Policy Memo for Slum Upgrading and Long-run Urban Development1 by Mariaflavia Harari and Maisy Wong2 (February 2020) The United Nation estimates that 2.5 billion people will be added to cities by 2050, with more than 90% of them belonging to the developing world. To facilitate this massive urbanization, cities will need to expand the provision of housing and infrastructure to enhance the productivity and quality of life of urban residents. Moreover, the United Nation estimates that up to 1 billion urban residents live in slums, which are central to the debate on rising inequality within cities. Policy makers are considering various options to facilitate urbanization and enable the transformation and renewal of cities. We will focus on the three most common policies: (i) public housing; (ii) sites and services; and (iii) slum upgrading on-site. The empirical evidence to date sheds light on important trade-offs faced by policy makers. While the settings differ, a key theme that emerges from recent studies is that the most appropriate policy depends on local factors such as the cost, the number of targeted beneficiaries, the availability of land (especially in areas with job access), the capacity of the implementing agency, and local institutions. Moreover, the projected path of urban development in a city also matters. In particular, given the high rate of urbanization, doing nothing will have important implications as well in the form of higher congestion and uncoordinated proliferation of slums. The ensuing negative externalities can potentially limit the entry of new migrants moving to cities in search of economic opportunity (Lagakos et al., 2019). Slum Upgrading On-Site Slum upgrading provides basic public goods on-site to existing slum residents. It is growing in popularity given the low program cost per capita and the potential to cover a large number of beneficiaries. For example, it has been considered in Bangladesh, Brazil, Colombia, Kenya, India, Indonesia, and Tanzania (UN Habitat, 2011; World Bank, 2017; UN Habitat, 2017; Government of India, 2016; World Bank, 2018). Harari and Wong (2019) study the long-run impacts of the Kampung Improvement Program (KIP) in Jakarta from 1979 to 1984. KIP provided basic public goods, such as roads and sanitation, to more than five million residents in slums (kampungs) in Jakarta. In addition, residents were offered informal non-eviction guarantees to encourage private investments. Also known as the Muhammad Husni Thamrin Proyek (MHT), KIP is an award-winning program, widely held as a successful urban poverty scheme. It eventually covered more than 15 million people across Indonesia within a limited budget and developed strong local teams and institutions 1 We are grateful to Pak Darrundono for sharing his expertise and for connecting us with other experts. We thank the many authorities in the Jakarta Government for making the data available for academic research. We also thank Gilles Duranton, Marja Hoek-Smit, Vernon Henderson, and Ben Olken for their advice. We acknowledge support from the Research Sponsors Program of the Zell/Lurie Real Estate Center, the Tanoto ASEAN Initiative, and the Global Initiatives at the Wharton School. All errors are our own. 2 The Wharton School, University of Pennsylvania. Emails: [email protected] and [email protected]. 1 to promote urban renewal. Many reports have examined the short- and medium-run impacts of KIP, concluding that it was successful (Devas (1981), Taylor (1987), World Bank (1995), Darrundono (1997), and Darrundono (2012)). In particular, a 1995 World Bank report describes many positive impacts of KIP: it “improved paths, lighting,... housing,… access to clean and safe water,” and resulted in “less frequent flooding.” In addition, “residents are...better educated and healthier, household size have declined, more residents are employed and have greater income, and women have taken a more active role.” Furthermore, the program had “landmark impacts on institutional development in the urban sector of Indonesia” (World Bank, 1995, pp. 5-9). In Harari and Wong (2019), we examine the program’s long-run impacts by comparing KIP targeted areas and observably identical non-KIP areas in 2015. Our empirical strategy restricts the analysis to historical kampungs that existed before KIP and compares treated ones with those that were never treated, within the same neighborhood. Essentially, this thought experiment involves two locations (T and C) that were both slums before KIP, with T becoming treated. We also find similar results by comparing neighborhoods within 200 meters (inside versus outside) of KIP boundaries. We assemble a uniquely rich, granular, and comprehensive dataset using KIP policy maps, assessed land values, and a photographic survey of 28,000 photos from which we measure building heights and the degree of informality. We also obtain auxiliary data on one million land parcels to characterize land fragmentation and data on ten million individuals from the 2010 Population Census to assess population density and demographics. Our primary outcomes are current land values and building heights. Our main finding is that KIP neighborhoods today have 12% lower land values and half as many tall buildings, compared to observably identical non-KIP neighborhoods. They are also more likely to be informal and have higher population density. These results stand in contrast to the earlier studies of KIP, but are consistent with the notion that slum upgrading can make slums persist longer than they otherwise would (Duranton and Venables, 2018). By inducing residents to stay in the neighborhood (which may be a policy objective), KIP improvements and the non-eviction guarantee led to higher population density and more fragmented land in KIP areas. Given the high resident relocation and land assembly costs in dense slums, it is more challenging to redevelop and formalize KIP neighborhoods relative to non-KIP ones. Today, Jakarta is undergoing rapid urbanization and experiencing an acute shortage of land, housing, and infrastructure. Two-thirds of KIP areas are now in central Jakarta, where land is highly valuable. While non-KIP areas in these neighborhoods have become formal, KIP areas stay informal with lower land values and building heights. If the formal neighborhoods just outside of KIP attain higher land values, the long-run effects of KIP can be large enough to reverse the direct improvements of the initial upgrades on land values in the short-run. Our results suggest an aggregate loss of surplus from delayed formalization. This delay potentially reflects “complex and unclear land management systems” (World Bank, 2019) associated with weak property rights which complicate the process of redeveloping land to its best use. Other recent papers find similarly large foregone opportunity costs of land use in India (Gechter and Tsivanidis, 2018) and Kenya (Henderson et al., 2016). 2 There are three policy implications from our paper that we wish to clarify. 1. Lower land values in KIP areas do not imply that cities should avoid slum upgrading. While we find that KIP areas have lower land values than non-KIP places today, this does not mean that cities should not consider slum upgrading as a policy option. Slum upgrading is likely useful in contexts where the government has limited resources and the city is at an early stage of urban development. This was Jakarta’s situation when KIP was implemented: the average GDP per capita for Indonesia was around $1000 (2015 USD), comparable to the GDP per capita for Bangladesh, Kenya, Pakistan, and Tanzania today. The opportunity costs of land use we find tends to manifest in later stages of urban development, when land becomes scarce. While this happened more than 3 decades after KIP was introduced in Jakarta, it could happen sooner in other cities facing rapid urbanization. Ultimately, all policies entail costs and benefits and the suitability of slum upgrading depends on the trade-offs against alternative policy options. As we discuss below, other common policy options (“sites and services” and public housing) tend to be expensive and limited in scale in terms of targeted beneficiaries. They also typically require resettling residents, while slum upgrading on- site has no relocation costs. Our findings do provide lessons for where, when, and how to design slum upgrading programs. First, our results indicate that the location of upgrades is crucial. In central areas, the opportunity costs of land use can be large. This suggests that it will be less costly to relocate slum residents earlier, before central land becomes scarce or the central slums become very dense. Second, in a city at an early stage of development, slum upgrading provides a low-cost way to target poor residents and improve their quality of life, conveying immediate benefits that may be large relative to future costs. In this respect, slum upgrading can be viewed as a “stop-gap” policy for early-stage, resource-constrained cities (Duranton and Venables, 2018). This echoes some of the trade-offs discussed in Leaf (1994): “Despite the important contributions which KIP has made to the betterment of physical conditions in the city (Devas, 1981), it is quite possible that in the broader view KIP will have the effect of being more of a temporary ameliorative measure (although for many kampung, temporary may refer to decades)...” Third, some of the goals of slum upgrading could be achieved for a lower opportunity cost by combining person-based benefits with place-based targeting. This could improve the income- generating potential of residents without tying them to a particular location. For example, the 1990s wave of KIP complemented physical improvements with person-based benefits. 2. The higher land values in formalized non-KIP neighborhoods do not imply that all central slums should be redeveloped. Our results also do not imply that existing KIP neighborhoods should be redeveloped into formal neighborhoods.