July 03, 2005
Cairo's Collapsing Buildings
While being driven past the outskirts of Cairo, I noticed a large number of unfinished buildings inhabited by Egyptian families. My tour guide, having already explained the nightmare of Egypt’s population explosion, told me that these unfinished buildings were actually a form of tax evasion. Apparently land taxes were lower on properties with unfinished buildings, which explained why so many of them had steel rebars and bits of cement hanging off the topmost floors. Keeping a building perpetually unfinished was a useful way to avoid taxes in a country where government spending did not generally lead to improved living standards.
Now anyone familiar with Herodotus knows not to believe everything an Egyptian tour guide says, but it seemed plausible under the circumstances. It did not, however, explain why Egyptians would build such ramshackle homes, structures so unstable that they frequently caved in and killed the families living within them. Some expat journals, noting the frequency of these collapses, lamented the fatalism of Egyptians and their apathy in the face of such tragedy. In terms of incentives, this type of behaviour makes no sense, unless there are serious barriers standing in the way of improvement.
In his book, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, Peruvian economist Hernando De Soto outlines the findings of 5 developing-country surveys, conducted to assess the level of "dead capital" – underexploited and informally-held assets that can’t be bought, sold or used as collateral – in each country. In his estimation, 92% of the urban property in Egypt is informally held, using extralegal titles or no titles at all. In the case of Cairo, not every informally-owned building had been extralegal from the start, many "dropped out [of the legal system] as complying with the law became too costly and complicated" (De Soto, 32). His survey of Cairo notes the common practice of illegally subdividing apartments and selling them, as well as building additional floors on top of older public housing units.
Without digressing into a discussion of De Soto’s work (Economist has a useful summary), it is evident that lack of accountability poses a serious challenge to solving Cairo’s collapsing building problems. If property ownership is unclear, who should be held accountable in the event of a collapse? The current legal framework does not meet the needs of Egyptian citizens, and rent-control policies only increase the incentive to illegally subdivide units and sell them at the market rate. Poor enforcement of building codes is not helpful either, as cost-cutting measures inevitably lead to shoddy construction.
Egypt's property ownership woes are exacerbated by its massive population growth. Estimates of greater Cairo's population vary between 11 and 16 million, with thousands of commuters from surrounding regions clogging the streets day and night. Housing and other public infrastructure is inadequate for sustaining current demand and will only decay further as the urban population swells. This enormous population growth, combined with limited opportunities for new labour force entrants, results in extreme crowding, poverty and a willingness to take risks in order to secure an urban dwelling.
As with all governments where popular representation is limited, there is little incentive to address the issue, particularly if it affects a powerless segment of society (e.g. poor citizens). Western governments, in response to similar tragedies, often issue knee-jerk policies to demonstrate action, following up with meaningful legislation and/or procedures to avoid such disasters in the future. In transparent, accountable governments, there is strong political incentive to promote public safety and respond quickly to threats, or else lose the next election. In countries where this incentive does not exist, government inaction and citizen apathy are both predictable responses.
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It's a common sight in the Balkans to see partially unfinished buildings, especially in rural areas. Here, I think part of the incentive is to build the superstructure, and pay for finishing the floors of the building as the family grows. I don't think there's any tax incentive here to keep buildings unfinished.
I am also not sure about Istanbul, where at least in some parts, unfinished buildings are a fairly common sight.
Some countries, however, are more infamous for shoddy construction that others. Albania in particular is particularly bad for this. I still remember seeing a gas station, where the roof sitting on two pylons had collapsed, and nobody had done anything about it. In other parts of the city, the large numbers of ramshackle construction are quite astounding.
Part of this is almost certainly tied to rapid population growth, as you mentioned. Albania, it should be noted, is one of the few countries in the Balkans with a positive growth rate. Most of the rest are shrinking due to immigration. As people flood into an urban area, they want to be able to build a home as quickly as possible, and they are also willing to overlook potential flaws in construction.
Posted by: ascendance at July 4, 2005 07:25 AM
As you know this kind of subject is a particular passion of mine.
Certainly I do believe the tax advantage was real at one time (if not now), but regardless, it is a strong belief.
This aside, another issue is the ability to enforce - rights are not only unclear, but even theoretically clear rights are hard to enforce in good time and in a reasonably cost effective manner.
Posted by: Lounsbury at July 4, 2005 01:04 PM
Actually in Albania almost all of the collapsed structures you see were collapsed by the government. People went on a building spree, with actual decent construction techniques I might add, post communism but in many cases didn't aquire the proper building permits or for that matter the property the buildings sat on. After the government "got its act together", it started demolishing all of the buildings that weren't legal. Thus you see many a superstructure of a hotel along the Albanian "Riviera" collapsed and in a heap and many a home along the byways pushed in on its self.
Being an engineer, I can tell you the buildings in Albania, all of the buildings in Albania, are MUCH better constructed than those in any of the MENA countries I've visited. For instance, they use more than three pieces of rebar per support colum while in Tunisia three is the norm on any residential single or (low) multiple family dwelling. Albania and the other countries I've visited in the Balkans seem to have it much more together when it comes to buildings.
Posted by: drdougfir at July 4, 2005 04:13 PM
Can you expand on the differences there? I have a vague understanding, but it would be interesting to reflect on the cost versus benefit.
Posted by: The Lounsbury at July 5, 2005 05:49 AM
Regulation and property rights are clearly an important factor in this, but so is the way that these buildings are paid for. Egyptian expatriates will send money back home bit by bit, using remittances to build a home. One year the foundations get done (you might skip this part), the next the floor, then walls, etc. etc. Without proper mortgage financing, this is the way buildings get built. The same scheme applies to Egyptians working in Egypt - you pay for your home as you can, in lump sums.
It's not just informal housing either. Zamalek, in central Cairo, is home to one of the ugliest buildings in the world - a circular tower block that has taken fifteen years to build and is still far from done.
Posted by: Simon at July 5, 2005 06:29 AM
Quite right, however the manner of funding and existence of (i) property rights, (ii) a functioning system to protect, (iii) a reasonably functional credit system are intimately tied.
Piece meal funding might not be necessary if reasonable mortagages were available, transfers can as easily pay for a mortgage payment as actual materials.
Of course there is the taste for risk on the part of the Egyptians - even with a decent system they still might not have confidence in their resources to take on longer term mortgages.
Finally, the building in Zamalek. Still not done? Super. I used to drive by it years back.... Never changes.
Posted by: The Lounsbury at July 5, 2005 06:59 AM