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THE ECONOMICS OF HOUSING POLICY fora DEVELOPING ECONOMY:
SOCIAL SCIENCE RESEARCH CENTER UNIVERSITY OF PUERTO RICO 1967
THE ECONOMICS OF HOUSING POLICY FOR A DEVELOPING ECONOMY: PUERTO RICO*
by:
Charles A. F;-ankenhoff
A Study of the Social Science RFsearch Center University of Pur'rto Rico, R!. Piedras ~ ~ a
June 1957
\ *This is a preliminary release for. commentary and suggt>st .ns. The footnotes are not included.
1; TABLE OF CONTENTS Page Chapter I
- The Economic Role of Housing The Economic Role of Construction in Puerto Rico.
7
- The Economic Role of Housing in a Developing Economy
10
Background: The Developing Economy The Economic Concept of Lou-Cost Housing 1. The Stock Concept of Housing 2. The Flow Concept of Housing a. Housing Demand Unlimited b. The Economic Contribution of Housing Production
12 14 14 20 21
Appendix:
Chapter II
Chapter III
1
The Need for an Economic Housing Policy A Rational Housing Policy for Puerto Rico Aggregate vs. Rational Housing Policy 1. Housing Needs 2. Employment Fluctuations 3. Importing Capital Funds
24 29
Wanted:
Chapter IV
A Systems Analysis for Housing Policy in Puerto Rico Introduction of Systems Analysis The Housing Problematic in Puerto Rico 1. Resources Available - GNP 2. Budgetary Allocation of Resources to Housing 3. The Efficient Use of Resources Allocated to Housing Systems Analysis and the Housing Deficit Approach
Chapter V
- Economic Choice and Housing Policy
- The Housing Market:
40 40 42 44 48 52 53 55 55 57 59 52 53
Objectives Alternatives Costs Models Criteria Chapter VI
31 32 34 35 37
A F:esh View
67
Page Chapter VII
- The Finance Va..iable in Housing Policy
C2
83 Factoring Out Subprublems Subproblem 1. Private Sector - Public 88 Sector Relationshi..p Private 2. The Role of Subprobiem Enterprise in the Construction of Low-Cost 93 Housing Subproblem 3. Distribution of Construction According to Family Income 95 Capacity Subproblem 4. Residential Construction by the Popular Sector 96 97 i. Urban vs Rural 99 ii. New Construction vs. Improvements iii. Technical Supervision vs. Non99 technical IV. Authorized vs. Unauthorized 101 Construction 101 V. Land O coed, Rented, or Free 102. Subproblem 5. Housing Unit Pricing 103 Subproblem 6. Housing Subsidy Objective Subpr.obaem 7. Mortgage Guarantees as Instruments of Housing Policy 109 Subproblem 8. Domestic vs. Imported Capital 109 Subproblem 9. Balance of Payment Perspectives and Objectives 112 Subproblem 10. Research for Housing Policy +15 Appendix: Puerto Rican Budget Analysis and Housing Criteria: A Critique 119 The 1938 Budget for Public Housing .23 Chapter VIII
The Pj.oblem of Proºramming, Housing Production Patterns in Housing Production in Puerto Rico Housing Production Criteria for the San Juan Metropolitan .Area Criteria for Assigning Priorities to Alternative Housing Programs 1. Residential Construction as Proportion of Domestic Capital Formation 2. Developing the Savings Potential (S) 3. The Pooductivity of Construction Labor 4. Efficient Use of Materials 5. More Effective Land Use 6. Production for Consumer Preferences 7. The Inflation Factor
126 125 137 133 137 1.39 141 143 143 144 145
iv Chapter IX
Chapter X
- Social and Economic Criteria for Sum Development
148
Socia' Perspectives Economic Elements of Slum Development The Labor Force Variable i. The Capital Formation Variable ii. iii. The Trade Variable
14C 153 154 155 155
The Search for Employment Criteria A Suggested Aoproach to Employment Criteria 1. The Use and Development of Labcr Skills 2. Increasing Labor Productivity 3. Growth and Stability of Construction Employment 4. Wage Increases in the Construction Sector 5. Unemployment in the Construction Industry 3. The Flo., of Reliable Statistics a. Labor Productivity Data b. Construction Activity by the Popular Sect:-r
Chapter XI
Price Level Changes in the Construction Variables Subproblem 1. Subproblem 2. Subproblem 3. Subproblem 4. Subp:oblem 5. Subproblem 5.
Chapter XII
Changing Consumer Price Levels Rising Land Pri-es Changing Credit Costs Rising Construction Labor Costs Changing Costs of Construction Materials Changing Overhead Costs
Towards an Institutionalized Housing Policy Housing Administration and Policy Making Housing Policy and the Community 1. Public Agency 2. Regional and National Coordination Coordination with the Private and Popular Sectors 4. Data Collection and Research Programs
I
Page
157 160 i.J2 1.34 168 171 173 178 179 179 181 162 185 188 189 191 191 193 193 1.97 1.99 203 205 203
V
LIST OF TABLES, DIAGRAMS, AND CF?AP.TS
I. TABLES Page Private Housing Construction Permits in San Juan Metropolitan Area as Percentage of Total Housing Construction Permits 92 in Puerto Rico New Public Housing Units in San Juan Metropolitan Area as Percentage of Total New Public Housing Units in Pi.erte Rico. . 92 94 Allocation of 1963 Puerto Rican Budget for Public Housing . . . 98 Some Characteristics of Urban and Rural Housing Units Concrete Housing Units Produced Annually under Programas 100 ti Sociales, 1950-1963 110 Sources of Capital Funds, 1960-1965 111 External Capital Invested in Puerto Rico: Long Term 121 Housing Function in Puerto Rico's Budget 128 New Housing Units Produced by the Private and Public Sectors. . Housing and Population: Percentage Increase in Units, 129 Puerto Rico, Fiscal Years 1956-1965 Countries Grouped in Relation to Housing Construction per 130 1000 People, 1962 132 Group Income Percentage Distribution of All Families by 146 Total Acquisition Cost: Yearly Averages 162 Wage Differential for Seven Groupings of Construction Workers . Labor Productivity in the Construction Sector of Puerto Rico, 166 1960-1965 Distribution of Man-Hours per $1000 of Contract Cost, by Major Types of Construction, Industry, and Occupation, 1959-1962 . . 167 169 Employed Persons by Industry: Fiscal Years 1950, 1960, 1966. . 170 Unemployment Rate by Industry and Month 174 Employment and Unemployment in Puerto Rico, May 1965 Hours of Work Needed to Eliminate Unemployment of Male 176 Family Heads, 1963 Statistical. Errors in the Estimate of Labor Force, 180 Employed and Unemployed The Consumer Price Index for Wage Earners' Families in 183 Puerto Rico, 1964 and 1965 187 Changing Price, FHA-insured, One-family Homes, 1959-1965 190 Weekly Median Salaries, by Industry, Puerto Rico II. DIAGRAMS Puerto Rico Construction Diagram: Flow of Funds Spectrum Model of Housing Production in Puerto Rico Planning Board
88 134 201
III. CHARTS Consumer Price Index for Wage Earners' Families in Puerto Rico. . 184
CHAPTER I
THE ECONOMIC ROLE OF HOUSING
In the technical discussion of a subject as familiar as housing, it is difficult to escape from the traditional images of home.
These images
have their roots in culture, in politics, in religion, and in the memories sacrosanct to each family.
They have strong emotional overtones.
They
resist change. In this study we propose to take a new look at housing, a look which sees the housing unit not as a home but as a business which produces services, as a key element in capital formation and as an integral part of the urbanization process. Specifically, the focus or the analysis is in terms of the economic role of housing in the developing economy of Puerto Rico.
The goal is to
lay the groundwork and to provide the basic criteria for a continuing rational housing policy.
In this connection there is a temptation to
present a wealth of data on the development of housing in Puerto Rico. Indeed, a great deal of data is available although it is still far from adequate.l
The criterion to be used in determining which data to use is
rather simple. ~
Phatever data which helps us to establish or clarify the
criteria needed to evaluate alternative housing programs will be presented. Even this data will not be presented in exhaustive fashion but only as a sample of what might be needed for decisions by a housing policy authority. The presumption is that making housing policy is a continuing process of study, evaluation and decision-making.
It is a process to be undertaken
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under the leadership of a public institution which seeks to rationalize and coordinate construction efforts by the three major sectors which produce housing:
the public, private commercial, and popul.ar.1.5
This coordination has important social and political implications which cannot be ignored in the decision-making process.
At the same time, in the
important area of economic development the role of housing remains largely unintegrated.
The justification for housing has been predominantly social
and political, and the economic impact has been ignored or discounted as secondary.2 Housing policy is a function of the total development policy of the country.
It must be faithful to the needs and capacities of the people of
each region of the country.
At the same time it should contribute to the
economic development of the whole country.
The decision to construct housing
units influences the flow of money and credit, the availability of employment opportunities, and the production of basic materials.
The type of home and
community services influence directly the ;willingness of people to stay within a community.
The relation of the urban community to job opportunities
is aleo a significant one. In fact, a brief reflection on housing and housing policy immediately draws attention to the related policies of urbanism and regional planning. Housing policy is very much a function of urbanization policy, and the decisions by the several sectors to construct housing units is an important factor in regional development. Under the circumstances it might well be asked, Why is housing policy something special?
Why should it receive special attention when there are
so many other important policies, e.g, industrial, agricultural, wage, and
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urbanization, which are intimately associated with the economic and social development of the country? The definition of housing policy as an economic policy to be found in the same spectrum with monetary policy and fiscal policy will be considered in Chapter III.
The justification for the special consideration of housing
policy in a developing economy will occupy us for a moment here. In the first place, the house becomes a home and therefore something which enters intimately into the lives of the families of the country.
If
the criteria for any economic system are economic security, economic liberty, equitable distribution of wealth, production in accord with consumer demand, and a rising standard of living, a moment's reflection shows that the possession of a home fulfills these criteria in a way that no other economic element can.
This home, in addition to its social function, is the major
investment of the family in a developing economy.
It represents security
against social change, monetary instability, and political instability.
It
reflects the economic condition of the family and can be improved over time to match an increase in the family's standard of living.
The family with
a home has a stature in society, and in its own eyes, which the nomad family does not have. In the second puce, stable communities are formed by families in such homes.
The family alone is insufficient to satisfy its own needs.
live in community and participate in community life. community participation far more meaningful.
It must
Home ownership makes
Each family owning--or begin-
ning to own--its own home has a social and economic stake in community development which it would not otherwise have, especially in a community largely formed by those who have not been formed by generations in urban
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living.
Thus housing program decisions enter directly into community
development, channeling it or distorting it.3 In the third place, a great number of key economic forces find their focus in the development of housing.
There is the whole set of variables
related to the infrastructure itself, to the construction of roads, utilities, schools, health centers, etc.
There is the set of variables involved in the
urbanization of land and the production of housing units.
Finally there are
the markets and maintenance services needed to support the given urban area. It is true that the economic and social complex whose focus is the home depends on job opportunities, but these can be considered as export-import relationships as well as in terms of industrial or agricultural development within the housing complex.
In fact, with the advent of computers, this
separation of home and production line may he expected to diminish.
We are
seeing now, in fact, the development of office space and tertiary services within the living centers of the urban complex. In the fourth place, housing investment plays a special cyclical role. The construction cycle is considerably longer than the business cycle with real possibilities for economic stabilization through housing policy decisions In the fifth place, the close relationship of housing starts with credit conditions makes construction schedules depend greatly on conditions in the capital markets, on the cost and disponibility of medium-term and long-term funds.
Short- to medium-term loans are needed for the construction itself,
while mortgage financing requires long-term funds.
In this case the housing
sector is in active competition with industry and commerce and other demanders of capital funds.
Still the construction sector demands for funds
cannot be simply catalogued under monetary policy or fiscal pnliey_
The
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special nature of housing and its direct relation to consumers (or investors) and producers precludes the location of housing policy as a variable dependent on either monetary or fiscal policy, or even on industrial or urbanization policy. In the sixth place, the proper operation of housing policy involves the coordination of housing production and improvement among three significant sectors of the economy: the public sector, the private commercial sector, and the non-commercial popular sector.
The initiatives to be taken by
housing policy decision makers in each sector are necessarily different, but they need to be integrated within the current rate of growth of the economy.
The housing policy decision unit may exercise direct control over
construction by the public sector through its programming.
Its control of
the private sector will be indirect through its fiscal structure, certain land subsidies, zoning guide lines, and other means.
The control over the
popular sector is also indirect in terms of the informal housing initiatives taken by lower income families.
It may be direct when related to the pro-
duction of low income public housing, e.g. low-rent public housing, or through loans given by the Puerto Rican Housing Bank. In the seventh place, there is the phenomenon of urbanization which is found in countríes in development' as well 'as in the more economically mature nations.
This urbanization process finds that housing policy decisions act
as relatively independent variables.
The decision to build a series of
condominiums, for example, rather than a vast area of single-family residences, will change the face of the city, including its needs for transport and utilities.5 All of these reasons taken jointly appear to justify an analysis in which an economic housing policy is developed, at least in outline form.
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This outline form should serve as a base for the development of housing policy, including the selection of programs. alternative programs.
Housing policy is faced 'yith
It needs to determine the kind of program mix which
will achieve given objectives, including the fundamental objective of contributing to economic development.
Housing policy also needs to generate
the statistical control program needed to establish a learning feed back which operates while the programs are in process.
It is not sufficient to
wait until the end of a given political office to determine if the construction effort was a success or failure.
There should be a continuing relation-
ship in which housing policy officials are in contact with the programs while they are in action so as to determine whether or not they are operating according to the pre-established program. This study proposes to establish the bases for an economic housing policy in the developing economy of Puerto Rico. two parts.
It will be divided into
Part One will be concerned more with the conceptual, the
methodological, and the theoretical.
Part Two gives more attention to the
statistical analysis needed to launch an economic housing policy on a continuing basis.
This division is one of emphasis rather than of logic.
For example, housing financing is assigned to Part One in the development of the analysis.
--
Chapter I:
Appendix
The Economic Role of Construction in Puerto Rico Puerto Rican Aspect:
The Problem
The rapid growth of the Puerto Rican economy in the past ten years is the result of a number of forces, economic, social, and political. There has been political stability and openness to change; there has been a certain social mobility reflected by internal immigration into the city and emigration to New York, Philadelphia, Chicago, etc.; there has been a vigorous program of economic development. One of the important forces sparking economic growth has been the developing construction sector.
This includes not only residential con-
struction, public and private, but also non-residential commercial and industrial buildings, urbanization, highways, schools, and hospitals.
In
recent years about two-thirds of the Gross Fixed Domestic Investment in Puerto Rico has been in the construction sector.
In terms of derived
demand we see that this growth generates new employment opportunities, attracts an increasing flow of capital funds, and stimulates domestic industry, e.g., sand, cement, steel rod fabrication. From this point of view the construction sector of the Puerto Rican economy is the focal point of the significant economic forces operating on the island and in relation to it.
There is the labor force, related as it
is to demographic changes including birth and death rates and immigration rates.
There is the labor force as a function of the educational system of
Puerto Rico with its important consequences for labor productivity. Secondly, there is the flow of investment funds.
This involves the use
of domestic savings, the initiation of mortgage operations by the domestic
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banks (and their consequent sale in the New York capital market).
This
involves the attraction of foreign capital funds directly through mortgages and indirectly through outside ownership (usually United States) of large contracting firms.
Then there are the forces generating speculative changes
in land prices and general changes in wholesale and consumer price levels. There is the guaranteeing operation of the FHA and of the other Federal agencies engaged in construction or in the encouragement of construction, including renovation. Finally we find that many of the forces of industrial development are found to be operative in the construction sector.
There are first of all
the infrastructure forces, e.g. construction of highways, ports, acqueducts, sewers, electricity, and telephone lines.
These forces are also involved
more directly in the urbanizing of land prior to the construction of residences, offices, etc.
A large part of these developments, it is true,
involve public authorities rather than private industry, but the economic impact of the operations may be assumed for our purposes to be more or less equivalent.
There is the development of the construction industry itself,
with its general contractors, special project contractors, subcontractors. Intimately associated with this development are the architects and engineers. (We have already mentioned the rapid development of the financial "industry" related to construction credit). On the production side of the construction sector we find the growth of the industries producing stone, clay, glass, cement, and related products. In fact, the Puerto Rico Junta de Salario Mínimo groups these industries into one Industry for the purpose of its salary recommendations. this Industry included 266 plants:
In 1961
13 making glass products; 6 making
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Portland cement and other construction materials; 158 making concrete products; 7 involved in mineral products (less related to construction sector); and 72 in the rock, said, and gravel sector. On what might be termed the consumer side of the construction sector we have wholesalers and retailers o£ furniture and other household durables. There are real estate brokers.
There is the development of financial
intermediaries engaged in construction loan activities. (Income yield of construction sector, e.g. total rent, social benefit from highways, does not concern us here).
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CHAPTER II
THE ECONOMIC ROLE OF HOUSING IN A DEVELOPING ECONOMY
Is housing productive?
This question is still asked seriously and
tends to be answered negatively.
It may be granted that a worker is more
productive when he lives in a better home, but the direct economic productivity of housing is generally considered to be low.
The implication
of this low productivity for the development of an economic housing policy was considered briefly in the preceding chapter.
Now we are concerned with
defining what is meant by the economic role of housing in a developing economy. In stressing the economic function of housing there is no intention of downgrading its socio-cultural significance.
This social aspect of housing
has received such emphasis, in fact, that the economic role tends to be neglected.
We are concerned with the economic role of housing because of
its relationship with economic development.
The services produced by the
ho+.istg unit and the production of housing belong essentially to the economic process and should be considered from this perspective.
It is also
true that any discussion of economic housing policy must be preceded by a careful delineation of the economic role of housing. The working hypothesis of this analysis is that housing does not just play an economic role but a crucial economic role in a developing economy. To state this hypothesis is immediately to enter into an arena of opposition among economists themselves.
If the opposition tends to be mild it is
because economists tend to assign housing a social priority rather than
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economic.
Among those who are concerned with the programming of areas in a
developing economy, the majority holds that housing is either economically neutral or in direct competition with industry for scarce resources.
Among
those who are concerned with housing and the problems of capital formation in a developing economy, a majority is of the opinion that housing investment competes with economic development.
Vice-President Hubert Humphrey expressed
this view neatly in a l9ú5 Urban Development Seminar under the auspices of the Agency for International Development.
In a brief examination of past
attitudes which downgraded housing, Humphrey remarked:
"Several years ago
there was a feeling on your part and on ours that things like housing were luxury investments that would have to wait on the building of more factories, more power plants and more roads.
Housing, so they said, was not productive."
It might be well to list at this point the basic argument in its several forms advanced by those technicians who insist that the developing economy must choose between housing and other capital investments: 1) Housing is an unproductive form of capital investment.
Charles Abrams
describes this position aptly as the "Devil-Take-Housing" argument: "It generates no foreign exchange, competes with industry and agriculture for scarce capital, draws off needed labor and materials, and may even be inflationary."1 2) Housing yields a high capital-output ratio.
Jan Tinbergen estimates
that housing needs an investment of $8.20 per dollar of output while a commercial enterprise needs only one dollar of additional investment to produce another dollar.2 3) Housing is a social necessity and is therefore a social problem. The production of housing units should depend on socio-political needs and pressures.
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4) Housing in a developing economy plays substantially the same role as it does in the mature industrial economy, where income from housing is a minor segment of the national income accounts.
Background:
The Developing Economy
Ignoring Puerto Rico for the moment, let us take any developing Latin economy, "Bolívar", as the environment of this analysis of the economic role of housing. are low.
The capital resources of Bolivar are limited.
The rate o£ investment is low though growing.
Domestic savings
Manufactured materials
are relatively scarce, expensive, and of uneven workmanship.
The, labor force,
still largely rural, is numerous, unskilled, and only partially employed. Bolivar typically suffers from capital flight engendered by fear of inflation, unusual taxes on capital, and general monetary instability. exists a chronic imbalance in the balance of payments.
There
The economy depends
on the export of primary products to pay for its imports of machinery, drugs, and chemicals.
The accumulation of foreign exchange through such exports,
however, is not dependable in a world of trade in which the prices of primary products change abruptly from year to year.
The resulting uncertainty in the
accumulation of foreign exchange accentuates the current budget deficits. In this way a climate of inflation and of monetary uncertainty is generated and sustained. The infrastructure of Bolivar., e.g. its roads, warehouses, electricity, schools, public health center, commercial facilities, is inadequate and unbalanced in its development.
A few cities are highly developed.
Others
have a minimum of economic infrastructure. In spite of everything, our typical developing Latin economy is undergoing a vigorous process of change and growth.
The sociology of this change
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is of the greatest significance but has only recently been subject to intensive study.
Part of this process, urbanization, is of special interest
to housing professionals.
The normal pressures of urban development have
been increased and even distorted by mass internal migration from the rural to the urban population centers.
Highways and buses make it easier to move
from the country, and the superior life of the city attracts the "campesino". One inevitable result of this mass movement of the rural poor and unskilled into the relatively disorganized metropolitan area is the creation of slum housing areas. housing in a hurry.
Families and individuals need vast quantities of
Crowding together, invading unused lands, these people,
whom we shall identify with John Turner produce their own housing.
5 as constituting the popular sector,
The private commercial sector ignores them.
The
public sector .is not prepared, due to fiscal and personnel weaknesses, to provide needed housing nor needed construction controls. Now let us step back from this close-up view of the economy of Bolivar to stress the kind of housing unit which is relevant to this analysis of the economic role of housing in a developing economy.
Our primary interest is
in low-cost housing, be it produced by the private commercial sector, the public sector, or by the popular sector--for the following reasons: In the first place, the vast proportion of families in Bolívar are low income families.
Probably the upper income class plus the middle income
class constitutes less than 25% of the total.3 Low income families constitute well over two-thirds of the total families.
In the second place, low-cost
housing is distinct from high-cost housing in its economic consequences for development.
Low-cost housing requires less capital which can be gathered
largely from local sources.
Low-cost housing readily uses relatively
unskilled labor and locally produced materials. In the third place, and by
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way of contrast, housing for high income families is more likely to use capital which is ripe for investment in other enterprises.
It will also
tend to require skilled labor and imported construction materials.
The Economic Concept of Low Cost Housing
It will be useful not to be over precise in our description on low-cost housing.
The temptation is to put down limits in terms of size cubic space
per person, or value.
Chilean law, for example, established in the past a
maximum of 150M2 of constructed area for low-cost housing.
This would hardly
be considered low-cost housing in other countries, nor is it really in Chile. As an operational definition we may characterize a housing unit as "low-cost" which is within the capacity to pay of low income families in the particular urban area.
The actual levels could easily be specified for the
particular region at a particular moment, but rapid price changes and changes in the availability of credit make such determinations academic.
Housing
therefore may be regarded as "low-cost" which in some way fits the purse strings of lower income level families living in an urban area.4
The lower
income families in a developing Latin economy constitute at least two-thirds of all families. The analysis of the economic role of low-cost housing in a developing economy can be analyzed in two divisions:
1) the static or stock concept
o£ housing, and 2) the dynamic or flow concept of housing.
1) The Stock Concept of Housing
A great deal of discussion about the economic role of housing loses its sharpness when the distinction between housing as a stock and housing
as a flow is not kept clearly in mind. The stock concept of housing refers
to housing units in place and producing services. rich
is measured in the in ~e~uc
It is a wealth concept
iy taken censli3 o. housing.
ZhL flow
concept simply refers to the production of housing units. Usually the hog ing planner begins with estimate of housing deficits.
the s't~ck concept to make h:..
He takes the current housing inventory, sub-
tracts the number of substandard units, and compares with the number of households.
To make projections of the housing deficit he will calculate
the expected rate of household formation and compare with available standard housing units after subtracting
anticipated losses to the housing inventory.
Once the housing deficit is established on the basis of given population projections then the housing planner begins to think in terms of the flow concept, i.e. in terms o£ the production of housing units.
From this pers-
pective the flow concept becomes the dependent variable with the stock concept treated as the relatively independent variable.
Later we shall try
to show why this perspective is not correct. The economic planner then takes the estimated deficit and tries to
incorporate enough housing investment into his liort and long term planning to balance the formation of new households and to reduce the existing deficit.
His difficulty is that he has to justify this investment in
housing in the face of other, apparently more productive, investments. must therefore establish investment priorities and criteria.
He
One criteria
he will probably use is some kind of capital coefficient to measure alternative investment productivities.
On the basis of these criteria, housing
investment is generally assigned a low economic priority. A brief analysis of one commonly used capital coefficient, the capitaloutput ratio°, may be introduced at this point because it illustrates very well the distortion which has taken place in measuring the economic role of housing stock.
We begin with the denominator of this ratio output.
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The villain in the piece is current national income accounting procedure. Under this accounting procedure housing finds itself in an ambiguous position. From one point of view the national income accounts consider housing investment as capital formation together with investment in plant and machinery and in other types of construction.
Thus, depreciation on owner-occupied
homes is added to the capital consumption allowance account.
From another
point of view the social accounts measure the return on this capital by rent alone.
Among economists there are some who would classify housing as
"unproductive" capítal or "consumer" capital. Others would agree with Simon Kuznets that housing should be treated as productive capital.8 The problem of ambiguity arises especially in the treatment of the yield from the existing stock of housing.
National income accounting assumes "that
home ownership is a business producing housing services which are sold to the home-owner in his capacity as tenant".g
On the basis of this reasoning the
rental value of owner-occupied homes is imputed to the national income. is not the imputation itself which concerns us.
It
It is the use of rent to
measure the totality of housing services produced.
On the one hand the
house is treated as productive capital, as a "business producing services", even to the extent that expenses for the maintenance of owner-occupied homes are classified as intermediate business purchases and charged to current account; on the other hand, the total value of the housing services produced during the year is represented by the rent factor alone.
The productivity
of a factory is never measured by its rent, but this is what is being done by the national income accounts in the case of housing. Actually the house is far from being the dead end in the production process which national income accounting implies.
As a production center
the house has its inputs of labor, materials, and credit.
It is true that
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generally the labor of the home-owner and of the housewife are ignored by the national income accounts.
On the other hand, if the owner hires a
major-demo for himself and a cook and maid for his wife, the national income rises accordingly.
A recent estimate assigns an opportunity cost
of $8,OOO for normal economic services by the housewife in the United States. On the output side the services produced by a house have a definite economic value, together of course with the social and psychological imponderables mentioned at the beginning of this chapter.
The economy receives
hotel services, restaurant services, recreation, warehousing, and parking services from the house.
In the developing economy, including Puerto Rico,
the house may often be used as the center for a small commercial enterprise.lO The use of rent, either actual or imputed, to measure the value of the production of housing services is clearly inadequate.
We are not suggesting
here that these changes be incorporated into the national accounts, but only that we cannot assume that national income accounting automatically reflects the role of all economically productive factors. If we agree that rent is a questionable denominator for the capitaloutput ratio, we can turn to the concept of capital found in the numerator of this ratio.
There are a number of difficulties related to its use espe-
cially in a developing economy.11
In the first place, while the concept of
housing investment is clear enough, the actual assignment of urbanization costs to the capital expended is far from being standardized.
Land
urbanizing requires a number of arbitrary allocations of cost.
There is
also the fact that inflated urban land costs tend to distort the structure of housing costs.
Finally, there is the difficulty of assigning the costs
of direct and indirect subsidies to the investment in housing units.
In
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each case the decision to assign or not to assign may change the value of the capital coefficient substantially. In the second place, there is the fundamental difficulty, especially characteristic of the developing economy, of getting accurate and homogeneous statistics over time by sector.
Such statistics may be found in the export
sector due to the dependence of the economy on export-import taxes. not be found in the construction sector.
It will
This is even true in the United States
'where construction statistics are notoriously inadequate.12
Without such
statistics the calculation of capital coefficients on a sectoral_ basis becomes an academic exercise. Thirdly, apart from the technical difficulties involved in gathering useful residential housing statistics, there is the fundamental objection which may be advanced against the very use of a capital-output ratio to determine investment príorities.l3
The objection is based precisely on the
complementary factors of unevenness and uncertainty which characterize the developing economy. The uneven development of the infrastructure, for example, suggests that capital cannot be steadily absorbed on some marginal basis.
Rather there is
to be found a characteristic lumpiness in social and economic institutions which tends either to overestimate or to underestimate the productive role of additional capital.
The assignment of priorities becomes unreal because
of the innate instability of the capital-output ratio in a developing economy.
This instability increases in proportion to the political uncer-
tainty and price level changes in the country. From another point of view, it is clear that the use of any capital coefficient to measure investment productivity assumes that the non-capital factors can be placed for the moment in Alfred Marshall's Pandora box of
-19-
"ceteris paribus".
The difficulty is that these non-capital factors, be
they political, social, or economic, are precisely the ones which play the major role in determining the productivity of additional capital.
To use
a marginal productivity analysis of capital such as Rosenstein-Rodan has suggested (i.e.) in which it is assumed that the supply of all factors other than capital remains constant) is to ignore this fact. In the United States, for the past 150 years the stock of housing has played a major role in the national balance sheet.
Residential housing has
accounted for some 257 of the total reproducible wealth and for 407. of the total value of the country's structures.
Within the non-farm household
sector, the value of housing tends to surpass that of all other durable tangible assets combined.l4
The "reach" of housing into the economy has
been of consistent importance in the United States and can be expected to play a no less important economic role in the future of the developing economy. The attempt to apply United States experience in housing to a developing economy would be a poor kind of induction, but so far as family habits are concerned it seems fair to say that having a home with a mortgage encourages the family to discipline itself and to save.
It is also interesting to note
that Goldsmith and Lipsey14.5 have found that home ownership motivated savings, home-owners tending to save more than non home-owners.
It may
well be that the traditional view of the mortgage as a millstone around the home-owner's neck needs re-evaluation.
•
A final important point related to the economic role of housing taken in its stock concept is that of investment.
The house is typically the
major investment of the family, especially of the lower income family in the developing economy.
The house represents economic security as well as
-20-
social security.
The importance of the investment role of housing becomes
even clearer in the not typical inflation-ridden developing economy. owners can ride out the storm of inflation better.
Home-
Even the burden of
mortgage payments becomes lighter in the process, although adjustments have been attempted, e.g. in Chile and in Brazil, to maintain equity in such payments through some kind of monetary correction.
2) The Flow Concept of Housing
If one considers the stock concept of housing to be reflected in the national balance sheet as wealth, then the flow concept is to be found in the national income accounts as new capital formation.
The flow concept
relates housing unit production to a dynamic housing demand.
As such, it
cannot be simply reduced to the stock concept. Unfortunately there is a marked tendency among economic planners to make housing in its flow concept a dependent variable relative to the housing stock.
The standard procedure, as we have seen, is to evaluate the stock
of housing through some form of census, project anticipated gains and losses, and then to relate these projections to estimated changes in household formation.
The so-called housing deficit is the result of this mechanical
approach.15
standard minimum housing units which
people
There is a housing deficit approach which implies that 1) there are should have now, and 2) any
possibility of a satisfactory solution developed over a period of several years by the families themselves is to he rejected.
The housing deficit
easily becomes the albatross hung around the neck of the planner in the developing economy.
The planner in Brazil in 1955, for example, finds
himself with an 8,000,000 housing unit deficit.
-21-
At this point I should like to propose that the flow concept of housing be given the status of a relatively, independent variable in the process of economic development.
This proposal is based on two propositions:
1) aggre-
gate housing demand in the developing economy is unlimited, and 2) the production of housing units by all sectors makes a direct and highly important contribution to economic development.
By insisting on a certain priority of
the flow concept over the stock concept, we are claiming that the direct economic production is greater than the sum of services produced by the available stock of housing.
The economic consequences of this position for
planning should become more explicit as we analyze these two propositions.
a- Housing Demand Unlimited
The notion of an unlimited demand will seem strange to those reared in the traditions of microeconomic analysis.
It is true that the producer
in pure competition is visualized as having an unlimited demand for his product.
However, on the basis o£ any macroeconomic analysis aggregate
demand is never completely inelastic.
Just what is meant here by postulating
an unlimited housing demand for a developing economy?
Can the coefficient
of demand elasticity for housing be zero in any realistic evaluation? In the aggregate, yes; by type of housing unit, no. we find a constantly increasing need for housing.
In the aggregate
There is now the need
related to new family formation and the influx of new families into the cities.
There is also the need which is related to increasing prosperity
as economic development actually takes place.
This total dynamic need
belongs to the flow concept rather than to the stcck concept.
It is not
just a question of fulfilling some mechanical, necessarily abstract, housing deficit. units.
It is a question of meeting a durable growing demand for housing
-22-
This emphasis on housing demand as something durable in a developing economy makes more sense when one realizes that the President of the United States has predicted that housing in that mature and prosperous economy must be doubled by the year 2000. In the remainder of this century--in less than forty years--urban population will double, city land will double, and we will have to build in our cities as much as all that we have built since the first colonist arrived on these shores. It is as if we had forty years to rebuild the entire urban United States.15.5 If this continuing housing need is predicted for. the United States, the typical developing economy can hardly think in terms of exhausting its housing demand. The "No" mentioned above is stated with reference to the demand for particular housing by price types.
This is where elasticity, both price Even though the
elasticity and income elasticity, will play its role.
aggregate demand for housing units is expected to be dynamic and growing, the mix of housing demanded will be limited by price changes and by per capita income growth.
Elasticity of demand measures the responsiveness of
quantity demanded to changes in the price of the good.
Rising housing prices--
they seldom fall in any country these days--tap different segments of market demand.
Rising incomes and expectations influence the demand for housing by
type and style. Some consequences of unlimited housing demand plus the changing mix of demand for housing policy are worth further reflection.
In the first place,
housing policy will have to distinguish between the production of housing units by the three major sectors within the economy: sector, the public sector, and the popular sector.
the private commercial
An .important part of the
Turner thesis, for example, is the recognition of the significance of
-23-
production by the popular sector.
A family without a home and substantially
without savings or access to credit will build its own housing unit, even if it means building in a slum.
It does not wait to be declared a housing
deficit, but simply proceeds to meet its own housing need.
From this point
of view, housing demand elasticity in the popular sector is completely inelastic. Secondly, the objectives of housing policy become more operational. Instead of being formulated in terms of amortizing an estimated housing deficit without diminishing the rate of economic development, objectives can be set with reference to satisfying economic growth needs.
The housing
policy maker is now free to ask, Ghat combination of housing production programs should be planned in order to contribute to a better economic development? By granting the flow concept of housing its independence, the housing policy maker is free to ask for the economic credentials of each housing program alternative.
Housing policy in Brazil may decide for the moment
to limit its production of housing units to a rate of 1:1000 population; Israel to a rate of 10:1000 population. an absolute.
In neither case is the decision
It is based primarily on economic criteria related to a desired
rate of economic expansion.
Note carefully that the economics of housing
policy do not preclude decisions to build housing units for purely social reasons.
The point is to encourage housing policy decisions which seek to
integrate the .production of housing units into the total economic program. Thirdly, the relatíve independence of the flow concept gives housing A
policy a good perspective of the data it needs for rational decision-making. what is the potential of the private commercial sector for meeting the housing needs of moderate to low family income levels?
Can a series of
-24-
subsidies, producer or consumer, be developed to increase the production reach of the private sector?
Is the present budget allocation sufficient
as measured on some cost-benefit basis?
Is the tax structure calculated
to serve the low-cost housing unit needs?
that about the feasibility of
a program of home loan guarantees? When it comes to the question of housing unit production by the popular sector the problems multiply.
Even housing professionals can claim a great
ignorance of this phenomenon.l5
What is the process by which the popular
sector creates its housing units?
Does it necessarily create only slums?
Are there not different genres of slums?
What contribution can the public
sector make towards the formation of viable popular sector housing projects?
b- The Economic Contribution of Housing Production
At first blush there seems to be nothing debatable in insisting on the economic significance of housing unit production.
Nor is there much question
that housing unit production (i.e, the flow concept) is more important economically than the production of housing services (i.e. the stock concept). The difficulties arise when the economic planner thinks about how much to allocate to housing investment.
He feels immediately and mistakenly (as
we have already suggested) that housing investment competes with investment in other, probably more productive, sectors of the economy.
This reaction,
together with the granting of a low economic priority to housing, is still quite common.
T'e want to see here a little more positively why it cannot
be justified. In the first place, housing units are comparable to factories in being production units--this from the stock concept point of view.
Hot ever, in
terms of the demand for production of factories and the demand for production
-25-
of housing units, there is a great deal of difference between the two.
The
demand for factory construction is far more elastic than that for housing. Housing demand is durable and dynamic in a developing economy to a greater degree than that for capital investment in plant.
In other words, an economy
can absorb houses at a greater rate than it can absorb factories.
This point
becomes even truer when the balance of payments is considered, because factories usually involve the balance of payment, housing no.
This difference
suggest that residential housing contractors` ceteris paribus should have a more dependable and a more substantial business than business plant builders. In the second place, housing production involves essentially the key economic variables of employment, savings, and materials.
In this perspec-
tive it does not seem so distinct from the construction of factories. it is very much so.
But
Again with reference to the balance of payments the
factory is much more apt to need imported manufactured materials than the housing unit.
But even more importantly, there are differences within the
key variables themselves.
Instead of just using up scarce, skilled employ-
ment, scarce savings, and scarce materials, housing stimulates and increases their availability. In employment, housing (remember that we are referring primarily to low-cost housing) can use relatively unskilled labor with minimum of machinery.
One sophisticated urbanization recently constructed in Lima used 95%
labor, that is, only one small machine to lift concrete to the roof.
The
laborers are not highly productive, perhaps, but they are low-waged and tend to learn on the job.
This kind of housing development is not competing with
factories for skilled labor.
In fact it tends rather to add to their supply.
The vast majority of construction workers now in the rapidly-growing industrial complex of Concepción, Chile, came directly from the rural areas with a minimum of working skills.
-20-
With reference to the savings invested in the production of low-cost housing units, these need not be in competition with other kinds of investments, e.g. in stocks and bonds.
Families in the lower income category in
the developing economy do not consider these more sophisticated investment alternatives.
They do want a home and are willing to save for it.
the major investment of their lives is typically the home.
In £act,
Thus domestic
savings are stimulated and motivated by the desire to be home-owners, not factory owners.
Moreover the low income family accepts rather well the
discipline of regular payments on the mortgage.
In fact it is generally
agreed that percentagewise the lower income family does better than the higher income family in this regard.
It is true that the production of
low-cost housing involves the public works agencies of the government sector in necessary infrastructure investments.
Such investments should be eva-
luated on a cost-benefit basis just as any infrastructure investment should be.
Here the stock concept of housing in its production of economically
valuable services comes into play. Construction materials may be taken as a third key variable.
In the
production of low-cost housing their production domestically tends to be stimulated and justified.
A country such as Peru may have to import cement
temporarily while its productive capacity is being enlarged, but generally speaking the production of low-cost housing units should result in a minimum burden on the balance of trade. local materials.
Such housing, by its very nature, demands
There is also the multiplier effect, which has been
largely ignored, in the development of industries associated with housing, e.g. woodworking, hardware production, painting, and maintenance. To return to the problem of competition mentioned earlier, it seems fair to conclude that housing increases the availability of basic resources
-27-
while using them.
Indeed it increases them in such a way as not to compete
with the more industrially-advanced sectors of the economy.
The understanding of the economic role of housing in a developing economy requires the basic distinction between housing as stock and housing as flow.
Housing as stock assumes that the housing unit is a production
unit, although in no exclusive sense.
It is visualized ín capital formation
terms as a "business which produces services".
These services can be
measured on an input-output basis, although the national income accounts fail to do so.
The capital-output ratio which commonly uses rent as a
measure of the economic productivity of housing is rejected as inadequate. The "housing deficit approach" traditionally used by economic investment planners must also be rejected.
It takes the stock concept of housing
as its point of departure and attempts to determine housing investment negatively with reference to reducing a housing deficit rather than positively with reference to the contribution. The flow concept is thus treated as a dependent variable of housing in relation to the stock concept. The two key factors overlooked in the "housing allocation to housing investment deficit approach" are 1) the role of housing in its flow concept, and 2) the fact of extensive residential housing construction by the popular sector. ti?hen the flow concept of housing is taken as the relatively independent variable then the housing policy maker finds himself free to demand the economic credentials of each program or mix of programs.
what kind of
contribution will each make to current and projected economic development?
-28-
He is forced to set objectives which are operational and criteria which permit him to know if these objectives are being achieved.
In other words,
housing policy becomes rational; it takes its place as part of the total economic policy spectrum to which monetary policy and fiscal policy belong. Housing policy is oriented not towards control of all residential construction but towards the integration of housing unit development within the total economic development of the country.
In this connection an eco-
nomic housing policy is vitally concerned with full employment and monetary stabilization objectives.
-29-
CHAPTER III
THE NEED FOR AN ECONOMIC HOUSING POLICY
To paraphrase a famous Churchillian remark, "H wsi_ng is too important to leave it exclusively in the hands of architects and contractors".
Housing
is a basic social necessity and its production forms the major segment of capital in the developing economy.
Both the public interest and the private
interest are deeply involved in the housing field. Over the years any government f_tnds itself with a proliferation of agencies and programs related to housing.
These have generally grown "like
Topsy" without a great deal of coordination or intercommunication among them. Together with these agencies is a cluttered network of legislation related to housing.' Chile was a good example of such lack of coordination in the public housing sector.
The presidential candidate in 1954, Eduardo Frei, complained
that some 23 agencies and offices dealing with housing matters were largely uncoordinated.
His candidacy was successful, and one of his first official
actions in implementation of his program was to form the first Housing Ministry of Latin America (El Ministerio de la Vivienda y Urbanismo) in 1965. The formation of such a ministry is no panacea for a country's housing problematic, but it does constitute a formal recognition of the need for a coordinated housing policy in terms of planning, programming, and program evaluation. The housing situation in Puerto Rico has been perhaps less disjointed than that of Chile, but there has been the same basic lack of coordination. The Governor of Puerto Rico first noted this deficiency in his annual message to the Legislature in February, 1936:
-30-
In the attempt to keep up with the need our government has proliferated in less than ten years of activity related to housing more than ten relatively independent activities: urban renovation, public urbanizations, guaranteed mortgages, cooperatives, rural housing, lots and community services, rural communities, land authority, on-site rehabilitation, housing bank. Huwever almost all the housing programs remain buried under the impact of the program of public housing with Federal aid. The other programs have suffered an inevitable lack of attention in trying to compete with the former. He emphasized in particular the domination of all programs by the program using Federal funds, and concluded that "we must create one organism to direct public housing activities". One year later Governor Sanchez formally recommended the creation of a Housing Administration for Puerto Rico "as a first step to redirect our efforts in this important area, to proceed to undertake the responsibility for coordination, programmation, design, construction, financing and administration of housing". Hith the creation of the Housing Corporation (CRUV) as a subsidiary of the Housing Administration we will consolidate into one operational organism the housing programs and urban renovation programs subsidized by the Federal government and by the Commonwealth of Puerto Rico. It is one thing, however, to recognize the need for better administration and another to recognize the need for better policy.
Administrative conso-
lidation does not guarantee the making of good housing policy decisions.
In
fact, the administrator is unlikely to have the background necessary to differentiate one from another.
Economic housing policy is a technical
instrument, like monetary policy or fiscal policy, whose effective use is helped by a climate of good administration.
Policymaking itself, however,
is an economic rather than administrative instrument.
With this distinction
in mind it will be useful to discuss the need for a coordinated housing policy in Puerto Rico.
-31-
Wanted:
A Rational Housing Policy for Puerto Rico
Recently, a condominium costing approximately three million dollars was completed in the San Juan Metropolitan Area.
Once the building plans
were approved by the FHA and by the Planning Board a Puerto Rican commercial bank provided the contractor with the necessary line of cred;r.
When the
building was finished the bank sold the mortgage to an investor group in Milwaukee which will receive eight million dollars over a period of forty years.
This transaction, typical for Puerto Rico in its use of imported
capital, means that 807 of the monthly income of this condominium will leave the island. Investment decisions made in the construction sector of the economy are .playing an increasingly significant role in the economic development of Puerto Rico.
In, fiscal 1964 the construction sector produced 157 of the
island's gross national product and its rate of growth (17%) was almost double that of the economy taken as a whole.
The rapid growth of the
construction sector, i.e. homes, factories, commercial buildings, hospitals, schools, highways, and other public works, in Puerto Rico is even more significant when it is related to the formation of capital, the heart of economic development in any country.
In Puerto Rico construction accounts
for almost two-thirds of our fixed capital formation.
Machinery and
equipment account for the other third. An analysis of the growth of construction shows that private residential construction, which jumped 22% in fiscal 1964 and is expected to produce $170 millions2 in housng units this year, is the key element. Economically speaking, we have seen that housing is important because it generates a strong demand for workers, savings, and materials.
Housing
-32-
also merits special attention because it is closely related with the stable development of the family and of the community. Puerto Rico needs a rational housing policy, "rational" in the sense of being coordinated and planned according to the development needs of the island economy.
Housing policy is primarily a policy for stable economic
growth which is closely related to fiscal and monetary policy, but is neither one nor the other.
At the present writing, Puerto Rico has no
formal housing policy. what we find is an aggregate housing policy; myriads of decisions are made by dozens of public and private institutions.
Aggregate vs. Rational Housing Policy
Public housing policy is the sum total of separate decisions made by the Planning Board, the Federal Housing Administration, the CRUV, Land Administration, the Housing Bank, Fomento, Water Resources Authority, and other public authorities.
In the private sector, over three hundred con-
tractors make housing policy by their decisions to buy and to urbanize land. In addition there are mortgage companies, commercial banks, and savings and loan associations who determine (often under FHA rules) the price and availability of construction funds.
The sum total of the unrelated decisions
made by all these institutions determines the housing policy for Puerto Rico. It may be that each one of these decisions .is individually very good, but it cannot assume that in the aggregate they will produce an optimum development for Puerto Rico. There are a number of economic problems with which a rational housing policy must cope.
For example, there are investment problems involving the
cost and allocation o£ funds and business cycles, i.e. changes in the rhythm
-3~-
of production, which the construction sector can either accentuate or alleviate.
There are regional balance of payments problems, problems of
employment, of land speculation, and of the rising cost of building materials. Each one of these problems needs separate study and analysis, e.g. the Treasury Department is concerned with the balance of payments; the Labor Department is concerned with the production and cost of building materials. There is no guarantee, however, that these separate analyses will be made and implemented within the perspective of the total economic development of Puerto Rico.
They my furnish the materials for a rational housing policy,
but they cannot activate it.
The making of a rational housing policy does
not now fall under the responsibility of any institution. Years ago, in fact at the time of the American Revolution, Adam Smith wrote convincingly of the influence of the "invisible hand" which guarantees that each man, by seeking his own separate economic good, will necessarily contribute to the greatest national income for the country: As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value, every individual necessarily labours to render the annual revenue of the society as great as he can...He generally indeed neither intends to promote the public interest, nor knows how much he is promoting it...He only intends his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.3 From this philosophy, of course, flowed the "laissez-faire capitalism" whose remnants are still haunting us, especially in the developing societies. A critical evaluation of "laissez-faire" capitalism and of its implications ~
for policies of economy development need not detain us here.
Fortunately
for Puerto Rico, a minimum of coordination and planning has been publicly
-34-
accepted as reasonable and necessary. this acceptance.
"Operation Bootstrap" illustrates
Perhaps at one time the "invisible hand" was operative
in Puerto Rico, but present political, social, and economic problems indicate the need for increased rather than decreased coordination and planning. A rational housing policy will form only one part of the total development policy for Puerto Rico.
Its goal will not be to solve the specific
problems involved in housing construction and investment nor to stifle the initiatives coming from the individual institutions, but to coordinate and plan a balanced development of the entire Puerto Rican economy. Puerto Rico's need for a rational housing policy will become clearer if we consider for a moment three problem areas where such policy could be implemented: 1)
to see that the housing demand is supplied at each income level;
2)
to reduce employment fluctuations in the construction sector; and
3)
to coordinate the import of long-term funds for construction.
1) Housing Needs
A key goal in the "Propósito de Puerto Rico" is home ownership:
"Cada
familia puertorriqueña debe llegar a ser dueña de un hogar detente" (Each Puerto Rican should own a decent home).
A rational housing policy would
be concerned not only with the number of housing units erected but whether or not their distribution is meeting at least the spirit of Puerto Rican objectives. In fiscal l9ú4 over 16,000 housing units were constructed, approximately 12,500 by the private sector and 3,500 by the public sector.
Of the private
residences 90% were FHA-guaranteed and averaged a sales price of $14,155.
-35-
In terms of housing units constructed per thousand inhabitants, Puerto Rico is among the leaders of the world in construction.
In terms of meeting the
needs of the normal island family, Puerto Rico remains relatively backwards. In 1960 over 907 of the families and single individuals, i.e. some 400,000 potential household units, earned less than $4,000.
By 1965 this
high percentage had been reduced to 74%, but it still made up over 420,000 household units.
Projections for 1975 show a further percentage reduction
to 62%, but in absolute numbers we still find over 400,000 household units earning less than $4,000.
Another factor reinforcing the demand for low-
cost housing is the inadequate urban housing in which 87,000 low income (less than $4,000) families were living in 1964.
It seems clear, therefore,
that the demand for low income housing is going to be an important factor in the construction sector of Puerto Rico for many years. Is this need being met? must ask.
This is the question a rational housing policy
When one looks at the average $14,000 homes erected by the private
sector--in 1900 the average FHA insured home was $12,000--it seems clear that the needs of all family income levels are not being met by the private sector. When one looks at the total production of 1,100 housing units by CRLV (the agency especially charged with providing low-cost housing for urban Puerto Rico) in 1965, then it must be concluded that Puerto Rico is very far from mastering its housing problem in the public sector also. Since 1958 CRUV has constructed a total of 11,924 units.
The Banco de
la Vivienda was established over two years ago to help the families in the $2,000-$4,000 income range, but it is only getting under way.
The Department
of Agriculture's Programas Sociales has had more success in meeting rural housing needs by stimulating the construction of some 30,000 small, concrete homes on a self-help basis since its inception ía 1949.
This rural program
-35-
is based on the initiative of the people themselves grouping together to build their own homes.
Unfortunately, a small budget has limited the proper
development o£ this program. The meager data presented suggests that Puerto Rico, for all its aggregate prosperity (including the vigorous growth of its construction sector) is not coming to grips with its housing needs.
It may well be that
our present institutions are inadequate, or that there is insufficient coordination between the private and the public sectors.
Who is responsible
for asking such questions and seeing that they are answered?
Shall it be
left to the particular agency, for example to CRUV, to judge for itself? Here, surely, is one area in which a rational housing policy can operate.
2) Employment Fluctuations
Puerto Rico, in spite of a high growth rate, has managed to maintain a consistently high rate of unemployment, 12.8% in the 1959-1963 period, 10.8% in 1964.
One task of a rational housing policy will be to make a
critical evaluation of employment in the construction sector with the goal of taking steps to stabilize construction employment by planning more carefully the timing and the execution of public projects. In the past five years normal construction employment has constituted about 8.5% of the labor force in Puerto Rico.
This figure, amounting to
57,000 workers in 1964, is not particularly striking.
However, there are
two characteristics of construction employment which are highly significant. First of all, construction workers are men, a large percentage of whom are heads of families.
There are, in fact, more men employed in the construction
sector than in the entire manufacturing sector.
-37-
In the 1964 Economic Report to the Governor there is an interesting table titled Hours of Work Necessary to Eliminate Unemployment Among Heads of Families.
After agriculture, construction led all the rest with an
estimated 12 million hours needed.
Next comes the manufacturing sector
with an estimated need of 10 million hours.
This data leads us to the
second significant characteristic of construction employment; its relative instability.
Construction workers may average only 8.57 of the total work
force, but they usually account for about 227, of the total unemployment. This latter figure changes quickly and significantly from month to month. In the case of construction employment a rational housing policy would be concerned with developing more adequate statistical information concerning worker skills and productivity, than is presently available.
This data is
needed for the proper evaluation of construction cycles, an important area in Puerto Rican housing policy.
3) Importing Capital Funds Twentieth century Puerto Rico is accustomed to the use of credit.
The
workers in the caña traditionally received credit during the dead season when there was no work.
At present both the giant commercial banks and the
little store make consumer credit easy, and eager capital markets on the mainland make it easy to build on the basis of long term credit.
Both
Puerto Rican mortgages and Puerto Rican bonds find a ready market in the United States. But credit is a two-edged sword. country can absorb it
It is not automatically good, and no
u unlimited amounts.
For this reason the Federal
Reserve System makes monetary policy in order to stabilize groc'th without imposing the unjust tax of inflation.
In Puerto Rico the monetary policy
-38-
of the United States has important indirect effects, but Puerto Rican monetary policy is largely a random affair where, within certain limits, the banks and other financial institutions make their own decisions based on the profit motive. In 1963 Puerto Rico showed a net import of $297 millions in long term capital, which was 3% of the gross national product.
In 1964 the net import
of capital reached $309 millions and now finds itself (as of 1966) paying for accumulated capital imports to the tune of $177 millions. percentage of this capital is used for construction.
The great
CRUV is now talking
about bringing in $300 millions of imported capital to build low-cost housing, and Fuentes Fluviales de Puerto Rico (the Puerto Rico Water Resources Authority) has just borrowed $90 millions for a ten-year period to be paid out of revenue from the sale of electricity. We will make no effort to judge here whether these large commitments of Puerto Rico's financial future are justified or not. that in each individual case they can be justified.
In fact we presume
However what is the
total effect of these transactions on the growth of Puerto Rico? At the beginning of this year, the commercial banks of Puerto Rico held $232 millions in real estate loans, with the Banco Popular and the First National City Bank leading all the rest.
The significance of real estate
loans by the commercial banks of Puerto Rico is that the banks tend to sell them in the capital markets on the mainland and then use the money for more profitable ventures such as consumer credit and commercial loans.
The
residential mortgage sold in the New York capital market has become a great highway for importing long term funds into Puerto Rico.
These funds have the
attraction of being relatively cheap in terms of interest rates, but they imply a future drain on the economy and a reduced economic impact by the construction sector.
-39-
A rational housing policy will wish to evaluate these important financial commitments and to consider what measures might be taken to encourage Puerto Rican capital to participate more actively in this sector of the economy's development.
The making and execution of a coordinated housing policy for Puerto Rico requires 1) the possibility of selection among clearly-delineated alternative housing programs; 2) the development of adequate criteria for the selection of an effective "mix" of housing programs; 3) the regular availability of data on an individual program basis so that evaluation may take place while the program is in process; and 4) the coordination of housing construction activity with the total economic development of the country. Puerto Rico's Secretary of Commerce, Jenaro Baquero, has written of the danger of receiving in the economy more money than it can productively absorb.4
In this connection he signals out the importation of mortgage
capital.
Whether or not he has proved his point, the danger is a real one.
An excessive money and credit flow could easily inflate prices in this tiny economy and distort the allocation of such limited resources as skilled labor and urbanized land.
An individual government agency may be dedicated to the
proposition that the more money the better.
A responsible housing policy
M
authority would realize the need to link the growth of the housing sector with the total economic development of the island.
-40-
CHAPTER IV
A SYSTEMS ANALYSIS FOR HOUSING POLICY IN PUERTO RICO
Essentially, systems analysis is the comparison of alternative means of carrying out some function, when those means are rather complicated and comprise a number of interrelated elements.l
Introduction of Systems Analysis
In this chapter we wish to orient the systems analysis approach with reference to the making of economic housing policy decisions.2
In the
United States, in the decade of the Sixties, systems analysis has been developed on a large scale by the Department of Defense. is relatively simple.
The justification
Resources are scarce, whether for defense or for
housing, and should be used efficiently. choice among alternative programs.
There is need for a mechanism of
Budget allocations are made on the basis
of these choices. Planning, programming, and budgeting are three steps in the process of systems analysis.
The word "systems" is used to describe the process rather
than "economic" because we are dealing with interrelated factors which collaborate to produce some product, an output.
A manufacturing plant is a
system whose output may be a particular tangible product.
A university is
a system which produces, through graduation, a less tangible output, an educated man.
A housing program is a system producing housing units.
Generally the outputs may be quantified to some degree, but not entirely. Costs, or inputs, can also be quantified to some extent. conmion measure of cost but not the only one.
Dollars is a
One non-quantifiable aspect
is the impact of the program on the life of a given community.
-41-
In any system there are various ways in which the inputs can be handled so as to produce an output.
Each combination of inputs may be
presumed to yield a different (either quantitatively or qualitatively) output. In terms of a housing program, the number of families participating might be varied, as well as land allocation, type of structures, terms of credit.
The problem is one of selecting the program inputs which will most
effectively produce the desired output.
The challenging role of systems
analysis is to vary the inputs, note the effect on both cost and output, and then opt for the preferred system.
There is a temptation to think in
terms of maximum output for a fixed budget allocation or minimum cost for an assigned output, but neither of these is satisfactory alone.
It is the
cost-output relationship which must be kept in mind. Granted the desirability of selecting among alternative housing programs on the basis of systems analysis, the problems involved in such a selection are considerable.
First of all, there are important qualitative factors on
both the cost and output side.
Housing units may run from tents to castles
with a resulting spread in their cost.
Even limiting ourselves to low-cost
housing programs the cost difference between a public condominium (up to $17,000 in Puerto Rico) and rural self-help housing (under $500 in Puerto Rico) is considerable.
Not only is a house not a house in any consistent cost
sense, but if we agree to think in terms of communities rather than in terms
not.
Some communities are desirable; some are
These differences apply to the lower
as well as to the upper income families. differences into consideration.
income
of roofs, differences increase.
families, even to the poor,
Systems analysis must take these
-42-
Secondly, regions differ. appropriate for another.
Proper housing for one region is not most
If this qualification seems obvious, it might be
pointed out that Brazil still has a model low-cost house which it is trying to sell to the lower income families in the Amazon, in the wide open spaces of Mato Grosso, and in highly-urbanized Sao Paulo. is bad programming. region to region.
This procrustean approach
Material, lahot and credit costs will also differ from
A third difference lies in timing.
If the goal is to
provide the poorly-housed family with a minimum housing package (minimum but complete) as soon as possible, the systems analysis will operate within rather inflexible constraints.
If, on the other hand, the goal is to help
the poorly-housed family to perfect its own home gradually as resources become available, the constraints in terms of programming are far less rigid.3 It is not difficult to conclude that systems analysis offers no easy solution to the housing problematic.
However, its consistent use should
permit the economically and socially precarious process of planning, programming, and budgeting scarce resources for the production and improvement of residential housing units to become more rational.
If the problem is
fundamentally one of choice among alternatives, these alternatives should be made as clear as possible.
Moreover the evaluation process itself
should be dynamic in the sense that programs are subject to evaluation while they are being implemented.
The Housing Problematic in Puerto Rico
The housing problematic of Puerto Rico may be sketched very briefly for the purposes of this chapter.
In the first place, the phrase itself,
"housing problematic" refers to the whole socio-economic complex of problems
-43associated with the people's need for housing.
"Housing problematic"
does not only refer to the need for residential housing units.
It also
refers to the need for community services, for utilities and streets, for legal changes, for proper zoning, for master plans.
Our emphasis is on the
w
economic factors involved, but the goal of the analysis might best be described in joint terms of community development and economic development. To provide an order of magnitude we will estimate that almost 20% of the families in Puerto Rico are inadequately housed.
Some 100,000 housing
units are involved.4 This giant backlog of inadequate housing may be expected to become aggravated as population increases and internal migration to the major urban areas, especially to San Juan, continues.
To meet this backlog
is a totally inadequate program of low-cost housing consisting primarily of Federal fund projects.
Some 80% of the inadequate housing belongs to the
slum ("los arrabales") communities and receives an almost negligible proportion of Puerto Rico's housing resources. As we have seen, the Puerto Rican government is trying to solve the situation by the establishment of a unified Housing Administration while giving very little weight to the need for a rational and economically coordinated housing policy.
Our goal here is precisely to establish the
foundation of an economic housing policy which can be administered to meet the needs of Puerto Rico's housing problematic. In this chapter we will not attempt to apply systems analysis to any specific aspect of the housing problematic in Puerto Ríco. analyses will be the task of the later chapters.
Specific economic
Now we are concerned with
4
placing the housing problematic o£ Puerto Rico in the systems analysis •
context.
This placement or orientation will include a brief analysis of
1) resources available for housing on the basis of the national product; 2) the budgetary allocation of scarce resources to housing; and 3) the efficient use of the resources thus allocated.
-44-
1) Resources Available - GNP
Economics may be defined as the science of the administration of scarce resources.
The application of economics to a particular problem is economizing.
In their analysis of the economics of defense, Charles Hitch and Roland McKean point out that economizing is not just a matter of keeping ce^ts to a minimum, but involves three related considerations of strategy, technology, and economy.5
"Strategies" are wa»s of using resources; "technology" indicates
the feasibility o£ the various strategies; "economics" chooses the strategy which is most promising. One basic factor in the process of economizing is that of the quantity of national resources available.
The stock of productive resources available,
the national wealth, is measured at infrequent intervals.
Of more interest
is the measure of change in the nation's wealth which are produced regularly in the national income accounts.
The national income or product represents
the sum total of goods and services, valued at current prices, added to the country's wealth during the period of one year. The limitations of resources produced represents an essential constraint under which any program, including housing, can develop.
With so much
concrete, so much wood, se much construction materials and labor force, the number of housing units which can be produced during a given period is iímited. pie.
Also housing must compete with other sectors for its piece of the
However, our interest for the moment is in the size and constituents
of the pie itself as represented by the national product. But the "pie" analogy limps in the sense that it cannot be assumed that resources, even basic resources, are in fixed supply.
The labor force
is considerably more flexible in numbers and, given vocational training, in
-45-
skills.
Productivity increases effectively change the availability of
resources.
New uses of resources and better ways of transporting them
all lend a certain elasticity to their supply.
The problem reall.y becomes
one of assigning development priorities to the use of basic resources. In this way superficial constraints may be seen for what they are, and what Hitch and McKean identify as the "real" constraints appear. The real constraints, the truly 'basic' resources, are exceedingly complex and difficult to measure, involving the state of the technological art, stocks of ingenuity and knowledge, institutional arrangements, and incentives as well as the total supplies of capital and people.° While it is true that economizing is not just a matter of keeping costs to a minimum, this is always desirable.
In fact, the evaluation of costs in
relation to real constraints should contribute to the making of good policy decisions.
Remember that the economist does not view costs in the same way
as an accountant does.
For the economist, the cost is an opportunity cost.
The real cost of producing anything is the alternatives that are foregone. The acceptance of one housing program implies the rejection of its alternatives as well as the judgment that "all things considered, this program offers us the greatest opportunities".
The allocation of scarce resources to one
program or combination of programs, effectively limits our options in behalf of other, competing programs. The gross national product of Puerto Rico ($3 billion in 1966) may be used as a genera) constraint indicating the availability of resources, that is, the physical production possibilities of the country (assuming reasonably full employment)
Assessing the strength and growth of the GNP does not help
the policy maker to develop specific programs.
It should permit an evaluation
of Puerto Rico's ability to support its housing activity.
This evaluation
should help to determine the relative share of the economy's production effort which may be dedicated to housing and related activities.
-45-
The advantage of using the gross national product as the point of reference is that the important relation of construction activity to Puerto Rico's economic development is not passed over.
Certain basic
monetary data are needed to determine the share which housing activity should have in the total production effort, but these need not be too detailed.
It is not so much a question of assigning specific quantities
of cement, wood, labor skills, but of determining the relevant budget constraints within which the specific constraints will operate with a certain flexibility.
The policy determination at this level, therefore,
is one of determining scale.? What is the meaning of Puerto Rico's GNP?
It includes consumer
expenditures, private and public capital formation, government expenditures, and an unfavorable balance of payments largely adjusted by the importation of capital.
The elements of the national income accounts are not as flexible as
they might appear.
Lord Keynes has already pointed out the stability of
consumer patterns.
Government budgeting lends a certain stability to expen-
ditures by the public sector.
Commercial relations with other countries
have a certain stability reflecting consumer demand. To discover the flexibility possessed by the GNP with reference to hoúsing one must go beyond the standard national income accounts into the institutional framework which is directly relevant to national production, including the schools which form human capital and the research units which import and develop technology for use within Puerto Rico.
Housing, of course,
is especially related to a certain limited group of financial intermediaries. Generally speaking there are political constraints which enter in to diminish the flexible adjustment of GNP to new uses.
Then there is the accustomed and
anticipated standard of living which must be considered under the heading of a general constraint on socio-economic change.g
-4i-
Studies recently made suggest9 that rising productivity is a key factor in GNP growth, far more dynamic than the associated rise in the labor force. There is no reason to believe that Puerto Rico does not share in the dynamics of rising productivity, though perhaps at a lower scale.
Data on the
changing productivity within the construction sector itself would be of the greatest interest.
Since they are not available, the availability of capital,
especially imported capital, will still appear to be of major importance. The capacity of the Puerto Rican GNP to grow dynamicall.y10 is beyond discussion. growth.
What is needed is an analysis of the changing structure of this
Agriculture, for example, once played a far more dynamic role in
island economic development than it does today.
What is the present contri-
bution of the construction sector and what is its projected impact?
The
housing policy maker must ask these questions explicitly or implicitly before he can determine what proportion of Puerto Rico's resources should be allocated to that sector. National income accounting has its weakness when it comes to housing. One aspect of this weakness has already been discussed in relation to the housing sector and the capital-output ratio.
The accounts do not really
give us a good measure of either the actual or potential production of housing units and related services.
The construction activities of the
popular sector are largely ignored by social accounts.
Much of rural cons-
truction and improvements is also omitted from the national product. again, clandestine construction. activity should be counted.
Then
The national
income accounts give us a low estimate of the housing production potential of Puerto Rico. Apart from the analysis of the GNP itself as an expression of the country's economic welfare and growth there is the question of the impact of policy decisions on that growth.
Decisions made in the areas of
-43-
monetary and fiscal policy by affecting the size and change of GNP indirectly affect the possibilities of resource allocation to any particular sector. A new policy of capital depreciation or a new tax on capital gains will influence construction activity.
This interrelation points up the need to
evaluate as precisely as possible the anticipated impact on some kind of cost benefit basis of alternative policies. What this interrelationship suggests and emphasizes is the need to make housing policy with relation to the total economic policy.
In fact one
criterion of successful housing policy must be in terms of its contribution to the economic development of Puerto Rico as a whole.
This contribution
needs to be evaluated both in terms of the short run in which GNP factors may be taken as more or less constant and the long run when they may be taken as variable.
The relevant constraints, of course, must also be distin-
guished on a short run versus a long run basis.
2) Budgetary Allocation of Resources to Housing
The budget is the fiscal instrument for resource allocation in the public sector.
It is not a discretionary policy instrument in the same
sense as monetary policy, because, once approved, it is not easily changed. On the other hand, all the decisions entering into the budget process involve choices among competing uses for the available resources. choices operate at various stages in the process.
In fact these
For this reason their
economic impact is spread directly over a time period.11 We do not intend to enter into a detailed analysis of Puerto Rico's budget allocation for housing.
A detailed analysis of the Puerto Rico budget
for housing will be given in a later chapter.
Right now we wish to ccnsider
-49-
the budget as an instrument for the allocation of resources based on criteria. In the Commonwealth Budget for Fiscal 1958, for example, less than 27 of the total budget is allocated to the development of housing.
This amounts to
some $15 millions out of a total budget of $705 millions.
What are the
criteria which determined this allocation as opposed, for example, to the allocation of $29 millions to industrial development?
The amount of the allo-
cation is important, of course, but in terms of housing policy the way of determining the amount is far more significant.
There are always present
the politics of allocation, politics over which the technical person has little control.
Then there are the economics of allocation, the economic
process through which programs find themselves incorporated into the budget. A certain mix of public housing programs is supported by the budget. This mix both reflects and has important consequences for an economic housing policy.
Construction activity by the public sector is an important policy
instrument, and the housing segment of this activity is probably the most dynamic and the most sensitive to changing economic conditions.
The goal
is to use systems analysis in order to clarify criteria by which programs are selected, make planning more effective, and the possibility of program implementation more flexible. How can systems analysis help?
In the first place, it forces us to
12 go beyond an analysis of aggregate expenditures.
The total level of
expenditures needs to be evaluated in terms of its components, i.e. of the individual programs which it contains.
In other words even aggregate com-
ponents are not useful except when related to a program which has discernible final products.
Systems analysis insists on this analysis of productive
wholes rather than of accounting aggregates.
-50-
In the second place, systems analysis sees new programs as alternatives. To select one program is to relinquish the opportunity to invest in another. To increase the budget commitment to one program is to decide to diminish the budget commitment to another.
Systems analysis not only functions in
the evaluation of new program combinations, it also functions in the evaluation of programs actually in process.
These too need to be evaluated not
only with reference to their objectives but to new alternative programs which might replace them. In his testimony on individual program analysis before the Subcommittee on Fiscal Policy in July, 1965, Charles Schultze points out that "the efficient allocation of resources in the Federal sector of the economy requires two kinds of choices:
first, a choice of the least-cost method of
carrying on a given program--in other words, cost reduction; second, a choice of where to allocate budgetary resources among the many competing claims of existing and proposed new programs--we might best describe this as program evaluation."12.5
This emphasis on choice among competing alter-
natives is the key to the proper use of systems analysis in any area.
Cost
reduction and program evaluation may both be involved, but even more basic is the need to develop criteria which will be useful in choosing among programs. The third way in which systems analysis helps in the allocation of resources among competing sectors is in its stress on the program evaluation need for criteria.
Logically these criteria, or tests of preference, must
be related to specific program objectives relating planned output to the cost of inputs.
Input-output thinking is involved here, but not technically.
The input-output method is a highly technical, rather inflexible method of
deter~iiuizts, :é:?.:eTi.idt93t.
'
i.o: s
..":i
on
tf
LIcf:3.on
functi.an.fi.
It iaxirolves F ::;uúther c:
cuíap::ins 'wthl.ct+ W,o r~cs
poi.ic.Y d_c
very i:+.rtle room for tlA: "?.otlqu&F. .ti fiab7.e.
'.:"'ü:s.
.lfss
.tt
k:= :.t very usetul for If 't.h.e
housing policy n-~.ker .s askag the basic 4=zes~ ic,r+ ";Yhst do rre get for t:'hü:: :^e Ia:=vA to payY`' . i.aip xc -•output tables ; even i; _he:! were s!v zileble, ta~i.3 1 },r: of
1.'Y:t1
i
Ln
c., t:?•:.e cof":r~r•;;' ;
evaltilattng polisi.b1e hOGditlg }:it.gr:.~ ~,.
LS •just
srSc'C. S
3rtat
f3.?xible irzsrrtuneiR'i: io:Y' ;irogrs
~i.s •
Y7a ~.:'LitLUr .
íich .:r..ci '3c.Kean see the sea.?~ tion of an e.ppropriaLe criterion Fs
prok' i- en of s~yst.eus anatyois .1` r. f,: ~serreQ.,Pss.
Criteria, as
They e.re also indicators
,f
:te rrar;~~-.r•4 '.'1p1 ier_tat?.on to program oLjec~ives. i.tr!
d J, ry 9tn
i~:
'.r.0
e hatve just effecti
so which
In the que3tii.on of
s ; poverty programs, foreign aid programs, Rnd :eived ere riot readily guanti.f:.ed.
Ho,aever, cri.teci2.
:t
lea3i: .,,e.á t:ia .t ^eitoríe) cat be developed which permit us ::o assign r.r.".a~tve i:>r: jc;cit4.
on
ceasonablo basis.14
. . %h an id,ea' os:, at le
t, to minimize the inclusion o£ low-priority prcgiams,
31s of c?: itria
~:...':°
be the _: )SC .,. U :t>aílabíl. 4:~• ' L'3L~~- . .L•`:v
'trC~: 'J
f :-:; 1.y
y of raater•ia~.~,, credit, and labor, .':ie n~ai er o_ partici*ation in the progra-n i
c .~erLa) , subsid;es
pr.ip` -. , ._ ..:, fcol
for the evaivation cf hou3Lnp, progtaTs wcu'A:
~. , the doyree of heir
4_ilE ..~`► .~ ~~yt~
_-rt."
Good criteria sho*. .c; hel*D to a :cah'.ish
stimu~}.:ed.
12 .
ivolved, the degret to
., program ¡e.g. public condominiuris in
rich pr.oduos a high cast unit using sk.'_iie:l labor, w'.t:Rout
Lr.'.c .ryation, for upper lower income families "n ryxtensLvic ' -'h, id
ai:ay
a1..'•i
; 'end) should rec .ve a 1oá,?-prior.tt: even i
^ iv n_
t ids
"'Te i i, ir1g . et
ç x L.,,_ í; y
eiera+
ary criteria
'which
are appl
d in .tuo•_co Rico
t-•hen Federal funds pl: v a eomiaandir.J - r.!e :u
where LL
r., 7h
unds s:re reG _:. pa.*.'3ti'Jii r2-cei~le. £
T..:l{'~ ?~r
orl
The
i)
2) progr: rlori
ru2'SA
(
í_ º
fii.c:lea'.`.
eEfici
ffectiv 1y?
üs
;:!sgr?
G.d to
:"4,i7'•isth`
g programs ha'c,e rece?.v issue.
the
Ro\
i:O glee i,:'a
th eir br:dget allocatzd resourcá
The tact of the budget esei.gnsnent ;:resumes that th e basis.
Some priority
'.i:ad in what Charles Hitch idetified
must
tages of 1tudy and .r.eady i.:t :7S"O^.ryti..
T_
HiIG :
o
'lcv becoitE's
ere acceptaG~le on
pr'7g
~.
i
.1 •
C, .^e the co~nbinatioa of hnus $3dignne
., .
-
Now more
pro,imate '
itEr
,^
as the process of
°Sub -optimization°' refora %o the reed to break down. nrohlemy of
zee iont0 . 1"
Kcoaao-iically speakhg..
-pxobleas.,•f
ch:: ca into their componente or e
s;ib -op :; tization is a type of partial
equilibrium an . ysis t3.+ 3t zee _ ezter -
si~rey r by i .frer? Nrarshall, later by 1. M. Keynes. ?ace the s 1h-problam
are identified,
e.g. for hosirig cotes ru-.tior.
are ' ong- and short-term credit problems; there is the ucce of capi' :. n +rf)portior to labor; there £s the problem cí: const~ uc
equin
imported, the t.,
r
t
br
v~silatle resources.
o~.
the questio:t arises of m_king thQ This i
the question of efficienc
r=x~.s co the ye¢Ler '1se of e.dc`.itioual. resources, 11fi.nding t.ho+ut yielding les
that yield more o: some valuable outputs c~xaerr .
: ar
o The r7o3.1 of
uestion ita econcr,iic terns is deterr iftitsg the marc;i.nw;.
The
e,:~p'a:,rin, additior.ñ resoui:es in one program rather the,:, ar,;,t:h s
S:Ptas a11a1ysl.s
r.?5ource has more stil;ty Or't 4,, -,a , 7 , •c::
f r...
7t:ltr
%h4 ;
in
ttli:;
case
to
show
the
.
add:y.rJc-....._
in or,p program trrasi in an.othe:r. ib'-proJlclC
ii.~i?7'C'ne
set
prod.ucs:. a::.ilrr.
?í ea.s
L;i
of
duC_t7L:rit,`.%
is31'.
F).'U'~'L'?L?? 1i1aV'
('.[Fr,.rA'.íl"(ltri ,si'k ,.
x'n+.&ziunships.
-53-
Program evaluation will also require that actual productivity e.g. housing value per worker, credit costs per square foot, material costs per square foot of construction, be measured and compared with planned productivity. Another focus for sub-problem areas is that of the families involved. Presumably the program was adopted originally because it seemed to meet the needs of low income families.
Within this major orientation each sub-problem
should be continually checked against the income levels and consumer desires which they are intended to meet.
There are not a few examples in Puerto Rico
and in countries of Latin America where low-cost housing units are vacant because they have not met the felt needs of the people.
Systems Analysis and the Housing Deficit Approach
Systems analysis implicitly disposes of the housing deficit approach to the housing problematic.
The housing deficit approach was discussed criti-
cally in Chapter II under another perspective.
It is derived from macro-
economic data to divide housing units into "adequate" and "inadequate" and project the potential housing need on this basis.
The focus of systems
analysis in housing is the program and groups of programs.
Hitch and
McKean point out that a governmental program is the counterpart of an industry in the private sector of the economy--and is just as ambiguous, as hard to define, and yet as useful a concept as an industry.
To facilitate
judgments about their value, programs should be aggregations of activities yielding products that can be at least subjectively appraised.19
The
housing deficit approach treats houses as "objects" rather than as programs. If the end product of housing policy decisions were more roofs there might be more justification for this perspective, but the real end product is the formation of communities.
-54-
Secondly, the housing deficit approach tends to emphasize the amount of materials, labor, credit, etc., needed to construct a certain number of houses while systems analysis is concerned with the program mix which will result in the most efficient use of allocated resources.
Housing is not
one program but a group of programs, e.g. low-cost rental units, cooperatives, self-help housing, slum rehabilitation projects.
This distinction is used
by systems analysis and largely ignored by the housing deficit approach. Thirdly, when housing is an object and is consequently viewed in terms of so much concrete,wood, pipe, etc., policy decisions are far more difficult.
It is only when these inputs are related to a program of specific
outputs that opportunity costs can be measured and choices among alternative possibilities can be made. Finally, when the housing problematic is analyzed on the basis of alternative combinations of housing programs the possibilities for research are pinpointed.
Instead of looking for a better use for concrete in all
types of housing production, research into the use of concrete is related to particular programs.
Concrete in a pre-fab housing program will play
one role; concrete in a self-help housing program will play another. requires a great deal of capital.
One
The latter requires something which can
be readily handled by unskilled, relatively unsupervised labor.
Thinking
in terms of housing programs prevents us from thinking of productivity in absolute terms.
-55-
CHAPTER V
ECONOMIC CHOICE AND HOUSING POLICY
The essence of economic choice...is the comparison of all the relevant alternatives from the point of view of the objectives each can accomplish and the costs which it involves and the selection of the best (or a 'good') alternative through the use of appropriate economic criteria.' Quantitative measurements do not constitute the essence of housing policy decisionmaking.
Housing policy decisions are faced with making a
choice among alternative ways of achieving certain objectives.
We are
concerned in this chapter with the economics of this choice although economics is only one ingredient of the final decision. the process of economic choice will be considered: natives, 3) costs, 4) models, and 5) críteria.2
Five elements in
1) objectives, 2) alter-
Some of the analysis will
repeat what has already been said in Chapter Four but from a different perspective.
Objectives3
In any economic analysis the proper choice of objectives must receive priority.
Only in relation to such objectives can the proper questions be
asked and the relevant criteria developed. are not easy to come by.
The difficulty is that objectives
Hitch makes this point in the RAND Corporation
study referred to above: The principal theme of this paper is that in many of the most important problems objectives cannot be taken as given; that ends and means interact in complex ways that the systems analyst must master; and that he can indeed, and should, as one of his major objectives, help clarify and define the objectives that he strives to maximize.4
-56-
Objectives imply a commitment of resources.
Such a commitment presumes
that a cost analysis has been made which indicates that the given objectives are feasible.
For example, the production of 20,00!) housing units a year
might be set as an objective.
Is this possible within the present production
capacity of the country? Objectives may also be in conflict. tent to some degree.
In fact, they usually are inconsis-
Even the great national economic objectives of monetary
stability and full employment may come into conflict so that some trade-off must be made.
For example, we will tolerate 47 unemployment in order to keep
inflation down to l.5% a year.
This conflict among objectives is even more
likely to occur among lower-level and higher-level objectives. Since few objectives are completely quantifiable, there is always the difficulty of having objectives which are operational so that their achievement can be measured.
Nrt all costs nor all benefits can be reduced to
dollars. In Puerto Rico the housing objectives are generally stated as follows: 1) Every family its own home, 2) An adequate housing unit, 3) On-site rehabilitation in decadent areas where conditions permit, 4) Moderate prices in good locations, 5) •Free choice depending on economic capacity. obiectives are still too general to be useful.
These
It will be the task of
housing policy authorities to clarify these objectives and make them more precise. In 1955, the ARUV prepared a so-called "Reasonable Ideal Plan" for housing development in Puerto Rico for the decade following.
This Plan
projects Federal Government expenditures of two billion dollars and Commonwealth expenditures of a little over one billion.
Even when 336 millions
-57-
are subtracted from the planned Commonwealth expenditures (this amount to be raised by bond issues), the annual budget for housing would be a projected minimum of seventy-eight millions.
The contrast between this projection and
the actual housing budget (a little over 2% of the total budget) of fifteen O
millions can hardly be termed "reasonable" even in an ideal sense.
This
contrast points up the need for operational objectives.
Alternatives°
Objectives may be achieved in a number of ways. some ways are better than others.
Theassumption is that
Economic choice requires alternative
routes or "systems" for the achievement of a given set of objectives.
The
problem of the systems analyst is to come up with good alternatives. The selection of alternatives in housing is less simple because there can be no housing program (we will agree to identify "systems" and "programs" when it comes to housing) which will satisfy national needs.
There is,
rather, a whole spectrum of housing programs running from the simple provision of a lot to the presentation of an entire housing package.
Among these
programs it is necessary to choose the combinations which will best meet the housing objectives of the region and of the country. Later we will examine the problem of selecting the program mix on the basis of criteria.
Now we will consider briefly the need to identify all
worthwhile alternatives.
Each program is presumed to contain all the elements
e.g. land urbanization, material and labor costs, credit costs, and relevant institutions, necessary for its production of distinguishable units.7
There
are some programs which are more politically and economically feasible than others.
There are some programs which are simply unacceptable to the low
income families, although this would depend on the consumer preferences of
-58-
the particular region.
Planners often think in terms of providing complete
housing packages, but these may be an unreal alternative given the budgetary situation. The present Low-Cost Housing Authority of Puerto Rico, the CRUV, has been reasonably imaginative in developing alternative programs. June, 1956, these included the following:
As of
public low-rental housing,
condominiums, "casa techo" (house structure only), apartments for single persons, mutual aid and self-help housing, experimental housing, low-cost self-liquidating houses, cooperatives, emergency housing, moderate rent housing with FHA guarantee (221d3), urbanizations of lots only, urban renovation, on-site rehabilitation of slum areas, Housing Bank loans to low income families.
The list of programs is impressive in its variety.
The question is to what extent these programs have been evaluated and on the basis of what criteria. In the selection of alternatives there is the danger that only a priori alternatives will be advanced.
The people themselves are much more imagina-
tive than the traditional housing authorities.
In not a few cases the best
alternatives may be found from an examination of how the low income families with initiative take care of their housing needs. their income capabilities.
Usually they do so within
Not infrequently what they do poorly can be
ameliorated by technical assistance from the public sector. The great problem in choosing alternatives to compare is to be sure that all the good alternatives have been included. Frequently we lack the imagination to do this at the beginning of an analysis; we think,of better alternatives, i.e. invent new systems, as the analysis proceeds and we learn more about the problem. The invention of new and better systems in this fashion is indeed one of the principal payoffs from this kind of analysis.8
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One final point is that there may well be an interrelationship among alternatives.
As Hitch points out, this interrelationship will prevent us
from considering proposals A, B, and C separately.
It is rather a question
of comparing the rest of the system plus A with the rest of the system plus B with the rest of the system plus C.9 Costsl0
Each alternative requires a certain amount of resources. scarce resources is measured in disutility terms o£ cost.
The use of
The efficient
use of resources should be reflected by lower costs per unit produced. Cost studies may be related either to fixed objectives (which we want to achieve with minimum amount of resources) or to fixed resources (where we wish to produce as much as possible with the assigned resources).
The
former approach uses cost as a criterion of choice; the latter uses effectiveness as the criterion for program selection.11 Cost analysis and systems analysis will be related in our search for relevant criteria.
At the moment we will concentrate on costs alone.
In
the first place it is necessary to have some kind of cost estimating process. So far as material costs are concerned, standard accounting procedure might be used.
Difficulties spring up immediately when nonmarket factors enter
into the production of residential housing units.
In self-help housing,
how is the unpaid labor of the individual working on his home evaluated? How are the administration costs of government to be assigned on a unit cost basis?
What about the assignment of other subsidies as opportunity
costs of the program? on its components.
The costing of each program will be different depending
The important thing for the purposes of economic choice
is to include all the cost inputs.
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In this connection it is good to emphasize the need to consider social costs as well as economic costs.
Newspaper headlines will refer to plans
to "wipe out" slums, and politicians will speak of clandestine housing units as major obstacles to the solution of the housing problem.
No proper evalu-
ation can be made, however, without taking into account the social cost involved in the destruction of a community. although often a sick one.
The slum is a genuine community,
Criteria must be developed to evaluate the social
cost of destroying this community as well as the economic cost.
Destroyed
homes may be rebuilt rapidly; destroyed communities are not easily rebuilt. In fact, they tend to create new social problems or aggravate the old ones. Secondly, cost does not play the same: role in each of the housing producing sectors.12 market.
In the private sector the inputs are priced by the
In the main these prices are accepted as legitimate indications
of cost. Acceptance of these prices as appropriate measures of value and cost to the economy as a whole is implicit in most of our institutional arrangements, in our approval of a competitive economy in which the preferences o£ all consumers help allocate resources among uses... Such prices, by guiding the choices of firms and individuals, do lead to 'maximum production' or 'efficiency' from the viewpoint of the whole economy if certain conditions are fulfilled.l3 The value of cost inputs in the public sector is not so clear. are not clearly market choices.
The choices
'Ten the government subsidizes education or
fights forest fires, market considerations may not be paramount.
Presumably
society is not willing to subject all its activities to the test of the market.
And this also applies to housing.
Housing construction decisions
by the popular sector may be more of a market decision but not wholly so. The family must have a home, no matter the cost. and squatting arise from this need.
Problems of land tenure
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If we consider costs as a discipline or constraint for economic choice it is clear that each sector, public, private, and popular, will suffer from
s
different constraints and will react differently to them. To what extent are costs measures of effectiveness? do not measure effectiveness. i.e. to their output.
By themselves they
They have to be related to what they produce,
Lowering costs and achieving the same output is a
measure of increasing efficiency.
For this reason cost is always a signi-
ficant element in program choices, but never the only one.
"Housing at any
cost" is not a defensible proposition. An important point made by Novick is that cost estimates for competing programs need not be over-precise.
The idea is "to concentrate on using
cost-estimating methods which will facilitate discrimination among alternative systems on a relative cost basis".14 absolute precision.
The goal is relative accuracy, not
For this reason Novick recommends that the systems
analyst concentrate on developing cost-estimating methods which 1) stress consistency in the treatment of alternative systems, and 2) emphasize measurement of cost sensitivity based on differences among program components. As most systems analysts know, their data rarely are accurate enough to admit highly refined calculation. They are searching for gross measurements--orders of magnitude--which will turn up dominant relationships which are larger than the possible errors of data or calculation. For these purposes, rather crude computational techniques and reasonably approximate cost data will usually suffice.l5 So far as cost data are concerned, all cost inputs should be included before any relative evaluation can be made.
Cost measurement does not consist
only in measuring the direct costs of factors of production involved but also the cost implied in the rejection of reasonable alternatives.
These
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costs are to be considered marginally, that is, hoc7 much more cost is involved in one alternative than in another.
Thus cost is not ,4 17 an
opportunity cost concept but also a marginal cost concept.
Models
Reality in any area is too complex to be dandled by the human mind. For this reason the scientist develops models of reality which serve as a framework for his analysis.
These models should incorporate the key
variables which bear on the problem of his science. attempt to describe reality.
The model does not
It is an analytical mechanism which identifies
key relationships among the relevant variables.
It may be useful for making
predictions, but this is not necessary. Models may be mathematical, graphical, physical, word-written.
They
may be highly sophisticated as are not a few econometric models of today or as simple as Fisher's famous MV=PT. as an analytical instrument.
Their value lies in their usefulness
In systems analysis models are useful in
tracing relationships between inputs and outputs for the purpose of evaluating alternative systems.1J better decisions.
Models should help the policymaker to make
To the extent that the relationships considered in the
model tend to prevail in the future, to that extent the model may have good predictive power. Models may vary greatly in the degree of precision which they require, but they should help the decision maker to predict the consequences of alternative programs.
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CrLterial7
Hitch and McKean define the criterion as "the test by which we choose one alternative or system rather than another".18
Each system (or in our
case, housing program) presents a combination of consequences.
Criteria
Y
are needed to rank these programs in order of preferredna.r.s.
From this
point of view the selection of criteria is the crucial area in systems analysis.
To select the wrong criteria is to select the wrong guides for
action. Each program gains certain objectives at a certain cost in resources. It is the relationship between gains and costs that establishes the relative ranking of each housing program.
These relationships will be considered in
more detail as we proceed to examine the housing market and each of the major variables.
Here we can reflect on the criterion problem itself.
In the first place, it is good to remember that in the housing area some kind of cr.itze'ia arc already operating. and evaluated. resources.
These should be identified
Certain programs are already engaging specific groups of
Implicitly or explicitly the selection of these programs presumes
that others were rejected.
On what basis were the choices made?
The
systems analyst will sometimes have to search diligently for the criteria used.
They are not always explicit and objective.
In Puerto Rico the mere
existence of Federal funds for housing projects is enough to bend all efforts in securing a good share of these.
The criterion by which the low-cost
s
housing authority accepts or rejects Federal housing programs are hard to come by. In the second place, criteria come in hierarchies.
The ones most
closely related to action may be termed "proximate" criteria.l9
This leads
back again to the need for breaking down the problem into its sub-problems.
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Proximate criteria operate at the level of the subproblem and may be considered as "the functions that we would like to maximize in choosing among alternative courses of action".20
In relation to housing policy
a high level criteria might be that low income families should be given the option of owning their own home.
At a lower level, i.e. lower in the
sense of being closer to action, the criteria might be that each family should live in a decent housing unit.
The ownership option might be
removed as a short run criteria so long as the program e.g. low-cost rental units, does not contradict the higher level criterion. Thirdly, while there is no set way of determining criteria, one way may be suggested: 1) Identity the programs, i.e. the interrelated group of activities whose end-product is the production of housing units or related services.
Include alternative programs which have been rejected
or abandoned. 2)
Also include new programs which appear feasible.
Estimate the gains and costs of each program.
The formulation of
criteria will take place through an interplay between expectations and what is actually realized.
Gains should be referred not only
to technological efficiency but to the family income levels served. A self-help project which meets 40% of the need in one area and 5% in another area should include this percentage in its set of criteria.
Costs should include direct and indirect (e.g. adminis-
tration, subsidies) expenses.
Costs should also be measured in
both social and economic dimensions.
Economically, it may be more
efficient to transfer a number of families from their present site. The social cost, however, may be the destruction of a community.
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3) Identify the major components of each program together with the set of criteria, e.g. financial criteria, which will make them comparable on at least a relative basis.
Check to make sure that
the criteria selected do not negate the upper level criteria. 4) Test the criteria against known programs where program differences are well defined. In the determination of criteria remember that the element of time is crucial in the evaluation of the gains and costs related to a particular program. construction, costs tend to be short run and gains long run.
In
In many cases
standard discounting procedure can be used to get a comparative evaluation for income streams.21 In addition to the selection of conflicting criteria there are other dangers in criteria selection.
In the first place, poor criterion will result
from putting all the emphasis on the achievement of fixed objectives or on minimizing costs.
k~hat Hitch and McKean call "the requirements approach"
tends to ignore the relation between gains and costs of alternative programs and concentrate in getting the best or getting the cheapest.22
Neither the
best nor the cheapest necessarily represent an optimal choice.
Secondly,
ratios do not make good criteria, especially the maximization of ratios.23 Ratios ignore magnitudes.
(For example, the bow and arrow may give me a
better target ratio than a nuclear warhead). stant among different levels of magnitude.
Neither need they remain con-
The ratio only has meaning with
reference to given budget constraints--or minimum cost constraints.
A
third way of selecting poor criteria is to get the wrong size of gain or cost.
In choosing a housing program the test might be the minimum cost of
producing 25 housing units.
If 500 housing units were involved a different
program might be much more effective..
It is also true that a housing
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program which requires the use of skilled labor which is in short supply and scarce capital equipment might produce housing units more efficiently but with adverse effects on other production sectors.
s
A fourth way of selecting poor criteria would be to ignore the multiplier effects of given programs or what we will identify later as leverage effects.
There are also external economics of scale which should be taken
into consideration. As we enter into the several aspects of the housing problematic in search of criteria for the makirg of a better housing polícy it should be clear that the search is for preference guides rather than for solutions to the housing problem.
In a true sense the housing problem cannot be solved.
It belongs to a dynamic society in which expectations change, incomes change, technology changes, and customs change.
What is a satisfactory house today
may not be so tomorrow, apart from any depreciation involved.
Also what
may be a satisfactory home for one family may not be for another.
The
osmosis effect of families continually buying houses upwards illustrates the mobile character of housing demand--in economic terms, its price elasticity, income elasticity, and custom elasticity. We turn now to the final part of Part I, an analysis of the housing market and the consideration of possible criteria for evaluating change and alternatives in the housing market.
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CHAPTER VI
THE HOUSING MARKET:
A FRESH VIEW
The market economy is a concept so familiar that it is often forgotten. "A perfect market", wrote Alfred Marshall in his famous Principles-of Economics, "is a district, small or large, in which there are many buyers and many sellers all so keenly on the alert and so well acquainted with one another's affairs that the price of a commodity i, always practically the same for the whole of the district."3
The market is an area of close buyer-seller communication in
which the price of a defined good is sensitively established.
In fact, the
market economy is an interlocking system of markets in which the forces of supply and demand operate. There are worldwide markets for wheat, coffee, copper, and other primary products, but the market for housing is essentially local.
The land cannot
be moved, and the housing unit built on it is rarely moved.
There are portable
houses, but these still constitute a rather insignificant market.
The market
for home mortgages is more extensive than that for the housing units themselves due to the development of financial intermediaries which permits the easy flow of capital.
(For example, mortgages on Puerto Rican homes readily find a
market in New York).2 The system of markets which constitute the housing market of any country probably is among the least systematized and sophisticated of the market structures.
Houses are not homogeneous units, at least outside of a relatively
small area.
Housing units are permanent in their location.
or purchasers are not professionals in their field, although
Housing investors professional
real estate brokers may help in the transaction.3 a number of limits as a market. from perfect.
The housing market has
In the first place, communication is far
Houses are different, and part of their value lies in the
actual and potential neighborhood in which they are.
There are relatively
few buyers and sellers that really know the capital good in question.
In
the second place, financing, at least initially, tends to be local and limited by the available financial intermediaries.
In the third place,
housing serves a limited geographical area, usually related to employment possibilities.
In the fourth place, housing serves limited income groups.
Certain kinds of housing provide alternatives for certain socio-economic family groupings and not for others. may be very marked. of employment,4 of the city.
In any given locale, these differences
The poor cannot afford to live too far from the source
Socially, the rich cannot afford to live in certain sectors
Finally, the possibility of supplying substantial quantities
of new housing in relation to the existing supply is not feasible. Up until recently, investment in housing had been regarded as a rather personal affair in which society was not directly interested unless something went seriously wrong with the market, e.g. in the Depression when people could not afford to keep up their mortgage payments much less buy new homes.5 Now we have realized that construction enters into the economic heart of the country in terms of its relations with credit flows, employment, and use of construction materials.
Construction plays a key role in the formation of
capital and has an important multiplier impact both vertically and horizontally on the economy.
This impact holds true in every production sector
(public, private, and popular) of the economy. Before investigating these important areas in detail, however, it will be necessary to analyze the housing market itself.
The purpose of this
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analysis is to see the housing market from the point of view of the maker of housing policy.
What criteria can be used .in determining the influence of
alternatíve housing programs on the housing market?5 The traditional view of the housing market characteristically begins from the top (in terms of some high-echelon government agency office) down. The typical market study7will pick an area like San Juan and examine it macroeconomically, e.g. in terms of employment, incomes, population growth, existing adequate supply of housing units, ccndition of the mortgage market. On the basis of these data an estimate of the effective housing demand for San Juan will be made.
This estimate may de divided by sales price, rental
housing demand, and special housing markets, e.g. for the elderly. A typical conclusion of such a study is that "Based upon projections of income distribution to 1953 and previous FHA experience, the effective annual market for sales type housing, geographically distributed in proportions consistent with the market to be served, is limited largely to homes in lower price ranges:
e.g. 19% of the homes under 12,000; 23% of the homes between 12 and
14 thousand; 22% of the homes between 14 and 13 thousand." Our position is that the traditional view of the housing market is not useful for the making of housing policy.
San Juan is not just one market
but an interrelated, heterogeneous system of submarkets.
The basic problem
is to identify these submarkets and their interrelationships.
The assumption
is that any change in housing policy will find its implementation and interpretation within this market system.
Macroeconomic data are useful in
providing us with certain magnitudes.
They are worthless in the identification
of the housing subraarkets.B William Grigsby has taken the general definition by Rapkin Winnick and Blank and has defined the housing market area as "the physical area within
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which all dwelling units are linked together in a chain of substitution".º Grigsby evaluated this definition in terms of his purpose which is "to work in the direction of matrix analysis in order to develop the concept of interdependency of submarkets".10
Grigsby sees the housing market as a
given complex of submarkets which are related to one another in varying degrees. We will accept for the moment this test of Rapkin 6Jinnick and Blank of whether two dwelling units are in the same submarket:
"whether the
substitutability is sufficient'y great to produce palpable and observable cross-relationships in respect to occupancy, sales, prices and rents, or in other words, whether the units compete with one another as alternatives for the demanders of housing space."11
Using this test from another point
of view, we will want to determine the submarket in terms of the alternative presented to families of certain income levels.
We will look from the family-
eye point of view rather than from the market to the family.
This is an
important change of perspective if we wish to identify the real submarkets and the linkages among them.
The point is not to identify them in terms of
housing deficit or even of housing potentials but in terms of reasonable family alternatives.
Each family can conceivably enter several submarkets.
Housing policy will want to stimulate and control these alternatives in terms of its objectives. Before entering into the problem of identifying the submarkets, the housing market concept should be broken down into the three sectors--private, public, and popular--which produce housing.
With reference to the market
mechanism of the private commercial sector there is no particular problem. McKean puts this very well in his work on Efficienc~L in Government:
~
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...so far as the private sector of the economy is concerned, market prices of outputs are accepted in this study as measures of the value of those outputs to the whole economy. Likewise, the market prices of inputs are accepted, for the most part, as the measure of their cost, that is, as a measure of the value of alternative products which those inputs could produce. Acceptance of these prices as appropriate measures of value and cost to the economy as a whole is implicit in most of our institutional arrangements, in our approval of a competitive economy in which the preferences of all consumers help allocate resources among uses.l2 Supply and demand forces operate more or less traditionally, taking into account changes caused by fiscal policy such as no tax on housing units of less than $15,000 in value.
Families of certain income levels choose among
condominium locations, single-family residences, row houses, etc.
Assuming
that a $7,000 income was needed to enter this market in 1965 less than 20% of the families in Puerto Rico were eligible. To speak of the market mechanism in the public sector is to identify another market area.
What, for example, is the relation of a public housing
agency to the market mechanism? market.
It probably does not buy its land in the
If it does, a subsidy will probably enter in.
Buildings are drafted
by public sector architects and then turned out for bids by private contractors.
The market mechanism function only partially.
It would be an inter-
esting study to see the relation between CRUV projects and market demand, i.e. by eligible families.
There are existing CRUV buildings which have
taken years to fill with families,13 and others which were suddenly bought from the private contractors who built them.
There is every indication that
the market mechanism is not working to brake or to stimulate construction of housing units by the public sector.
It would appear rather that such construc-
tions were a function of the flow of Federal funds and of Commonwealth budget allocations.
CRUV may be taken as one example of a public agency
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related imperfectly to the market mechanism.
Other examples could be taken.
The point is that housing production by the public sector need not be governed by economic efficiency criteria.14
Resources are not allocated
on the basis of the price of inputs and the preferences of consumers.
The
market price does not really reflect the cost to the country of the allocation of resources represented by the production of housing units by the public sector. On the assumption that housing policy decisions seek greater efficiency in the allocation of resources and use of resources for housing purposes, to what extent do market prices show efficiency in the public sector?
In the
first place, the public sector does not produce housing units for profit. Theoretically, it is not in competition with the private sector.
The public
sector has the purpose of a more effective distribution of wealth based on a more or less well-defined social policy.
"Every family its own home" is a
policy involving a commitment to those families which are unable to enter the private market.
The decision of the public sector to enter into the
provision of housing units is a political decision which implicitly takes precedence over the free operation of the price mechanism.
How then is
efficiency to be measured in this case, an extremely important case in a country where two-thirds of the families cannot enter the private market unaided?
To cite McKean again: ...there is a logical basis for identifying market prices of outputs with their value to the nation and market prices of inputs with their cost to the nation. Such prices, by guiding the choices of firms and individuals, do lead to 'maximum production' or 'efficiency' from the viewpoint of the whole economy, if certain conditions are fulti].led (for example, the existence of a high degree of competition). For those who wish to examine it, the rationale for using market prices is summarized in an Appendix to this chapter. As explained
4
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there, the foregoing terms refer to maximum production or efficiency in a restricted sense, namely, efficiency for a particular distribution of wealth. Turning now to the government sector, we cannot as feel confident. In government activities, whether or not prices generated by the market mechanism should be used to value outputs and inputs is a more complicated question. The answer depends upon the ultimate aims which lead to government activity in each sphere. Why do 'the people', through their government, intervene at all in such areas as flood control, irrigation, and water pollution? Perhaps the reason is that they would not, under any circumstances, want prices to regulate the output of flood-control or irrigation services, just as most people would not want free markets to regulate the output and nature of court decisions. If that is the situation--if they dislike the performance of the price mechanism in this sphere--it is hardly appropriate to simulate its results, even in part, by the use of market prices.l5 Granted that government is justified in entering the field of housing production, the question is, On what terms? ['e will assume here that government will only enter to the degree that private industry cannot or will not.
Pe will examine later to what extent government should help
private industry reach more famities in terms of their housing needs, instead o£ producing housing directly itself.
Now we are interested in the criteria
which decide how limited resources are to be allocated when the price mechanism is not functioning. Although the price mechanism of the market does not function normally in the public sector, it does function partially. for example, may be judged on a market basis. housing unit can be evaluated.
The costs of the inputs,
The technical quality of the
The financing may be measured.
In fact the
major costs of housing production by the public sector may be evaluated in market terms although there may be no market transactions involved.
Probably
the only major cost which escapes such quantificatíon is the allocation of government administration costs to a particular program, but even this may
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be estimated. standards.
The output of housing services can also be measured by market
This means that certain cost-gain comparisons should be useful
criteria for determining program mixes. On the other hand, the context of decisions made in the public sector is quite distinct from the standard market decisions of the private sector. The former seeks to implement socially-accepted goals publicly expressed by the government, goals in which the public sector takes on the responsibility of providing housing for those families who cannot provide it for themselves. There is no question of profit here, only of need.
The housing policy
decision, therefore, must evaluate the market factors operating in the public sector in a non-profit public welfare context.
High-level criteria must
deal with the fulfillment of need rather than with the market forces of supply and demand.
Are the available resources meeting the need most effectively?
This question seems to force us back into the housing deficit approach. It does not because need is a relative not an absolute. poor house needs a better one. beginning.
The family with a
The family with no house needs a reasonable
Housing policy decisions will be made to fulfill needs on a
flow stream basis rather than on a stock basis.15.5
If we think of the
housing problem as a production of a stream of housing services, then we wish to measure the present flows of housing services in relation to family income groupings, and then act to improve these streams on an equitable basis. This action may involve the programming of loans, technical help, family subsidies, cost of community services, etc.
The action may
also involve putting up more housing units, but it need not. These considerations bring us back to the perspective of the family once again.
What options can the public sector give the family?
families need much less help than others.
Some
Needs differ so that no one
housing approach, e.g. the public "caserío", is sufficient.l`'
The need
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for giving a family, even a low income family, options can hardly be stressed too much.
In any country the poor as well as the rich have definite notions
of what constitutes a house and of what they want.
Each family has a vision
of its own home for which it is willing to work unless it is crippled by a government which is at best paternal at worst self-seeking. The options provided by the market mechanism in the private sector are obvious.
The family has its income limits and must harmonize these with a
variety of residential offerings, new and already in use.
Within the income
limits a desirable location is sought, desirable socially rather than in The options provided to the family which does
terms of proximity to work.
not have the income to enter the private market are not so obvious.
The
Housing Bank will provide loans whose object is to boost the upper limits of low income families into the private market.
Loan rates are reasonable and
a Puerto Rican FHA is developing to make them attractive to investors.17 The lower limits of the low income families have an option of sorts in going into a slum or into a caserío, which is theoretically a temporary residence until the family is in position to enter the low-cost housing market.
One
goal of housing policy will be to increase the options available to the low income family.
They should not be deprived of their consumer preference
right merely because the public sector has chosen to intervene. We have already referred to the principle of subsidiarity under which the public sector enters basic areas only when the private sector cannot meet the need.
There is also another justification for public sector housing
production which is more positive. for housing policy itself. of economic development.
In fact it constitutes the justification
Housing production is an important coefficient
It broadens the base of capital formation from
which the country operates.lg
It is much too important a factor in economic
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development to grow on the basis of some invisible hand.
The problem is,
of course, the integration with public sector construction activity with the total construction activity of the country and the total economic growth. The third producer of housing units is the popular sector.l9
These
are essentially low income households, rural and urban, who handle on a noncommercial basis their own residential construction, including additions and improvements.
There is reason to believe that construction operations
by the popular sector constitute an important fraction of the total construction activity.
It is this sector which produces slum housing.
The popular sector uses the market mechanism differently from either of the other two sectors.
Unlike the private sector it uses the market
partially and on a long run basis.
It uses the market partially because
it will quite often furnish its own labor and/or receive technical help and subsidies from the government. or it may not.
It may get its materials on special credit,
The "long run" referred to is the rather long period of time,
five to ten years, in which the transition from inade.~uate to adequate housing takes place.
The family slowly changes from wood to concrete, from two
rooms with an outhouse to four rooms with the bathroom within the house. This change belongs to an investment process rather than to the kind of intermediate credit flow received by the constructor in the private sector. The popular sector may be related to the public sector, e.g. cooperative housing programs, self-help housing, but it may also be in conflict with the public sector, typically, the construction of slum-type housing. In any event, the forces of the market mechanism do not really come into play in a significant, controllable fashion.
It is rather a question of
rapid temporary construction so as to have a dwelling before being apprehended in the construction act by the police.
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Only an unreal housing policy would close its eyes to construction activities by the popular sector.
At least these should be channeled so
as to provide a reasonable base .for future urban development instead of just another grouping of amateur capital formation activity which must be ~
destroyed in the name of ordered growth.20 [ghat criteria will the housing policy maker use to regulate construction by the popular sector? Before entering into a search for specific criteria for use by the housing policy maker it will be useful to reflect a bit more on the basic concept of the housing submar.ket program and systems. are "public investments yielding public returns".21
Housing programs
Each program may be
taken as production process related to the development of relevant housing units.
In a larger sense the program belongs to a system which supports
it institutionally in terms of financing, community services, actual construction, legal, etc.
These systems are more or less integrated.
In fact,
the goal of housing policy is to develop a coordinated and harmonious set of systems in the housing sector.
Given institutions may have several
programs, as does, for example, the CRUV, Puerto Rico's low-cost housing agency22 The program is the hard core productive element in the system and will be the focus of our search for criteria.
~
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If the program is taken as the smallest integral productive unit and the system, refers to the program complete with its institutional structures, how does the market fit in?
The market, or more precisely the submarket,
relates the system to the existing set of consumer preferences.
This
difference is an important one because the function of the concept of the submarket is to give priority to the alternatives facing the family.
Once
a family chooses a cooperative housing program, for example, the kind of institution
it uses, credit flows, relation with the government, etc., all
flow almost automatically.
The key decision is the one to enter a particular
submarket, to participate in a certain housing program.
The program is less
o£ a consumer concept than a production and programming concept, although the distinction is useful primarily for analytical purposes.
Each system, there-
fore, represents the total institutional milieu within which consumer preferences are expressed vis-a-vis a particular program of housing production. This program might be sponsored by anyone of the three sectors, the public, the private, the popular.
Once again, however, the focus is on the family
as viewing housing alternatives.
The housing policy maker has the respon-
sibility of generating and stimulating programs in each sector which will create reasonable options for the family rather than force each family into a Procrustean set of housing services. Grigsby stresses the factor of linkage among the housing submarkets.22'5 Quite rightly he stresses the fact that "units compete with one another in alternatives for the demanders of housing space"22.6, although the notion of competition is not too clear.
If the alternative among sets of housing
services available are real then it would appear that the competition would he quite imperfect.
We can agree with Rapkin Winnick and
Blank22.7
that a single market is formed by housing units which are relatively
-79-
interchangeable, but we do not agree that when "units compete with one another as alternatives for the demanders of housing space" that this means that they are in the same submarket.
This position suggests by indirection
that a given family has no option among submarkets. The point of family options is very important to the housing policy maker.
Policy decisions affect these options, closing or opening them, even
changing them from sector to sector.
If we limit our thinking to one
submarket with a variety of homogeneous units then we are limiting housing policy to technique, reducing it from an economic policy.23
The whole concept
of linkage, so well developed by Grigsby, depends fundamentally on the existence of these options and their measurement for identification purposes in terms of location, tenure, value, structure. Here, Grigsby's analysis appears incomplete.
Linkage is seen as some-
thing existing among submarkets rather than in terms of alternatives for the demanders of housing space.
This view tends to obscure the basic
relationship of interest to the housing policy maker, namely that of the submarket alternatives available to the demanding households.
The distinc-
tion is an important one for housing policy because the goal is to allocate households among submarkets and not within submarkets. Grigsby suggests that the "chain of substitution" (would "cable" be a more illustrative term?) has four major links: structure type, and value.
that of location, tenure,
His analysis suggests, quite rightly, that these
are organic links in continual shift, although he makes no effort to weigh them.
Hé sees these linkages among submarkets as linkages among individual
houses in these suñmarkets.23.5
-•80-
Thus the size and number of submarkets as well as the linkages among submarkets are in the process of perpetual change. This dynamic aspect of the matrix means, of course, that each time the market moves to a new equilibrium position, the coefficients in each cell of the matrix have probably changed. This in turn implies that the matrix would be extremely difficult to manipulate empirically even if data were available for insertion into the model.23• He declares that 'bur goal is a matrix of housing submarkets which can help us predict the impact of economic and social trends, and particularly governmental actions, on various sectors of the supply".23•? a housing policy goal?
Is this goal really
It is not so much a question of the impact of changing
submarkets on the various sectors of supply.
Housing policy wishes to provide
each family with reasonable options among submarkets, reasonable not only in relation to consumer preferences but also to an integral economic development program.
Let us examine for a moment this household view of the submarkets.
?e may begin by using the stock-flow distinction previously used for the evaluation of the economic role of housing.24
In this case, however,
the stock of households refers to those households who are content for the moment, i.e. households which are not planning to enter the market within a given period.
The flow of households measures those who are in the market
for a different unit of household services.
Included in the stock will be
those households who intend to improve their own homes.
It should also be
pointed out that stock includes both owners and renters, the latter being typically closer to the frontier of the stock-flow spectrum. The flow of families is the significant variable for the housing policy maker.
This flow is composed 1) of migrants in and out of the particular
geographical area of a given housing market, i.e. interrelated complex of submarkets; 2) of households in the process of changing their submarket
-81-
within the market area; 3) of households changing uíthin a given submarket. New households breaking off from those already existing would be categorized
£
according to their new relationship with the housing market complex. The flow of households then needs to be identified with the particular production sector involved (public, private, popular) and, if possible, related to the program mix o£ each sector.
The housing policy maker will
be concerned with stimulating, controlling, coordinating the flow of households into given programs.
All of this requires a flow of data on a
stratified sample basis analogo•is to the flow required for unemployment statistics.
The stock-flow distinction for households may have a high
degree of seasonality, but this too can be measured without great difficulty. Special difficulties will enter with regard to housing policy for the popular sector, e.g. for slum development.
i
Chapter IX.
s
These will be considered in
CHAPTER VII
THE FINANCE VARIABLE IN HOUSING POLICY
The critical dimension in the production of housing units in a developing economy is finance.
Housing materials can be produced locally.
Adequate quantities of labor are available, though not always with the desirable skills.
Organization can be arranged.
The significant constraint
is credit. It is true that people in developing economies have long produced housing without being greatly dependent on the availability of credit.
In
a largely rural society, families and neighbors pitched in to build their own homes.
They were not built completely, all at once, but were the result
of a growth process. In a developing urban region, family work commitments and the discipline of time value do not permit the moderately low income family to construct its own home without recourse to credit.
Land is expensive.
The utilities,
such as water and electricity, must be installed by relatively skilled labor. Construction materials must be purchased from a local entrepreneur rather than gathered by hand from a nearby forest. society.
The urban society is a money
Since the typical low income family has no savings tradition, it
must look for credit before it can hope to have its own adequate home. Puerto Rico is no exception to the rule.
Rapid urbanization together
with a low accumulation of savings combine to create a strong demand for construction credit.
Even the low middle income families tend to want their
home built for them, a well equipped home which costs more than double their
-83-
annual income.
This demand for housing credit has been satisfied by large
imports of savings from the United States.
The willingness of these savings
to enter Puerto Rico to work reflects the similarity of political and economic conditions which tend to create a commor mortgage market.
There
is a common monetary system, free flow of funds, a mortgage market largely composed of FHA- and VA-guaranteed mortgages, and political stability supported by the United States Constitution and common citizenship. Precisely because of its close relationship with the United States, Puerto Rico is not the typical developing economy in its ability to solve its housing problems.
Still it is a developing economy and as such its
ability to absorb large quantities of imported capital is definitely limited. One of the tasks of this chapter will be to .discover these limitations. Another task will be to break down the housing problematic into more manageable subproblems for housing policy purposes. Factoring Out Subproblems
We begin by assuming that housing credit is a relatively independent variable in the supply of housing units.
Objectives related to this
variable therefore form an important part of housing policy.
They also
tend to link housing policy with monetary and fiscal policies.
A brief
description of the steps in the financing of residential units in Puerto Rico will be useful in helping us to factor out the relevant subproblem areas. There are two relatively independent factors in the financing of residential units:
1) there is the owner developer, and 2) there is the
permanent lender.
The owner developer takes on the responsibility of
seeing that his land is prepared or "urbanized", plans the project, gets it approved, and finally hires the general contractor (who might be himself)
-34-
who is responsible for the actual construction.
The permanent lender
approves the project beforehand, and, for a fee, gives the owner developer an advance commitment in which he promises to buy the mortgage when the construction is completed.
With this commitment the owner can go to a
financial institution which grants intermediate credit, usually a commercial bank although it could also be a savings and loan association, in order to get the line of credit he needs to build the housing units. In the wholesale production of housing units which an urbanization involves there are two types of credit, one longterm and one intermediate, granted by two separate institutions.
In the retail housing market, i.e.
production and sale of one house at a time, the same institution might well furnish both types of credit.
In either case the decision of the financial
intermediary to furnish credit or not, and at what price, is a key determinant in the development of construction activity.
If housing construction
has flourished in Puerto Rico it is precisely because there has been a ready flow of capital, at relatively low interest rates.l
The financial
intermediaries have found themselves with a good supply of mortgage capital due to easy money conditions in the United States. Before attempting to factor out the subproblems suggested by the role of financing in Puerto Rico residential construction, one other point should be made.
Puerto Rico is not a State.
At present it is a commonwealth which
is under Common Law 500 of 1950 freely-associated to the United States.
In
fact, Puerto Rico is seriously considering exercising her option to choose definitely among statehood, independence, or continuing the commonwealth as a permanent political structure.
While this uncertainty exists it is
realistic to consider Puerto Rico in its balance of~ payments relationships
-85-
with other political entities, above all, with the United States.2
It is
quite possible, too, that daily economic decisions are tending to close off the political options by increasing the dependence of Puerto Rico's economy on that of the United States.
This tendency appears to be a significant
one in the support of construction activity by imported capital. What subproblems then should be factored out in the Puerto Rico construction problematic?
We can begin by making certain key distinctions.
In
the first place, there is the basic economic distinction between long term and intermediate credit.
The same institution may grant both, but they play
different roles in the portfolio of the financial intermediary. play different roles in the housing market.
Also they
The intermediate credit is
related to the owner developer with the funds to pay land for the actual urbanization and housing construction.
The long term credit provides the
household with the mortgage needed to make his demand effective. In the second place, the construction of residential housing units by private initiatives and public initiatives must be distinguished.
The actual
housing unit might be identical, and in fact the construction is probably done in both cases by private enterprise.
At the same time, the sectors
do have traditionally distinct commitments.
The entrepreneur seeks a profit-
able return on his investment, racing the risk of failure if his judgment of the market has been faulty.
The public agency seeks in theory to serve
a particular public need, e.g. the provision of adequate housing for those families who cannot procure it in the private market, and uses the budget as an instrument of allocation.
The public housing agency has a far wider range
of options in selecting housing programs because it is not responsible to stockholders but to the more flexible public good.
The public construction
-8v-
sector can also count on special helps or subsidies in its programming and is generally guaranteed against failure.3
These special non-market factors
distinguish the public sector from the private sector and also add to the difficulty of evaluating the former on a cost-benefit basis.4 Thirdly, a distinction must be made between residential and nonresidential construction, and this for many reasons. relatively independent variable.
The residence is a
Schools, hospitals, se~rers, roads, elec-
tricity, airports, etc., all tend to be more or less dependent on actual or planned residential construction.
Zoning recognizes these distinctions in
the actual allocation of urban land use.
Economically, it is the presence
of the homes which justifies and demands many of these other kinds of construction.
Even factories now are being brought to the home instead of
the housing units forming a company town about the dominant factory.
A
structure of highways will be laid out almost irrespective of actual housing development in order to insure an integrated coverage and communication for the developing region, but even these must be carefully coordinated with urban residential growth and patterns of change.
It is on the basis of this
distinction between the dynamics of residential construction and the relatively dependent development of nonresidential construction that housing policy is located in the monetary policy-iscal policy spectrum rather than the more general (and therefore, more unwieldy) construction policy.5 In the fourth place, the search for subproblems and for critical variables leads us to distinguish domestic capital from imported capital.
Since
Puerto Rico belongs to the United States monetary system one would suppose that there is no real difference between the two.
Even apart from the direct
political consequences of having a substantial percentage of the island's
e
-87-
capital formation dependent on outside capital there are serious economic consequences.
The fact that domestic capital leaves Puerto Rico to work
abroad and that imported capital comes in to do this work of capital formation in the construction sector exercises a strong influence on balance of payment flows.
At this point we need not pass judgment on the differences
but only observe that they exist.°
Imported capital services must be paid
for and this involves losses to the Puerto Rican economy which are not balanced by the receipts from abroad in payment for Puerto Rican capital services.
Just as any economic good, it is expensive to move capital from
one region to another.
Also flows from the United States capital markets
are influenced by an entirely different set of factors from those by which capital flows out of Puerto Rico are influenced.7 In the fifth place, there is the
pular sector which we have already
signaled out as distinct from the private enterprise and public enterprise sectors.
Generally speaking this sector takes more personal production initia-
tiles in building its homes.
The construction activity of the popular sector
.is relatively more important in the rural areas, but anyone who. has observed the rapid transformation of new urbanizations as owners add substantial improvements to their new home must be impressed by the importance of this activity in economic terms.
The difficulty is that a substantial portion
of this construction activity goes completely unrecorded statistically. Still it is an activity whose impact is to change land use, increase the demand for skilled workmen, use considerable amounts of construction materials, and demand more intermediate credit. minimum of long term imported capital.
This sector probably uses a
-88-
PUERTO RICO CONSTRUCTION DIAGRAM:
FLOW OF FUNDS Domestic Capital
Imported Capital Private Sector
Long Term
Long Term -Residential -Non Residential
Intermediate
Intermediate
Public Sector Long Term
Long Term -Residential -Non Residential
Intermediate
Popular Sector P -Residential i -Non Residential ~
Long Term Intermediate
Intermediate
Long Term Intermediate
Identifying the key distinctions in housing financing in Puerto Rico is not enough. show.
These must be integrated as the above diagram attempts to
Residential and nonresidential construction occurs in each of the
three sectors, private, public, and popular.
Each is supported by domestic
and by imported capital flows, and each of the capital flows is present in an intermediate- to long-term time spectrum.
It is precisely the organic
interrelationships of these basic divisions which makes it difficult to factor out useful subproblem areas.
Divisions tend to overlap, but the
important objective for housing priicy makers is to ferret out the critical variables concerned, their magnitudes, and their relationships in the hierarchy of the total housing problematic.
Subproblem 1:
Private Sector-Public Sector Relationship
llhat are the characteristic variables of this subproblem which can be evaluated and controlled in the making of housing policy decisions?
•
-89-
We begin by distinguishing the complex of technical decisions culminating in building permissions from the economic policy decisions which relate the former to the economic development of Puerto Rico.
The technical programming
and approval function under the aegis of the Planning Board in cooperation with other governmental agencies and with the project's oTrn architects and engineers.
This technical process will be put into the Marshallian "ceteris
paribus" while we concentrate on the objectives and criteria directly related with the formation of economic policy decisions in the construction of housing units under private sector initiatives. In terms of housing units constructed or of total construction value, the private sector has played the dominant role in the commercial housing market. (We shall ignore for the moment the production of housing uníts by the popular sector.) Over 75% of the new housing units were constructed by the private sector in 1963 (88% in terms of value in 1963-65).
Should the
ideal be to have all residential construction initiated by private enterprise?8 Assuming the inassumable, that private enterprise can serve most efficiently the housing needs of all levels of family income in Puerto Rico, the answer is in the affirmative. Historically, the private sector has been very far from achieving this target.
In the early Sixties some 50-7U% of the housing units privately
constructed have been FHA-guaranteed.
A sample taken from FHA data in
April, 1965, shows that the median priced housing unit is approximately $15,000 and was bought at a family income level of $550 monthly.
With 62%
of Puerto Rican families earning less than $250 monthly, it is clear that the production of housing units by the private sector is not meeting current housing needs.
Presumably, the market demand of higher income families
offers greater profit opportunities.9
-90-
Does this situation suggest that the public sector should be given the complete responsibility to meet the housing needs of families who are not able to enter the market?
Again, historically, it is clear that the public
sector has fallen far short of any such responsibility.
The existence of
substandard housing plus the inability of families with incomes of $3,000$5,000 to get either public or private housing give witness to the deficiencies in the present housing program of Puerto Rico.10
Neither construction
for profit nor construction by subsidy seems to be meeting family housing needs.
Evidently what is needed is some combinations of the two, residential
construction subsidy-stimulated and profit-motivated. Assuming that a basic responsibility of government housing policy is to create a climate for relevant (in the sense of meeting the needs of the lower income families) production of housing units by the private industry sector, the following key variables can be influenced: 1.
The price of the important land variable is subject to fiscal control through taxes levied to discourage speculation.
The institution of
a land bank, including some of the characteristics of the present Land Administration, might also be useful. 2.
Service charges on capital can be lowered directly by the reduction of interest rates or the extension of the term of repayment.
These
can be lowered indirectly through a system of guarantees of low-cost housing such as that contemplated by the Housing Bank. 3.
Construction material costs can be reduced through the granting of lower rates on intermediate credit.
4.
Tax rebates to industry engaged in certain types of construction.
5.
Exemption of investment in low-cost housing units from income tax. In Puerto Rico this exemption holds up to $15,000.
-91-
6.
Minimize purchaser downpaynent so that housing costs are related to current family income rather than to savings.
7.
Subsidize buyer mortgage costs and insurance rates.
8.
Public-supported research into better quality, lower cost housing units tailored to Puerto Rican family requirements and capacity to pay.
(This might include a public re_ations effort to change con-
sumer tastes away from the current pill-box-type home.) Controlled changes in each one of these variables, except possibly the research variable, will have a measurable impact on the housing units costs for a particular project at a particular time.
The cost-lowering impact of
a mix of these variables would he less easy to determine, but reasonable estimates could be arrived at.
The significance of these variables lies
in the fact that they are susceptible to control by public policy for the purpose of stimulating (not necessarily controlling) the efforts of private enterprise in the construction of reasonably-priced housing units.
The
proper and constantly-evaluated use of these variables as well as others should forge a Puerto Rican housing policy which will serve the needs of households at all income levels while permitting the contractor to choose at what income level he will provide housing units. One other point should be made here with reference to the regional inequities o£ construction within Puerto Rico.
Specifically, over two-thirds
of the residential. units built by the private sector are to be found in the San Juan Metropolitan Area. (See Table.)
This imbalance reflects the rapid
growth of San Juan and also tends to accentuate it.
Migration of famílies to
San Juan from other parts of the island has been a continuing and disturbing phenomenon resulting from a lack of attention to regional planning.
The
following Table reflects the concentration of residential construction permits in San Juan:
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a) Private housing construction permits in San Juan Metropolitan Area as percentage of total housing construction permits in Puerto Rico (Fiscal Years) 1955 - 73% 1956 - 78% 1957 - 6170 1958 - 67% 1959 - 690
Source:
b)
1960 - 77% 1961 - 71% 1962 - 64% 1963 - 66% 1964 - 63% 1965 - 60%
Informe Económico al Gobernador
New public housing units in San Juan Metropolitan Area as percentage (Fiscal Years)
of total new public housing units in Puerto Rico 1955 - 6;0 1956 - 30% 1957 - 1% 1958 - 7% 1959 - 14;0 Source:
1960 - 29% 1961 - 27% 1962 - 74% 1963 - 31% ir'! -
8'/0
Planning Board, Commonwealth of Puerto Rico
Who are these families? do they come from?
What is their reason for moving?
What kind of housing
Accepting the general objective of the advisability of
developing Puerto Rico outside o£ the San Juan area, the possibilities of developing a substantive housing program on a regional basis needs careful study.
The perspective of the island's regional development plan to date
has tended to focus on industrial development as the relatively independent variable and residential units as relatively dependent.
The results of this
analysis indicate that the focus should be rather on the family housing unit as the independent variable.
-93-
Subproblem 2: The Role of Private Enterprise in the Construction of Low-Cost Housing
The subproblem of the role of private construction enterprise in Puerto Rico's low-cost housing program can be factored out of Subproblem 1. We begin by accepting the principle of subsidiarity which says in effect that public enterprise should take over the project necessary for the public welfare only when private enterprise cannot do the job we11.12
In other
words, we assume that the private sector (including the popular sector) has the primary housing responsibility in Puerto Rico and that the public sector has a complementary housing responsibility in the sense of helping very low income families to provide for their housing needs.
This function is fulfilled
very well in the mutual-help rural housing program even though the program is far from adequate in its coverage. On the assum».ion that low-cost housing involves providing housing units for families whose ir_co:nes range between X2,02^ and $5,000, then it is
immediately evident that private industry is not presently reaching this group.
This group, which included 46% of the families of Puerto Rico in
1963, has a c~c.p_=.cit; to pay for a home valued between $4000 and $9000. a group it has accumulated very little in the way of savings.
As
Granting
that a large number of alternatives are available to the housing policy makers to stimulate the production of housing units by private industry for this group, what criteria should be used in making choices o€ the appropriate policy mix? The fundamental choice is between using input criteria or output criteria. In the former case we set a budget limit and try to achieve the greatest possible number of relevant housing units given this budget.
In the latter
-94-
case we set the desired product at so many housing units for each level of family income and try to minimize the costs involved.
To put it another way,
a fixed cost objective involves us in effectiveness criteria, while a fixed product objective requires the use of cost criteria.
The two are closely
interrelated, but they should not be confused. To show the need for criteria more clearly we can take Puerto Rico's 1963 budget assignment to housing. of 62% over the 1962 assignment.
$9.9 millions were assigned, an increase
This sum was intended to take care of the
following housing needs, urban and rural:
ALLOCATION OF 1963 PUERTO RICAN BUDGET FOR PUBLIC HOUSING
3,100 urban housing units 5,000 families of "°.; rF
'
s" installed in rur: 1
3,500 rural housing u .:?'Ls of the self-help p^
c'mmunities
<:xn
1,000 urban housing a _it^, to be rehabilitat i 6,300 slum f 332 single
+.á.-
to be relocated in adecu t;ous ng
ertm;en_s to be constructed in the urban zone
700 lots with essential services to be distributed 700 housing wells to be constructed; to be terminated by each family
Clearly this budget assignment includes a number of significant housing policy decisions not only in relation to the allocation of a given budget amount but also in relation to construction by the prívate sector. question is, On. what basis were these choices made?
The
Were alternative
programs evaluated and the more effective ones selected?
What criteria
-95-
were employed in the choice?
Could this budget have been used more effec-
tively through a series of subsidies to stimulate the private construction of housing for low income families?
To use marginal thinking, at what point
does efficiency of the private sector constructicn fall below that of the public sector?
The exercise of a rational housing policy depends on the
explicit consideration of these questions. To the extent that the principle of subsidiarity is accepted for implementation the public sector should not make residential construction plans without reference to the possib~.lity of their being implemented more efficiently by the private sector under the stimulus of certain economic aids. The impact of encouraging private initiatives in the construction of lowcost housing should tend to harness financial resources not only of the public sector but also to release those of the private sector and of the popular sector.
Subproblem 3: Distribution of Construction According to Family Income Capacity
The construction of housing units should be geared to the family income levels.
More fundamentally, we accept the goal of fulfilling current housing
needs in a more equitable manner.
Just as a more equitable distribution of
national income is an important element in general economic policy, so a more equitable distribution of opportunities to purchase new (and existing) housing units is an important objective of a country's housing policy. At present in Puerto Rico14 the opportunity of a family to buy its own home is almost entirely related to its current income capacity--this relationship does not hold in the case of rural self-help housing.
Relatively little
has been done to enable the lower income family to purchase its own housing
-96-
unit.
On the assumption that housing should not be given away, the selection
of criteria for the evaluation of alternative subsidy mixes should be related to the family capacity to pay and, possibly, to the size of the family.
For
each possible type of subsidy, including loan guarantees of the FHA-type, elimination of downpayment, reduced interest on mortgages, extended term of payment, reduced service charges, reduced insurance rates, the housing policy maker can calculate the cost of the subsidy per housing unit and its effectiveness in terms of reducing the pricé of the housing unit.
On the basis
of this systems analysis approach a better (i.e. more efficient) group of programs can be devised to serve the housing needs of low income families. It will probably be necessary to have a distinct subsidy mix for each level of family income or at least to provide for a careful relationship of the particular set of subsidies to the densely populated levels of low income families between $2000 and $5000.
Subproblem 4:
Residential Construction by the Popular Sector
Housing planners and economists are so accustomed to thinking in national income accounting categories that the possibility of important economic contributions being made outside these categories tends to be ignored or rejected as part of the end of "clandestine housing".
The
implication is that real economic production of housing units will be found in the private residential market or in production by the public sector.
The fact is that a great deal of residential construction takes
place apart from the initiatives of these two sectors in what we have chosen to call the popular sector. We have already noted that initiatives by the popular sector dominate the residential construction field in the developing economies of Latin America.
Public budgets and private industry have been unable to meet the
-97-
need for housing of a rapidly urbanizing population.
The popular sector has
filled this vacuum with vast numbers of housing units, many of them initially inadequate but which are developed and improved as the family income grows. For many reasons Puerto Rico finds itself economically in advance of the majority o£ these economies.
The private and public sectors have been
relatively more effective in filling housing needs.
Still a considerable
amount of residential construction has been produced by the popular sector, both in the country and in the city.
This production is largely unmeasured,
but there is every indication that it constitutes an important segment of Puerto Rico's construction activity.
A brief analysis of this system in
terms of the following distinctions will help to indicate possible criteria for housing policy:
i.
i.
Urban versus Rural
ii.
New Construction versus Improvements
iii.
Technical Supervision versus Nontechnical
iv.
Authorized versus Unauthorized
v.
Land Owned, Rented, or Free
Urban versus Rural The housing unit in the city and the housing unit in the country perform
at least two basically different functions. living rather than for working. from home.
In the city the home is for
The homeowner is more likely to work away
In the rural sections the home with its adjacent buildings is
more likely to belong to the productive process in which the owner also is involved.
In terms of the capacity to pay of the citydweller and country-
dweller there is also a distinction, in the sense that the former will find it easier to get credit facilities.
Generally speaking, the city is far more
-98-
closely integrated to the monetary system.
This financial factor plus the
fact that the city dweller is more apt to be a specialist of limited skills explains why relatively few urban families build their own new homes. The country family, on the other hand, is more likely to build its own home, usually with the help of some neighbors.
Both the city and the
country family will make important additions to their homes, but the former are more apt to hire a small group of construction workers to do the job while they themselves continue in their own work.
Zoning, use of public
services, needs for licenses also are more relevant to urban construction and tend to require skilled construction workers.
In Puerto Rico no permit
is required for construction in rural areas unless it is near a main road. Finally, there are the cultural differences between the city families and the rural families which may result in distinct patterns of construction. The following table presents some distinguishing characteristics of urban and rural housing in Puerto Rico as of the last housing census:
SOME CHARACTERISTICS OF URBAN AND RURAL HOUSING UNITS Puerto Rico, 1960 (000's of units)*
Housing Units
Urban
7, of Urban
Rural
% of Rural
Total
248
100
273
100
Occupied
233
251
By Owner -Land Owned -Land Rented -Land Free
121 57 14 47
198 105 5 87
By Renter
103
52
*United States Census of Housing:
1960, Puerto Rico
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The relative success of the self-help housing program in the rural areas of Puerto Rico is both based upon and reflects differences in country and urban life.
We will examine this program in a moment as an illustration of
supervised construction activity within the popular sector.
ii.
New Construction vs. Improvements Construction activity by the popular sector involves improvements to
existing housing as well as the construction of new housing. terms the latter may well be more important.
In economic
An immediate sequel to the
erection of urbanizations is the addition of constructed units ranging from rooms to ironwork.
Often the owner will not do the construction work himself.
He will hire a foreman who in turn will hire a small crew.
The owner, however,
may purchase the materials and in general supervise the project.
The number
of square feet constructed plus labor and management cost are not included in national income accounts.'E
iii.
Technical Supervision vs. NonTechnical The phrase "technical supervision" refers to construction activity by
the popular sector which is programmed by a public agency and technically organized.
In practice this takes place in Puerto Rico's rural low-cost
housing program which is administered by the Department of Agriculture. Using land expropriated under the 1941 Ley de Tierras, the "campesino" is given no less than 1000 square meters plus technical assistance and credit for construction materials needed.l7
It has been estimated that 50h of the
rural families live in inadequate housing.l$ The families group together and ask the Social Program Administration for technical assistance.
The Administration furnishes social workers who
help the family to organize their savings program for the downpayment of $30.
-100-
It helps the families to set work schedules, as each family must provide two to three days of labor each week.
Then it assigns an engineer foreman who
handles the technical direction, the ordering of materials, the supervision of the concrete crew (part of the Administration) and of the whole project of 15 to 30 homes.
The homes cost the families around $400 which they can
pay off in small monthly portions over a ten-year. period.
The following
table shows the growth of this program since 1950:
CONCRETE HOUSING UNITS PRODUCED ANNUALLY UNDER PROGRAMAS SOCIALES 1950-1963 1950-1955 (First Five Years) 1956 1957 1958 1959 1960 1961 1.962 1963
959 rural 932 " 927 " 1308 " 1345 2503 " 2867 " 2899 " 2774 "
+ + + + + + + +
82 urban* 865 " 221 " 182 " 190 " 128 " 117 " 256 "
*"Urban" - technically within urban boundaries, but practically rural.
From 1950 to 1963 the self-help housing program constructed 18,564 housing units at a cost of $7.8 millions of which the Commonwealth paid $5.8 millions.
Each one of these housing units has an immediate multiplier
effect not only in the work contributed by the families but also in the improvements which they must make on the units constructed. the initial structure built has no kitchen. owner.
For example,
This must be added by the
The estimated value of the completed self-help housing unit is
$1500 to $1900.
-1O1-
This program has been limited in its growth only by the inability of the Administration of Social Programs to provide the necessary budget assignments and personnel.
Apparently there is a rather high productivity for
the value of the inputs involved.
Further study might well show the advis-
ability of expanding and perfecting this program.
iv.
Authorized versus Unauthorized Construction For policy purposes the illegality of unauthorized residential construc-
tion or improvement is of much less importance than the fact that the unauthorized construction activities are substantially unrecorded.
The
Planning Board has tried to make some estimates of the amount of such construction to determine its economic significance.
There is every indica-
tion that they are significant to the degree that the housing policy maker cannot dismiss unauthorized construction as a civic fault of little consequence.
If more complete studies bear out the significance of this activity
it may well be necessary to increase either the surveillance or the fines for such activity.2O
v.
Land Owned, Rented, or Free The table on page 93 indicates very clearcut distinctions among the
categories of land owned, land rented, and cash free land.
Probably a
large proportion of the latter is unauthorized occupation.
Again speaking
economically, the importance of this is that mortgages cannot be taken out, nor large loans, where the title is not clear.
This factor therefore
will also tend to encourage construction activity by the popular sector itself.
The problem of cloudy land titles is typical in Puerto Rico as
in any developing society.
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Subproblem 5:
Housing Unit Pricing
One sector of the economic policy spectrum where housing policy is melded with monetary policy is that of price stability.
In the case of
housing policy, however, the concern is less with keeping general price levels stable than with the impact of alternative housing policy programs on the prices of the entire housing unit.
A detailed analysis of price
stability objectives will be our concern in a later chapter.
Here it will
be sufficient to indicate general relationships which exercise an important influence on the price of the housing unit as a whole. One construction cost formula which ties the factors together may be expressed as follows:
Uc = K(A+B+C),2Z
where
A_ = direct construction cost, i.e. the price per unit bid by the general contractor B
cost of land per housing unit
C = indirect construction cost, including financing fees, interest charges, legal charges, architects' fees, internal revenue stamps, etc. K = carrying charges of the completed building, including permanent loan interest charges, mortgage guarantees, taxes, insurance, reserve, and amortization 22 Uc= monthly charge per housing unit This formula helps us to judge the effect of various types of housing subsidies on the production of housing units for certain family income levels. For example, a new Federal Housing Act which reduces permanent interest charges to 3% on certain kinds of housing will reduce K substantially and therefore will open up the program to lower income levels. Another advantage of this formula is that it indicates where rising costs of one factor might be balanced by lowering costs of other factors. The biennial raise in construction wages, for example, makes A larger,
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depending on the percentage role which labor cost plays in total costs.
This
rise could be balanced either by greater productivity within A or by decreasing the cost of land per unit by increasing the density, e.g. instead of using the Zone R5 ratio of one housing unit per 100 square meters, this could be reduced by the zoning authorities to one housing unit per 75 square meters. Finally, if the housing policy maker determines that a certain number of condominium housing units should be made available at $80 monthly, it can calculate rather exactly where costs must be lowered or subsidized in order to permit the private contractor to meet this need.
Subproblem 6:
Housing Subsidy Objectives
'7e must begin to think of public aid to reduce housing consumer costs not merely as welfare benefit, but as the single most effective means for guiding the location and distribution of new construction.23 The use by policy makers of a carefully selected pattern or system of subsidies provides the possibility of channeling construction activity without controlling individuals engaged in it.
The combination of the
subsidy plus the conditions under which it is granted constitutes a powerful instrument of housing policy.
The subsidy can only be used effectively,
however, when the objectives are clear, i.e. operational, and the criteria for measuring their achievement established. The general objectives towards which the selection and use of subsidies are directed are clear in themsdlves although not in their interrelationships: 1) to foster a more equitable distribution of opportunities for home ownership,24 2) to encourage participation by private industry in the construction of low income housing units, 3) regional control of housing
-_04-
unit development (zoning plays an even more direct role here), 4) development of effective institutions for the administration of subsidies.
These general
objectives will only become operational when policy planning determines its targets as well as the costs of alternative subsidy mixes. Ideally the first objective should strive to subsidize the production of housing units so that the percentage produced at each family income level will approximate the percentage of families at distinct income levels in the population.
Ideally again, the second objective should see that subsidies
are planned so as to involve private industry completely in the production of residential units.
In either case, however, the housing policy maker
must take costs into account as well as benefits and try to determine the point where the marginal cost of the subsidy or subsidy mix becomes greater than the additional benefit received. A present listing of subsidies related to housing unit production and purchase would include a wide variety of land subsidies, building credit subsidies, mortgage credit subsidies, rent subsidies, building material subsidies,. administration subsidies, and social orientation and technical training subsidies.
Numerically there appear to be a generous number of
subsidies, but the program as a whole suffers from lack of integration.
The
problem of subsidy allocation as a cost, for example, assigning administration costs to the self-help housing program, remains un~oived.
The process of
selecting subsidies on a cost-benefit basis among alternative combinations of subsidies remains primitive. One explanation for this lack of an integrated system of subsidies as part of a rational housing policy lies in the difficulty of selecting criteria25 The criterion, as we have seen, functions to relate costs to objectives.
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Objectives are interdependent so that the assigning of costs has an arbitrary element.
Also the assignment of subsidy costs to a particular project may
be arbitrary.
For example, if the city puts public utilities and streets on
a particular section of land which is then used for a low-cost housing project, the costs can be readily assigned to the project.
But if the price of land
generally in an area increases due to increased consumer demand, the provision of city services, and a certain element of speculation, then the assignment of subsidy expenses to a particular project is less easy, but still possible. The criteria selected will therefore have to relate 1) costs to objectives, and 2) costs to the public budget.
In fact, in the case of subsidies
it may well prove to be the better strategy to put the objectives in terms of budgetary limits and then seek to improve housing ownership distribution, private enterprise participation, land use, and institutional efficiency. Whatever the approach, it should be emphasized that a satisfactory program of housing subsidies requires a philosophy as well as an arithmetic, and gift-giving is not a good philosophy.2'
Subproblem 7:
Mortgage Guarantees as Instruments of Housing Policy
Perhaps the most important development in the stabilization of residential construction is the mortgage guarantee.
The fact that the Federal
Housing Administration or the Veteran's Administration stand behind a housing loan strips the loan of its traditional local limitations and makes it a fit instrument of liquidity in the capital markets.
The FHA mortgage
system tends to create a climate of confidence in the home construction sector and to permit a wider diffusion, in terms of family income levels, of home ownership.
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Actually in Puerto Rico, over 70;ó of the private residential units are being constructed under FHA (and, to a much lesser extent, perhaps 77, VA) guarantees.
The difficulty has been that these new homes have been construc-
ted for the upper 15ºó of family incomes rather than for the middle and lower income groups.
The average FHA house in Puerto Rico now costs over $16,000.
To understand why this faulty distribution is not necessary it will be useful to analyze the role of the mortgage guarantee in more detail.27 The FHA-type mortgage guarantee considered as an instrument of housing policy influences both the quality and the price of the housing unit in favor of the buyer.2g
A mínimum standard of quality is guaranteed because
the housing unit plan must meet FHA specifications.
In addition, FHA
inspectors make three checks during the construction of the housing unit to be guaranteed. The guarantee also serves to make the terms of the purchase more reasonable:
1) it fixes low maximum interest rates, 2) the loan-value ratio
is increased substantially, and 3) the maturity term is lengthened.
pith
reference to the interest rates, in Subproblem 5 we have seen that lower interest rates affect K in the cost equation
Uc = K(A+B+C).
In this way
more families with lower capacity to pay can enter the market.
In fact, an
interest subsidy could be used to lower the cut-off point still further. Changing the loan-value ratio has great significance because it influences directly and immediately the multiplier effect of the downpayment. Assuming that some downpaymcnt is required in order to prove the good faith of the borrower and to provide a margin of safety for the lender, its multiplier effect can be readily measured.
If, for example, the buyer has to put
down a 50% downpayment, then its multiplier effect (M) is two.
N = 1/1-C,
-"07-
where C is the loan-value ratio. becomes 4.
If C is raised to 757 the multiplier effect
This means that the purchasing power over housing depends on the
loan-value ratio set either by the market or by government regulation.
In
the second quarter of 1964 the average loan-value ratio under FHA terms in Puerto Rico was 93.5% for new homes and 82.4% for existing homes.
Over 50%
of the new homes had a loan-value ratio of 977.29 Once the downpayrnent goes above 90% it seems clear that it really does not function as a limitation upon the price which the buyer can pay.
This
limitation then becomes almost completely related to the family income capacity to pay.
Here the ability of the family to dedicate a certain
percentage of its effective income to the payment of monthly housing expenses is assessed by the guaranteeing agency.
Generally the ratio of housing
expenses to income tends to fall as income rises. Under the FHA guarantee the term of the mortgage has been substantially lengthened. term.
In the United States ten years used to be a typical mortgage
The average FHA mortgage in Puerto Rico now runs approximately 29
years for a new home and 27 years for the purchase of an existing home.
The
longer maturity of the mortgage tends to decrease the cost of servicing the debt, but only up to a certain point.
A longer term means that the number
of required payments increases and therefore each one can be lower, but since the interest costs increase with this longer maturity, the monthly payments will decrease proportionately less than the increase in the length of the mortgage term.
On the assumption that a level payment plan (i.e.
equal monthly payments geared to meet the value of the principal by the maturity date and to pay interest on the amounts outstanding) is used, Fisher notes that the debt service is a function of the amount of debt, the interest rate, and the term of the mortgage.
Other things equal, the burden of debt service increases or decreases proportionately with the amount of the original debt, and this is the only item with which debt service does vary proportionately. The relationship between debt service, the term of the mortgage, and the interest tate is more complicated. As the term of the mortgage, and thus the number of required payments, increases, the amount of each payment decreases; but since the interest cost of the loan increases with its term, the decrease in the required repayment is less than proportionate to the increase in the length of the loan contract. Consequently the effect of additional extensions of term in moderating the debt service burden diminishes as the proportion of amortization to total debt service decreases,31 The FHA mortgage guarantee not only stimulates residential construction activity by liberalizing financing terms, it also fosters confidence among the lenders by fixing clearcut standards under which the prospective home purchaser may become eligible for such a mortgage.32 This brief analysis of the role of a typical mortgage guarantee suggests that it has an important potential as an instrument of housing policy.
The
economic consequences of changing each of the major elements of the debt service and of the loan-value ratio can be measured in terms of the general objective of improving the opportunity of lower income families to purchase their own home in the private market.
It offers also a good example of the
implementation of the already discussed principle of subsidiarity in which the public sector cooperates with the private sector for the welfare of lower income families. Here is a case, too, where lower level criteria may be used with reference to adjusting maturities and interest rates.
At the same time,
these must be related to the other echelons (and other subproblems) of the construction sector.
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Domestic versus Imported Capital
Subproblem 8:
"A rose is a rose is a rose ",wrote Gertrude Stein, but capital is not capital.
Capital is not a homogeneous commodity unless similar sources and
uses and time periods are involved.
Specifically, imported capital is not
the same as domestic capital, neither in its generation nor in its economic consequences. It is true that since the industrial revolution in England, practically all countries have depended in their development on receiving large quantities of loanable funds from abroad.
Domestic sources have been of importance in
reflecting changes in income distribution and the willingness of particular sectors to re-invest their profits, but capital imports are traditionally a booster for economic development.33 The increasing import of capital vis-a-vis the accumulation and use of domestic capital is not intended to be a permanent condition.
On the
contrary, the young economy is expected to support its capital formation more and more from its own increasing savings.
t?. Arthur Lewis has gone so
far as to define the central problem of the theory of economic development as that of 'understanding the process by which a community which was previously saving and investing four to five per cent of its national income converts itself into an economy where voluntary saving is running at about twelve to fifteen per cent of national income".34 Precisely one of the flaws in the 8-107, growth rate of Puerto Rico in recent years is the fact thatthis mobilization of capital from domestic sources is not taking place.
The private sector reached a high of saving
3.5% of its personal income in 1953. figure of -$9.5 millions.
In 1964, savings were a negative
if we look at the checking deposits and the
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savings deposits of the commercial banks of Puerto Rico, the lack of savings is no less obvious.
In 1951 the commercial banks had $20 millions of savings
and $758 millions of checking accounts; in 1964, $26 millions of savings and $1072 millions in checking accounts.
At the same time the total loans
outstanding almost doubled from $510 million to $949 million.
Real estate
loans increased from $105 to $238 million; commercial loans jumped from $143 to $323 million; loans to individuals rose from $106 to $181 millions. This picture of an economy which is growing rapidly on the basis of other people's savings, not its own becomes even clearer when we look at the Source of Capital Funds.
The famous "Bootstrap" of Puerto Rico is in effect
SOURCES OF CAPITAL FUNDS 1960-1965* (Millions of dollars) Source
1960
1961
1962
1963
1964
1965
Total Sources Net Import of External Capital Depreciation Government Savings Savings by Private Sector Yearly 7 Increase of Imported Capital
407
546
560
663
719
766
213 131 63
293 144 55
309 160 59
310 181 85
369 199 111
459 211 124
-0.4
39
30
68
-9.5
-17.6
14%
107
127
12%
*Ingreso y Producto, Puerto Rico, 1964, Junta de Planificación
being held by investors from the continental United States.
This capital
dependence becomes even more striking when it is realized that existing large capital holdings of Puerto Ricans are playing a small role in the island's capital formation.
Although precise data are not available, it
seems clear that large amounts of domestic capital are leaving Puerto Rico to work in other regions.
This "capital flight" is added to by the financial
institutions such as insurance companies and mutual funds which take Puerto Rican capital out of the country to invest.
-
-111
When it comes to the financing of construction activity, the dependence on imported capital is even more clear.
The public sector sells its construc-
tion bonds in the New York capital market, and the private sector sells its mortgages to financial institutions and groups in the United States. Puerto Rico's commercial banks will initiate mortgages and then sell large quantities of them in the same market.
The same banks will also work together
with mainland banks to provide lines of credit of two to three years for the actual construction of the buildings.
The following balance of payment data
gives some indication of the demand for imported long term capital in Puerto Rico.
EXTERNAL CAPITAL INVESTED IN PUERTO RICO: ($000,000's)
Total Increase Bonds of Puerto Rico Government Agencies Federal Credit Agencies Mortgages and Loans Other Mortgages and Loans Net Direct Investments Source:
LONG TERM
1951
1952
1963
1964
293
335
375
359
114
82
155
114
30 51 95
23 55 170
25 43 123
29 46 166
Balance of Payments, Puerto Rico, 1964
The fact of Puerto Rico's dependence on capital imports is clear, but conclusions do not follow readily.3S
Two sets of problems are involved and
therefore two sets of objectives must be considered: 1) the need to stimulate capital formation, especially in the construction sector, from domestic sources, and 2) limits to the economy's capacity to absorb capital productively. We will consider the first problem now and leave the second to the following chapter.
The distinction in the first problem between domestic and imported
capital leads us inevitably into balance of payment considerations.
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Subproblem 9:
Balance of Payment Perspectives and Objectives
One of the arguments of Fomento to attract industry from the United States to Puerto Rico is that no balance of payments problems are thereby created. Dollars invested abroad, runs the argument, tend to upset the balance of payments of the United States; dollars invested in Puerto Rico do not. Technically this argument is valid, but the implication that Puerto Rico can have no balance of payment problem is false. Even individual states in the United States are competitively aware of their need to foster regional growth, to attract new industry, new capital, new research and educational institutions. and state development campaigns.
Many states have their "Fomento"
Puerto Rico has even more reason for such
an awareness because it is a freely-associated state.
In fact, as we have
noted earlier, the political status of Puerto Rico is :till undecided. Therefore, to ignore the balance of payment implications behind large imports of capital is to run the risk of exercising an economic power which effectively deprives the people of Puerto Rico of its political options. Political autonomy plus increasing economic dependence áo not make good partners. With the exception of the war years in the early Forties, Puerto Rico has run a consistent and increasing deficit in its balance of trade with the United States.
In 1950, Puerto Rico's current trade account was a negative
$105 millions.
In 1960, this deficit rose to a negative $319; in 1955, a
negative $525.
The substantial. and increasing difference between exports
from Puerto Rico and imports into Puerto Rico is unlikely to change very much.
Increasing payments for capital services and for transportation
services can also be expected to continue.
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The equilibrating factor up to the present has been the rising flow of external capital into Puerto Rico.
The capital is brought in primarily by
three groups--builders and buyers, private industry, and the Puerto Rican government, including its agencies.
The capital is relatively cheap, for
example, around 6% in the case of FHA-guaranteed mortgages, and its net benefit (or productivity) in each case seems beyond question.37 Granting the advantages of imported capital, is there any reason for encouraging the use of domestic capital in its place? is clear enough: Ricans.
The political answer
foster the ownership of production activities by Puerto
The economic answer which seems to favor the import of capital
needs qualification.
Usually a country increases its rate of capital for-
mation by channeling its resources away from the production of consumer goods into the development of a more potent production structure.
This
sacrifice of present consumption in order to increase future consumption has not taken place in the economic development of Puerto Rico.
One
explanation for this situation lies in the generous flow of cheap money from the United States. To the extent that imported capital is being substituted for domestic capital, to that extent the economic base of the island's development is narrowed and its dependence on steadily increasing flows of such imports becomes greater.
If, for some reason beyond the control of Puerto Rico,
those flows are diminished or cut off, the economy will suffer disproportionately.3S In the second place, the existing inflationary pressures on the general level of prices in Puerto Rico will be lessened when the choice between present consumption and the sacrifice of that consumption for future growth
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becomes real.
Presently, under the aegis of cheap Federal funds and
relatively cheap private capital, there is little incentive for the consumers to rein in their spending or for the consumer credit institutions to tighten up on consumer credit. Thirdly, and probably of greatest economic significance, there is the loss of the multiplier effect which takes place when large amounts ($177 millions in 1964) of working capital leave the country in payment for capital services.
In a true sense the multiplier is the third dimension
which gives capital formation its depth.
Technically, the investment
multiplier is the coefficient which indicates the increase in income generated by each autonomous increase in investment.39
The site of the
multiplier is a function of the region`s marginal propensity to consume: k = 1/l-MPC.
In other words, the lower the rate of saving, the higher the
multiplier.
In the case of Puerto Rico, with its low savings rate, the
multiplier could be expected to be relatively high. Puerto Rico, the process reverses.
Uhen capítal leaves
The island economy receives an important
contracting impact, hidden though it may be by the advent of newly imported capital. Any capital invested in Puerto Rico has a multiplier effect.
Arty new
injection of investment funds will tend to work itself through the economy in succesive waves of payments of salaries, material costs, interest, consumer purchases, etc.
The accumulation of savings and the payment of
taxes will slow down the process, but any given amount can be expected to have a multiplier effect.
The point is that whereas domestic capital
takes full advantage of the effect, imported capital does not.
Imported
capital must be serviced (e.g. interest and amortization on mortgages),
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and those charges put the multiplier in reverse.
For this reason the positive
encouragement of domestic capital investment may be taken as a general objective.
Only after a careful study of the multiplier gain from domestic
capital, preferably on a sector by sector basis, and the multiplier loss from service charges on imported capital can operational objectives be established.
Fiscal measures to encourage participation by domestic capital
should be undertaken on the basis of cost-benefit studies.
One such measure
might be to lower substantially the tax rates on capital invested in certain types of housing projects.
Taxes would be lost from that particular source,
but the overall gain to be derived from permitting the multiplier effect to work itself out fully within the domestic economy should more than balance the loss, even for the Treasury. In addition to the advantage of using the full weight of the multiplier, there is the further advantage of having investors who will presumably take a more personal interest in the success of the project.
In relation to the
construction sector, the whole multiplier process is even more significant because of the dependence of the industry and of the buyers on imported intermediate and long term funds.
For this reason an important area of
housing policy is to develop specific objectives for the purpose of encouraging the investment of domestic capital in construction activity.
Here once
again the close relations among housing policy, fiscal policy, and monetary policy become evident.
Subproblem 10:
Research for Housing Policy40
when it comes to the development of research programs for the guidance of public policy the principle of subsidiarity still applies, but it is the public sector which may be expected to assume primary responsibility. ;he
private sector cannot be depended upon to do consistent research to establish better criteria for public policy.
Individual firms are not generally
equipped to do the kind of research which will integrate residential production activity with the total economic and social development o£ Puerto Rico. The only limits to the research coverage are those established by the problematic itself.
Labor productivity, capital technology, industrial
organization, financing, consumer studies, are all valid areas and necessary. The research focus, however, should be on the production of better guidelines to help in formulating rational housing policy decisions. To go into a little more detail, labor productivity studies should be of the greatest interest in examining the changing skills of construction labor and their relation with the changing inputs (generally increasing) of capital equipment. in the industry.
The given objective is increasing employment stability
An important by-product of such studies might be to point
up the need for more adequate vocational training programs for construction workers.
Also an analysis of the changing capital-labor production ratio
should help planning decisions to contribute towards a greater employment stability in the construction sector. A proportional increase in the use of capital equipment and of the percentage of skilled workers will help stability in the sense that L) it will tend to increase factor mobility, and 2) it will tend to encourage the contractors to plan their work better so as to use their expensive equipment and trained worker teams more effectively. Financing is an important dimension of construction activity.
We have
seen that the climate of government guarantees and the availability of reasonably-priced credit have played an essential role in Puerto Rico's
-11?-
construction growth.
The research problem is to seek ways in which the
family capacity to pay is used more efficiently.
Efficiency here would be
a matter of continually trying to include lower income families in the programs.
In some cases considerable gains might be made in the direction
of expanding the housing opportunities downwards economically by eliminating or minimizing downpayments. Measuring the impact of alternate subsidies on each level of family income would be another important task of housing policy research programs. The determination of subsidy mixes is an important part of housing policy in which the inevitable tension between social policy and economic policy must be faced and resolved.
Houses cannot be given away, but neither
should they be permitted to remain economically inaccessible.
The United
Nations economist, Hans Singer, has stressed the need for preinvestment work prior to any urge-scale investment program.41 already been done for some cities in Chile.
This kind of study has
The dev2lopment of financial
plans tailored to meet the needs of each family income level should be considered as essential preinvestment enterprise. From the point of view of industrial organization of the contractors, studies could be made on the credit structure which has grown up with them in Puerto Rico, and also on the extensive use of subcontracting with all its implications for housing policy decisions. Finally, an important area for policy research is the home owner or the potential home owner.
Jhat does he want?
Too often we find a paternalistic
element which for all practical purposes denies that the low income family should have preferences. glad to get it.
The attitude is:
Let them take this house and be
In many cases the low income family is confronted with a
-11°-
"package deal" in which his personal wishes have been ignored, and in which all that is expected from him are regular payments.
In this area a great
deal of care should be given to implementing the objective that each family should have the maximum freedom in selecting its own home. Each country has its housing ideals which should be respected.
In
Puerto Rico people do not want a wooden home; they want one of cement blocks. In Colombia, at least in the North, the people do not want houses of cement blocks, but of brick.
In Venezuela, not even the poor will willingly accept
a modular, pre-fab home.
Consumer tastes can be changed, but this is
necessarily a slow process which housing policy decisions should not impose by force. Enough has been said to indicate the directions which research for housing policy should be expected to take.
It is not pure research.
research geared to better decision-making.
Specifically, it is research
It is
continually engaged in the search for better objectives at the different levels of construction activity and for better criteria to be used in their measurement and evaluation.
At least indirectly, housing policy research
should tend to stimulate better communication within the housing sector, more effective coordination among housing agencies, and a growing integration with the total economic development of the country.
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Chapter VII:
Appendix
Puerto Rican Budget Analysis and Housing Criteria:
A Critique
"The worst is over in housing!", read a Business Week headline in January, 1967.
The explanation was that both the Federal Reserve and the
White House were pushing recovery in the mortgage market in order to bolster the economy.
If there was any doubt about the significance of the finance
variable in the construction sector, especially in the residential part, the tightness of credit in the last three quarters of 1966 should have dispelled it.
Private housing starts in the United States dropped rapidly from 1.5
million in March, 1966 (seasonally adjusted) to 0.7 million in October, 1966, and the tightness in credit was the reason. In this appendix we are not interested in analyzing the impact of the 1966 tight money market on residential construction in Puerto Rico.29
Neither
are we concerned with making a statistical study of money and credit flows supporting activity in this sector.
We are taking the point of view of the
housing policy maker who is searching for criteria which help him to decide among alternative programs in each of the three production sectors, public, popular, and private.
In this appendix we are interested especially in
financial criteria. Housing programming in the public sector is intimately related with the budget.
We have already seen something about the problem of budget allocation
in Chapter V.
Now we wish to go into this area in more detail.
The public budget gives us a fiscal policy perspective of housing policy.
Fiscal policy involves government receipts and expenditures and
the structure and operational decisions involved in them.
Speaking simply,
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government receipts may be related to its tax structure and the public Fiscal policy, like
budget to the program of government expenditures.
monetary policy and housing policy, is geared to the broader national objectives, such as full employment, growth, and stability.
We can identify the
fiscal policy perspective of housing policy because of the sector of the
service systems.
The presumption is that housing
policy
tax structure and subsidv which influences the behaviour of residential can operate in
some way (i.e. directly or indirectly)30 to coordinate the fiscal structure vis-a-vis housing. It is only recently that the notion of a discretionary fiscal policy has been subject to serious political debate and received some measure of acceptance.31
A growing segment of economists and politicians are accepting
the fact that the government has an active responsibility in the design of its fiscal programs just as it has an active responsibility for making 32 monetary policy. Once again it will be well to emphasize the special role of housing policy in economic development.33
The economist states without fear of
contradiction that neither fiscal policy nor monetary policy can be of much use in achieving national goals if the whole network of economic structures is not cooperating.
This qualification also holds true for housing policy
with the qualification that housing policy almost automatically includes the other dimensions within it.
Essential to housing policy are not only
financial currents but also production with its variables of labor and materials and consumer demands for housing services. its very nature, is integrated within the economy.
Housing policy, by
Government fiscal policy works through the ability of the government to tax, to borrow, and to spend.
The decision to spend or not to spend in
significant quantities has a powerful impact on the economy.
To reduce
corporate profit taxes or to change depreciation policies is to influence investment planning by the private sector.
Housing policy, in terms of
government decisions to spend or not to spend, and how to finance the spending, has an immediate impact on activity in the construction field. In fact, the building of highways, schools, medical centers, and other public works, has been a standard way to stimulate a faltering economy since the days of the New Deal. The problem is how to measure the fiscal impact of government expenditures on housing.
In Puerto Rico, for example, we have the following
budget data on housing:
HOUSING FUNCTION IN PUERTO RICO'S BUDGET (millions of dollars) Fiscal Year
General Fund
Special Fund
7 of Budget
1962 1963 1964 1965 1956 1967 1968
5.990 8.465 9.086 12.109 14.252 14.370 15.119
.150 .581 .351 .323 .208 .107 .111
1.8 2.2 2.1 2.4 _'.6 2.1 2.5
Source:
Bureau of the Budget, Commonwealth of Puerto Rico
By what criteria were these budget aggregates arrived at? related to housing production by the public sector?
Were these data
In what way?
Why was
the budget allotment 2.17, in 19sí7 and then up more than 257, to 2.6'7, in the following year?
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These are legitimate questions involving, at least implicitly, the search for criteria.
Still they cannot be answered without going into a
more detailed analysis of the budget in which individual programs are scrutinized and compared.
The relevant economic question now becomes,
Does additional money spent on one program yield a greater return than that additional amount spent on another program or programs?
We need some kind
of criteria for measurement at the margin. Any evaluation of the housing programs generated by the public sector requires that these programs be identified.
They are "public investments
yielding public returns". In the proposed Budget for Puerto Rico for 1968 four public agencies are included as being directly concerned with the development of housing units by the public sector:
Administración de Renovación Urbana y Vivienda
(ARUV), Corporación de Renovación Urbana y Vivienda (CRUV), Banco de la Vivienda (Housing Bank), and the Administración de Programas Sociales. Housing Bank and the CRUV are public corporations.
The
The ARUV and the Social
Programs Administration are, as their names imply, administrative organisms rather than businesses. An analysis of the 1968 Budget together with some comparisons with earlier budgets should provide us with some understanding of the activity of the public sector in housing programming.
It may also help us to evaluate
the rationale of Budget allocations. Two points stand out immediately:
1) the Budget assignment o£ $15,230,200
is not a useful figure for housing policy determinations; 2) the identification of public agencies concerned with housing production by the public sector is not adequate.
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The 1968 Budget for Public Housing
It will be necessary to go into some detail in our examination of the housing budget allocation for Puerto Rico.
We are searching for housing
policy criteria related to the allocation of resources by the public sector.. The first step will be to see how they are actually allocated.
It should
be emphasi2ed again that we are not trying to describe completely the housing financing situation in the public sector.
We will select represen-
tative data which seems to offer the possibility of making better housing policy decisions. The public housing funds of Puerto Rico amount to $15,230,200 in the 1968 Budget.
It is divided among four public agencies: ARUV CkUV Housing Bank Social Programs
$ 511,000 9,269,000 1,100,000 1,745,000
Our analysis can begin by dividing the individual budget allocations on the basis of administration costs and production costs. [?hat is the relation between dollars dedicated to production and dollars dedicated to the administration of the public agency?
This division is an oversimplification, but
it may give us one useful criterion. In the 1958 Budget, 281,, of the total hou5íng budget is dedicated to operating costs of some kind, and 727 invested in permanent construction. 327. of the 1967 Budget
as devoted to these operating costs.
at the individual agencies interesting differences appear.
If we look
The CRUV
apparently dedicates less than 670 of its budget allocation_ to administration costs. of CRTJI.
The figure is unreal because ARUV is the administrative arm
The administrator of ARUV is also the executive director of CRUV.
-i.24-
The investigation and planning function of ARUV is subordinated to the needs of CRUV under the aegis of the present executive director of CRUV, Carlos Alvarado.
In terms of the criterion, the operating expenses of ARUV should
be added to those of CRUV.
This would give us a more realistic administrative
cost budget of ll%. It is difficult to use this criterion in the case of the Housing Bank, which is a financial intermediary whose business is to administer loans.
The
million dollars, for example, is considered as an operating expense by the budget, although it is really a reserve fund.
Anticipated operation expenses
for the Housing Bank in 1968 are $1,195,000.
If we relate these expenses to
an anticipated $x,900,000 of loans we have a percentage of 19%.
The signifi-
cance of this relationship will not be clear until comparisons are made with other financial intermediaries. When we turn to the Social Programs Administration of the Department of Agriculture, we find that the administration cost-production cost relationship is not too clear.
We have the budget assignment of $1,745,000 for
housing needs in the rural areas,34 and there are operating expenses of $2,062,000.35
To apply the criterion here evidently has little value.
A
breakdown of the operating expenses gives us a little clearer picture:3o Reinstalación de Agregados (involves 1000 families) Construction of Utilities and Rural Community Services Administration of Social Programs Construction of Low-Cost Housing Units
$866,000 223,000 425,000 548,000
The criterion clearly should relate the operating cost related to the construction of low-cost units ($548,000) to the production cost of these units. The latter turns out to be $800,000.
The $1,745,000 budget figure includes
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$900,000 for the construction of utilities, etc., and $45,000 for special programs.
The criterion relating administration cost to production cost
turns out to be 5.5::8.0, that is, every dollar going into actual production of housing units in this program requires $.70 administrative support. Adding in the construction under Title V we have (7.7::17.4) a ratio of $.44 supporting each production dollar, which is high. The criterion is not satisfactorily presented.
In terms of the ELA
budget the CRUV will produce permanent improvements valued at $9,269,000 from an administrative base of $525,000 (really only $413,000 for operating) plus the ARUV budget allocation (all administrative) of $529,000.37
The
criterion of 1.1::9.3 implies that only $.12 of administrative expense supports each production dollar. What is the difficulty?
The ratio does not give us magnitudes.
it must be asked, What do we get in terms of production? are we serving?
Clearly
How many families
The $800,000 production costs of the Social Programs
Administration plus its $548,000 administration costs gives us a figure of $1,348,000 which was used to terminate 2,227 units already begun and to initiate another 1,605 more units.
In other words we have the picture of
3,832 families being served by a $1,348,000 budget.
Refining this relation
further we can say that each family received ELA help, i.e. budget help, of $340. How many families is CRUV serving with its far larger budget? budget is not too clear here.
The
In Appendix B38 we find that 8,601 housing
units are to be under construction (including those initiated and those in termination begun the year before). the following programs:
The production list for 1968 includes
public housing units; apartments for single persons;
lot urbanization; on-site rehabilitation of houses; other low-cost housing programs.
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CHAPTER VIII
THE PROBLEM OF PROGRAMMING HOUSING PRODUCTION
The efficient allocation of resources in the Federal sector of the economy requires two kinds of choices: first, a choice of the least-cost method of carrying on a given program--in other words, cost reduction; second, a choice o£ where to allocate budgetary resources among the many competing claims of existing and proposed new programs-best described as program evaluation.) Philosophers have distinguished the Greek method of linear analysis from the Hebrew method of analysis in depth.
The former uses syllogisms to proceed
along a straight-line trajectory; the latter takes the problem as a whole and seeks to penetrate it by examining it in various perspectives.
In this study
the effort has been to take wholes and to consider them from distinct perspectives.
This strategy involves some repetition but has the advantage of being
more useful for the analysis of housing policy decision-making. The perspective of the present chapter is housing unit production.
The
finance variable enters in once again, but in the perspective of production. The budget, for example, will be analyzed as an instrument for assigning resources to the production of housing by the public sector.
Patterns in Housing Production in Puerto Rico
Ideally, housing production in Puerto Rico (as in any developing economy) is an amalgam of three sectors.
There is the public sector in which
the government takes the initiative in providing housing facilities for families below certain income l.evels.
There is the private sector which
may be narrowly identified as the production of housing units on a commercial,
profit-seeking basis for families whose income level is above a certain minimum.
Finall~r, there is the popular sector in which personal, non-
commercial initiative is taken by the family either to build or to better its own home.
t'e have already considered the vital importance of this
latter sector in a developing economy. In Puerto Rico, as in any developing economy, the popular sector is highly significant economically as well as socially.
Production data,
however, are hard to obtain because much of the production, especially the continual house improvement activity which should be considered as part of the construction process, is done without Planning Board permission However not all construction activity by the popular sector is iilegal.3 Self-help programs, as we shall see, should be included under this sector, in which the government permits small groups of families to take construction initiatives but under government (in this case, the Department of Agriculture's Programas Sociales) technical supervision and coordination. There are some housing programs, e.g. cooperatives, which do not readily fit under any one sector, but even these may be grouped according to the source of the initiative which brings them into being.
The search for
criteria for housing policy necessarily emphasizes one series of data rather than another.
Still this concentration should not be taken to deny the
basic fact that housing construction programs run in a spectrum from the popular sector construction activity to the construction of private homes in the luxury class.
The analytical division made in this study among the
three sectors is justified with reference to the source of major initiative in the given construction activity.
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Table I provides us with the basic data on new housing units produced by the private and public sectors respectively.
TABLE I New Public Housing Units 1954-55 808 1955-56 720 3342 1956-57 1957-58 2553 1958-59 1784 1959-60 3341 1960-61 6630 1961-62 3640 1962-63 3529 1963-64 3557 1964-65 5800 *Private construction based on construction permits. Source:
New Private Housing Units* 4515 6677 6384 5539 7122 9932 9081 13185 11366 12693 16294
Planning Board, San Juan
Construction in the private sector stayed more or less on a plateau of 6300 units from fiscal 1956 to 1959.
Beginning with 1960 the private resi-
dential construction activity increased to a level of 12,600 units, doubling the earlier production.
There is no discernible pattern in this growth
except that of steady increase.4 While the variable of housing production by the private sector does not give us much information in itself, the correlation of this variable with that of population growth and personal income growth is interesting.
It
seems reasonable to conclude that these relationships, at least in their direction, will be useful guides for housing policy.
There is a direct
functional relationship which can reasonably be expected to continue.
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TABLE II HOUSING AND POPULATION: PERCENTAGE INCREASE IN UNITS, PUERTO RICO, FISCAL YEARS 1956-1965 Public Housing Population
Year 1955-56 1956-57 1957-58 1958-59 1959-50 1960-61 1961-62 1962-63 1963-64 1964-65 Source:
.0270 .9 1.1 1.1 2.2 1.5 2.5 2.4 2.3 2.1
- 170 +370 - 23 - 30 +140 + 52 + 6 - 49 - 2 + 63
Private Housing +4870 - 4 -13 +29 +40 - 8 +45 -14 +12 +28
Planning Board, Commonwealth of Puerto Rico.
During the same ten-year period, 1955-1964, the annual production of housing units by the public sector increased from 800 to 3500 units.
Again
there is no discernible pattern in the production, unless the availability of Federal funds for public projects is considered as an independent variable. The population of Puerto Rico rose slowly in the decade of the Fifties (due to the high rate of emigration) from 2.24 million inhabitants to 2.35 million in 1950, then more rapidly (due to net immigration increases) to 2.57 million inhabitants in 1964.
If we examine Table 2, which relates
public housing to population, there is no apparent policy.
At best one
might conclude that Puerto Rico is producing public housing at a rate of 1.5/1000.
Its average private housing rate is 5/1000.
We will see immediately
why these are not good criteria. Here is one interesting case where the aggregate is more valuable than its parts.
The aggregate, 6.5/1000 inhabitants, permits us to rank Puerto Rico
generally with other countries. (See Table 3 taken from 1964 Governor's
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Report.)
The aggregate housing production rate also helps us to estimate
the needed housing unit flow.
Assuming the present population growth of
2.5%, i.e. 25/1000, and an average household (taking into account both families and unrelated individuals) of 4.0, then an aggregate rate of 6.5/1000 would appear generally adequate to take care of population growth. This is a useful high level criteria, although it needs to be specified by more data.
TABLE 3 COUNTRIES GROUPED IN RELATION TO HOUSING CONSTRUCTION PER 1000 PEOPLE: Number of Units Per 1000 Inhabitants
Countries
10.0 units or more
Israel Russia
8.0 to 9.9 units
Sweden Australia Switzerland United States
6.0 to 7.9 units
Puerto Rico Denmark Italy Canada France Holland Japan
4.0 to 5.9 units
England Yugoslavia Bulgaria
2.0 to 3.9 units
Portugal Chile
less than 2 units
Honduras Panama Mexico
1962
Returning to the public versus private housing production we find that the ratios used above are misleading.
The numerator, number of housing
units produced by either sector, is reasonably correct, but the denominator is not.
To get a true public housing rate, production by the public sector
should be seen in terms of the eligible population.
This reasoning also
holds true for evaluating production by the private sector.
Value figures
should not be used on the assumption that housing policy does not have the goal of giving everybody the same housing but of providing everyone with equal opportunity to procure adequate housing,5 In 1963, over 50% of the families of Puerto Rico earned less than $2500 per year.
Assuming that this income level is eligible for public housing
and, conservatively, that 1/2 of Puerto Rico's population is in this category, then we can relate public housing production in l93 with the population, coming up with a rate of 2.9/1000 which is more meaningful than the crude aggregate already discussed and rejected. Before calculating the equivalent rate for the private sector it should be stressed that to say that 50`/O of the families are eligible for public housing assistance is not to assume that the remaining 50% can provide their own housing needs in the private market.
In Table 4 we note that in 1963
only 170 of the Puerto Rican families made over $`000 in annual income. A very significant 40.0% of the families made from $2000-5000.
Until very
recently this group of families, especially those between the $2500 and $4000 income levels, has lived in a housing "no-man's land" in which they are too rich for public housing and too poor for private housing.
?ractically
speaking, this group did not participate in the private sector in 1963.
In
1962, when some 60% of housing built by the private sector was FHA-insured,
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L\BL.~: 4 PERCENTAGE DISTRIBUTION OF ALL FAMILIES BY INCOME GROUP Puerto Rico 1963 3.7% 13.0% 26.2% 40.0%
less than $500 $500 to $999 $1000 to $1,999 $20000 to $4,999 $5000 to $7,499 $7500 to $9,999 $10,000 to $14,999 $15,000 or over Source:
¡
C°" ..JIO
3.7% 2.8%
Income and Expenditures of the Families, Puerto Rico, 1963, Department of Labor, Commonwealth of Puerto Rico
the average Puerto Rican family purchaser had an income of $5500 ($543 monthly) and bought a house valued at $11,665.
Using the conservative assumption that
25% of the Puerto Rican families could have entered the private market in 1952, then the private sector production rate becomes 18.0/1000. The contrast between the public sector rate of 2.9/1000 and the private sector rate of 18.0/1000 is suggested as a useful indicator or criterion for housing policy.
At the same tine they are two-edged in the sense that
changes in ratios can only be meaningful in terms of analyzing changes separately in the numerator and in the denominator.
Housing Production Criteria for the San Juan Metropolitan Area
In Puerto Rico the San Juan Metropolitan Area plays a dominant role as a population center and income production center. housing production reflects this dominance.
Naturally the rate of
For this reason the San Juan
area is usually treated apart from the rest of Puerto Rico.6
In the decade
-Á33-
between the census years of 1950 and 1950, for example, San Juan population increased 277 while the population of Puerto Rico grew only 627.
In terms
of income production, the average San Juan worker family had an annual income of $3052 in 1963, while the same family category in the rest of Puerto Rico, i.e, outside of San Juan, enjoyed an annual incoiae of $2055.7 These differences between San Juan and the rest of Puerto Rico immediately suggest that the criteria of sector housing production will require qualitatively different denominators.
The 1123 housing units constructed for the
public sector in 1933 can be related to all families in San Juan earning less than $2500 (on the assumption that these are the families presently eligible for public housing) assuming that 35'/ of the city's population is eligible for public housing, i.e., a rate of 5/1000.8 San Juan's private sector produced housing units at the rate of 31.5/1000 if we assume that 35h of its estimated population of 680,000 could have bought houses in the private market.9
Criteria for Assigning Priorities to Alternative Housing Programs
In Chapter IV the reasons for concentrating on individual programs rather than on aggregate expenditures were given.
The efficient allocation
of resources was seen as demanding the evaluation of individual programs (defined as aggregates of activities which produce a distinguishable product) in terms of achieving housing policy objectives.
Housing policy's relation
to the production variable is seen, therefore, as involving a series of production options.
The idea is to choose, or to stimulate choice, on the
basis of using the available scarce resources more effectively.
-'~.~ ~4-
Some programs offer more possibilities of efficient contribution to the country's housing needs than others.
What criteria can be used to
assign priorities among alternative programs of housing production? ['e might begin by establishing a production spectrum with reference The spectrum
to the family income capacity served by various programs.
model suggested below has the advantage of clarifying the analysis together Clarity ccmes from taking
with the disadvantage of oversimplification.
SPECTRUM MODEL OF HOUSING PRODUCTION IN PUERTO RICO
POPULAR Slum Family! Income
PRIVATE
PUBLIC
ProgramasSociales / / / $1000
CRUV /
Housing Bank / / $5000
Cooperative /
/
/
Private Contractor _1 / / $10,000
Urbanizations ''Caserío" Loans Guaranteed Rural Slum $12-15,000 Improvements Condominiums Urban Slum 15-20,000 Purchase of Special Apartments Improvements 20-25,000 low-cost housing Rural Self-Help Individual Urban Self-Help-- ---homes Urban Renewal Emergency Housing Lots and Utilities Ccmmunity Services
integral programs for analysis.
As was pointed out in Chapter VI, each
program deals with one or more submarkets, that is, with relevant groups of consumer preferences.
Submarkets are related in that they represent viable
options for certain family income levels.
The existence of this option
suggests that there is a spectrum model for each region or related group of submarkets.
Since each program may have a number of projects, especially
in the public sector., we may also think of each producticn project as related to a submarket of consumer preferences and buying potential.
-135-
If we agree on the necessity of an individual program analysis we find ourselves with internal objective of efficiency (in terms of cost reduction) and an external objective of comparative program evaluation.
The internal
(i.e. belonging to a particular program) objective is primarily technical in the sense that it seeks the better use of assigned resources, including land, labor, housing credit, and materials.
Effective land use is important
in terms of determined population densities, densities already implicit in zoning regulations.1C
So far as labor is concerned, if housing units may
he produced on a more labor intensive basis this will represent a saving of Also if
a
scarce capital resources.
higher rather than lower percentage of
unskilled labor can be used this represents a gain for the economy where presumably skilled labor is scarce.
Criteria are of course implicit in the
more effective use of land and labor. Housing credit usually involves intermediate credit for construction purposes and long term mortgage credit.
Intermediate credit is used more
efficiently when its turnover is relatively rapid.
Such a turnover is to
the interest of the financial intermediary who will usually grant a line of credit to the contractor on which he can draw as bills actually have to be paid.
Anything which would speed up construction and make billing more
smooth and rapid would contribute to the more effective use of available intermediate credit.
T?hen it comes to the more effective use of long term
mortgage credit efficiency is helped by reducing interest rates or by lengthening the amortization period. costs.
It is also helped by reducing closing
More fundamentally, to the extent that mortgage payments stimulate
savings by low income families, the savings which would not be undertaken for any other motivation, the economy finds its pool of saving enlarging.
The
development ofthe important savings potential which exists among low income families is also an important criterion for comparing programs.
A final element in the achievement of internal program efficiency is the way in which materials are incorporated into the housing unit.
Certain types
of prefabricated units promise a high degree of technical efficiency if this gain is not reduced by the need to make heavy investments in construction capital equipment.11
Research into the better use of housing materials can
make an important contribution to internal program efficiency though probably far less than would appear due to consumer resistance to unusual construction 12 and the need for relatively large investments in capital machinery. When it comes to the external objective of inter-program evaluation we find ourselves searching for criteria to choose among competing programs. This search may be narrowed down if we try to derive a general production function in which the production of housing by a particular program (PV) is a function a) proportion of savings assigned to housing credit available (Ce); b) family capacity to save (Fe); c) proportion of workers (skilled and unskilled) available (L/W); d) labor productivity in housing construction e) land use (D), material technology (M), consumer taste (T), and the inflation factor (F). Pv = f(Hc, Fs, LIP, P,p, M, D, T, F) On the assumption that this production function contains the major variables affecting housing production, what criteria do they suggest which may be useful in guiding a rational housing policy? One point should become immediately clear. or key to housing policy decisions.
There is no '4magic number"
Any housing program is a mix of many
variables, not all equally susceptible of statistical measurement.13
In
some cases one dominant economic criterion may appear, but this would not be common.
Even where statistics are available, reliable (in the sense of
-1:7-
homogeneous) data over time is not easy to find.
The lack of statistics is .
an important obstacle to the determination of housing policy.
In fact one
of the purposes of this study will be to use whatever data is readily available as well as to stimulate the development of new sources. The analysis in this chapter is not for the purpose of achieving, even as a first approximation, the twofold goal of cost reduction and program evaluation.
It will suggest criteria which will be useful in achieving
these goals, and it should indicate any significant data difficulties.
1) Residential Construction as Proportion of Domestic Capital Formation
The first variable to be examined in our search for production criteria is related to domestic capital formation.
What percent of the total capital
formation is being allocated to the production of housing units? sector decides this in its budget assignments.
The public
The percent is not easily
determined, however, because budget assignments are rarely functional.
They
cannot be readily referred to individual programs and therefore do not provide a base for the establishment of criteria.
In the case of the Department of
Agriculture's Social Program Administration, which is largely concerned with the production of rural self-help housing, a 1S5E budget breakdown assigns the administrative cost of $548,000 for the construction of low-cost housing units, plus a production cost of $800,000.
These data do not give the complete
picture, however, because there is no way of assigning a share in the general administrative costs (by Programas Sociales) to the production costs, nor of assigning a share of utility construction costs to the housing units.
The
difficulty illustrated here is compounded when we come to CPWV housing production data which represent a great variety of housing production
programs.l4
The variable which relates housing production values to domestic capital formation is not a directly useful criteria for housing programs.
In the
first place residential production by the private sector ($217 millions in 1956) must be separated from that taken under the initiative of the public sector ($23 millions in 1955).
Secondly, residential construction by the
popular sector, not included in the social accounting, should be estimated and given an imputed value.
Thirdly, individual programs should be factored
out by sector for evaluation.
Fourthly, in the case of the public sector it
will be difficult to relate the budget to its production because a large segment (up to 957, in the construction of public rental housing) of Federal funds enters into play.
At the same time Federal funds for housing produc-
tion represent a largely exogenous variable (though not completely so) for which criteria do not appear explicitly.15
These Federal funds are indirectly
part of the Governor's Budget because they usually require certain matching commitments by the ELA.
However, budget assignments in this case tend to
derive their priorities from these commitments rather than on the basis of housing policy criteria. Production by the public sector in 1956 amounted to 11% of residential construction operations (at least in terms of value).
If we assume that two-
thirds of Puerto Rico's 500,000 families need public help then it would appear that the public sector budget assignment is out of balance with the need.
This imbalance might well have been alleviated by low-cost housing
production by the private sector, but this has not been the case.
The average
value of a housing unit produced by the private sector in 1935 was over $15,000.
So far the private sector has contributed very little to the
housing needs of tow income families in Puerto Rico.15
-I 9-
In fact, the inadequacy of the public sector in meeting the housing needs of low income families suggests the need to re-evaluate public sector housing This reevaluation might well establish the need for a group of
policy.
leverage criteria in which public subsidies (including land banking) and production activities identify their impact on the lowering of private market prices and on the rationalizing of slum development activity.
In other words,
it would appear that the public sector cannot solve the housing problem by itself and that it needs to cooperate explicitly with the other sectors for the achievement of national objectives.
2) Developing the Savings Potential (S)
Like any capital formation, the production of housing requires a flow of savings. rence.
In the case of housing, however, there is a significant diffe-
Housing both requires savings and generates them.
The relatíon
between savings required and savings generated can he calculated for any program.
The criterion involved here is the savings leverage of the program
and presumes that, all things being equal, the program which generates more savings is to be preferred. For example, in the case of the rural self-help housing program, which is under the auspices of the Department of Agriculture, the production and administrative costs may be roughly computed on a unit basis.
The difference
between these costs and the final value of the housing unit into which the family has put hours of labor and additional materials is the savings generated.
One might usefully conclude that every $1 of public sector housing
in the program.
The ratio of construction cost charged to the
public
investment stimulated a dollar in equivalent investment by the family involved sector
to the differential between that cost and the value of the finalized housing unit can be identified as a leverage criterion.
-143-
In fact, in Puerto Rico, the leverage criterion has other perspectives. In the case of the public sector there is a marked tendency to think in terms of the leverage impact of $1 in ELA funds when matched to a Federal funds project, e.g. in the "caserío" where all costs are borne by the Federal government except the urbanization costs relating the public housing project with utilities and streets.l7 needs low-cost housing.
The reasoning is very simple:
Puerto Rico
Federal funds provide large amounts of public housing
at a minimum cost to the Puerto Rican budget.
Social costs, e.g. the bad
effect of such housing on family life, are substantially ignored.lg
By virtue
of Federal funds and bond issues (e.g. it is hoped that $36 million of the anticipated 1958 public housing expenditures of $45 millions are to come from bonds and Federal funds) the great majority of urban public housing projects are being financed.
In practical terms this means that imported standards of
construction and housing tenancy conditions are entering into the lives of thousands of low income Puerto Rican families (some 30,000 families now live in public rental housing).
Here is a case where social criteria are needed
together with financial leverage criteria. In the case of the private sector there is also an interesting leverage criterion.
Up to two-thirds of the private residences, including urbaniza-
tions, are being financed by imported capital.
The majority of mortgages
are initiated here by mortgage companies, but the long-term financing comes from the continental United States--from insurance companies, savings and loan companies, pension funds, etc.
Every dollar of local construction by
the private sector, therefore, may be seen as generating important quantities of capital imports.
Such a leverage involves a substantial loss of the mul-
tiplier effect which one would normally expect to receive from investment in
-141.
new capital formation. economy.
Interest and amortization payments leak out of the
If there were no other way of providing needed housing, the multi-
plier loss might be defended.
We will try to show later (it has already been
mentioned in a previous chapter) that Puerto Rico does have the capital to produce its own housing units if it wishes.
Housing policy could stimulate
the development and use of such capital. In a certain true sense, the popular sector provides the largest criterion leverage in its production of housing units.
It generates money, employment,
and materials, all within the local economy.
Only recently have the Housing
Bank loans come into play to support this activity.
The leverage potential
of the popular sector in its production of housing units is very far from being developed.
A minimum of stimulating housing policy decisions could help
to make this sector far more productive than it is.
3) The Productivity of Construction Labor
Labor productivity cormonly relates output per worker on a current basis to input per worker.19
The resulting figure, average or marginal, is pre-
sumed to be a useful measure of increasing or decreasing labor efficiency. Contrasting figures or ratios may be useful if t'e can assume that the skilled/ unskilled proportions of workers stay the same and that the capital investment remains steady.
Homogeneous data on output per man-hour is not readily
available, neither in Puerto Rico nor in the United States. In the study of labor productivity in the Puerto Rican economy made by Lloyd Reynolds and Peter Gregory an interesting effort was made to calculate a relative labor productivity by relating output as a percentage of national income to the employment input variable taken as a percentage of the total
labor force.20
In 190 the relative labor productivity of manufacturing was
calculated to be 142 while that of construction was 74.
In 1966 manufacturing
would be approximately 108 (612/3,000::135/725) and in construction was 70 (212/3,000::73/725). While the measurement of productivity is a technical problem which admits solution if not too much precision is sought, the role of productivity in suggesting criteria for program evaluation remains problematic.
The
difficulty lies in the fact that construction employment both requires and generates productivity.
On the hypothesis that the program that uses a
lesser proportion of skilled labor is better for the economic development of the region, then one criterion for program evaluation is its higher proportion of unskilled labor, presuming that the labor intensity ratio is the same or less than for competing programs.
In this same line another criterion would
be the productivity leverage promised by the program.
If unskilled workers
can enter a certain type of construction, e.g. low-cost housing, and learn while they work, then we find what might be called a productivity leverage. The consideration of possible productivity criteria brings up an important point, namely, the need for checks and balances in criteria.
For
example, if we take the criteria of productivity alone and say that the program which has greater labor productivity is the program to be preferred we run into real difficulties.
Productivity, especially in a developing
economy, belongs to an integrated growth process.
In absolute terms the pro-
ductivity of a given construction program may be such as to require a minimum of unskilled labor with a maximum of stdlled labor and machinery.
This
program would tend to aggravate unemployment and probably aggravate balance
-143--
India offered some examples recently of the unbalanced
of trade deficits too.
use of productivity criteria by ignoring substantially her vast unused labor force and buying quantities of heavy construction machinery.21
4) Efficient Use of Materials
All things being equal the program which promises to use available material more effectively in the production of housing units is the preferred program.
But what criteria are to be used to determine this effectiveness?
The first criterion we suggest is a simple one:
the program which uses
the lower proportion of imported materials is to be given priority.
This
criterion could be refined to place emphasis on the use of locally-produced construction materials.
The second criterion suggested is that the program
whose materials require less capital investment to produce should be preferred. Thirdly, the program which requires less skilled laborers to handle the materials should be preferred.
Fourthly, the program which incorporates
advances in material technology without unbalancing the rates of capital investment or the need for skilled labors is the preferred program.
Fifthly,
the program whose materials satisfy consumer preferences better should receive priority.
For example, in some countries the wooden house is not really
considered to be a decent house.
Sixthly, a marginal criterion might be
used for those programs which experiment with technological advances in the use of materials, for example with bare concrete surfaces. 5) More Effective Land Use
The objective need for a more effective use of land increases in direct proportion to the rate of urbanization and the increasing need to match increasing density of population.
The San Juan Metropolitan Area has expanded
so as to include the municipalities of P3ayamón, Cataño, San Juan, Santurce, Río Piedras, Carolina, Trujillo Alto, but its population is expanding at a faster rate.
From over 500,000 in 1950 it rose almost 307 in 1960 to 548,000
and is expected to reach 850,000 (a conservative estimate) by 1970. With an expected demand for a minimum of 200,000 housing units in San Juan by 1970, the proper use of land reaches almost emergency dimensions.
(In
1950 the housing inventory was 148,000 units with anticipated losses during the decade of 28,000 units.)22
Ghat kind of criteria can be developed to
guide the determination of programs for this area? If we do not want to proceed in a vacuum, we must ask for the master plan and criteria which were used to determine its development.
It will
also be necessary, at least for the housing policy maker, to analyze current zoning policies and the criteria used in land allocation.
In other words,
the set of criteria to be used with reference to the evaluation of alternate program land uses is a function of decisions already made by planning authorities.
These criteria must be related to the planning objectives already
determined.
No attempt will be made in this study to search for these
23 criteria.
5) Production for Consumer Preferences
The consumer perhaps comes closest to being king in the popular sector. What he puts up may be poor but it is his own. options are extremely limited.
In the public sector his
In the private sector probably only the upper
income families have real options in exercising their preferences for housing designs and colors.
What does happen, of course, is that the private sector
. I, r,
house is eventually adapted to the family preferences through additions and improvements, including painting and landscaping.
Even such limited
consumer expressions of preference are customarily denied to the occupants of public rental housing.24 In terms of decisionmaking by housing policy authorities, that program should be preferred which gives more leeway to consumer preferences and initiatives.
The whole mysterious process through which the house becomes
a home requirec that it express in some real way the personality of the family which owns it.
It is common knowledge that a roof does not make a
home, nor a group of houses a community.25
The program which permits the
psychological process of home ownership pride to develop should be given a high priority.
One criterion whích contributes to this pride is that the
house can be chosen by the family.
One advantage of the core housing program
is that the family becomes involved in the termination of its own home, even when it follows technical advice carefully. There has been a tendency in the past among housing technicians to feel that the low income family is fortunate to receive any house, much less choose one he likes.
It is now being learned from experience that no family is too
poor to have distinct and legitimate housing preferences.
The development
and selection of housing programs, particularly by the public sector, should honor these preferences to the greatest possible extent.
This principle
should be part of the people's own participation in housing development.
7) The Inflation Factor
At first blush it would appear that inflation should not he considered as a factor in establishing program criteria.
In so far as inflation refers
to an increase in the general price level_ it should function among all
-14b -
programs more or less indifferently.
To understand why this conclusion is
not an accurate one it will be well to reflect briefly on the role of inflation in Puerto Rican housing production. Price changes involving housing units will be analyzed in more detail in a later chapter, but it is clear that they include rising land prices, increased labor and material prices, the increased overhead coming from a percentage markup, and also rising credit prices. rising at an estimated 7% annually.G O
Costs of construction are
The following table gives some indica-
tion of the rising prices of homes in the private sector.
TOTAL ACQUISITION COST:
1958 1959 1950 1951 1952 1933 1964 1955
YEARLY AVERAGES*
11,099 12,111 13,501 12,653 11,647 13,483 14,810 16,152
*Source: Data for States and Selected Areas: Sis, Sis, Sls, 61s, 22s, 22s of every year.
FHA 195º-55; Table 55s, 55s,
The rapid rises in housing prices cannot be said to have discouraged demand.
Average incomes have also grown in Puerto Rico, and the price of
credit under FHA-guaranteed projects has been quite reasonable.
At the same
time, continental capital has flowed into Puerto Rican mortgages in generous quantities, given the combination of rate differentials2
and FHA guarantees.
The distorting effect of rising prices has probably operated more on the producer side than on the consumer side, at least until the tight money
-47-
period in l96ú when capital imports slowed down considerably.
Producers,
i.e. constructors, have found that the Puerto Rican housing market is quite profitable and so have entered it in greater numbers.
The 'duality of pro-
duction has suffered in the process.2` M
What about criteria for evaluating alternative programs on the basis of the inflation factor?
One suggested criterion:
the program which has
a smaller proportion of imported capital should receive preference.
Interest
costs should be less if supported by local capital, and the inflationary pressures within the economy will be alleviated if the ,uantity of imported funds is checked.
The second criterion suggested is that:
the program
which makes more efficient use of the housing factor whose costs are more inflationary should be preferred.
If, for example, land prices are a leading
inflation factor then the program yielding a higher population density should be preferred (always presuming "ceteris paribus"). The third criterion: should be preferred.
the program which will take less time to complete
The fourth criterion:
the program which involves a
region suffering less from inflationary factors should be preferred; for example, the metropolitan_ area tends to concentrate money and materials in such a way as to force construction prices up more rapidly.
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CHAPTER IX
SOCIAL AND ECONOMIC CRITERIA FOR SLUM DEVELOPMENTI
Project residents have left the secure setting of the shanty town with its tightly knit network of relatives, neighbors and friends. Relocation in public housing exposes them to a strange and new social environment and subjects them to formal control mechanisms unknown in the shanty town.2 The programming of economic development for slum communities is of crucial importance in the urban development process. reflects imbalances within the entire economy.
The growth of slums
At the same time reliable
data are limited and deep-rooted class prejudices are many.
This chapter
attempts to cut into the heart of the problem by laying the groundwork for slum development policy criteria.
We will analyze briefly and separately
the social and economic aspects of the slum.
Social Perspectives
In Puerto Rico an estimated 105,000 housing units were inadequate in 1966.
Eighty percent of these units were located in slums, the majority
of which (65%) are concentrated in the urban areas of San Juan, Ponce, and Mayaguez.3
Slum development--slums are called "arrabales" in Puerto Rico--
involves in-migration to the city, relatively high birth rates, construction without permission, lack of utilities and community services, and other socio-economic factors, including the imbalance between rural and urban development in Puerto Rico.4 Apart from a minimum use of on-site rehabilitation by the CRUV, a public policy honored more in word than by act, the major effort of the public sector agencies has been to eliminate the slum and to place its
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residents in public housing ("caseríos").
The policy presumes that the public
housing rental units are temporary until the family secures its own low-cost housing.
In point of fact, public housing units have turned out to be per-
manent residences. *
Consequently, one very important area in which criteria
for a slum development policy need to be established is the relationship between the slum and the public housing projects In fact, the establishment of criteria for evaluating the impact of alternative programs has certain built-in difficulties in the case of the slum.
In the first place the slum has a bad reputation.°
is not considered to be defensible.
Its very existence
Clandestine housing, we are told, is a
"major obstacle" to the solution of Puerto Rico's housing problem. tion" is the word usually used to qualify "slums".
"Elimina-
For this reason, slum
development policy is anathema. In the second place the data, especially economic data, are few and of varying degrees of reliability.
Thirdly, slums are generally examined not
in themselves but in relation to public housing programs or urban renewal Fourthly, slums traditionally have no spokesman.
Politicians are
not apt to go to bat for them outside of election periods.
Public agencies
programs.
plan their programs without consulting the slum dwellers. There are certain important assumptions on which our discussion of criteria formulation for a more rational slum policy are based. should be made explicit.
Perhaps the fundamental assumption is that the
slum is a genuine community.
It is not just a group of derelicts, anti-
social, ignorant, diseased, and socially hopeless. of itself as a community. belonging.6.5
These
The slum is conscious
It has characteristically a group sense of
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On the basis of this assumption any criteria must be related not just to the production of housing units but to the slum as a community.
This
brings us to the second assumption, namely that the essential goal of slum development policy is to integrate the slum community more completely into the socio-economic development of its urban center.
Each slum community
must be studied on its owes merits, but the basic slum policy of physical elimination complemented by the formation of new towns is not acceptable as a policy.
Community development, not slum elimination, is the goal, although
the gradual elimination of slum conditions must also take place. Thirdly, we assume that the development of slums will continue as families migrate from the rural areas and small urban areas into the major urban communities.
This internal migration, so typical of the developing
Latin economy, is not likely to be subject to the discipline of the public sector, although certain steps may be taken to channel this movement.? Neither will the public sector ever have sufficient funds to keep ahead of the housing needs of these migrants. Fourth, we assume that the development of slums belongs to urban development as a natural part of its growth, not as a cancer on the body social.
Slum development is accepted as a healthy social phenomenon.
The
slum community should be seen as a community in development, receiving its share of urban community services, and contributing its own services to the development of the greater urban area. Fifthly, we assume that the normal standards of community development should apply in programming for slum development."
To date, the official
movement of families from slums to public housing projects in Puerto Rico has consistently violated these norms, applying dubious continental
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United States standards to the Puerto Rican family for the purpose of securing more Federal funds. house for slum dwellers.
Finally there is the special role of the
It is their major investment, guarantees their
economic and social security, and motivates their consumption (usually on a credit basis) o£ consumer goeds.9 Granted these conditions, what needs to be done for the establishment of criteria for housing policy decisions?
The first need is to develop a
data system which reports regularly and reasonably on the factors which contribute to slum development.
Also master plan data is needed so that
decisions to establish water, light and sewers are integrated with the planned use of the area.
Highway construction programs are another aspect
of this planning. Each slum community should be studied from the point of view of programming its development into the overall development of its urban center. should involve a community master plan.
This
Plans for the development of each
community should be worked out with the representative leaders of that community.
The paternalism so typical of government entrance into the lives
of the lower income families does not result in better integration.
In fact,
the public housing project is a continuing example of what happens when the government-appointed project management group dominates the decision-making process. 0 Inevitably, programming by the public sector impinges on the popular sector.
On-site rehabilitation, for example, is an expressed priority goal
of the low-cost housing agency (CRUV) in the Puerto Rican public sector.11 One set o£ criteria, therefore, is that other things being equal the popular sector program which permits and stimulates on-site rehabilitation is to be
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This stimulation should involve family participation.
preferred.
The
Puerto Rico budget for 1968 allocates 15% of the total housing budget of $9,269,000 to this program.
Cayey, San Juan, and Ciales are receiving 507
of the allocation for on-site rehabilitation.
The criteria which allocated
these funds are not known, but the great differences in allocation among barrios suggests the need for clearly defined criteria if we wish to put resources to a more effective use. The significance of the home to the slum dweller can hardly be overemphasized.
It guarantees the family a certain security and independence.
The house becomes the symbol of the man's ability to provide for his family and therefore of his authority.
The rental housing project undermines this
need completely. Related to these criteria are those which have to do with public housing programs.
If the community life of the shanty town is different from and
superior to the community life with the public housing project with its superior physical facilities, then programs which favor the former deserve preference.
Moreover when it comes to the public housing projects themselves,
they need to be thoroughly evaluated so as to eliminate the community evils already noted. Taking another perspective we can expect that programs aimed towards the integration of the slum community into the life of the urban center will have an important leverage effect.
We know from our, experience with the
very low income families in Peru, Chile, and Brazil that these will be motivated to save consistently for their home and to invest in it provided that they have a certain minimum security that they will not be driven out at any moment.
Therefore programs which provide slum dwellers with the
assurance wbtoh they need to improve their homes should be fostered.
-l53-
The slum is essentially a nontechnical self-help construction program. Public sector programming, at relatively little expense, can assist in this process to see that such construction follows minimum standards of safety and proper use of available utilities. In this discussion about the popular sector we assume that interior migration will continue into the metropolitan urban area.
This assumption
has assumptions of its own, namely that the rural-urban relationship will not change, and that municipal development will not take place on an effective economic basis.
Intimately related with housing policy decisions for
the urban center development are decisions with reference to the development of agriculture and regional decisions affecting the development of municipalities. The development of a strong municipal structure is an ostensible goal of the Puerto Rican public sector, but it is still far from being implemented. A vigorous renovation of economic development policy on a municipal and regional basis should do much to slow down the currents of internal migration flowing into San Juan, Ponce, and Mayaguez.
The development of better
transportation facilities should also help curb this flow which is a search for urban services as well as for economic opportunities.
Economic Elements of Slum Development
To be concerned with the economics of slum development seems to fly in the face of the traditional condemnation of slums by civilized peoples. The ideal city, we are told, is the slumless city.
The slum is regarded
as a cancer on the body social which should be removed as quickly as possible. On the contrary, the point of view which we assume here is that the slum has a legitimate and necessary role to play in the dynamic process of urban development.
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The slum is not just a sickly community living a parasitic existence but an economically productive community.
The slum should not be considered
in terms of how to destroy it but how to integrate it with the urban center to which it belongs. There are, of course, slums which have large pockets of sick and otherwise economically-unproductive people. the slum of the industrial economy.
These are more likely to be found in
In the developing economy the slum
tends to be, at least initially, the staging area of the migrants.
There
are also urban slum families, but these tend to be young and relatively vigorous.
They supply the city with its unskilled labor force and with a
large percentage of its construction workers and domestic servants.
They
prefer to build and own their own homes and to live within their slowly growing family incomes. We can begin by assuming that there is a functional relationship between the slum community (S) and its urban center (U): S=f(U) This functional relationship can be broken down into its major components of í) labor force (L), ii)capital formation (U), and iii) trade relationships (R).
Each of these components may be taken as a relatively independent
variable in the total urban development process. I) The Labor Force Variable The labor force variable seeks to relate the slum community to its urban center by contrast
Each labor force may be distinguished on the basis
of the birth rate (b), the mortality rate (m), nutrition (n), educational levels (e), income (y), employment skills (s), community organization (Oc), and labor organization (Ow), so that L = f(b, m, e, y, s, Oc, Ow)
Each of these variables may be ;uantified so as to contrast the economic community which is the urban center and its satellite community, the slum. The goal of this contrast is to know where to assign resources in the effort to integrate the two communities. ii) The Capital Formation Variable The second relatively independent variable which relates the urban center community with its slum satellite is capital formation (D).
Fundamentally,
the contrast is in the field of the production of capital.
We cannot really
plan for a better inter-community integration without comparing the rate of capital formation and the structure of capital formation on an intercommunity basis. The capital formation variable is a function of the developed skills of the work force (s), infra structure development (i), the propensity to save (v), the rate of capital formation (f), and the physical index of goods and services produced (e). D = f(s, i, v, f, c) In comparing the economic growth rates of the two communities, the master plan of their integration becomes more relevant. iii) The Trade Variable The trade variable assumes that there are a series of export-import
which are
or
relationships (R) between the urban center community and its slum satellite economic significance.
Generally speaking, the primary export
of the slum community is unskilled labor hours.
In this way it builds up
its "foreign exchange" in order to buy the food and consumer durables it requires from the urban center community. In this relationship the slum community is much more sensitive to job lay-offs and credit tightness than members of the urban center.
To paraphrase
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a saying of the Marshall Plan era, "When the urban center sneezes, the slum satellite catches pneumonia".
In the allocation of municipal funds for
utilities and other services, the slum satellite is liable to suffer more from any shortage of funds. The suggested variables to be quantified are the following:
hours of
labor, skilled and unskilled, exported (lu, le); salary index of labor, skilled and unskilled (we, ws); elasticity of demand for labor, skilled and unskilled (eu, es); propensity to consume (p); elasticity of demand for goods, durable and nondurable (gd, gp); and the consumer price level index (li). R = f(lu, 1sá wu, WS, eu, es, p' gd, gp' li) At present, data is not available on most of the variables suggested, at least on the basis of an inter-community breakdown.
For the most part,
however, we believe that they are sufficiently quantifiable to permit an evaluation of the economic role of a particular slum community together with the possibilities of its integration with its urban center.
The key variables
presented also indicate the criteria neéded for establishing priorities in this inter-community integration process.
Ci~atlr IAiR
A
THE SEARCH FOR EMPLOYMENT CRITERIA r
About 115 Yorkers are employed for one year for each million dollars spent for constructing ne: facilities, such as buildíngs or highays. More than half the jobs created by construction expenditures are in the various stages of manufacturing, mining, trade, and transportation industries that produce, cell, and deliver materials required for construction activites.l Construction activity generates employment.
In the United States
between 1.959 and 19552 approximately 225 man•hours of employment were created by each $1003 of construction contract cost. projects require a variety of man hours.
Different kinds of construction
Public housing projects, for
example, have a relatively high employment generating effect. Designs for public housing generally eliminate the installation of luxury or highly fabricated equipment, such as central air conditioning. Consequently, the proportion of the total cost of such housing allocated to materials ís smaller and the importance of on-site cmploymen!_, a large percentage of s1hich is composed of unskilled labor (iho more significantly increase man hours per dollar) is greater than for most other types of construction.? The lose man-hour requirements for private onefamily_ housing are attributable primarily to the large share of total costs for overhead and pro£its.3 The purpose of this analysis is to relate the employment generating role of housing construction to housing poiicy decisions through the establishment of sets of criteria. The search for criteria in the field of the construction employment offers many difficulties.
In the first place, the demand for workers, skilled
and unskilled, is derived fro,a the demand for housing.
It is a derived
-15. -
variable whose criteria must be related to general economic conditions. Secondly, the objectives of the employment variable are intimately related to the general economic situation, both rural and economic.
In Puerto Rico
there is sufficient labor mobility so as to make it difficult to isolate the construction employment variable.
A sugar cane worker in Puerto Rico,
for example, may well become a construction worker during the dead season. The objective of full employment is not easii.y related to the construction industry itself. productivity.
Thirdly, there is the difficulty of measuring labor
Increasing labor productivity at a reasonable race is a
clearly needed criterion for any program, but the use of any such criterion requires statistics which are not generally available.
In fact, the lack
of statistics in the construction sector on both its supply and demand sides is traditional. Searching for criteria to guide a more rational housing policy is always difficult business, and not the least of the difficulties lies in selecting the methodology to be employed in the search.
One way is to
begin with a detailed analysis of the structure of employment in Puerto Rico together with the actual functioning of this structure.4 needed,but this is not our task.
Such studies are
A second possible method would be to
relate man-hours needed for the production of a variety of projects.y examples of this in the United States have already been cited.
Some
Such calcu-
lations might be useful, but we will not attempt them in this study.
?e
will assume that each type of project will generate its particular employment needs, on-site and off-site, and that no two will he the same. A third possible method in the search for program evaluation criteria is a modified input-output method as developed by W. I'. Leontieff at the beginning of World War II.
This approach presents a series of production
functions for the major production sectors of the economy with the goal of making better estimates of the impact of changing production on the allocation of resources.
Data from the input-output table can be used to compute
for each industry included the direct purchases from every other industry per dollar of output value. The input-output approach in the establishment of housing policy criteria presents a number of difficulties, both practical and theoretical. First of all, the production function data presuppose a certain stability which does not exist in a developing economy.
The infrastructure changes;
labor productivity changes; technology changes--rapidly and unevenly. Secondly, the application of input-output data to housíng programs which involve non-market forces such as holiday labor and the integration of pools o€ non-banked funds is of doubtful value.
Thirdly, the precision
data necessary to compute useful input-output tables can be obtained, if at all, only after much time and expense.
Even in the United States, the
Department of Commerce had a six-year lag between the data of its interindustry tables (1958) and their preliminary publication (1954).
Fourthly,
the data for the construction industry is unlikely to be sufficiently detailed for their adjustment to alternative mixes of housing programs. Other possibilities for deriving useful construction employment criteria might be found in using some combinations of the approaches just considered.
Current housing deficit data, for example, might be used to
calculate number of worker hours needed, and therefore the demand for workers, in each region.
The set of criteria would be relatively simple
to produce on the basis of a five-year plan or ten-year plan.
This approach
might constitute an interesting planning exercise, but it hardly meets the complex housing needs of a developing community characterized by poor income distribution.6
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Although the capital-output ratio has already been evaluated in some detail, it should be mentioned here as a possible approach to establishing criteria for housing program planning.
The philosophy behind the use o£
this ratio is to establish planning investment priorities on the basis of some kind of marginal efficiency of capital statistics.
The assumption
behind its use is that priorities in the allocation of additional funds should be granted to those production sectors which promise greater net returns.
The housing sector has been tried and convicted of being a low
income producer and has therefore received a low priority.7
As we have
seen above, if the ratio is properly calculated it might be used as an investment indicator, but in terms of deriving criteria for evaluating alternative housing programs or groups of programs it does not appear to be useful.
A Suggested Approach to Employment Criteria
While it is true that the employment variable is a derived variable related to total construction activity, it is intimately related with one key economic objective, full employment.
One set of employment criteria
should meet the requirements of this objective in the sense of evaluating alternative programs in this light.
The difficulty is that "full employment"
is an incomplete operational concept, even when established at some level such as 4'/o unemployment. Lord Keynes identifies full employment as the condition of the economy "when output has risen to a level at which the marginal return from a representative unit of the factors of production has fallen to the minimum figure at which a quantity of factors sufficient to produce this output is
-1')
available".8
In the abstract this definition is quite satisfactory.
The
difficulty lies in the omission of labor productivity as a factor which ivalifies full employment.
The notion of disguised unemployment is common
enough in economics, but the relation of labor productivity to the full employment concept is generally ignored by putting it in Marshall's famous sack of "ceteris paribus".
The Puerto Rican cutting sugar cane with his
machete may be fully employed, but his employment only becomes significant for purposes of comparison when related to worker productivity in other areas of Puerto Rico and to cane worker productivity in other areas of the globe.
(The sugar cane worker in Hawaii, for example, has been estimated
to have six times the productivity of his Puerto Rican counterpart, and three times the pay.) If we wish to relate employment objectives to housing construction we shall have to look for lower level objectives.
It is not possible to
identify in detail all of these at the beginn.ing9, but a basic listing may be suggested.'° 1) The Use and Development of Labor Skills 2) Increasing Labor Productivity 3) Growth and Stability of Labor Employment 4) Lower Unemployment Rate 5) Stable Employment Conditions ~) Adequate Statistical Flows Each one of these objectives must be related to housing programming before they can be of use to the housing policy maker.
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1) The Use and Development of Labor Skills
In the
The common economic measure of labor skill is the wage.
United States the semiskilled workers earn about 2O7 tore than laborers The di. ti ~Ycrce L ^t'ie~n ck .1..' ed and
and skilled workers about 407, tore.
but
unskilled labor^rs F s ^orro'e'a co o=.dcr~ibly in *', e it is a sitiatior
qui :e tg:; .cz1_ i^
DiffeYe.~ceo in wo e skills
the
t:≥.-r
?Ycrp~~ ~_~ o r also tend to c~.,~cfa~iih • ^t
in the co~strt.ction ire-:i^Lry.
wage differentials
de ie..opiug £cot ozu ,
for seven grc
'r
The folicwl.vg table rre
n_ts 1964
of cr-*t^s v~tiori worber_s.
Total
7 of Total
Regular Average Hourly Wage ( )
26,020
100.0
126.9
A-Heavy Machinery Operator
775
3.0
211.6
B-Superintendent of Construction
186
0.7
181.0
C-Special Trait Workers
1,819
7.0
168.0
D-Skilled Workers
7,332
28.2
137.5
379
1.4
141.1
F-Semi-skilled workers
6,030
23.2
119.4
G-Unskilled Workers
9,499
36.5
106.8
Occupational Groups*
Total
E-Assistants to Carpenters, Mechanics
Number Employees
*Source: Junta de Salario Mínimo, La Industria de la Construcción, 1964, page 33.
Each housing unit production program uses different proportions of labor and capital and, in the labor variable, different proportions of skilled and unskilled.
One important employment advantage of the construction
industry in the production of low-cost housing is that a larger percentage of unskilled labor can be used.
Not only does this kind of program make
better use of the labor force, it also offers a training factor as unskilled workers from rural areas enter into the discipline of production work and learn to handle basic tools and some simple machinery.
The rapidly growing
area of Concepción, Chile, is a good illustration of the training leverage of construction programs. The table above suggests some possible criteria relevant to the objective of increasing the use and development of labor skills.
Over 50% of
the construction workers in Puerto Rico urban areas are in the unskilled and semiskilled category.
A housing production program for the low income
families should use a greater percentage of unskilled workers is possible. A program which proposes to use a high percentage of machinery and skilled labor may be acceptable for other reasons, but in terms of the employment objective it sacrifices employment for productivity in an unacceptable way. The fact that the salary of the unskilled worker is considerably below that of the skilled workers suggests the need to improve income distribution through a policy of vocational development.
A program which permits this
kind of policy to be implemented should receive preference.
The average
skilled worker in Puerto Rican construction in 1964 earned $58.34 weekly, while the unskilled worker earned only $41.98 weekly.
Assuming a 48-week
work year, the skilled worker earns $2800, which establishes him in the lowest middle income group, and the unskilled worker earns $2000.
In
X 2000 can hardly support an urban family and therefore should Puerto Rico 5 not he considered as a reasonable objective.
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In terms of criteria for alternative program evaluation, we may conclude that those programs which use higher proportions of urrtski_llr.d workers and offer training advantages are to be preferred.
2) Increasing Labor Productivity
The ccncet.s of 1<.bor skill and of labor productivity ar
eüs;ly con-
Labor skill is concerned with the production capacity o
fused.
vidual worker.
the indi-
Labor productivity on the other hand is an eco..c7;ic maasure
of general worker power to produce economic goods and services per unit of labor input. Labor productivity is comnioniv cncasured as an input-output ratio expressed in terms of number of man-hours per unit produced.12 laws productivity consists in reducing the input.
Increasing
Some technician_s13
reject this ratio because it seems to put too much weight on the labor factor.
The answer is that man-hours, in this case, represents the hands
of the worker using his instruments.
Here the Marxian notion of input of
living labor plus input of embodied labor is conceptually useful.i4 The Russian economist, G. A. Prudensky, lists six principal factors which influence labor productivitv:10 i-Introduction of new machinery and progressive technology ii-Specialization, cooperation and combined production iii-Rational organization of work and production iv-Improvement of workers' skills v-Improvement of industrial organization and management techniques vi-Changes in industry structure
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These factors do not work in precisely identical fashion in every production sector.
Each sector, e.g. construction in Puerto Rico, may be presumed to
have its own factor mix.
They do suggest several possible criteria for
housing policy decisions. Prudensky emphasizes that the most important condition for higher labor activity is improvement in worker skills. objective related to this factor.
We have already considered the
New machinery and improved technology are
also decisive factors; but here we are faced with measurement difficulties. Years ago we had the Cobb-Douglas function to suggest that the marginal productivity of labor is 3/4 P and the marginal productivity of capital 1/4 P L C where P is product, L is labor, and C is capital.lo But even if this were accurate at the time it can hardly be accepted for a particular sector of production today. We can begin by establishing a minimum criteria that any given program should not depend on reducing the present level of worker productivity.
The
productivity criteria should be relative to the production capabilities of the particular group of workers.
Rural workers may not have achieved the
labor productivity levels of urban construction workers.
On the maximum
side we can take as a criterion that the proposed program should not demand a labor productivity which is greater than that of the available workers making alloi~ance for an annual growth factor.
If it is greater, we can
anticipate that it will either draw top skill workers from other production projects or necessitate the importation of special labor skill or capital equipment. Casual observation in Puerto Rico indicates that the percent of capital being used by the construction industry is increasing.
Corporations have
been formed recently which specialize in renting heavy equipment.
The
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increase of high rise building is also contributing to the rapid growth in construction equipment.
At the same time the growth in the number cf
construction workers is proportionately less.
The following table, covering
only a six-year period, maces this point by showing that there is a general trend toward greater productivity by labor in the construction sector.
To
what extent this trend is due to greater labor skill or to the ,:eater use of capital equipment is not clear.17
The productivity increse cf 70% in the
1961-1965 period is too great to assign it to increasing labor skills alone.
LABCR PRODUCTIVITY IN TU.E JONSTP.UCTION SECTOR OF PUERTO RICO, l9ó0-1965 (in thousands)
Construction Value Construction Workers Productivity/ Worker Source:
1930
1961
1962
1963
1964
1965
227
253
307
32.3
376
492
48
52
53
57
59
61
4.7
4.9
5.8
5.8
6.4
8.0
Planning Board, CorEmonwealth of Puerto Rico
These productivity ratios in themselves have no particular value as criteria. The statistics are not precise enough to produce useful ratios except in the general sense of detecting a marked tendency towards greater productivity. Apart from the inflation factor it can be presumed that certain inadequacies of data, e.g. failure to cover construction produced by the popular sector, will roughly tend to balance out.
Another factor making for lack of homo-
geneity over the years is the changing ccmposition of construction activity in terms of housing, highways, hotels, hospitals produced.18
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In terms of national income accounting, the construction sector with 57,000 workers contributed 15% of GNP in 1964 while the manufacturing sector with 112,000 workers contributed 22% of GNP in the same year. i
Assuming that
labor skills in the two sectors do not differ greatly (in fact, they are probably higher in the manufacturing sector), we have another confirmation
•
of the significance of the increased use of capital in the construction sector. Labor productivity studies have been made recently by the United States Department of Labor.l9
The surveys were designed primarily to determine the
number of man-hours utilized for each $1000 of construction value produced, i.e. in terms of cost to purchaser. ' Ian-hours" includes both on-site construction employment and the off-site employment required to produce and deliver materials used in the construction.
The following table gives a
resumé of the studies according to major types of construction:
DISTRIBUTION OF MAN-HOURS PER $1000 OF CONTRACT COST, BY MAJOR TYPES OF CONSTRUCTION, INDUSTRY, AND OCCUPATION, 1959-52
Industry
Total man-hours A- Construction industry 1- On-site 2- Off-site B- Other industries Source:
Private one-family housing
Federal office buildings
Public housing
204 84 72 12 120
227 107 97 10 120
236 126 114 12 110
Monthly Labor Review, Vol. 88 (February 1955) page 155.
Here the relative constancy of the aggregates is interesting, a median 224 man-hours being required to produce $1000 of value.
Of this 224 hours the
construction industry contributes a median 43% or 96 man-hours.
The most
striking difference is in the proportion of skilled and unskilled workers used in each major type of construction.
It varies from 3.2:1 in the produc-
tion of private housing units to 1.9:1 for Federal office buildings.
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We have already seen 1:hat public housing expenditures tend to generate more employment. families.
The buildings are simpler and designed for low income
Thus the percentage of unskilled labor used (which means the
participation of more man-hours per construction dollar) can be higher. This high unskilled employment mix is even more striking in terms of a regional breakdown,20
For example, public housing in the South uses 142
man-hours per. $1000 of construction contract cost as contrasted wi.rh 95 man-hours per $1000 in the Northeast.
This latter differential also reflects
the advantages of using cheaper labor rather than more construction equipment. These data suggest possibilities for housing policy decisions and general construction in the public sector which can make a direct contribution to construction employment. all decisions.
Construction policy need not be just the sum of
It can be a rational policy geared to definite economic
needs. So far as the other factors mentioned by Prudensky are concerned, it is sufficient to note the need for industry research and for vocational training programs.
The research should cover not only the effective use of
construction materials and housing construction techniques, but also financing arrangements and industrial organization and management having to do with the effective use of manpower.
These factors are all clearly related to the
making of an integrated, rational housing policy.
3) Growth and Stability of Construction Employment
Employment in the construction sector is not just a matter of numbers employed and the rate of unemployment.
In addition to the quantitative
dimension of numerical growth there are the qualitative dimensions of
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stability in growth and of a growing productivity by construction labor. The latter has already been discussed.
What operational objectives can be
uncovered in the former? In the first place, the rapid growth in the production of construction value did not generate an equal rate of growth in construction employment. In the 1952-1962 decade construction value (using current prices) rose 200% while construction employment rose 70%. tivity is not enough. case?
To point to increased labor produc-
What should the housing policy objective be in this
The answer is not simple.
The following table indicates that cons-
truction employment has been maintaining its relative position in the Puerto Rican economy.
Apart from the productivity limits suggested above
EMPLOYED PERSONS BY INDUSTRY: Fiscal Years 1950, 1960, 1966 (000's) 1950 Manufacturing (except home needlework) 55 Construction 27 Trade 90 Services (except Gov't.) 77 Government 45 Source: Planning Board, Commonwealth of Puerto Rico
1960
1966
81 45.
130 65 131 115 100
97 75 62
there seems to be little reason for choosing any "magic number" as an objective.
One partial objective-criterion is suggested by the ratio of the
number of construction workers to the total labor force. constituted approximately 9% of the total. 11 by 1962.
In 1959 they
This percentage rose slowly to
By the end of fiscal 1965 this figure dropped back to 9%.
Any
total housing program should be expected to operate within reasonable distance of this relationship in cooperation with other elements of the construction sector.
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A second partial objective-criterion might relate growth in construction employment with growth in production of construction value.
It would be
necessary to include a productivity rate of increase factor to make sudden changes in the ratio meaningful. a
Referring for
moment to the stability side of construction employment,
we may begin by noting the lack of stability.
Contractors customarily lay
off unskilled workers when they are not needed.
So far as skilled workers
are concerned, contractors prefer to make sacrifices to keep them.
In May
1965 construction workers constituted 8.8% of Puerto Rico's work force. Construction workers, however, accounted for some 22% of the total unemployment.
The following table on work experience by major industry group shows
that Construction is second only to Agriculture for lack of regularity in work.
When one realizes that construction workers are almost exclusively
men, the implications of this lack of work stability for family life and income is obvious.
UNEMPLOYMENT RATE BY INDUSTRY AND MONTH
All Industries Agriculture Construction Manufacturing Trade Public Administration and Services Source:
Jan 1967
May 1966
Jan 1966
May 1965
15.6% 33.9% 32.7% 15.8% 12.2%
9.4% 9.4% 16.4% 11.3% 10.6%
13.4% 30.5% 25.6% 14.6% 12.0%
9.7 13.2% 21.7% 12.5% 9.0%
10.2%
6.7%
6.5%
5.2%
Employment and Unemployment in Puerto Rico, May 1966, January 1967.
In this case a detailed study of working conditions and factors contributing to work unstability need to be measured before housing policy decisions can be made.
Unlike other regions, the weather is not an important seasonal
t
factor in construction in Puerto Rico.
Certainly a minimum objective
would be to reduce work instability by better coordination among public construction projects.
4) Wage Increases in the Construction Sector
In Puerto Rico, more technical consideration has probably been given to changing wage rates than to any other factor.
In fact, in this area
the housing policy maker finds his main objectives already established even if not very precise
The general policy of the government is to provide
every opportunity to the workers to better their salaries.
The importance
of this policy lies in its implementation, under pressure from Federal Minimum Wage Laws, within each significant sector of Puerto Rican industry. The Minimum Wage Law of Puerto Rico (approved June 26, 1956, and amended a number of times) established a Minimum Wage Commission composed of three members named by the Governor of Puerto Rico for a four-year term with the advice and consent of the Senate.
This Commission is charged with
revising minimum wages for each industry in Puerto Rico at least every two years.21
On the basis of public hearings in which the public, the contrac-
tors, and the workers are represented, new minimum salary raises are granted by the Minimum Wage Commission.
Declaring itself in favor of assuring
workers in any industry of the highest salary the economic conditions of the industry permit, the Commission is in effect doing the work of a good union.
In fact, in Section 1 (e) a direct commitment is made to fostering
collective bargaining.
What are the criteria used by the Commission in
granting a particular increase?
To determine these it will be necessary
to consider certain sections of the Minimum Salary Law of Puerto
Rico.22
Among the norms for determining minimum wage change provided by the Minimum Wage Law23 we find this general objective:
Minimum wages should
be set as high as the industry can reasonably pay without reducing employment substantially.
The Law then proceeds to introduce four factors which
are to be related to the specific wage increase decision.
These are:
1) the changing costs of living, 2) the needs (primarily economic) of the workers, 3) the economic condition of the industry, and 4) its competitive position.
In other words, the objectives for minimum wage changes must
take into account both the worker and the industry. 24 In determining its biennial revisions of the minimum wage in the construction industry, the Coiuuiission sets its objectives by occupational We see that unskilled workers
groupings. (Refer to table on page 162.)
form the greatest block of workers, 3ú.5'/o, and that unskilled plus semiskilled (carpenter's helper, mason's helper, janitor, messenger, chaintnan, etc.) constitute b0% of the construction force.
Both of their salaries
are below the Federal Wage minimum of $1.25 per hour. The Commission's economists provide it with a detailed description of workers' wages and of industry profits.
The analysis proceeds on the
basis of distinct segments of the construction industry, i.e. urbanization, land development, plumbing, electricity,
building,
paving, sewers, etc.
Not only contractors but subcontractors are studied. In 1964 the Cocnni_ssion's Decree raised the minimum for semi -skilled construction workers from $1 .05 to $1.25 per hour. workers was raised from $.90 to $1.10.
The minimum for unskilled
From the table referred to above,
we see that the actual average rate for semi -skilled was $119.4 and for unskilled, $106.8.
In terms of effect on industry payrolls tables were
computed which showed in the case of the semi -skilled workers that the
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minimum rise to $1.25 would result in a 9.5% rise in the payroll for 75% of this group, but 27 for the total industry payrol1.25
In the case of
the minimum wage raise for the unskilled construction workers, 75% of the workers were also affected.
Their payroll as a group rose 8.5% but the
percentage increase in the total industry payroll was 2.2%.
Thus the
raises resulted in an estimated 4.2% increase in the industry payroll. In the case of these minimum wage change decisions,therefore, we have a good example of a general objective being implemented by decisions based on statistical data, although not exclusively so.
The impact of a wage
raise on the industry payroll can be accurately determined, but the economic condition of the industry, especially regarding its future, involves more than a glance at the profits. derables to be considered.
There are also a number of important impon-
In the case of Puerto Rico, for example, a
change in political status would influence the development of the construction industry greatly.
Also a change in the flow of mortgage funds from
the United States could change the whole picture for the construction industry. With reference to possible housing policy decisions, Puerto Rico now has a reasonable amount of data and experience for evaluating possible alternatives.
Each salary mix determined upon is a result of such decisions.
5) Unemployment in the Construction Industry
In terms of discovering objectives it is difficult to establish quantitatively what the size of the construction worker force should be. On the basis of past experience we do not expect the labor force to grow as rapidly as construction values-produced do. tivity prevents this.
Increasing labor rrodc_c-
If we concentrate our search for criteria on unem-
ployment rather than on employment, the results are more fruitful.
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An acceptable general objective is to minimize unemployment.
This
objective (which also belongs to national economic policy) can be achieved in several ways:
1) increase workers' skills, making them eligible for
more productive employment within the industry; 2) encourage interindustry worker mobility thrcugh specific re-training programs; 3) stabilize construction value production through the implementation of a rational housing policy; 4) control the introduction of heavy construction equipment so that there is time for worker adjustment.
Each one of these lower level
objectives implies a number of performance criteria which can be at least partially quantified. It will be useful first, however, to get a general view of construction employment and unemployment.
The following table presents this com-
parative data on an interindustry basis for Puerto Rico.
An estimated
EMPLOYNENT AND UNEMPLOYMENT IN PUERTO RICO, MAY 1965* (thousands of persons)
Labor Force Total
Unemployed 70 of Labor Force Distribution:
773
Labor Force: Employed -Agriculture -Industry -Manufacturing -Construction -Commerce -Transportation -Services -Other Industries
698 126 572 134 (467 women) " ) .31 ( 27 128 (2470 " ) 48 ( 8 " ) 190 (4770 " ) 12 (25ió )
100 16.3 83.7 17.3 7.9 16.6 6.2 24.5 1.6
** 15.4 73.0 23.6
*Monthly Report 31, Bureau of Labor Statistics, Department of Labor, Commonwealth of Puerto Rico. **Percentages are for salaried workers in each sector. Salaried workers account for 88.47 of the total unemployment in Puerto Rico. The other 11.670 is equally divided between self-employed and those who have no previous work experience.
L.
10.0 5.8 12.1 0.9
-1i5-
75,000 members of the working force were unemployed in May 1965. constituted 9.7% of the total labor force.
This
In relation to the construction
industry we find that two significant facts emerge.
In the fírst place,
there is the striking difference between the 7.9% figure which represents its share of the total labor force and 20.7% which represents its share of the total unemployment.
The ratio of percentage employed to percentage un-
employed for the Construction industry is highest at 1:2.6.
Manufacturing
is 1:1.3, Commerce is 1:0.6, and Services reaches a low of 1:0.5.
Not only
does the construction worker suffer from the highest relative unemployment, but he also works the least regularly of all industrial workers.
In 1963,
only 55% of the construction workers (manufacturing, 70%; commerce, 74'/) worked regularly. employ-ment.27
In 1962, only 50% of the construction workers had regular
The seasonal aspect of construction unemployment does not
appear to be significant.28 The second significant fact about the construction worker is that 98`70 of them are men.
In fact, until 1965, the absolute number of male construc-
tion workers was equal or even superior to the number of male workers in the entire manufacturing sector.
High unemployment rates in the construc-
tion sector therefore means that a large number of heads of families are affected.
A recent study concerning the Hours of Work Necessary to
Eliminate Unemployment Among Male Family Heads makes this point very clear, especially in view of the fact that construction labor in 1963 comprised only 8.27O (57,000 out of 695,000 workers) of the labor force in Puerto Rico.
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HOURS OF WORK NEEDED TO ELIMINATE UNEMPLOYMENT OF MALE FAMILY HEADS, 1963* Industry
Unemployment
Subemployment**
Agriculture
13,000,000
8,700,000
Construction
9,300,000
3,100,000
Manufacturing
7,900,000
1,800,000
Other Sectors
10,800,000
4,700,000
*Junta de Planificación, 1964 Informe Económico al Gobernador, Priir'ra Parte, page 151. **Less than 35 hours of work weekly when he can work full time.
With reference to objectives, minimizing of the ratio of percentage of construction workers in the labor force to the percerxtcge cf co: t..uction workers among the total unemployed seems likely to be useful. itself
should give housing policy makers a per
employment position of the industry.
The ratio
ccti- a concerning the
Increasing the regul-;r4.ty of conf construction policy whose
struction work should also be an objective trends can be quantified.
The high proportion of male family h,~ A i suggests the need for priority actiocz in p) of construction.
c;ed in construction work .ing ar.d stabilizing the growth
Practically, this will mean adjusting non-residential
construction demands by the public sector to the dynamic de-ielopment of the private residential construction sector.
Later in the paper these policy
possibilities will be analyzed. An examination of the four ways listed above to ameliorate unemployment in the construction industry leads to several conclusions concerning objec-
tives for housing policy.
First of all there is an obvious need for research
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to determine the best method or ccmbination of methods to increase construction worker skills.
Various forms of vocational training and on-the-job
training would have to be considered in order to improve construction worker flexibility and motivation.
This study would involve an evaluation, both in
terms of dollar costs and expected skills produced, of a number of possible programs. Secondly, specific programs should be established for the purpose of retraining construction workers who remain consistently unemployed. objective would be to increase worker mobility.
The
The mobility of the
Puerto Rican agricultural worker has already been proven by his readiness A retraining
to travel to the United States for work during harvest.
program could help the worker displaced by the increasing use of capital equipment to find equivalent work in other industries.
Clearly, the goal
of this program should be evaluated in terms of its role in reducing both frictional and structural employment.29 Thirdly, better planning of construction programs in the public sector could be expected to contribute to worker job stability.
Here the whole
question of the impact of the construction union on fostering work stability needs study.
If the unions in Puerto Rico are failing to push this objective,
then the government might consider other routes.
For example, the guarantee
o€ minimum wages on an annual basis in the construction industry might be examined as a possible objective.
Such a guarantee would encourage contrac-
tors to search for work for their unskilled employees as they do presently for their teams of skilled workers. Fourthly, steps should be taken to control the rate of import of heavy construction equipment with an eye towards permitting a "normal" rate of productivity growth.
This in turn would contribute to work regularity in
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the construction industry,
t+ihat this means in practice is that the program
mix which is chosen should make an effort to balance productivities.
It is
not just a question of putting up buildings as quickly as possible but of gearing construction activity to current labor productivity.3O
6) The Flow of Reliable Statistics
There is general agreement among statisticians that construction data in the continental United States leaves much to be desired.
Lawrence Bloom-
berg, U. S. Bureau of the Budget, cites a significant body of professional opinion which agrees that construction represents one of the weakest components of gross national product.31
The well known U. S. Income and Output,
1958, published by the U. S. Department of Commerce stated that even the "basic data for estimating the value of residential conctrt~tion remain unsatisfactory".32 Granting these data difficulties in the United States with all its resources and tradition of statistical precision, it is not surprising to find that construction statistics in Puerto Rico are far from satisfactory. One general objective for housing policy m•:.kers here must be to evaluate the reliability of the construction mescurements presently used and to institute new procedures for a more accurate and complete coverage.
To
a great extent the decision process in the construction sector will depend on the reliability and completeness of the statistical flow. There will be no attempt here to list all the statistical voids in Puerto Rico's construction data.
This can be done more profitably with
reference to each particular objective.
At the same time a piecemeal attack
on the areas of statistical needs is not the solution.
A systematic
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evaluation of present data available in terms of present and forseeable needs should have priority.
It will be useful to signal out two fundamental
areas of statistical neglect, namely labor productivity and construction activity by the popular sector.
a. Labor Productivity Data
The analysis concerning objectives and the need to make them at least partially operational confronts us over and over again with the need to measure labor productivity.
Numbers of laborers alone cannot serve as
adequate objectives for construction policy decisions. of labor productivity would be better than none.
Even partial measures
At present in Puerto Rico
the statistics used do not permit the basic correlation between construction value produced and the number of workers producing it.
Neither is there any
reliable data on the growing use of heavy construction equipment and its effect on construction worker employment.
Puerto Rico's Department of Labor
spent one year trying to develop a special Labor Productivity Measurement Section, but finally jettisoned the project.
b. Construction Activity by the Popular Sector
The second fundamental statistical need in Puerto Rico, as in any other developing economy, is to measure construction activity by the popular sector. The measurement of investment and of man-hours used in the production of constructions by the public sector and the private sector is well esiabli.shed, and, even if unsatisfactory, gives the statistician and the policy maker some useful perspectives.
On the other hand, the regular measurement of the
considerable construction activity constantly undertaken by the popular
sector, urban and rural, is nil.
Housing policy decisions should not be
made in ignorance of their impact on savings, salaries, and valuable organization energy invested in construction activity by the unlicensed popular sector. The use of operational construction objectives will largely have to wait until better and more complete data are available.
There are definite
indications of improvement in employment data on a numerical basis.
A
recent study by Carmelo Fortuño of Puerto Rico's Bureau of Labor Statistics indicates that errors relative to labor force estimates based on sampling have decreased significantly since 1962, and this on the basis of using a smaller sample.
STATISTICAL ERRORS IN THE ESTIMATE OF LABOR FORCE, EMPLOYED AND UNEMPLOYED* Puerto Rico:
Labor Force Employed Unemployed Source:
July 1962, July 1965 July 1962
July 1965
2.37 2.6% 3.07.
1.7% 1.7% 3.570
Department of Labor, Commonwealth of Puerto Rico.
-1&Z-
CHAPTER XI
PRICE LEVEL CHANCES IN THE CONSTRUCTION VARIABLES
Before entering this important inflation section of the study it will be useful to orient ourselves once more on method. Essentially, a systems analysis approach is being used.
This type of analysis involves 1) the
establishment of objectives, 2) alternative techniques or "systems" by which the objectives may be accomplished, 3) the estimation of costs or resources required by each system, 4) a logical framework or model relating objectives, techniques, environment, and resources, and 5) the formulation of criteria for choosing the better alternatives in terms of the objectives and costs.' The number of important variables involved in this section of the analysis and their far-reaching economic implications will force us to keep the perspectives very clear.
We are not attempting a study of the
inflationary process operating in the construction sector of Puerto Rico. Neither will we attempt to prove the fact of rising prices, although some statistics will be introduced for purposes of illustration.
The purpose
of this portion of the study is to factor out subproblems in terms of the objectives, and then to define the objectives which will in turn guide housing policy decisions.
The analysis of each subproblem still involves
the search for adequate criteria by which al~ernative ways of achieving the objectives may be evaluated.
These criteria will be necessarily in-
complete until detached studies are made for each subproblem.
In fact,
further study may well show the need to factor out other subproblems.
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Usually the question of price level changes in the key construction variables tends to be assigned to "ceteris paribus".
while this procedure
migtt be justified either for a short run analysis or for a mature industrial economy, it cannot be justified in the case of a developing economy. Puerto Rico rejoices in a degree of monetary stability far higher than the typical developing economy, but such stability is no guarantee against individual price changes.
This means that while we accept the general
objective of price level stability, substantial changes in individual price levels can still take place.
The areas of specific interest to us in this
analysis are 1) changing consumer price levels, 2) rising land prices, 3) changing credit costs, 4) rising construction labor costs, 5) changing costs of construction materials, and ó) changing overhead and profits.
In
fact, we may begin by regarding these as subproblems on the assumption that each includes a distinct, though interrelated set of economic variables.
Subproblem 1:
Changing Consumer Price Levels
No growing economy is exempt from the phenomenon of price level changes. The measurement of such changes involves the statistical concept of the price index, but the reality on which it is based at the changing levels of individual prices at the wholesale and consumer levels.2 The importance of changing price levels related to construction activity is obvious.
The house is the family's greatest investment.
ties hurt the family's capacity housing.
Price uncertain-
to pay and distort the economic value of
In countries such as Chile, where inflation commonly reaches an
annual level of 40%, the whole process of construction and of saving is crippled and distorted so that even moderately low income families cannot afford housing.
Puerto Rico, attached as it is to the United States
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monetary system, has not suffered such extremes in price level changes generally, although it has suffered certain severe individual price inflation. The Consumer Price Index measures the buying power of the dollar for a typical family. family.
In the case of Puerto Rico this is the wage-earner's
The indexes show, with respect to a base year period, the changing
price levels of the major items entering the typical family budget during a two-year period.
THE CONSUMER PRICE INDEX FOR WAGE EARNERS' FAMILIES IN PUERTO RICO, 1964 and 1965 (1957-59 = 100)
Source:
August 1964
August 1965
All Items
113.5
118.8
Foods
119.1
126.5
Housing -Rent -Furnishings
106.6 110.3 100.1
109.0 113.1 108.7
Clothing
105.2
106.8
Transportation
109.9
114.2
Bureau of Labor Statistics, Department of Labor.
The table reflects the ever-present creeping inflation in basic items of family living, a.creeping which is seen even more clearly in the General Price Index chart covering the 1962-65 period. next page.
Please consult chart on
A rather consistent rise of 2% annually in these consumer price
levels seems to be taking place.
The constant erosion of the consumer dollar, even at the relatively low rate of 27, annually, suggests that the family capacity to pay is also being eroded.
A mortgage commitment to pay over a twenty to thirty year
period is necessarily a function of this creeping inflation. the dollars to be repaid have less value.
On one hand,
And on the other hand, the
family capacity to invest in housing is decreased.
The saving grace, of
course, is that while salaries are increased, mortgage payments remain constant. In terms of housing policy decisions, this steady erosion of the dollar must either be included in costs or consciously granted as a type of subsidy. In cases such as Chile, where inflation is rampant, a serious decapitalization takes place in the savings and investment program.3
Subproblem 2:
Rising Land Prices
Land has always been recognized as a factor of production.
Theories
of the value of land have played an important role in the development of economic theory.
The Physiocrats saw land as the only productive factor.
David Ricardo related land rent to the principle of diminishing returns.4 Theories of urban land values came a little later, theories which were less concerned with payment for the use of the "original and indestructible powers of the soil" than with changing property values arising out of differences in location with reference to work, school, recreation, and prestige factors. The theory of urban land values which has been developed after World War I has placed primary emphasis on the location factor.
Robert M. Haig,
in his 1927 study, focused his theory in terms of the core or center of the city.5 Rent differentials are based on accessibility to the urban center.
INDICE DE PRECIOS AL CONSUMIDOR PARA FAMILIAS 013J1US EN PUEJITO RICO CONSI1[ER PRI CE INDEX FOR WAGE EARNERS' FAMILIES IN PUERTO RICO FEBRERA - FEPRUARY 1967
Indioe 1957-59 ® 100 1?5
Index 1957-59 • 100 125
120
115
120
~---
115
INDICE GENERAL DE PRECIOS -- FEBRERO DE 1964 A FEBRERO DE 1967 GENERAL PRICE INDEX -- FEBRUARY 1964 TO FEBRUARY 1967
110
1O
105
loo -
1 PM
1964
1
1 AM
1
1 J
1 J
A
L L ,j S ON O
1 E
1
1
FMAM
1965
1 1 1 1 1 1 1 1 J J A S O N D
1 E
r` I PMA
1
1
1
M
J
►
I J
1966
Estado Libre Asociado de Puerto Rico -- The Cornonwealth of Puerto Rico DEPARTAMENTO DEL TRABAJO -- DEPARTMENT OF LABOR Negooiado de Estadísticas del Trabajo -- Bureau of Labor Statistics División de Colts de Vida -- Cost of Living Division
A
1 '
l S
O
N
D
IF 1967
100
-185
Higher rents are justified by savings in transportation expenses. and transportation costs are complementary.
Rent
Later Richard U. Ratclíff
developed the Haig theory to the point of finding that the value of land is the capitalized value of its rent which in turn is a function of the productivity of the site.' Paul F. Wendt has taken a critical view of the theories of Haig and Ratcliff as inadequate to explain the growing complexity in inter-urban economic relationships. He reasons that "since the urban land market is divisible into many virtually ton-competing submarkets, the rents paid for centrally located sites cannot be explained satisfactorily as differential returns over 'no-rent' sites".g In a private study of the San Juan land market, Suphan Andic sees urban land values as a function of the following variables:
population
growth and mobility, the changing concept of residential living (as influenced by automobile, income, savings, new attitude for environment, different housing tastes, new techniques of construction), change in techniques of commercial activity and in the concept of industrial location, the role of financial intermediaries, the role of government support in public housing, effects of zoning on land prices and land values, effect of taxation, and speculation.
Each of these factors should be quantified and analyzed in
order to explain the impact of land price system on the price of residential housing units. Puerto Rico is second only to Hawaii, among all the States, in the high proportion of land prices to total value of dwelling.
By 1966 this propor-
tion had risen to over 40% in the San Juan market area.
By contrast, this
proportion of the market price of the site to the total property value is typically less than 20% in the major cities of the United States.º
-106-
In Puerto Rico more than ten agencies have powers to expropriate land. A land authority has been created to act as a kind of land bank.
It will
buy land at the request of another agency, but, at times, it will also have to compete with other public agencies. hold land are not known publicly.
The criteria it uses to purchase and
Any housing policy authority would have to
place the clarification of these criteria in a priority position on its agenda.lO Before proceeding to analyze the other inflation subproblems which are more directly related to the changing levels of housing construction costs, it will be necessary to consider briefly the role of FHA-guaranteed housing in Puerto Rico.
As was mentioned earlier, FHA- and VA-guaranteed housing
constitutes over 757 of housing production by the private sector. By 1966 prices had risen to such an extent that Puerto Rico could hardly qualify for FHA-guaranteed mortgages and vigorously sought their liberalization.
Late in 1966, the Federal Government established maximum sales prices
of $17,500 (instead of $15,000) for Puerto Rico and Hawaii.11 The following table gives some indication of price changes in the sales prices of FHA-insured, one-family homes, 1959-1965.
CHAD?GING PRICE, FHA-INSURED, ONE-FAMILY HOMES, 1959-1965* (Average) Effective Annual Sales Income** Year Price 1959 1961 1963 1965
$11,700 12,300 13,000 15,600
$5,990 6,520 6,620 7,460
*Data from FHA Homes, 1959, Sec. 203, Federal Housing Administration, Washington, D.C. **Total effective income is the FHA-estimated amount of the mortgagor's earning capacity (before deductions for Federal income taxes) that is likely to prevail during the first third of the mortgage term.
t
-1&7-
From 1959 to 1955 the average sales price o2 an FHA-insured residence in Puerto Rico rose 347,. and 1965 of 2O7.
Even more striking is the price rise between 1963
It is true that other prices were rising in Puerto Rico,
but the Consumer Price Index for 1965 was 116, showing a 167 price rise from the base period, 1957.59.
The index of residential rents was 113 in
December, 1965, and 114 a year later. We have already noted that the FHA-guarantee makes its mortgage an important instrument in the capital markets of the United States.
FHA
standards not only affect the mortgage as a financial instrument; they also set minimum construction standards (enforced by visits from the FHA inspector) for housing units insured by them.
Whether or not the standards
required by the FHA, e.g. fire protection, are all equally applicable to the Puerto Rican is doubtful.
It would be the duty of a Puerto Rican
Housing Policy Authority to examine the impact o£ these standards (as well as their relevance) on housing prices here.
Suhproblem 3:
Changing Credit Costs
Credit has already been analyzed in its relation to the financing of housing units.12
Here we are concerned with changing (usually upwards)
credit costs and their impact on the construction of residential housing units.
In this area one is immediately struck by the importance of
monetary policy decisions taken in the United States to the cost and availability of housing credit in Puerto Rico.
The tight money policy of 1966
made this relationship of dependence quite clear. Not only has the tightness of money been harmful to the stable growth of the construction of residential housing units.
There are some economists
who reason that housing funds have been imported at too rapid a rate to be
-188m properly absorbed by the economy. been going up consistently.l3
The result is that housing prices have
Whether or not the inflation in housing
prices is due to this factor of "loose" money is debatable. point raised is too important to be ignored.
Still the
As we have suggested before
in connection with the acceptance of Federally-funded housing programs, it cannot be assumed that there is no limit to the ability of the economy to absorb imported capital.
Criteria are needed to measure the absorptive
capacity of the economy on a sectoral basis. It is precisely in this area of credit costs that the housing policy authority must coordinate its decisions closely with monetary policy decisions so that such difficulties as the impact of changing interest rates on the construction industry will be evaluated as they occur.
Subproblem 4:
Rising Construction Labor Costs
In Puerto Rico there has been a steady advance in salaries in all sectors covered by the Minimum Wage Law.
It seems fair to say that the
regular operation of this Law14 has had a far more important impact on salaries than the labor unions.
The policy of the Law is precisely to
"achieve the highest salaries possible without substantially reducing employment".
By law, salaries must be reviewed every two years by a Minimum
Wage Committee. industries:
The following table shows salary changes comparing all
construction, manufacturing, and commerce.
For the manufac-
turing sector the weekly median salary has increased 587 over the sevenyear period.
In the same period construction salaries increased 727x.
For the salaried worker generally, median salaries rose 63%. (See table.)
July
WEEKLY MEDIAN SALARIES, BY INDUSTRY, PUERTO RICO 1957 - July 1963 1957
1958
1959
1960
1961
1962
1963
All Industries
$20.60
$21.50
$24.80
$26.30
$27.90
$31.10
$34.00
Construction
23.40
23.20
27.80
29.00
32,10
36.60
40.10
Manufacturing
24.30
27.20
30.00
31.00
31.80
36.70
38.20
Commerce
24.10
24.60
27.90
29.40
30.00
33.40
35.40
t
Source:
Bureau of Statistics, Department of Labor, Commonwealth of Puerto Rico.
These figures are of interest in showing that the buying power of the urban worker has increased considerably, but they do not in themselves suggest any but general objectives for housing policy.
Housing policy is concerned
with fostering this buying power, but in such a way that employment opportunities in the industry are not substantially decreased.
This means, specifi-
cally, that studies should be made to determine worker productivity in the industry in order to prevent the flight of management to the increasing use of capital equipment.l5 The determination of worker productivity is far from easy.
Salary
differences give some indication but not sufficient for the establishment of criteria. From the point of view of the construction industry, wages are costs, costs which constitute an important percentage of the total costs.
A common
r estimate of this percentage is 40%, and in fact accident insurance is taken *
out on this basis.
Still the percentage depends greatly on the type of
construction project, e.g. buildings,highways, piers.
Estimates are diffi-
cult to come by because a large amount of the work is done by subcontractors. Forty percent is probably a high figure.l6
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Subproblem 5:
Changing Costs of Construction Materials
Until recently (1964) the costs of construction materials in Puerto Rico have varied relatively little. almost constant.
The price of cement, for example, has remained
There is relatively little data In this area at the moment,
although some private studies have been made. Criteria are needed based on price changes in domestically-fabricated construction materials and imported construction materials such as sanitary facilities.
Roughly speaking, construction material costs, labor costs,
and overhead costs each have approximately one-third of the construction cost of the house.
Price changes in any one of these will tend to be reflec-
ted in a predictable manner in the total construction costs. Technological developments may well help to reduce the impact of rising material costs, but it has already been pointed out that a small percentage decrease in interest rates or a lengthening of the term of the mortgage payments will generally be of greater influence on housing price changes.
Subproblem 6:
Changing Overhead Costs
Overhead here includes profits.
Overhead is also an administered cost.
Usually this means that a percentage markup is involved.
This markup takes
place only after all costs have been calculated so that an automatic price increase is present. If for example the markup is 251O, then overhead and profits will add to the rising prices of any one of the cost components of the house.
To this
extent, adding the overhead percentage has significant inflationary effects. On the other hand it should give the builder the possibility of balancing the effects of the rising prices of other construction components.
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Criteria in this case should be developed to evaluate the use of subsidies as a control over the overhead inflation factor.
We have already
pointed out the value of subsidies as instruments to stimulate the increased participation of the private sector in meeting the housing needs of lower income fami._ies.
CHAPTER XII
TOWARDS AN INSTITUTIONALIZED HOUSING POLICY
Housing policy is an economic instrument for the achievement of national goals of stability and growth.
It strives to coordinate housing activity in
such a way as to fulfill the reasonable housing needs of the people and to contribute to economic development. Every country has a housing policy, explicit or implicit.
Housing policy
may be an aggregate of many actions taken by many authorities or it may be coordinated by a single responsible authority-.
In more and more countries,
there has been a movement towards the formation of a single integrated housing authority.' Puerto Rico is also moving in this same direction with the 1967 project of law submitted by Governor Sanchez to create a Housing Administration of Puerto Rico.
Housing Administration and Policy Making
From the point of view of this study this process of centralization fails to realize the distinction between good administration and good policymaking.
A brief analysis of the original proposal of the Governor of
Puerto Rico will help to make this point clearer. The Governor was concerned about the proliferation of semi-independent public housing agencies.
In his annual message to the Legislature of
Puerto Rico on the state of the country, the Governor recommended the creation of a single directive organism in the public housing sector:
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The problem of housing becomes worse every day... In the effort to meet this problem the government has. proliferated more than ten major housing programs in the past decade. These programs have proceeded largely independently of one another. Moreover almost all of the housing programs have been buried under the impact of Federal public housing programs...We must create one administrative organ to take charge of the public housing sector.2 A year later, Governor Sanchez sent a bill to create a single housing authority to the Legislature of Puerto Rico. The role of the administrator of the Housing Administration of Puerto Rico is one of institutional coordination.
The Housing Administration is intended
to include part of the Planning Board, all of the ARUV and CRUV, all of the Housing Bank, all of the Housing Cooperative program, and part of the Land Administration of Puerto Rico.
To help in the administration of this vast
organism a Board of Directors is included as well as an Advisory Committee. The Board o£ Directors receives no pay and will be composed (with one éxception) of members of the dominant political party.
The Advisory Board has the
duty of advising the housing administrator in the interpretation of public housing policy. policy.
However this Committee is not structured to make housing
It is composed of cabinet members and other high officials of the
government who will hardly have the time to enter into the housing policy decision-making process on a regular basis.3 In the analysis of the preceding chapters we have tried to outline a housing policy which includes a series of daily decisions--fiscal, monetary, admínistrative, and economic--made by a responsible and relatively independent public authority.
The law proposed takes no such view of housing policy,
neither does it offer an adequate administrative structure for its implementation.
What is involved in a true view of housing policy?
Historically, in Puerto Rice, housing policy has been considered to be the sum of actions taken by the Planning Board and by the CRUV to provide good housing for Puerto Rican families.
In this connection there has been
a concern by Senate and House committees meeting from time to time to prevent bad practices in financing arrangements and shoddy construction work. These technical preoccupations have their importance, but they do not really constitute the essence of a housing policy.
An analogy with monetary policy
may make this distinction clearer. Monetary policy is also part of the total economic policy spectrum of any country.
In the United States the central bank responsible for making
monetary policy is called the Federal Reserve.
Among its duties the Federal
Reserve is charged with the supervision and examination of its member banks which, however, remain free to make their own credit allocation decisions. This technical duty of supervision is not to be confused with making monetary policy.
Monetary policy consists in using instruments such as open market
operations, changes in the legal reserve, and changes in the rediscount rate to regulate the cost and availability of money.
This regulation of commercial
bank credit flows and o£ interest rates is for the purpose of achieving the national economic go~.is of economic growth, monetary stability and full employment.
The controls exercised by the Federal Reserve are for the ser-
vice of the economy and not for profit-making purposes.
In order to protect
the Federal Reserve from short-run political pressures, members of the Board of Governors have a fourteen-year term.
The Federal Reserve system itself
is economically independent by virtue of the income it receives from its holdings of United States Government Bonds.
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Although the analogy between the making of monetary policy and the making of housing policy limps in many ways, several significant consequences may be drawn from it:
1) the need for a single responsible policy-
making institution; 2) the need to relate housing policy decisions with the total economic policy o£ the country, and not just with sector.al interests; 3) the need for a relatively independent position, both politically and economically.
Just as the University which educates the professionals and
intellectuals of the country should be free of political pressures, including budget-sniping, so should the housing authority which makes decisions, often highly technical, which influence the economic, social, and cultural development of the country;
1)
finally, although the housing authority should be
concerned with practices prejudicial to the consumer of housing services, the fullest latitude should be given to the healthy development of the private sector.
In other words, the creation of a housing authority should not imply
the domination of the housing sector by some politically-appointed "czar". For the purposes of this study we assume that good administration is the instrument of the policy maker.
It gives him the assurance that policy
decisions will be implemented efficiently.
It is quite possible, however,
to take measures which will roster good administration without affecting policy decisions.
It is also possible to make administrative changes which
are not good for policy.
The release of ;b5 millions in government pension
funds for use in the mortgaging of homes during the tight money period was good administration but bad policy.
It was a orte—time shot which was not
well directed towards Puerto Rico's need for low-cost housing.
It ignored
the existence of the Housing Bank's infant low-cost housing mortgage guarantee structure.
Another example of good administration but bad policy was
•3.;6d .
the construction by CRUV of the condominium Quintana with units costing from $11,000 to $17,500.
The "caserío" or low-cost rental housing put up by the
CRUV with Federal funds may also be taken as examples of good administration and bad policy. The Housing Administration proposed by the Governor has no real independence, neither political, nor administrative, nor fiscal.
It is to be
composed of a great many agencies which are individually rather far from being models of administration.
It is expected to operate in a country which
has no rational urban development policy.
Under such conditions, the projec-
ted Housing Administration can hardly be expected to produce the kind of housing policy decisions which we have been discussing during this study.
Housing Policy and the Cncnmunity
One result of taking a narrow view of housing policy is to find oneself focusing ou the problem of housing unit production rather than on the problem of an integral community formation.4
The prime concern of housing
policy making should be the community rather than roofs.
The United States
AID program in 19~O cet about building a "Ciudad Tech.o" (now "Ciudad Kennedy") in Bogotá.
It put up many new roofs but fc.u:d itst:i.
creating a new slum.
In Caracas, the dictator Pérez Jiménez forced the people out of their huts ("ranchones") into his giant and well;vbuilt "superbioques". tions worse than any slum developed quickly.
The people were not prepared
for this relatively sophisticated form of community life. were not enough.
Social condi-
Good housing units
In fact, both families and community life were damaged.
In
Puerto Rico, as we have seen, the "caserío", which consists of well-constructed low-rent apartments, has also offered examples of failure as communities.5
Apart from its major areas of urban concentration, a developing country has three primary areas where communities are to be found: the slum, and the rural community.
the municipality,
Housing policy should find itself
committed to the proper development of each one of these communities.
In
the case of the municipality, housing policy will find itself sharing in a process of regional planning. depends on .job creation.
Housing development both creates jobs and
To be relevant it must be coordinated with indus-
trial development and with rural reform strategies. Slum communities constitute an ever-growing proportion of modern large cities in developing regions.
Housing policy will be concerned with
channeling the efforts of slum building by the popular sector so that its potential for growth will be able to function freely.
It will also be
interested in preventing the flow of unskilled and un-capitaled young people from the rural areas and small urban communities by stimulating their socioeconomic development, including the provision of health and education services which tend to concentrate in the major urban areas.
In this latter case, i.e.
where preventative measures are to be taken through positive programming, housing policy must work in close harmony with regional planning and urban development policy.
A concrete policy in this connection might be to begin
construction in the smaller urban areas rather than in the center urban area. The rural community is more difficult to work with because it is usually related to the slow and uneven process of promised agrarian reforms. It is also dependent on the industrialization of agriculture which is no less slow and uneven.
The rural community is less likely to have land problems in
relation to the construction of residential units, although clear land titles are always a problem.
The rural community does need extensive community
19u-
services, including irrigation, light and water for home consumption.
In
some areas of Brazil a high priority has been given to the provision of community services, with housing unit construction being left primarily to the initiative of the people themselves. With this kind of overview of the role of a centralized housing authority, it will be helpful to establish the conditions under which a housing policy authority might be expected to make policy decisions.
The following conditions
are proposed for examination: 1) That it be a public agency, relatively independent from the pressure of daily politics 2) That it be in position to relate housing policy decisions to the regional and national policies for development 3) That it can coordinate in a meaningful way with the private and popular sectors 4)
T?;at it develop regular sources of data for its program evaluation, and that it both stimulate and undertake basic research into areas relevant to h `Zsi: g policy
:; 1'r.:`+?ic
There may be
co;oi;t;ns i
or
uic': a cabinet-level post for the
central housing authority would be the best institutional arrangement.
The
United States and Chile, for example, have added a Secretary of Housing and Urbanism to their respective cabinets.
This position offers a number of
advantages relative to coordination and communication.
Its major disadvantage
is that there is a minimum of protection against political pressures.
The
Treasury is perhaps less susceptible to such pressures because of the highly technical nature of its work.
Decisions
by a housing authority, however,
will have an immediate grass roots impact which the politicians are hardly likely to ignore.
Each country will have to make the decision, once the decision to create a central housing authority has been made, to institutionalize it as an A
integral part of the, executive branch of the government or as a semi-independent public corporation.
Public corporations are a modern phenomenon whích
have developed in recognition of the specialized areas where the public sector must function.
In Puerto Rico there are Fomento Industrial (to attract
industry to Puerto Rico), Fuentes Fluviales (to handle power and light utilities), Acueductos y Alcantarillados (for sewer and water services), the Airport Authority, and many others.
These may issue bonds and generally
enjoy a certain economic and political independence. Following the analogy of the central banking institution responsible for making monetary policy to which we have already referred, we will suggest here some form of semi-independent public authority as he most useful way of institutionalizing the making of housing policy.
The public housing field
is already replete with semi-independent public agencies, so that this would not be an innovation.
On the other hard, the Housing Policy Authority should
have sufficient authority to coordinate at the higher levels of government administration. In Puerto Rico institutionalizing housing policy might well mean making it an integral part of the Planning Board.
The Planning Board as presently
constituted has vast powers touching on almost every aspect of socioeconomic development in Puerto Rico.b
It is particularly potent in the
field o£ housing, setting guidelines and approving individual applications R
for housing construction.
In fact, there is one office in the Planning Board
which already plays a very important role in the making of housing policy.. This is the Office of Programming of Public Works.
-~Qb-
The Planning Board of Puerto Rico divides its functioning into 1) the Planning Area, and 2) the Operations Area.
The following diagram makes this
division clear:
PLANNING BOARD
Secretary of the Board — Planning Board office of thet President i J
Management Area
egal. Servic Division
.nvironmental Improvement Team
Public Administrative Service Office Relations Office
nformatio Office
i Iperaition Area
i
i r
Bureau of aster Plans ~._...
Eure: u Economic and o vial
AI alySis
Public Works ro ramsnin
of ~ Permits
,--I Bureau of Land Development and Use
Bureau of
Project Revision
The Office of Programming of Public Works is among the three offices constitilting the Planning Area.
This is the office which makes the final decisions
on the budget for housing after the CRTJV and other housing agencies have submitted their budget requests.
The Office of Programming of Public Works
exercises the following key functions of housing policy:
-201-
1)
Evaluation of construction programs sub::pitted to the Planning Board by public agencies
2) General evaluation of government programs and services for the purpose of guiding the development of government programs 3) Gather and analyze data relevant to the above evaluations 4) Prepare plans for the rehabilitation of slums 5)
Coordinate in Puerto Rico the following programs of the Federal Government:
Area Rehabilitation Programs and Accelerated Public
Works Programs ñ)
Coordination of the planning process between the Commonwealth Government and its municipalities
7) Evaluation of community improvement programs This office, tucked away in the Planning Board, plays a key role in making housing policy decisions for Puerto Rico.
Neither its criteria nor
procedures, especially in the determination of the Budget, are available for public discussion and critique. Housing policy decisions are in a fundamental sense political decisions. As such they should be sub¡ect to public scrutiny and consequently to public endorsement or rejection at the polls.
In practice this is quite difficult
to achieve without depriving the policy-making authority of the flexibility it needs for its daily work.
Traditionally, this lack o£ flexibility has been
a real handicap for the making of fiscal policy.
In fact, the United States
is just reaching the point in its political development where the development of more initiatives by the fiscal authorities are being contemplated in the field of fiscal policy.
The need to go to Congress for each change in a tax
law has made fiscal policy too ponderous an instrument for the fast-moving economic scene.
Housing policy decisions not only have political implications, they are highly technical.
If high interest rates and capital scarcity tend to disrupt
the secondary mortgage market relatively rapid action needs to be taken.
There
is little time to wait for the machinery of the legislature to grind to a conclusion.
This same difficulty, in addition to the difficulties presented
by the technical aspects of the subject, holds true in the evaluation of programs in process which are less productive than planned.
The need to
reassign resources within the fiscal year should not be subject to the complete and long-drawn budgetary process.
A responsible housing authority should
have the power within limits established by law to allocate funds on the basis of its evaluations without waiting for the fiscal year to end. The Housing Administration now under consideration in Puerto Rico has as its purpose the consolidation of public housing and urban renewal programs under one organism.
The proposed Housing Policy Authority need not be
opposed to the formation of such an agency for administrative purposes.
The
important poi:.t is that the policy-making institution have the freedom and
to the total d c.
t of Puerto Rico.
r'
_
_.
cies may take
Po3.itic '.
basi.' , but onh
ch contribute E
•c1 . . _.
c
as emergen-
cell
_;_y to make housing police
r
administrative f ' '
_
ccio--economic
of
2) Regional and National Coordination
The Housing Policy Authority should be in position to coordinate its policy decisions with the total development policy of the country.
Coordi-
nation at a national level is one of its prime responsibilities, granted that housing policy is found on the same economic policy spectrum with fiscal
-203-
policy, monetary policy, and wage-price policy.
Housing policy decisions may
affect important segments of labor, capital flows, and the construction industry in general.
Decisions related to these key economic variables must be
coordinated with the other institutions which formulate economic policy. In a special way, housing policy in Puerto Rico should coordinate among institutions at the three administrative levels: tional, and the municipal.
the national, the interna-
Nationally it will cooperate with other government
institutions in areas where they either conflict with or complement one another.
Internationally there is the special need to handle the Federal
housing programs and Federal fund flows affecting housing.
This "handling"
has to be done in such a way that the island's capacity to absorb the funds and the programs within its own programmed needs is clearly established in each case.
The implicit criterion which appears to prevail at the moment is
that the more Federal funds the better.
No institution would dream of
refusing them.? Very little effort has been taken in Puerto Rico to develop housing on the municipal level, i.e. to permit the municipal authorities to enter into the programming and evaluation of proposed housing projects.
Such an effort
should be an important part of regional planning and the resulting ability of the municipality to develop its own resources with help but without domination by the highly centralized Commonwealth government.$ Housing policy decisions affect each sector of economic development policy in a special way because the family and the community is directly concerned.
Housing policy decisions determine community location and even
the existence of a community in the case of slums.
The decision to apply
the urban renovation process to one area rather than another is one which conditions the lives of many families.
t
201+-
VWhen we consider the operations of the national institutions which impinge on housing policy decisions, many come to mind.
There are zoning
regulations, the structure of taxes, especially property taxes, the decisions of the monetary policy authorities to change the cost or availability of money, wage policies, import regulations, and changing tax depreciation policies.
In addition to these, the easy and popular decision to freeze
rents carries with it many harsh consequences for investment in residential housing. In each case it will be up to the housing policy authority to weigh the consequences of policy actions undertaken by government agencies and take appropriate measures, if possible, on a preventative basis.
3) Coordination with the Private and Popular Sectors
Tensions are immediately introduced when one mentions the need for coordination among the sectors, especially between the public sector and the private sector.
The public sector feels that it has a special jurisdiction
over the house of "social interest", i.e. houses of families which cannot enter the market to buy or rent their own home.
The private sector is
jealous of its market prerogatives and tends to be very sensitive to competition by public entities. These tensions will always exist where profit-minded and vote-minded institutions meet on more or less common ground.
The private contractor
suffers the discipline of the market and is naturally interested in making a good profit from his operations.
The public corporation suffers from a
minimum of market discipline in the sense that public money practically guarantees it from failing.
It is always conscious, however, of the impact
-205-
on votes of the actions which it takes.
At the same time, even in the
political arena, there is a very loose control over the activities of a public entity by the electorate--no less loose than the control of the giant corporation by its stockholders. Since the production of low-cost housing is still primarily a matter of direct public concern but with immediate consequences £~r housing production by the private sector, a housing policy authority is needed to coordinate the two.
In most countries the private sector had no difficulty in
holding its own at the beginning, but with the advent of inflation and of an increasing power in the public sector, the private sector has become relatively dependent. As a working hypothesis in housing policy the principle of subsidiarity has been accepted.
This principle says, in effect, that the State enters
the scene only where the private citizen cannot enter or is unwilling to do so.
In the case of housing this would mean that the State or public sector
should not build residential housing units in direct competition with private enterprise.
The economic reasoning behind the acceptance of the principle
of subsidiarity is that the State is not a market mechanism and cannot act like one.
Using public monies it can operate indefinitely with a deficit--
and frequently does so.
Neither does the traditional bureaucracy of the
politics-oriented agency favor a high order of economic efficiency. The Housing Policy Authority must he a public institution but with sufficient political and economic autonomy to guarantee a responsible coordination between the public and private sectors.
Concretely, this
Authority should undertake research whose results it shares with the private contractors.
It can also foster direct subsidies, e.g. lower land prices,
-206-
lower interest rates, to the private housing producer on the condition that ít pass these savings on to the lower income families.9
Low-cost housing
operations by the public sector are subsidized by public tax monies.
The
benefits of these subsidies might be used to strengthen the ability of the private sector to lower its market entry levels.l0 The public sector can also cooperate to an important extent with the popular sector.
It does this through programs of self-help and mutual aid.
These programs involve furnishing plans and materials on credit at low interest rates.
The public sector will also furnish technical help to the
interested families.
In Puerto Rico, the Department of Agriculture's Social
Programs section has stimulated the building of more than 30,000 units this way.
In Ciudad Guayana in the eastern part of Venezuela on the banks of the
Orinoco, the government has tried at least to channel the development of slum settlements.
It paid for slum housing already constructed and moved
these to areas where urban development might more readily take place.
The
program has not been a complete success, but it does offer a good example of the public sector attemption to cooperate with the popular sector rather than to ignore or eliminate it as so often happens.11 Another way, in addition to standard rent subsidies, in which the public housing authority can cooperate with the families which must enter public housing projects is to permit them a certain choice.12 be forced into their homes.
Families should not
This has been tried in many different countries--
Brazil and Venezuela come to mind immediately--with almost inevitably bad results.
The housing unit itself may be superior to what they had, but the
community development is distorted and perverted.
In this way, new low-cost
housing units became new slums in Caracas and in Río de Janeiro.
-2Oj-
4) Data Collection and Research Programs
At the heart of the policy-making enterprise lies the collection, analysis, and presentation o£ statistical data.
A dependable flow of homogeneous
data is necessary for good decision making in any field.
In the field of
residential construction programs, public sector and private sector, such data has been almost traditionally inadequate.
In Puerto Rico, for example,
the number of housing units constructed is estimated on the basis of the number of construction permits issued.
Studies indicate that there is a
considerable difference between such permits and the actual housing construction as reflected by permits to use the house.l3 Not only have the macroeconomic data on construction activity been weak; the microeconomic data, i.e. data with reference to particular programs in process, has been either non-existent or inaccessible.
It is precisely this
data on a program basis which the Housing Policy Authority needs in order to evaluate alternative programs and choose those of greater potential for the needs of the country.
In this case the Authority must itself take the
initiatives to establish such sources of information: The establishment of such a statistical flow requires an extensive and careful coordination with other public agencies. Department of the Budget.
One such agency is the
Budgets should be prepared on a program basis so
that planned expenditures can be balanced against expected production. Cooperation with the Director of the Budget will thus be of crucial importance in programming decisions. The Housing Policy Authority is not only concerned with the evaluation of new programs; it is also concerned with the progress of existíng programs in process.
Data should be forthcoming from these programs in such a way
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as to permit this kind of ongoing evaluation.
It could happen, for example,
that a cooperative program is not living up to its planned production potential, in which case the Authority will have to decide between shifting more resources into this program or reducing the flow of resources into it, stretching them out over a longer period of time. Program evaluation implies the need for research either directly by the Housing Policy Authority or by contract with some private firm, or with a segment of the University community.
Generally speaking, the academic
institution should be interested•in doing basic research in the field while the Authority itself should develop its own research team of program evaluators.
The Authority, for example, will prefer to establish its own lower-
level criteria on the basis of its own experience. At the same time, coordination among the research groups bearing on the housing sector is an important task for the Housing Policy Authority. Both its failures and successes should be known and publicly evaluated by qualified technicians.
In this way there is a control (at least, informal)
over decision-making activities of the Authority by its peers in the related professional fields.