shelter or the supporting services. Instead. it is ~ncas~mxt in terms of the value of such services consumed by households at the poverty threshhold. Once the current expenditure on housing and related services is known one can of course estimate the level of investment required by calculatin g the present value of such flows of expenditures by assuming a suitable discount rate and life of the asset. This. together with the projected number ol’ households below the poverty line, yields an estimate of aggregate investment required in lo\v-income housing and related services to ensure that al1 urban households consume ;I certain minimum lcvcl of housing and related services. Based on such an approach. the World Bank has made some rough calculations of the projected housing investment expenditure. ” Table 2 reproduces the estimated investment rcquirtments in housing and related infrastructure. Owing to a number of assumptions utilised in deriving these figures they should be intcrprcted with caution and arc merely illustrative of the order of magnitude.

The figures above are sensitive to a number of assumptions, such as the projected patterns of income distribution (and hence the number of households in poverty), and the nominal value of income and cxpenditurc. besides those already noted. Perhaps a major weakness of deriving capital investment required from current household expenditure is that it is hard to separate the latter into rental and recurrent cxpen&tures: and thcrc is also ;I problem of impu ting rental value for owner occupied shelters. ”

ESTIMATING

THE EMPLOYMENT

POTENTIAL

services, not all the projected investment in low-income housing can be treated as residential construction proper. Insofar as the employment content in housing construction proper differs from that of providing support services it would seem necessary to take into account the breakdown of total expenditure in these categories. Perhaps a third of total investment expenditure is devoted to the provision of water, sanitation facilities and the like, the remaining 70% being attributed to investment in housing construction.” What is the magnitude of employment that is likely to result from the projected expenditures? The share of labour in construction value-added obviously depends on the type of construction chosen and technology utilised. The attitude towards low-income housing and the very concept, as will be seen later. has undergone a significant change during the last decade or more. A major shift has taken piace - from providing houses to providing serviced lots - with a view to encouraging greater participation by the population concerned and harnessing the energies of the with many variants there of.‘” These developments, occupants themselves. needless to add. have significant implications for employment. Since the purpose of the paper is to shed light on the order of magnitude of employment implied by a basic needs approach to housing in urban areas, perhaps one can draw inferences based on alternative ~~ssumptions.

What is informal housing? It is perhaps

appropri~~te at this stage to briefly discuss the concept of informal housing. According to Habitat the ‘informal construction sector’ is referred to as ‘$unnumerated construction activity”. In other words, it included “construction in rural and urban areas involving self-help or paid labour, whether recognised as legal or not, and involving a wide variety of techniques traditional, adapted traditional or simple modern methods”.‘” Further, those engaged in such construction activity generally lacked access to formal sources of training and credit; although they showed an acumen for technology adaptation and hence the potential for competing with the formai sector succesfully, they are often wanting in technical know-how.” Parallel to the above, the term ‘informal housing’ is also current in the literature. Whereas the informal construction described above refers to the type of construction activity, or the type of individuals or economic units engaged in it, the term ‘informal housing’ refers to the type of dwelling units produced. Typically, the informal housing units use less expensive construction materials and hence tend to have a shorter life. Formal housing units in contrast, use more expensive construction materials (for instance: concrete instead of mud bricks; timber instead of ordinary wood) and tend to last longer. It also follows that formal housing relies more on manufactured inputs while informal units tend to minimise their use, partly through tr~insformatioI1 of basic raw materials on site by engaging small-scale producers in the neighbourhood. Perhaps another factor contributing to the distinction between formal and informal housing is the building codes and standards enforced by the national housing authorities. In recent years these codes and standards have been revised in several countries, partly in response to criticisms that they have been too rigid and unrealistic, and partly to alleviate the housing problem of the poor. Moreover, the standards vary from country to country. Yet another factor of importance is the availability of support services ‘-“Expcriencc of World Bank projects during the late 1070s indicates that the share of public services in total investment varied between 20 ani 30%. See World Bank: Sheller, op. cir., p. 6. But if one looks at the consumer budget data, poor households seem to spend more on support services than on shelter proper. “Sec. for example: Lisa K. Peattic “Some Second Thoughts on Sites-and-Services“. Hohirtrr Inrernurional Vol. 6, No. IL?. pp. 131-13’9. 19X2 for a succinct summary. ‘f’~JNCHS-HABITAT qo. cit., p. 14. 1987. “/hi
such as running water supply. power. and the like. Units lacking such facilities are sometimes referred to as informal housing. In view of the varying but overlapping interpretations, the terms informal and formal housing should be interpreted with caution.

The share of labour in total structural cost (i.c.. excluding site cost) has been estimated to vary between 30% and 40%. depending on the geographical region.” Detailed data from Mexico (and Colombia) suggest that the share of labour in value of construction on site dccreascs as the quality of housing improves from one of ‘minimal single family unit’ to a luxury high rise apartment.]” In other words, the labour share of construction valuc-added on site is higher in dwelling units for the poor. An analysis of a low-cost housing project in Ghana suggests that 30% of the construction cost can be attributed to labour utiliscd directly in the construction process and an additional 11% to labour utiliscd indirectly in the production and distribution of construction materials.‘” It should be noted that these figures refer to ‘formal’ housing meaning that the units arc served with running water supply, power. etc. and thus includes such facilities as kitchen. bathroom and toilet; consequently. a wide variety of manufactured construction materials are also utilised. In terms of physical labour requirements. the study estimates that the construction of such a unit requires a total of 17.3 man-months. What is perhaps more interesting is to cxaminc the employment implications of housing under alternative strategies. For instance. many developing countries. inspired by the World Bank, now seem to recognise that the only feasible solution to the problem of low-income housing is to allow or even encourage the residents concerned to build their own shelter. with of course some assistance and guidance from the public authorities. Evidently such an approach implies lower cost of construction and perhaps greater use of their own Iabour. reflecting the income constraint. Strictly speaking, employment resulting from a given cannot be compared to that expenditure on housing using this approach emerging from a conventional approach since the end products - laiz. informal although they provide similar services. and formal housing - are different. Furthermore. it is complicated to estimate employment hecausc of the use of their own labour which needs to be imputed ;I value. Likewise. the construction materials utilised may not always be bought in the market but simply recuperated free of charge. Notwithstanding these difficulties. it seems useful to obtain an idea about the extent of labour utilisation under this approach. data OII ‘informal’ The study on Ghana quoted above also provides some concrete housing. Unlike the formal housing. in which rclativclv expensive bricks are used, informal housing uses loam. which is freely available on site. Informal housing economises similarly on the consumption of other building materials. Consequently, it costs only a sixth of what is necessary for formal housing for the same floor space. What is perhaps surprising is that informal per unit as compared to housing requires less labour too: on11r 2.9 man-months over 17 man-months for formal housing. This anomaly is explained by the fact that the construction process in the former is also simpler. For a given total only 7.4 manexpenditure of 1.000 cedis. however, formal housing generated

Basic Needs and the Itlformal Sector

305

months of employmment as compared to 8.8 man-months in the informal. In other words investment in informal housing is likely to generate some 19% more jobs besides contributing six times as many formal dwelling units, albeit of a lower standard. The problem is further complicated if one looks into the skill composition of employment. Evidently formal housing units, using relatively more purchased inputs and of greater durability call for more skilled labour input (better such as carpenters, plumbers, electricians, painters, qualified craftsmen, masons, etc.), whose wage is significantly higher than that of unskilled labour. Consequently 50% of the total expenditure on construction accrues to labour 38.5% for labour on site plus 11.5% for labour indirectly used in the production and distribution of construction materials - in formal housing. In contrast, labour accounts for only 39% of construction expenditure in informal housing 17% direct and 22% indirect. These figures suggest that even though informal housing units use a somewhat higher amount of labour input (i.e. 8.8 manmonths) than the formal ones (viz. 7.4 man-months) for a given level of construction expenditure, the share going to labour in the former is smaller. And skilled labour is likely to benefit more in the process. Evidence from Mexico for the period 1970-1972 suggests that a minimal single-family housing, costing on the average US$1035 (excluding site), required about 6 man-months of labour for construction - 70% (i.e. 4.2 man-months) directly on site and 30% indirectly in materials. In terms of the labour share of total cost (excluding site value), it was estimated at 44-32% for labour on site and 12% indirectly, off site. *’ Since half the on-site employment was unskilled labour, and since most of the off-site employment was of a skilled nature, one might conclude that 60% of total employment generated accrued to skilled workers. Another study evaluating the preliminary experience of low-income housing projects in El Salvador suggests that an investment of between 346 and 524 colones generated 100 colones of labour income (directly on site).” In other words, the share of labour (directly in construction) in low-income housing investment ranged from 19 to 35% (compared to 17% in informal housing in Ghana quoted above). Measured in physical terms, the creation of one manmonth of direct employment required between 605 and 853 colones (i.e. US$240-340). This compares with 146 cedis (or about US$60) per man-month of direct employment in the informal housing in Ghana cited earlier. Evidence from a low-income housing project in Zambia suggests that the households generally engaged a brick layer at an average cost of 54 kwacha (or about US$63) to complete a two-room concrete block-- core house costing 357 kwachas (or about US$415). These figures imply a labour share of 15% (direct employment on site), which is probably an underestimate, since it does not take into account the labour input by owners themselves. Somewhat similar evidence emerges from another study assessing the experience in low-income housing in Senegal.21 The average expenditure on materials and labour were estimated at CFA Francs 850,000 and 380,000 respectively, suggesting a labour share (directly on site) of about 31%. Considering that the quality of housing was superior to the basic minimum shelter and that most households depended partly or wholly on hired skilled “W. Paul Strassman op. cit., Appendix II. 1978. “FSDVM (Fundacicin Salvadoretia de Desarrollo y Vivienda Minima) An estimation of the effect of the construction and mutual aid stages on the generation of jobs and income in “La Periquera”, “sensunapan”, and “El Naranjo”, Report No. 4. September 1976. “LHPET (Lusaka Housing Project Evaluation Team) George Overspill house consolidation; preliminary results, Working Paper No. 12. October 1977. “OHLM (Office d’Habitation de Loyer Mod&): Study of house construction in the sites and services project, Series 4, No. 2, March 1979.

labour the above figure is closer to 48% (labour share through direct employment) noted carlier for formal housing in Ghana. To conclude this section, one might note also that a low-income housing project in Manila, characterised by home improvements rather than construction of new housing units. yielded similar conclusions.” Some 85% of the total investment expenditure was on materials suggesting a labour share of 15%. The latter is probably an underestimate since it does not include the contribution by the residents themselves. The scanty evidence above needs to be interpreted with caution since it is derived from a small number of cases: moreover. the meaning of a housing unit and cost break-down vary with the country in question. At the risk of simplification. one might ncverthcless venture some crude estimate of employment that is likely to result from the projected investment in low-income housing (Table 2) on the basis of the above. Perhaps a third of the construction to labour directly utiliscd on the site of expenditure C~II be attributed construction if the output is ‘formal’ housing.“’ If however the objective is to provide informal housing (i.e. basic minimum shelter without private support facilities), perhaps ;I fifth of the total construction expenditure may accrue to labour directly engaged on site. It is conceivable that the housing output will be a mix of both formal and informal units; depending on the city/country. one may opt for more formal housing or V~CYIYYSU. Given the projected level of investment in low-income housing of US$I I6 billion (in 1975 prices) shown in Table 2. the share accruing to labour engaged on site might be placed on the range of US$23-39 billion. What about employment generated indirectly through production and distribution of construction materials? Although it is hard to predict what construction materials will be utiliscd and how they are produced (i.c. formal IYKS:\‘ILS informal sector). on the basis of the evidence cited earlier one might assume that the income accruing to labour indirectly is 50% of the figure for direct employment. The share of housing expenditure in Table 2 going to labour may be thus placed in the range of US$35-60 billion at 1975 prices. What these nominal figures mean in terms of actual employment is however a moot point. Naturally, it will depend on how this labour remuneration is divided between skilled and unskilled workers and the relative wage rates in different countries. Since neither such wage data are available for different geographical regions nor a weighted global average is possible or meaningful it is perhaps safe to look at plausible outcomes resulting from alternative assumptions about the wage rate as in Table 3.

Employllenl

Wage lJS$ US$ US$ US$

7 3 4 5

per per per per

day day day day

(or (or (or (or

tJS$ US% us lIS$

I-illc’

310 per yczr) 750 pcl- year) ’ IO00 per ywr) 1150 per year)

’

111 man-qc”r\

Mini mum

.Masimum

70 millic)n 47 million 35 million 2S million

120 million SO millton h0 million 48 million

“‘A study hy LJNCHS-HABITAT suggc\t\ that the karc of labour in total cost of construction of an identical core house in sclectd cities of developing countries i\ prohahly around 75’k SW: UNCHS O,I_ c’rf.. l9S2.

Basic Needs and the Informal

301

Sector

Estimating the annual flow Since the investment expenditure on low-income housing in Table 2 is based on the projected needs, as of the year 2000, it refers to the stock of housing which must be added by that year. If one assumes that the stock of such housing will be increased in a gradual manner between 1985 and the year 2000, then the annual investment required will be i/lsth of US$116 billion. Correspondingly, the number of jobs created on an annual basis will be Nsth of the figures shown above. In other words, if the mean construction worker wage is for instance US$500 per year, between 4.7 million and 8 million additional jobs can be expected each year as a result of this programme. It also follows from the assumptions about the quality of housing, i.e. informal housing produced by individuals or small enterprises in construction activity, that much of this additional employment will belong to the informal sector notably in such occupations as masons, plumbers, electricians, carpenters, and the like. A word of caution is however in order. The assumption underlying the above analysis is that the projected capital expenditures will be devoted to the provision of basic shelter and related services through what is known as the sitesand-services approach “in which new houses are built on previously unoccupied land with basic or more elaborate infrastructure such as water supply and sewage removal”. Where the urban poor are located in inner city slums for example such an approach is not feasible owing to spatial constraints. Under such circumstances, it is the ‘upgrading’ approach that is relevant: this aims at improving “existing community environments through the installation of basic infrastructure and replacement of or additions to existing houses”. (See also the discussion below.) Generally speaking, upgrading requires less expenditure per capita (or per household) than the sites-and-services schemes. For instance, an analysis of the World Bank projects experience suggests that costs per plot through upgrading are substantially lower than that implied by sites-and-services, mainly because the former did not include in general any structures, even though materials loans were made available in many cases.-7 It is however difficult to assess how the inclusion of an upgrading approach will affect the employment impact of projected expenditures. Since much of the future additions to urban population are unlikely to find accommodation in inner city slums, or other similar established communities, employment estimates based on sites-andservices schemes do indeed seem more appropriate. Insofar as households in poverty do live in congested locations, a part of the projected expenditures would be spent on upgrading. Since its share is likely to be small it should not make a significant difference to the employment estimates presented above.

CAN HOUSING NEEDS OF THE POOR BE OVERCOME SUPPLY INNOVATIONS?

THROUGH

Perhaps the real issue is not whether the projected investment expenditure in low-income housing will result in significant additional employment, but whether an expenditure of this magnitude will be forthcoming at all. What matters is the effective demand and not the need estimated in abstract terms. The demand for housing being a function of household income among other things, the crucial question is whether the poor households will have a level of income sufficient to translate their needs into effective demand and hence afford the expenditure involved. The World Bank, while advocating better access for the poor of essential public services along with better shelter and nutrition, observed on the “Johannes

F. Linn op. cit.. pp. 175-178

contrary: “the problems of the shelter sector thus do not lie on the side of effective demand”. It further noted, “consumption of shelter is low because its price is high, and its price is high because of the failure of the supply system”.‘” In the Bank’s view, what matters in the provision of shelter in urban areas of developing countries are the ‘supply constraints’. A number of factors are identified as constraints: scarcity of (raw) land in general, and serviced land in particular; institutional and management ‘bottlenecks’; inelastic supply of construction materials, skilled labour; and shortage of credit for investment in housing.“‘To these may be added other policy constraints (tax laws, zoning laws, rent control, etc.). Perhaps the most convincing evidence in support of lags in supply adjustments has been that: ‘.. . . the aggregate supply of housing, as reflected by the rate of increase in dwelling units from new construction and renovation, has generally not expanded by more than l-3% a year (Grimes, 1976), but that at unchanged prices demand for housing would be expected to increase by 8-l@% a year . . .“j”. Whether projections of widening gap between potenriul demand and actual supply can be attributed to supply constraints alone is a moot point. Notwithstanding the emphasis on supply factors in satisfying the basic shelter needs, the World Bank has nevertheless been conscious of the income constraint. It has stressed the need to keep the household outlay on housing and related services as low as possible so that a large number of poor families can have access to basic shelter without subsidy from the state. It also follows from the above that the notion of ‘basic minimum shelter’ is an elastic concept, since it can be varied to match the family’s ability to pay. In other words the goal is no longer the provision of housing and related services at a predetermined level such as that enjoyed by households at the poverty thrcshhold. Rather, it is to adjust the quality of shelter and related services to suit the household income. If such adjustments can be brought about freely, income of course cannot be a Since the objective of this paper is to constraining factor - by definition. examine the implications of providing a predetermined level of housing and related services, rather than adjusting their quality (and hence cost) to match the of effective demand posed earlier nevertheless family income, the question remains unanswered. In order to shed light on the ability of the poor households to pay for the minimum shelter and related services. and the extent to which innovations on the supply of low-income housing have facilitated access to housing, the available evidence is discussed below. Supply

qf low-income

housing:

e~dution

irl thinking

A number of special housing programmes for the urban poor have been in operation in the Third World cities for two decades or more. Despite decades of effort by public authorities in developing countries to increase the housing stock particularly in urban areas it is evident from the size of slum and squatter settlements in Table 1 that the problem of shelter has remained a challenge. As one study puts it: /. . . . governments have attempted to fill the accumulating deficits of standard housing through programmes modelled, in their basic outlines, on those of developed nations: that is through low-cost publicly-subsidised housing. These have met an insuperable obstacle in the incapacity of much of the population to pay for even the simplest standard house. Repeated attempts to cut costs through prefabrication

Basic Ned

und lhe Ir!furmul

Sector

309

and other new building techniques or through the use of alternative materials have been unable to close the gap. Attempts to reduce monetary costs through programmes of guided self-help in which the potential occupants contributed their labour proved in practice to require extensive and sophisticated management, difficult to mobilise at a large scale and - in the end - not so cheap as had been hoped.“” It is in the light of the above that a search for other efficient housing strategies began in the early 1970s. As a result, a shift in thinking occurred from “providing houses to providing serviced lots”. Typically, “the government acquires land and sells minimally serviced lots - sometimes with a core house to low income schemes, shelter costs per plot in them families”. Known as sites-and-service were lower than the unit cost of cheapest conventional public housing in many countries.“2 The World Bank experience during 1972-1978 period suggests that sites-and-services schemes ensured greater ‘affordability’ by the poor households than the conventional public housing; in most cases, the former were able to reach the second quintile of population from the bottom of the income distribution, whereas the conventional housing rarely reached even the third quintile from below.3” It is evident, from the trend described above, that there has been a tendency to minimise public intervention in shelter construction, the rationale being as follows. It has been argued that there are few externalities or market imperfections in the urban low-cost housing sector; nor are there economies of scale justifying public sector intervention. Leaving shelter construction to the private sector, it is argued, also helps in the “adoption of appropriate standards and technologies, mobilisation of low-income savings and investment and utilisation of relatively abundant unskilled labour resources” besides conserving scarce management, skilled labour and capital resources.3J Perhaps a more convincing argument for leaving shelter construction to private sector is the possible cost reduction. In Manila, for example, a preliminary assessment of the World Bank urban development project found that “private investment in substantial house construction was done by hired artisans and family labour at a cost per unit 20-50% below that of similar work done using normal contracting methods by the government”.‘” Cost reduction is indeed accorded a high priority, not only because it eliminates the need for subsidy (and hence greater chance of being replicated on a larger scale), but also because it stimulates private investment in housing. In other words there is an implicit recognition of the income constraint at the household level and, to stimulate growth in lowincome housing stock, the need to lower the price of shelter is emphasised. Such a strategy undoubtedly calls for a more conscious choice of housing standards and a realistic and compromising attitude of the urban authorities. The view that a sites-and-services approach will be less costly than the unorganised ‘progressive development’ by the squatter settlers has however been challenged by some.‘” Insofar as the service charges and down payments implied by the sites-and-services schemes are still beyond the reach of many poor, they do not constitute a satisfactory solution of the problem - even though they are able to reach populations at lower levels of income as compared to conventional public housing programmes for the poor. The upshot of the discussion is that one cannot ignore the fact that income is a binding constraint for the lowest income groups, notwithstanding the inno-

vations on the supply side. This limitation is apparently recognised by the Bank for it observes: “There are limits, however, to how low an income group can be reached through programs that cmphasise self-help or home owncrship. Many of those in the two lowest dcciles will inevitably rent rather than own their homes. Either the sources of their incomes are not stable enough or their incomes arc not Iargc enough to permit them to commit scarce resources to invcstmcnts in shelter”.” Whether the magnitude of urban population which cannot afford even the minimal shelter investment is small or large seems to depend on the city (01 plot in Malawi, which country) in question. For instance, a minimally-serviced costs a total of only US$lSS per plot. seems to be beyond the reach of 61% of the households, assuming that they can afford a maximum of 20% of their income for expenditures on housing. This is true even when loan is made available free of interest and a repayment period of 20 years is allowed. If the interest rate on loan is 10% and a repayment period of IO years is envisaged. 68% of the households - it is estimated - cannot afford the housing.3” The example above underlines the importance of income distribution and poverty. The extent of subsidy that would bc necessary in order to ensure that all households consume certain minimum housing and related services depends not only on the cost of such services but also on the distribution of households below the poverty line - i.c. how poor they are. If for instance a large majority of those below the poverty line in urban areas is absolutely poor. lacking even the it is evident that their outlay on housing minimum nutritional requirements, services will be far below that of households at the povertv line. To bring their consumption of housing and related services to the level et;joycd by households at the poverty threshhold will mean a significant subsidy. In pursuing a low-income housing strategy that will keep the financial burden of poor households to ;I minimum. the World Bank. and to ;I lesser extent other Dcvelopdevelopmental agcncics such as the U.S. Agency for International ment. Canadian International Dcvelopmcnt Agency. the Asian Dc\,elopmcnt Bank and the European Devclopmcnt Fund, have made the following assumption. By leaving the construction of shelter proper to the households concerned. it is assumed that the poor households will increase their consumption of shelter scrviccs themselves. through their o~vn savings and complementary investment. Rccognising capital market impcrfcctions in many de~,cloping countries, the World Bank has sought to liberalisc :~cccss to credit bq including a construction loan component within its urban project<. This no doubt could facilitate and accelerate the construction process (as in Manila. for example). But it is clear that households with unstable incomc and employment are unlikely to avail thcmselvcs of this option. The essence of the ‘progrcssivc development idea is to promote ‘housing construction or upgrading through staged decelopmcnt in which infrastructure or core house are built by ;I contractor. and the rest of the house completed by the household.“” This approach has been used in two different kinds of sheitcr programmes: ( I ) sites-and-services schemes: and (2) slum upgrading schemes. Thus the households concerned are expected to improve their housing through new constructions or improvements on the cxistin g one at a pact of their choice with due regard to income constraint and thus complement the investment in support services alrcadq’ made. To what extent has this occurred’? An c\Saluation

of the World Bank projects in four countries (El Salvador, Philippines, %&gal and Zambia) seemed to suggest that the process of ‘housing consolidation’ is faster and less expensive in the upgrading approach because it involved existing structures and improvements were generally brought about through traditional In the sites-and-services schemes, by contrast, site building techniques. preparation and construction of core houses were done by large-scale enterprises and housing consolidation involved the use of modern permanent materials and the services of building professionals and hence became more expensive. Housing consolidation by poor families seems to depend in a significant way on their ability to attract income transfers. such as gifts.‘” There are indeed factors other than income and availability of credit which also govern investment in housing: for instance, restrictions imposed by the project authorities on resale or renting of their property. But the evidence from the Philippines does suggest that, to keep the projects affordable, it is desirable to let the beneficiaries improve their incomes by renting part of their property.” The discussion above suggests that a number of factors influence the decision of households to invest in housing consolidation; income appears to be a major constraint particularly for the poorest. The provision of support services first, it is feared, could weaken the capacity to save and invest in house improvements, since the families are already burdened with payments for support services. A recent study based on survey data from Lima (Peru) however suggests the contrary.” Investment in support services - such as water supply and sewerage -seemed to result in a substantial appreciation in the value of the dwelling unit and encouraged owner-occupants to undertake house improvements, notwithstanding the fact that the households have to pay some 15% or more of their income towards the capital cost. One argument put forward is that the provision of basic urban services probably leads to an improvement in premises for business, and hence productivity and employment as well, besides improvements in housing. In any case, this is an area which requires further research to understand better the extent to which public investment in urban support services leads to higher productivity, employment and earnings of the poor. Even after eliminating the shelter component from the package, is it reasonable to expect that all households below the poverty line will have the capacity to pay for other support services and are willing to do so? Many studies on the slum and squatter settlement dwellers have shown that they not only pay for such services but also frequently pay more than those who arc better off than themselves.43 It has therefore generally been assumed that they do have both the capacity and willingness to pay. But an evaluation of selected sites-and-services projects of the World Bank casts doubt that everyone can afford such services: the experience from El Salvador, the Philippines, St%?gal and Zambia suggested that plots were ‘affordable’ to families ‘down to the 20th percentile of the income distribution’.” Since the beneficiaries included population in non-poverty groups as well it is difficult to draw any conclusions about the ability and willingness of the urban poor to pay for such support services -even though the poor generally attach higher priority to such services than to housing itself.J5

312

.s.1’. .sr~rhfrmrr/tr/f

Since the willingness of the beneficiaries to pay is a good indicator of effective demand for the services provided it is worth examining the evidence on cost recovery. As already indicated, cost recovery is closely related to the capacity to pay and hence the level of household income. Insofar as the beneficiaries come from non-target groups evidently a better record on cost recovery is to be expected. But there are a number of other factors which influence cost recovery: willingness of the authority to collect payments. efficiency of the administrative mechanisms to enforce collection and lags in adjustment, to name a few. If the services fall short of the beneficiaries’ expectations. c.g. owing to inadequate maintenance of the infrastructure, it is quite natural that they are reluctant to pay for them. More importantly. if the services provided do not correspond with the needs or priorities of the target group, and hence they are unwilling to pay for them, low cost recovery resulting from the process is of course a reflection of the lack of effective demand. Preliminary evaluation of the World Bank projects on sites-and-services and upgrading suggests that there arc indeed problems of cost recovery attributable to all the reasons cited above. It is hard to separate the effect of lack of effective demand unless more detailed data become available and finer analyses are attempted.“” Besides keeping the financial burden low on poor households, the new style projects (emphasising provision of support services) also stressed that the construction costs can be lowered through labour contributions from participating families. In other words. surplus labour. which was assumed to exist in project areas, could be transformed into productive employment. As it turned was not much surplus labour in project sites as originally out, “there Preliminary data from the Philippines suggested that paid anticipated”.” employment (i.e. number of person-days) was twice as large as unpaid. Only about a fifth of the households concerned seem to have relied on their own labour exclusively?” The evidence from El Salvador and Zambia also echoes this in the finding.‘” In the Mater0 Community, Zambia, 93% of the households sites-and-services project used hired labour.5” Thcsc findings cast doubt OII some of the assumptions underlying such projects - “that the opportunitv cost of families’ own labour was zero or near zero”.” In fact, an evaluation of selected projects suggests that the beneficiaries neither had the ‘free’ time nor the construction skills. Given that about half of the bcneficiarics of sites-and-services projects belonged to non-target groups (i.0. the upper three quartiles). it should not come as a surprise that they chose to engage skilled labour on a wage basis. There is of course nothing wrong with this, so long as additional employment is generated. The interesting question is: how much of this additional employment is directed to workers in the informal sector’! If it is large, cvidcntly there will be less leakages; much of the Iabour income is likely to be I-ecyclcd and spent on housing and other basic need items. But the evaluation study also suggested that mutual aid and self-help practices were correlated with low-mcome. particularly in Zambia and the Philippines. These findings stem to imply that employment can be an important component of ;I low-income housing strategy provided the

Basic Needs and the Informal Sector

313

focus is on the poor households. The mutual help approach to low income housing, where it has worked, seems to contribute to some reduction in cost as we11.52 Another possible source of cost reduction which has been little explored is the production of construction materials. Reductions in cost of construction materials seem possible through the involvement of informal production units. In Lusaka, for instance, the cost of bricks is estimated to have been reduced by 50%, without reducing the quality, through this approach.53 In another experiment in Lesotho, where an informal production unit was set up to produce construction materials including low-cost furniture and building items (like door and window frames), it was possible to generate employment besides lowering the cost.54 As the evidence from El Salvador suggests, such efforts to reduce construction costs can stimulate demand for low-income housing by enabling poorest households to participate.55 What is perhaps more important is that by increasing the participation of the working poor in urban areas in the production of construction materials it is possible to improve the incomes of households and hence the effective demand for housing and related services.

CONCLUSION

That there is a potential demand for housing and related services in urban areas of the Third World is self-evident, given the size of urban population and its share in slums and squatters. There is litle doubt too that the potential demand will continue to expand rapidly in tune with the projected trends in urbanisation in developing countries. Insofar as this demand is also effective and is accompanied by an adequate and timely supply response, it can result in substantial employment and income generation in urban areas. Past experience suggests that supply bottlenecks can be quite important in most developing countries thus withholding a full and satisfactory supply response. Policies and measures to eliminate such impediments are therefore imperative in ensuring employment promotion through housing. Considering the conditions under which urbanisation is taking place in the Third World, demand constraints seem more important in improving the housing situation of the poor. A substantial part of the future additions to urban populations is expected to be below the poverty line and hence the projected demand is unlikely to be ‘effective’. Even the basic minimum of shelter and support services corresponding to the level enjoyed by households at the poverty threshhold seems beyond the reach of many urban poor. This is evident from the emerging experience on low-income housing projects, which have attempted to reduce the financial burden on poor households by successively lowering the standard of housing and related services on the one hand, and by providing partial packages (i.e. with or without core housing unit) on the other. In other words, current efforts have sought to reduce the gap between potential and effective demand through modifications in the quality and quantity of the supply of housing and related services. These efforts have no doubt yielded positive results, judged by the percentile of urban population that they have been able to 5’An evaluation study from El Salvador for instance attributes 10% cost reduction to mutual help approach to construction. See FSDVM: Evaluation of mutual assistance and its functions within the process of social change - The sonsonate case, Report No. 12, July 1977. 53 LHPET: Draft report on observation of mutual help block-making in Garden overspill. Lusaka, April lY78. ‘4The Cooperative Housing Foundation: African enterprise: New business in the mountain kirtgdom of Lesotho, 1983. See also: From survival to development : A self-help upproach to commutlity upgrading (Port-au-Prince), by the same author for similar evidence from Haiti. s’See FSDVM: The Apopu demand study, Report No. 18, January 197X. which showed that even slight changes in monthly costs made significant inroads into the affordability of the project.

reach. Since a significant number of households is still too poor even to pay for the ‘rock bottom’ level of housing and related services, it is clear that meeting their basic needs will remain a challenge. Household income thus appears to be a veritable constraint. The projected levels of expenditures on housing seem difficult to realise without a subsidy: lowering the basic minimum housing through alterations in quality and quantity can perhaps reduce the need for public subsidy, but it is unlikely to eliminate it totally. The satisfaction of basic needs thus calls for policies to improve the incomes of the urban poor. Insofar as labour is the only income-generating asset possessed by the poor households, it is evident that basic needs satisfaction and employment are two sides of the same coin. The key issue is therefore whether provision of housing and related services will simultaneously result in higher employment and incomes for the poor. In principle. it would seem possible to generate substantial labour incomes through expenditure on housing and related services. Perhaps under half of it would go to individuals in informal sector occupations such as plumbing and electrical services. carpentry, masonry and the like. The rest would probably go to labour engaged in the production and distribution of construction materials, still in the informal sector domain. However. such increases in employment are unlikely to occur unless deliberate efforts are made to involve low-paid skilled and unskilled labour in the construction process and in the production of construction materials. The provision of basic support services seems to have a positive effect in stimulating savings and investment in house improvements. Likewise. easy access to credit to finance such investment can also play a positive role. But it seems clear that job and income stability besides the level of household income is important too. This is particularly important when one considers the future trends since a significant part of the increase in urban population is expected to result through migration. Duration of stay in the urban areas seems to contribute to somewhat higher and stable incomes. partly through job mobility.‘” Insofar as new arrivals in urban arcas arc forced to seek accommodation at the periphery (owing to the high density of inner city locations). the sites-and-services approach is likely to play a more important role than slum upgrading. These imply the need to formulate on low-income housing stratcgics that take into account employment considerations. In order to incorporate cmploymcnt considerations in a low-income housing strategy one however requires much more information than is available at present. On the demand side it would seem necessary to investigate the income elasticity of demand for housing by the poor households as well as the implications of unstable jobs and incomes on demand. ELidcncc available suggests that new entrants to the urban arcas tend to have low incomes and precarious jobs initially but. given enough time. do improve their job and income situation.” This implies that low-income housing programmes should take into account the time element and the different waves of immigrants. Housing programmes art likely to be more successful in older scttlemcnts than in new settlements. where immigrants arc still trying to consolidate their job and income prospects. Since participation by poor households in low-income housing schemes is conditioned not only by the opportunity cost of their time but also by their capacity. in terms of construction skills. it would stem necessary to know more about the poor households and their capacity, and to take them into account in choosing appropriate construction materials and technolgies. Finally. another major area in which littlc is known is the scope for production of

Au.sic~Needs unrl /he infbrtntrl

Src~fot

31s

construction materials in the informal sector. This in turn raises questions about imparting construction skills to individual workers, organisation of production units (individual ownership, cooperatives, etc.), linking them with the sources of demand, the quality and standard of output and the like. Can informal sector involvement in low-income housing production lead to further effective demand for housing? These and other questions need to be tackled through further research on informal sector and low-income housing.

APPENDIX WP

1 Natala

1: WEP WORKING

PAPERS ON URBANISATION

AND EMPLOYMENT

Carynnyk-Sinclair:

Rurul to Urhurt Mi~~ruti~tt in De~~elopittg C‘orttt/ric\ IYSO-lY70: A .Suryy (tj Geneva, ILO. February 1977. S. V. Sethuraman: Urhunisurion and Ew7plo~tmv7r it! Jnkurlu: .Sw~~tttur~ und (‘ottclusion.~ of u C‘CIJC Srudy, Geneva, ILO, May 1974. Superseded by working paper WEP 2-lY/WP 6. Kalmann Schaefer: Urban Der~elopment und Emplu~tttettt ttt Sue Pnrtlo: A Prrlimitttrr~ S~mtttturv of N Cnse .S/udy. Geneva, ILO, October lY71. Superseded bv working paper WEP 2.lY;WP I7 Heather Jo5hi. Harold Lube11 and Jean Mo;lly: Urh& De~~clop~t~ctt~ und Emplo~menr in Altidjun, ILO. October 1971. Supersedcd by publication. /tOidjtrtr. Urhutt De~~elopmettt und Geneva, Employmctt~ in /he Itwry Cuust. Ajit N. Bose: The Informal Sector in /he Calctrrru Merropolifutt Ecottomy Gcncva. ILO. October lY74. Replaced hv the publications Culcuttu und Rurul Benpal: Stnrrll .Sw/or S~mhio.rit, S.G. Seth&man: Urhanisuriotr and Employment in J&rrtr. Geneva. ILO. October 1074. Superseded hy publication, Jukarru: Urhun Drvelopmetrr and Emplo~ttrrttr. S.V. Scthuraman: The Urhun Informul Sector: C‘oncep/, Meu(.twetttettt und Po1ic.y. Geneva, ILO. April lY7h. Superseded by article in lnternarionul Lultottr Rcl~iew. Chris Gerry: Pc,rl) Producer.\ und the Urhutr I?wttottt~~: A C‘rrse .S/ucly of Dukur. Gcncva. ILO. rhe Li/erurwe,

WY

2

WP

3

WP

4

WP

5

WP

6

WP

7

WP

8

WP WP WP WP

September lY7J. Employment und L)c,,,elolttttpttt in Ghutru~ Repor/ on Two Ritter: Urhunisurion. 9 Planungsgruppe Surreys, Geneva. ILO. September 1974. In.\ighrs from N Series of C‘use 9udie.s of Third World IO Harold Lubell: Urbani.sution und Etnploymrnc: Merropolitun Ciriex. Geneva. ILO, November lY71. Solomon: Urhunixtrion nnd Emp/o~~men/ itt Ktrultr Ltdmpw, Geneva. ILO. February lY7.5. 11 Devadason I2 Kalmann Schaefer assisted by Chewa R. Spindcl: Urhtrtt L)e~4opmettr uttd Emplo~menr itr Sao Patdo, Sue Puulo: Urhutr Development trnd Geneva. ILO. June 1975. Superseded by publication. Emplowtetti.

WP

13 Olanrewaju

J. Fapohunda,

Jaap Reijmerinck and Mcinc Pitter van Dijk: Urhun Dc~~clopmcnr. nnd Income Dislrihution in Lugo\, Geneva. ILO, September lY7Y. Incorporated into publication. Lagos: Urhun Developmrnr und Employmenr. J. Douglas McCallum: Rogofri: Urban De~v&tpmc~ttt Reuli/ie.s utrd Platrv. Geneva, ILO. October lY75. Incorporated into publication. Bogorci: Urhtrn Dewlopmr~ttr und Employmwtr. Paul Bairoch: Emploi et Tuille do Villes. Geneva, ILO, May lY76. Olanrcuaju J. Fapohunda: Drr~elopmettr of Urhutt ft!fi.usfrtt~~/ure in Grcuw Lu,qo.\, Geneva. ILO. May lY7h. Incorporated into publication. Lu,qo.s: Urhutt Dn~eloptttetrr und Emplovmcttt. George A. -Aryee: Effec& of Formal E&c&m and Trurt;ing on the In&i& of Employmenr in the Infbrmul Sector: A Cusr Study of Kttmusi. Ghunu. Gcncva. ILO. Sentember- 1$76. Carlos E. Sinchez. Horatio P&t&ri and Fernando Ferrero: Derurrol~o Urhono y Secror fttf~~rmul en lu Ciudud de Corhodu (Argentinn). Geneva, ILO. September IY76. Replaced by research working paper Emltlo~mcttt

WP

I4

WP WP

15 16

WP

17

WP

18

WP

WEP 2-19lWP 27. 19 Carlos E. SBnchez. Empleo

en lm Ciudad

Horatio

Palmieri

de Cordohu

and Fernando

(Argenrmu).

Ferrero: Desarrollo /ndu.ctriul Urhunizacidn 1 ILO. October 1976. Replaced by workini

Geneva.

paper WEP 2-19iWP 27. Casrro Market: Slices of Ecottomic Life in u Poor Clzileun Fishing Town. Geneva. WP 20 David Morawetz: ILO. Fchruary 1977. WP 21 Manoel Tosta Berlinck, Jo56 Murari Bovo and Luiz Carlos Cintra: Devenvol~~imrnto dn rconomicu de Cumpinus: 0 Setor informal. Geneva, ILO, April 1977. WP 22 Manoel Tosta Berlinck. JosC Murari Bovo and Luis Carlos Cintra: De~~elopment of the Economy of Campinus: The lnformul Sector. Geneva, ILO. June 1Y77. (English version of WEP 2-lY/WP 21.) Acti\,itieJ: A Study of the Inler-rcluriottships hrrween rhe WP 23 George Aryee: Smull-Scule Manufacturing Formul and the Informal Seclors in Kumusi. Ghana, Geneva. ILO. June lY77. Promotion in rhe lnformul Sector in Ghunu, Geneva, ILO. April 1977. WP 24 S.V. Sethuraman:‘Em$o~menl Ltda.: El Secror Informal en lu Economiu Urhutru de Rogord, Gcncva. ILO. August 1977. WP 25 OFISEL, Sector of Freerown (Sierra Leone). Geneva. ILO, April 1978. WP 26 D.A. Fowler: The Informal Palmieri and Fernando Ferrero: Desurrollo industrial urhunizucidn I WP 21 Carlos E. Srinchez, Horatio empleo en la Ciudud de Corhodu (Argentinu): Un Cuse de Crecimiento De.sequilihrudo, Geneva, ILO. January. 1977. WP 28 Gero Schneider, Heidi Schneider and Udo Bude: The V&r Region und Accru: Urhunicuriott. Migruiion und Employmenr in Ghuna. Geneva. ILO. May 1978.

s. v.

316 WP 29 Akin L. Mabogunje ILO. July 1977. Superseded WP 31 Hazel Moir: monograph WP 31 Olanrcwaju WP 3.3 Gonzalo M.

and Michael

by the puhliciition ThrJakcrm

.~eth1rmtnnrr

0. Filani: Ah.sorptron

of the same title. Geneva.

InformalSrctor,

of Migrana I~O Kmo

City. Nigeriu, Geneva.

ILO. June 1978. Also issued in Jakarta m LEKNAS series. J. Fapohunda: The Itlfbrmul Sccror of Lugos, Geneva. ILO. August. 1978. Jurado e/ ~11.: The Irrformal Secfor of Mwila. Geneva. ILO. August. 197X.