The second United Nations Conference on Human Settlements, Habitat II in June 1996 at Istanbul, Turkey, reaffirmed the fact that the right to housing is a basic human right. A decade later the Third Session of the World Urban Forum of the UN Habitat was held in Vancouver, 23 June 2006 with over 10,000 participants from over 100 countries. This forum put urgency on various issues including housing by bringing in a new message: the urban population of developing countries is set to double from 2 to 4 billion in the next 30 years. In the same time span, the developed world's urban population is projected to rise by only 11 percent. Ms. Katherine Sierra, Vice-President and Network Head, Infrastructure, World Bank, expressed the looming challenge thus: "These 2 billion new urban inhabitants will require the equivalent of planning, financing, and servicing facilities for a new city of 1 million people, every week for the next 30 years."
In 2008, Government of India (GoI) estimated Rs.600,000 crores as the current requirement of investment to meet the housing needs. The current plan outlay has earmarked a total of Rs.24,100 crores. The deficit of dwelling units (DUs) is around 26.53 million, over 97% of this shortage relating to Economically Weaker Sections (EWS) and Low Income Group (LIG).
Two truths that emerge from the above are – i) the stock-deficit in housing relates almost entirely to EWS/LIG segments; and ii) Government alone will never be able to house everyone. Private sector investment in low-end housing is indispensable. In the affordable housing sector, the market can help ease a daunting challenge into a win-win situation for all.
The EWS/LIG is the informal sector of India who lives in the informal housing, squatter settlements and slums. In most cases they have no steady employment, no access to housing credit. Even when granted free land, with no credit history or stable income, they fail to tap bank-credit.
This leads to a commonsensical argument that maybe the cost to serve the poor is higher than what they can afford. But the numerous rent affordability studies in India suggest that the poor or at least a section of the broad category can in-fact afford a home. Slum studies have shown that the right to squat is usually ‘bought’ by paying ‘someone’ and that “people are generally willing to pay for services provided they receive the kinds of services that they need and regard [the exchange] as good value for money.”
The various studies have used their own definitions, and have different criteria, but there are some common conclusions. They all seem to agree on the point that within the category of urban poor be it EWS or LIG; there are various sections with varying affordabilities. As P.K. Muttagi puts it, the pavement and slums dwellers as well as the people living in informal settlements are not “a single homogeneous group” as he points out that some of the slum dwellers have “a regular source of income…they are look(ing) for a permanent shelter with basic amenities as they are able and willing to pay for it.” For a population this large, it might be sensible to have ‘more viable community size divisions’.
So the answer to the question, Is the cost to serve the poor higher than what they can afford? Could be a ‘yes’ or a ‘no’. In all probability, it could also be a ‘no’ for certain section within the broad category of the urban poor (maybe the LIG) and ‘yes’ for rest (EWS). The simplistic division being ‘Housing for the poor who can afford’ and ‘Housing for the poor who cannot afford.’
Now that we have established that there is in fact scope for market to operate in the affordable housing sector, we can begin questioning, ‘why then has privatization generally failed in the affordable housing sector?’ We examine this through the case of Chhattisgarh, India.
Chhattisgarh was formed in 2000. In its quest to find sustainable solutions to the housing challenge, the State Government, with a ‘progressive’ intent privatized the housing sector. Nearly 100 builders opened shop in the State between2000-2004. Soon, however, the builders were complaining that excessive competition had cut into margins and resulted in a pile up of unsold stock. A paradox surfaced: top-end housing stock was surplus while affordable housing was in acute short supply! And builders were unwilling to build according to the demand! In 2004, the State Government was constrained to re-create Chhattisgarh Housing Board (CGHB) to address the problem by focussing on affordable housing. CGHB claims that in three years it has built more low-end houses than had been built in the last 30 years, yet slums keep mushrooming! Chhattisgarh perhaps typifies developing economies in this regard.
Our purpose here is not to bring forth the fact that the demand for affordable housing is more than the stock being built, but to understand why ‘supply’ couldn’t shape according to ‘demand’. The instrumental rationality answer is that even though the actors may initially have diverse and erroneous models, the informational feedback process and arbitraging actors will correct initially incorrect models, punish deviant behavior, and lead surviving players to the correct models (North, 1993). In lay terms it means that the players have an informal feedback mechanism built within the market process to lead them to where ‘demand’ is. This has not happened in case of Chhattisgarh, the market has not corrected itself.
When a market phenomenon defies the rules of ‘utilitarian’ rationale, there is a need to look beyond the realm of Neo-Classical Economics. We then need to turn to other disciplines to provide a plausible explanation. It is probably such need that must have led to the development of New Institutional Economics.
New Institutional Economics (NIE)
As a discipline, NIE finds its pioneers in Ronald Coase, Douglas North and Olivier Williamson, whose works led to a new format of inquiry and analysis in the way that the effect of institutions on the market and actors are acknowledged in economics.
In the neo-classical theories exchange of goods/commodity is “frictionless”; actors always rational beings with profit being their sole motivation. Needham et al (2010) borrows the term from Ball (1998) to describe such theories as ‘ad hoc institutionalism’ - “It ignored institutions because they cannot be incorporated into testable economic theories of land and property markets. If the theory does not predict well, and if the existence of institutions is undeniable, institutions are sometimes introduced as a sort of deus ex machina: the failed prediction is attributed to the existence of a particular rule or practice.”
NIE is often considered within a modified Neo-classical framework, rather than an evolutionary branch of ‘Old’ Institutional Economics. This is because while the ‘Old’ Institutional Economics made first attempts at acknowledging the interdependence of institutions and actors, it lacked a theoretical framework. It was largely seen as a criticism of mainstream neoclassical economics.
The focus in NIE is on the understanding and prediction of determination of prices, outputs, and income distributions in markets through supply and demand as in the case of Neo-classical economics, with one major difference. Institutions in NIE are intrinsic to the process unlike Neo-classical economics where they are considered external correctors.
Brousseau and Glachant (2008) however argue that NIE is a product of evolutionary process, though not directly from the ‘old’ Institutional Economics, “but rather a combination of bricks coming from different traditions.”
New Institutional Economics (NIE) has “a rapidly growing literature combining economics, law, organization theory, political science, sociology and anthropology to understand social, political and commercial institutions (Klein, 1999)”. It is gaining popularity in the most successful fields of applied economics, and is especially popular in Development Economics in studies relating to explaining differences in performance between industries, nations, and regions. However, empirical analyses, especially those relating to the effect of institutions on housing markets in developing countries are scarce.
What are institutions? And why do we need to understand the culture of a place to understand its market operations?
North (1994) defines institutions as “the rules of the game: the humanly devised constraints that structure human interaction. They are made up of formal constraints (such as rules, laws, constitutions), informal constraints (such as norms of behavior, conventions, self-imposed codes of conduct), and their enforcement characteristics.”
Hodgson (2006) in his article “what are institutions?” talks about the word being used widely in many disciplines and its meaning having many connotations. His definition of institutions is as follows: “systems of established and prevalent social rules that structure social interactions.”
For the purpose of this paper and otherwise, if I were to define institution, I would think of it as patterns of social organization that aim to give effect to the values and goals of a society. Institutions are themselves governed by rules (written laws) or social norms (customary practices). In a society (as is the case of many indigenous societies), if being part of the community is the ‘goal’ then individualism and economic rationale would not be values that they would value. And thus in that society, one may find individuals taking on a (seemingly non-productive) debt for a social custom of, say, feeding the entire community following a marriage or a death in the family. Such a debt might not match the scarce economic assets that they possess. It certainly would not be justified when appraised with the financial tool of debt-service coverage ratio (DSCR). Yet the debt is incurred under an institutional compulsion. Such institutions are embedded in society and very much influence social interactions.
Institutions could be both formal and informal. Examples of formal institutions are the government, the institution of marriage to create a family, a school or a university to get an education, a market as an institution to exchange commodities. Examples of informal institutions could include social norms like exchange of gifts during Christmas, tipping a waiter, etc. These are examples of some societal norms which have an economic implication and influence economic choices not necessarily in a rational manner.
Every region has its own peculiar challenges and adopts unique approaches in solving them. These processes that work within a society, contribute to forming its unique culture. Cultural studies take various approaches, one such approach is the Institutional approach. Studying institutions would thus give insights into the culture that dictates the exchanges with a given society.
Traditionally, Sociologists, Anthropologists and Political Economists like Max Weber (1864-1920) have been asking the most prescient questions about the relationship between economy and culture, although in true Weberian fashion the perspective is diverse, diffuse, and still being defined in practice. It was followed by the works of Bronislaw Malinowski (1922), Marcel Mauss (1954), and Raymond Firth (1967). Matthews (1986) while talking about the Institutions in Economics called it one of the “liveliest areas” of the discipline.
Institutions frame behaviors and exchanges in markets, business networks, communities, and organizations throughout the world (Glachant & Brousseau, 2008). Needham (2010) argues that “Theories based on neo-classical economics, which largely ignore the role of institutions, are not intellectually sound because it is known that markets cannot work without institutions. Nor do these theories predict outcomes satisfactorily.” The need therefore is to understand not just the formal ‘rules of the game’, but more so the informal traditions that govern the market behavior.
In terms of this particular case, examples of a formal and an informal institution which might have an effect on the housing market are –
Consumer Protection Act, 1986 – This would be an example of a Formal Institution. In some of the interviews during my field work for writing the research proposal, it came to light as being one of reasons private builders are vary of entering the affordable housing market. The Consumer Protection Act, 1986, was enacted for better protecting the interests of consumers. The provisions of the Act came into force with effect from April 1987. Consumer Protection Act imposes strict liability on a manufacturer, in case of supply of defective goods by him, and a service provider, in case of deficiency in rendering services. “The term “defect” and “deficiency”, as held in a catena of cases, are to be couched in the widest horizon of there being any kind of fault, imperfection or shortcoming. Furthermore, the standard, which is required to be maintained, in services or goods is not to be restricted to the statutory mandate but shall extend to that claimed by the trader, expressly or impliedly, in any manner whatsoever”. The provisions of the Act are compensatory as well as preventive and punitive in nature and the Act applies to all goods covered by Sale of Goods Act, 1930, and all services unless specifically exempted by the Central Government. The need for Consumer Protection Act arose because of the lack of consumer protection covering sale of goods/services where there is no agreement in place. Housing however is an area which is covered by an agreement and hence could be challenged in a legal court rather than a consumer forum, which the private builders feel is generally biased in favor of the consumer. It therefore could be an institutional constraint which dissuades private builders from entering the affordable housing market.
Social Status/Recognition in Society – This would be an example of informal institution working as a constraint in allowing private builders to work in affordable housing. The construction market in a small/medium sized urban center is usually oligopolistic. There are often few builders who have the resources to invest in large scale projects of affordable housing. If the builder is a known provider of high-end buildings, he would be rather reluctant to enter the affordable housing market. The extent to which the institution might be influencing his behavior can be fairly understood if he were to rather enter a new line, say of retail clothing, than considering affordable housing, which, he probably feels, is a huge climb-down in his ladder of social esteem.
The issue of addressing formal institutions is much ‘easier’ as it involves mostly ‘political will’. The case may include repealing a law or introducing a regulation. Informal institutions however are more deep rooted and often involve steps towards introducing behavioral change. In the above example, the ‘embarrassment’ of being associated with affordable housing could be set right by upholding it as a ‘noble’ act.
Why then does a society need institutions? Why do they continue to exist even when they are not serving any ‘utilitarian’ purpose? North (1990) perhaps is right when he says that they reduce uncertainty by establishing a stable (not necessarily efficient) structure to human exchange, but (Hodgson, 2006) answers it equally well. “The durability of institutions stems from the fact that they can usefully create stable expectations of the behavior of others. Generally, institutions enable ordered thought, expectation, and action by imposing form and consistency on human activities. Institutions both constrain and enable behavior. The existence of rules implies constraints. However, such a constraint can open up possibilities: it may enable choices and actions that otherwise would not exist.”
But it is not just the societal institutions that play a role but as North ( 1993) points out we live in a world where “ideas and ideologies (of individuals) play a major role in choices and transaction costs” thereby creating ‘imperfect’ markets. Continuing with the theme of “ideas and ideologies” he emphasizes “the political process as a critical factor” in the performance of the economies. Meaning thereby that “individuals and organizations with bargaining power as a result of the institutional framework have a crucial stake in perpetuating the system.” It is an attempt at a possible explanation for the various levels of performance in different economies which cannot be understood only in terms of difference in resources and market.
Institutions do change, even though it is often through difficult and fumbling “efforts”. The change can be evolutionary, where constant feedback-cycles change incorrect or revolutionary models, where people get tired of the oppressive forces and revolt. Slums/Squatter settlements in this context might represent a class struggle. Davis (2007) in his best-seller book ‘Planet of Slums’, discusses the points made by Asef Bayat, and James Scott and questions whether the non-confrontational infiltration and the ‘quiet encroachment of the ordinary’, is ‘merely defensive’ or offensive revolt “as they ceaselessly aim to expand the survival space and rights of the disenfranchised.”
The ‘revolt’ in Chhattisgarh is just mushrooming. Before it turns into an uncontrollable eruption, efforts need to be made to effectively address the issue of affordable housing. It is also clear that the government alone or just the market cannot meet the challenge of ‘housing for all’. The government is neither unaware of the issue, not sitting idle. Now is therefore, as good a time as ever, to engage in a study that seeks answer to the question: “Can the government design institutions in a way that market drives affordable housing?”
However difficult a process it might be, efforts need to be made to understand the dynamics of institutional change, “particularly the interplay between economic and political markets” (North D. , 1993). Being more of the neo-classical vein the analytical framework that he proposes is in terms of the “pay-offs”. In his words, “if the institutional framework made the highest pay-offs for organization[al] piracy, then organizational success and survival dictated that learning would take the form of being better pirates. If on the other hand productivity-raising activities had the highest pay-off then the economy would grow.” While it is relatively true, it is not necessarily that simple a case of being black and white. Societies work within a complex of relations and will have many shades of grey.
The proposed study however would benefit more to question on the lines of Williamson’s (1999) concept of ‘remediability’: which set of institutional rules would achieve best the given goals of public policy? Or, “if we ask good questions, we should be able to find that certain kinds of institutional arrangement benefit people more often than other kinds (as cited in Needham et al., 2010).” And that then would give a basis for policy makers to design institutions in a way that will help ‘market’ operate in the affordable housing sector.
The solution will have to be “adaptive rather than allocative efficiency” (North, 1993). The institutional framework being flexible - where design/model has the capacity to adjust to the “evolving technological and demographic changes as well as to the shocks of the system.”
NIE has some of its own limitations which will be inherent in any study of this nature. In order to comprehend the institutional effect on the market, one needs to make a very detailed study – ‘Verstehen’: a deep understanding of how the [--] market works. Such studies can then be used to understand and predict the effect of even the small changes to that particular market. The effects however might not be ‘generalisable’ to other seemingly similar markets (Needham et al, 2010). While we do hope that there will be certain other lessons learnt which could apply to a wider geographical scope, the study is more guided by the idea that public policies need to be tailor-made rather than ‘one size fits all’. To quote Needham et al. (2010), there might not be a general theory, “but a number of partial theories…which will explain and predict better than theories which ignore institutions.” Otherwise what happens can be explained taking the classic example of Latin American countries who adopted a constitution very similar to that of United States only to get very different results/performance characteristics than the original country (North, 1993). “It is because both informal norms and enforcement characteristics will be different in both cases.” This reiterates Elster’s statement (1994) that “explanations in the social sciences should be organized around (partial) mechanisms rather than (general) theories.”
Report of the 2008 Technical Committee set up by Ministry of Housing & Urban Poverty Alleviation
See Ghosh and Sanyal, Muttagi, P.K., Singh, U.B., Sachithanandan, A.N., Thangavel, C., Bhattacharya, K.P., for a collection of essays on Rent Affordability in ‘Affordable Housing and Infrastructure in India (1998); Also see Anuradha Mascarenhas (2010) Survey to find if slum dwellers willing to pay for affordable homes, Indian Express; Singh Shagun (2011) Rethinking low incoming housing in India, and FEEDBACK VENTURES, Survey in Lucknow slums (2006)
The squatters pay protection money to the slumlords, the police and others on a regular basis (Davis, 2006).
Douglass C. North (1994), Economic Performance Through Time, Nobel prize lecture, December 19, 1993. Also published in The American Economic Review, 84 (3): 359-368, p. 360 as cited in Glossary for New Institutional Economics compiled by Alexandra Benham
Billig, Michael S, Institutions and Culture: Neo-Weberian Economic Anthropology, Journal of Economic Issues, December 1, 2000.
The author is an Anthropologist and has worked widely in the Social Development sector in India and abroad. Her work experience includes working for a grassroots level NGO in India, working at the NGO section of the Department of Economic and Social Affairs, United Nations, New York, being the UN representative of an Italian NGO – FORMIT Foundation, working in the field of social development and most recently, working as Program Officer, Research and Development, for World Sports Alliance, an intergovernmental organization, based in New York, which implements programmes that work towards implementing the UN’s Millennium Development Goals. She is currently a candidate for Ph.D in Department of Land Economy, University of Cambridge, UK. Her working title for the Ph.D is Seeking Sustainable Market Solutions for Affordable Housing in Chhattisgarh: A New Institutional Economics Approach.