Friday, 20 June 2014

Financing Development: The World Bank and the Globalisation of Mortgage Markets

Through this post, Liam Clegg takes a break from doing what he should be doing during a period of research leave (writing a book on global housing policy) to tell a story about a medium sized, single level, red brick commercial centre with a big sign on its roof.

I’m currently writing up a book about the evolution of housing policy at the World Bank (working title ‘Financing Development: The World Bank and the Globalisation of Mortgage Markets’). For me the writing process can sometimes become a bit of a slow affair, with increasing levels of frustration coming in as the ideas that seem clear in my mind become less compelling after key has been put to board and ink has been jetted to paper. However, as the many colleagues I keep talking to – or perhaps talking at – about housing policy will attest, this time seems to be very different. In fact, I’m having so much fun learning and writing about housing policy I’ve decided to write this blog about it. But because I am (a) slightly conservative by nature and (b) completely uniformed about libel law in the UK, I’ve also decided here to anonymise the case study I’m currently working on (sorry; you’ll just have to read the book – if, that is, I actually manage to find a publisher for it!).

OK, so lets talk about Country A. Like many places, Country A has a nice bit of a coastline. Town A used to be a picturesque fishing community kind-of-place along this coastline, inhabited by a few hundred families. Town A became quite a lot less picturesque from the mid-1960s, when the World Bank lent the Government of Country A quite a lot of money to build quite a large industrial works on its outskirts. In many ways, the works made good sense; located close of a readily extractable natural resource, good transportation potential over land and sea.

This works was going to be big. The World Bank has a propensity toward lending on a grand scale (it is, after all, a bank; it needs to generate income on its capital base to pay its staff and fund its future operations), and this was going to be the largest facility of its kind in Country A. It was estimated that the number of construction workers employed would peak at around 10,000, and that the number of staff needed to run it would be around about half that number. Given the small size of Town A, this meant lots of employment opportunities for the greater population of Region A. All good stuff; up until this point people in Region A hadn’t had the opportunity to work in large industrial complexes, tending instead to fulfil their immediate needs through subsistence-based agriculture.

So, a town with maybe a few hundred residences is going to be gaining 10,000 temporary inhabitants and, further down the line, 4,000 permanent inhabits plus dependents. This might just cause some accommodation problems. To be fair, Bank staff and their Country A counterparts did think of this; the need for additional housing was flagged to the Ministry of Housing, and a plan drawn up for Town A’s Municipal Authority to sort things out. Unfortunately, they didn’t. Consequently, arriving workers self-built temporary and semi-permanent housing for themselves. Given that across the developing world most peoples’ housing needs are met most of the time through self-build, in and of itself this isn’t as drastic a failure as it immediately seems from our York-based vantage point. However, on this scale, things got very bad very quickly. The quality of shelter was poor, and lack of water and sanitation in particular made living conditions extremely bad.

To try to remedy the situation that its initial intervention had helped bring about, the World Bank arranged a new loan with the Government of Country A to fund remedial action. However, partly because of the speed with which this loan was designed, the Government ended up relying again on the very same Municipal Authority that had failed first time round to carry out these housing improvements. While the progress reports that the Municipal Authority sent back to the Bank presented a picture of remarkable achievements, words on paper did not quite match outcomes on the ground. Some improvements were made; a modest amount of new housing was built, and – more usefully – a fair number of land plots with water and sanitation connections were prepared on which self-builds could be constructed. But when, a couple of years later, a Bank consultant travelled to Town A, it was clear that many of the buildings and infrastructure that had been written of had in fact not been provided.

One of the buildings that was not provided was a modestly-sized commercial centre. Well, it was provided, but it was built by the Municipal Authority before the Bank’s housing loan was arranged: different project, different funding pot; wherever the Bank’s money had gone, it hadn’t gone here. To give credit where credit is due, this commercial centre must have been built to a fairly decent standard. 40 years later, it still looks like it’s in pretty good nick; through the wonders of googlemaps, I’ve seen it. Single storey, red brick, steel roof. As inspiration for the writing process, I’ve pinned a photo of the centre to the corkboard in my office. Beyond this digital remote viewing, additional evidence of build quality comes from the fact that a major multinational bank has at some point in the last decade either bought or started renting out this space. The logo of this bank is written so large above the commercial centre it can be read on a googlemap in thumbnail format. And it’s here, for me, that the story gets really interesting.

If you want to buy a house, and you live in what is now in the 2010s a significantly more populated Town A, what you’re likely to do is to go down to this multinational bank in this commercial centre. Municipal Authority-led housing provision fell by the wayside a long time ago; inefficient and inappropriate use of funds always remained a problem. The main efforts of the Government and the World Bank have for quite some time been focused on making mortgage markets work better. And to me, at this intermediate stage of investigation, it seems like they’ve had a decent amount of success. By supporting lenders in their efforts to tap in to secondary markets, the World Bank and Government have helped expand the pool of credit available for mortgage origination. But the problem is that if you’re not in the highest-income 40 percent or so of the population, you’re not going to be walking in to this bank-with-the-interesting-history to ask for a mortgage.

Across Town A, Country A, and the developing world, the bottom 60 percent – broadly, the people the World Bank has been mandated to help – remain too poor for financial institutions to make a stable, predicable profit from. So banks don’t lend money to them to buy decent housing. Improvements to their shelter, which it’s safe to assume are of a lower standard than that of the top 40 percent of earners, have to come through other means. Country A does indeed have housing upgrading schemes targeted at these groups, and these are touched upon in the World Bank documentation that accompanies their large financial sector focused loans. However, in Country A, the Bank’s own evaluations are pretty critical of the extent to which Bank staff and Bank money have helped to improve and extend what remain highly imperfect operations.

Right now, I don’t know whether Country A provides an egregiously bad example of the globalisation of mortgage markets seeming to distract policy elites from undertaking more mundane, but betting targeted, housing policy interventions. But hopefully I will have soon completed studies of Country B and Country C, and so begin to have a clearer idea. I look forward to letting you know in due course!