Leasing Like a State, or: Public Housing is Development Policy

Lessons from Hong Kong, Singapore, and Addis Ababa

Skyscrapers in Nairobi.

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

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

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

Public Housing is Good Development Policy

If, like me, you’re a bleeding heart and think that people everywhere deserve a decent place to live, public housing seems like a natural response to housing crisis, purely on the basis of rights. But in this post I’ll argue that public housing makes for good development policy too.

The logic, when you stop to think about it, is painfully simple. Historically, the mantra of development is to pull as many workers from the fields and into the cities and factories as possible. But those workers naturally need a place to live.

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

A Hong Kong shantytown, as portrayed by one Jackie Chan in 1985.

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

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

In both places, a glaring social need was met with massive public investment. From 1973 to 1982, the Hong Kong Housing Authority built around 200,000 homes. Singapore’s HDB did even better, constructing around 500,000 homes by 1985. In a generation, the shantytowns were cleared away, their residents relocated to housing estates with consistent electricity and running water. Today, nearly half of Hong Kong’s population live in public housing units (mostly rented from the government), and around 78% of all Singaporeans live in public housing units, called HDBs, which they largely own. Public apartments, particularly in Hong Kong, are far from perfect; but it is hard to see how the housing situation would be improved in their absence. The victory of public housing is so complete that the dire conditions that led to their necessity—the memory of the crowded kampongs and Shek Kip Mei—are now almost completely forgotten.

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

First, there’s the important political economy point that, as city-states surrounded by large, unfriendly neighbors, neither Hong Kong nor Singapore might have survived sustained urban unrest. Hong Kong saw large anti-colonial demonstrations in 1967 associated with the Cultural Revolution; Singapore saw race riots in 1964 around the merger with Malaysia. In a classic Polanyian sense, city dwellers naturally demanded social protection from the ravages of the market; providing housing is a natural concession for political stability. African governments, who are often most politically sensitive to their urban constituencies, should take note.

Second, in a more strictly economic sense, I suspect that public housing can be a helpful complement to rapid, export-led growth—the great early achievement of Hong Kong and Singapore, and the stated ambition of many African countries.²

When millions of people move into the cities for factory work, this naturally drives up rents, which risk gobbling into their budgets. But even a solidly neoclassical analysis will admit that these rents reflect no productive activity; they’re simply a reward for being lucky enough to sit on a valuable piece of land. So what if, instead of private landlords, it is the state that owns the land? Rents can then be kept low, preventing housing costs from eating up the budgets of the new urban workers—in other words, real wages will be relatively high for a given nominal wage. Nominal wages (which is what firms see) can then be set at a globally competitive level, helping to build out a manufacturing workforce while still ensuring that those workers get decently paid—which, in turn, boosts their purchasing power, and the attractiveness of those manufacturing jobs. Instead of a pernicious race to the bottom, you have a virtuous cycle of public services and economic growth supporting each other.

Ethiopia leads the way

Public housing in Addis Ababa

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

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

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

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

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

The Indispensable State

Now, you might say, the average African state is unlikely to enact a public housing program as good as that of Singapore or Hong Kong or even Ethiopia. And there’s likely some truth to that. In neighboring Kenya, President William Ruto’s landmark affordable housing initiative has been mired in controversy from the start, with the courts recently striking down an accompanying tax increase as unconstitutional.

But a recurring theme in this blog will be an allergy to what Albert Hirschman called fracasomania—the anxious preoccupation with failure in the developmental process. We should celebrate the growing recognition, across multiple countries on the continent, that the state can and should assume responsibility for housing its people. And by taking on that ambitious responsibility, African states—just like governments elsewhere, from Red Vienna to developing Singapore—may just find their capabilities stretched and enhanced by the project. Failure is not the only possibility.

Almost one billion people in Africa will need housing, and so far, as The Economist points out, the private sector response has been woefully inadequate. If not the state, then who else will answer the call?

The pieces are already there in The Economist article, waiting to be put together. First there is the disappointing supply response to the entry of new firms experimenting with mortgage finance:

Mr Walley of the World Bank, which has lent to most of these companies, says the problem is that “the housing-supply response hasn’t happened, or not to the scale we would have liked.” 

Then there is the scarcity of capital for private investment, which is crowded out by government borrowing:

Compounding the problem is the scarcity of long-term finance in Africa and the fact that governments grab most of it by borrowing heavily. Banks and investors can earn 13-15% a year simply by buying government bonds.

We have a name for the only actor that can consistently solve coordination failures; that can intervene when no market exists; that can borrow the requisite amounts from international capital; and, in the right circumstances, construct homes at a massive scale.

We call it the state. In Africa, as elsewhere, it should build.

1. One of these, incidentally, would grow up to be the great action filmmaker John Woo.

2. I hope some enterprising third or fourth-year PhD student can put the data together and check this more formally.