This week I learned a lesson about what’s wrong with neoclassical economics, though I don’t think that’s what I was supposed to learn.
The advantages of cities
In my class on Urban Economic Policy, we’ve been studying the advantages and disadvantages of urban density. Cities are the place where civilization happens: when you get lots of people in one place, you get culture, creativity, specialization, fashion, choices. If you’re a working person, you can choose from more jobs and earn more money. If you’re a business owner, you benefit from the proximity of other businesses. If you’re a parent, you’ll find more and better educational options for your children. If you’re looking for art, sports, music, museums, parks, or other amenities, you’ll find more of everything in a city. In economics, these are known as agglomeration effects, some of which are good (urban density is associated with higher productivity of labor and capital), and some of which are bad (housing is more expensive and traffic slows down).
Upgrading informal settlements
This week, we’re looking at informal settlements (aka slums, favelas, shantytowns, barrios, etc.), which develop when urban growth outpaces or precedes city planning. In Jakarta, one of the largest cities in the world, millions of people live in “kampungs,” poverty-stricken neighborhoods where residents build homes with whatever material they can lay their hands on, often on improvised, unpaved roads, frequently without reliable sewage, drinking water, or electricity. Like other informal settlements, kampungs tend to have lots of tiny land parcels but few tall buildings.
During the 70s and 80s, the city of Jakarta spent $500 million to upgrade the worst of the kampungs. They expanded basic services in the target neighborhoods (with new roads, bridges, drainage, drinking water, schools, and health clinics) and offered residents a 15-year guarantee that they wouldn’t be evicted, to prevent gentrification from driving out the people the program was designed to help. The program benefited five million people, improved material conditions for 25% of Jakarta’s area, and was widely hailed as a success. In fact, it became a model for cities around the world.
But economists weren’t so sure.
How tall are the buildings?
Researchers from the University of Pennsylvania recently evaluated the long-term consequences of Jakarta’s improvement program, using cutting-edge methods. In 2018, decades after the improvement project had concluded, scholars Mariaflavia Harari and Maisy Wong compared land values and building heights in areas where the improvement project had been implemented with areas that it didn’t reach, using a sophisticated methodology to make sure the areas had been similar before the project began. (They applied what’s called a boundary discontinuity design, comparing communities a few hundred meters on either side of the improvement zone borders.)
The researchers found that the improvement project had actually slowed down the “formalization” of the affected areas. Compared to similar areas that hadn’t been upgraded, the “improved” neighborhoods of Jakarta today have:
· 12% lower land values
· 50% fewer tall buildings
· Greater informality (i.e. lower quality buildings and infrastructure)
· Smaller land parcels
· Worse vehicular access. etc.
In the short run, the researchers concluded, slum upgrading (yes, that’s what they call it) may be beneficial in the sense that it improves land values. In the long run, however, it locks in the small, irregular land parcels that are characteristic of informal neighborhoods. With improved infrastructure, the people who live in the kampungs are more likely to hang onto their land and less willing to sell. Redevelopment thus makes it harder for businesses, landlords, and developers to accumulate enough land to build high-rises, develop commercial establishments, or launch new businesses.
Helping people is a barrier to efficiency
Thus the slum improvement projects prevented more efficient urban development, and here we get to the word economists use to cover a multitude of sins. When cities develop according to the law of supply and demand, land closest to the center tends to be the most expensive. (If this sounds obvious to you, you’re right, but in economics this principle comes with a name – the bid-rent curve – and a graph.) So it’s inefficient to maintain low-density residential districts, for example, in the heart of a city, no matter how nice it might be for the people who live there. Where kampungs are close to the city center and therefore have a high “market potential,” it would have been more efficient to tear them down, “relocate” or “rehouse” residents in less desirable parts of the city, and build structures that ought to be in the central business district: high-rise apartment buildings, shops, and businesses. This efficient development happened as predicted in kampungs where the profit motive was left to run unchecked, but the “friction” of government interference – developing infrastructure and safeguarding property rights for poor people – prevented it from happening in the upgraded parts of Jakarta.
What’s a city for?
This was the lesson in our class, but it left me and some of my classmates bewildered. Why measure the effectiveness of the project in terms of land values and building heights? What about the wellbeing of kampung residents – their health, education, income? Isn’t that a more relevant guide to the benefit of the improvement project than land values? Isn’t it a good thing that kampung residents were able to stay in their homes while services around them improved?
And what about their former neighbors, whose neighborhoods developed more efficiently without messy government interference? Where are they now? Were they compensated when their small shacks were bulldozed and their small property parcels consolidated to make way for profitable new apartment buildings? Did they receive a nice new apartment in exchange for the shack they gave up, or were they forced to leave through coercion or even violence? (There is no guarantee residents are properly compensated during slum redevelopment, our professor told us, given that poorly defined property rights are a hallmark of informal settlements.)
The data suggests people dislocated by urban redevelopment usually end up much further from the city center: do displaced former kampung dwellers live where they can still access the jobs, schools, shops, and other resources that they moved to Jakarta for in the first place? Or are they worse off today, while successful entrepreneurs dine out on the profits from the shiny new stores, busy office buildings, and high-rise apartments that have replaced their old neighborhood? If the neighborhood benefited but the people who lived there didn’t, is that a victory?
Why do we build cities in the first place? So that people can flourish? Or so buildings can grow tall and land values increase?
I couldn’t find stories about people displaced from Jakarta’s kampung, but I dug up some stories of families in India who were rehoused during urban redevelopment. K. Raja, for example, had lived his whole life in a slum in Chennai, where he was a commercial painter, but he was evicted in February 2017 as part of a government-run redevelopment and resettlement plan. He and his neighbors were given one day’s notice that their homes were about to be demolished. While construction crews began making more productive use of the land, Raja was relocated twelve miles away. In his new home (an eight-story building in a massive public housing project), he has been unable to find work. His apartment floods when it rains, and his daughter is frequently ill from the damp. “There we had a community, we had jobs, and we lived with some dignity in our own homes,” he said. “Here, I can’t find a job, I don’t know my neighbors, and the hospital is far away. We have been dumped here like orphans with no help.” This is the model of slum clearance that Jakarta’s improvement project was designed to prevent.
Economics in action
When I and others pressed our professor on the subject, he laid out data showing that Jakarta suffered a net loss in economic surplus from the kampung improvement project. I have no reason to doubt the analysis or the math. On balance, the city is poorer for having upgraded the kampungs. Land values are not as high as they could have been, and land isn’t used as productively as it might have been. As for who benefited and who lost from allowing economic change to take its course unimpeded by well-meaning public officials, that’s a matter of distribution. You should pay people to move somewhere else, the professor said, and take advantage of the land to maximize economic development.
And here we get to the heart of the matter, the unholy alliance between the people who profit from deregulated markets and the scholars whose models rationalize the pain and damage markets cause. Graphs obscure the stories of the losers. Statistics demonstrate that everyone benefits. When efficiency and equity come into conflict, economists may say, “choose efficiency, and then redistribute the surplus.” Make more money, and then we’ll have a bigger pie to share. It’s the same fiction that lies at the heart of free trade: deregulated international trade may hurts some people and helps others, but don’t worry – we can redistribute some of the gains and make the losers whole. Everyone wins!
Inequality and big cities
Let’s face it, though. Cities in which millions of people live in slums are never going to be engines of prosperity for those millions of hopeful, desperate, hardworking people. The very existence of mega-cities is an indicator of economic inequality. Maybe it’s an engine of inequality. It turns out that the larger the city, the greater the level of inequality, and that’s true whether you allow informal settlements to evolve without regulation, forcibly evict and relocate poor people, or upgrade infrastructure.
There’s no simple policy solution for these problems. The sort of structural change necessary to reverse inequality goes beyond the reforms we discuss in this class. But I do have a methodological caveat: be skeptical about theories that abstract too far from the lived experiences of real people.