Housing Priorities in Developing Countries: A Planning Model

Abstract

holds, and in trends throughout the rest of the economy. In a perfect neoclassical economy the four decisions are made simultaneously together with choices of other goods and leisure. Actual economies are not only imperfect but imperfectly understood because of their complexity. Explanatory models of location, density, and transportation for American cities have cost millions of dollars in specification and calibration without attaining the expected relevance for policy. With all their sophistication on location-transport questions, these models make assumptions about housing volume, composition, and finance that are not only simplistic but wrong in the context of third-world cities [Lee 1972; Mohan 1976]. The planning model to be presented here also abstracts from reality in order to be readily solvable and inexpensive. Unlike other models, it does not let the volume of construction be determined endogenously by shortages and rising rents. Where capital markets are imperfect and the government controls financial institutions, resources available for new construction had best be taken as exogenously determined at the macro level, possibly as a three to six percent share of national product. Ordinarily, capital market imperfections will have led to an excess demand for mortgage c dit at most income levels. Housing authorities can choose the composition of dwelling construction by granting mortgage finance to one income group or another. Poor countries cannot, however, afford large-scale mortgage subsidies, and therefore, low-income households must settle in (and for) ap-

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