In most developing country cities, the legal, formal sector is largely irrelevant in terms of meeting the basic shelter needs of low- and moderate-income households. Housing that is delivered within the confines of legally sanctioned procedures is normally affordable to those earning at or above the median household income. Thus, those households earning less are forced to look elsewhere for shelter. In virtually all cases, their search leads them to the informal sector, where government rules and regulations associated with formal housing production are, by necessity, ignored. In the most desperate cases, low income settlers invade land - and no payment is made for plots. While squatting was prevalent in the 1960s and 1970s, it is less widespread today. Nowadays it is more common for informal settlements to take place on illegally subdivided lands which are either rented or sold. The major outcome of these informal approaches is the relatively efficient production of low-cost shelter.
For many years, governments and policy analysts viewed these informal settlements as slums needing eradication. Such programmes were based on numerous misconceptions about the slums (Hamer, 1985). A common belief is that informal settlements are chaotic, posing serious threats to public safety and health. While there are examples of precarious settlements on hillsides and in flood-plains, much informal development is planned, following quite acceptable standards.
More recently, policies towards informal housing developments have been shifting. Now it is commonly recognised that informal housing is a valuable capital asset which should not be eradicated (Mayo et al., 1986). Also, and perhaps more importantly, there is a growing recognition that informal sector housing production is an important overall component of the housing supply system. In the past several years, researchers and policy analysts have stressed the importance of making housing markets work more efficiently by removing burdensome regulations.
The relationship between the informal housing production sector and government regulations over housing and land development is direct and reciprocal. The informal sector exists because of government regulations. Remove them and you will eliminate the blemish of informality. What were one day informal settlements will the next day become low-cost housing subdivisions. Without regulations, the marketplace will determine what households are willing and able to purchase in terms of housing services.
Such an overtly laissez faire position ignores the fact that housing developments generate significant externalities, such as water pollution, traffic congestion, and soil erosion. Residents of housing projects demand public services, schools, clinics, police protection. The relevant policy question to ask is: what are the minimum levels of regulations or standards which can effectively balance concerns about affordability and access by the poor to housing, with broader community-wide interests? While this short paper cannot possibly provide a definitive answer to this question, it does offer some insights to the costs of high levels of regulations.
(A version of this paper was presented at a conference on the Informal Housing Sector, sponsored by Office of Housing and Urban Programs United States Agency for International Development Washington, DC.)