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Urban housing policy and housing commercialization in socialist countries : China and Hungary Chen, Lijian 1988

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URBAN HOUSING POLICY AND HOUSING COMMERCIALIZATION IN SOCIALIST COUNTRIES: CHINA AND HUNGARY By LIJIAN CHEN B. Arch., Tsinghua University Beijing, China, 1984 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE in THE FACULTY OF GRADUATE STUDIES School of Community and Regional Planning We accept this thesis as conforming to the required standard T H E UNIVERSITY OF BRITISH COLUMBIA August 1988 © Lyian Chen, 1988 In presenting this thesis in partial fulfillment of the requirements for an advanced degree at the University of British Columbia, I agree that the library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. School of Community and Regional Planning The University of British Columbia 1956 Main Mall Vancouver, Canada V6T 1Y3 ii ABSTRACT Housing was considered a public good rather than a marketable commodity at the early stage in the development of most socialist countries. Governments in those countries assumed full responsibility for urban housing finance, construction, allocation, management, maintenance and rehabilitation. A policy of low official rents and high subsidies was adopted as the method to ensure that all urban residents would have access to the state built housing stock. Success in solving the housing problem was to be a showpiece for the socialist countries. However, after approximately forty years of development of the socialist housing economy, many urban residents in countries such as China and Hungary still face severe housing problems. The governments in these two countries have initiated a variety of new efforts in recent years in an attempt to improve the living conditions of their urban residents. In spite of this, many urban housing problems persist and some are even becoming worse. In view of this situation, both govenments have introduced new housing policies which recognize certain aspects of housing as a commodity within the socialist economy. A major aim of these new policies is to encourage individual financial participation in residential construction. This approach, commonly referred to as the policy of housing commercialization, is considered by government to be a feasible approach to resolving the tenacious urban housing problem and an effective means to significantly improve living conditions for all urban residents. By undertaking a comparative study of China's and Hungary's urban housing policies, housing delivery systems and housing problems, this research endeavors to describe and assess the rationale and other associated factors behind this housing policy transformation in both China and Hungary. In addition, this research examines the lessons of Hungary's housing policy reform and concludes with a set of policy recommendations for China's future urban housing efforts. iii T A B L E OF CONTENTS ABSTRACT ii T A B L E OF CONTENTS iii LIST OF TABLES vi LIST OF FIGURES vii ACKNOWLEDGEMENTS viii C H A P T E R 1. INTRODUCTION 1.1. Problem Statement 1 1.2. A Clarification of "Housing Commercialization" 2 1.3. Hypotheses .' 4 1.4. Thesis Objectives 4 1.5. Scope 5 1.6. Methodology 5 1.7. Why Compare China with Hungary? . . 5 1.8. Thesis Organization 6 C H A P T E R 2. URBAN HOUSING POLICY, HOUSING DELIVERY SYSTEM AND PROBLEMS IN HUNGARY 2.1. Indices Relevant to Housing Development 7 2.1.1. Demographic Changes 7 2.1.2. Population Migration 8 2.1.3. Housing Production vs. Households 8 2.2. Housing Policy and the State's Role 9 2.2.1. The Ethos of Housing Policy -- Housing as a Public Good 9 2.2.2. The Goal of Housing Policy — Egalitarianism 9 2.2.3. Roles of the State and National Housing Plan 10 2.2.4. Housing -- a "Non-productive" Sector 10 2.3. Housing Delivery System 13 2.3.1. Housing Redistribution at the Initial Stage of Socialism 13 2.3.2. Dominant Position of the Government in Housing Distribution 13 2.3.3. Public Ownership vs. Private Ownership 14 2.3.4. Rental System - Low Official Rents and Rent Control 14 2.4. Urban Housing Problems and Their Social and Economic Impact 15 2.4.1. Urban Housing Problems 16 2.4.2. Social and. Economic Impact of the Housing Problems 19 2.5. Has the Housing Policy and Housing Delivery System Failed ? 21 C H A P T E R 3. URBAN HOUSING POLICY RE-EVALUATION IN HUNGARY 3.1. Economic Difficulities and Questions on Housing Policy 24 3.1.1. Economic Difficulities 24 3.1.2. Questions on Housing Policy 24 iv 3.2. Re-examination of Housing Policy 25 3.2.1. A Vicious Circ le . . . . 25 3.2.2. Housing as a Commodity 27 3.2.3. Roles of the State 29 3.2.4. Equality vs. Inequality 30 3.2.5. Social Politicians vs. Reform Economists 32 3.3. Housing Policy Re-orientation and Justification 33 3.3.1. Housing Policy Re-orientaion in 1982 33 3.3.2. Housing Policy Justification 35 3.4. Consequence of the Housing Policy Reform 38 3.4.1. Reduction of Housing Inequalities 38 3.4.2. Growth of the Market Mechanisms 38 3.4.3. Preventing Reduction in House Building 39 3.4.4. More Choices and Aesthetic improvement 39 3.4.5. Decrease of Subsidized Housing Production 39 3.4.6. Housing Polarization 40 3.5. Major Concerns Regarding the New Housing Policy 40 CHAPTER 4. URBAN HOUSING POLICY, HOUSING DELIVERY SYSTEM AND HOUSING PROBLEMS IN CHINA 4.1. Indices Relevant to Housing Development 43 4.1.1. Demographic Changes 43 4.1.2. Urbanization 45 4.1.3. National Wealth 46 4.2. Housing Policy and Housing Finance 46 4.2.1. Housing as a Public Good and the State's Role 47 4.2.2. Housing Finance 49 4.3. Housing Delivery System 52 4.3.1. Housing Redistribution at the Initial Stage of Socialism 52 4.3.2. The State's Dominant Role in Housing Distribution 53 4.3.3. Housing Tenure 53 4.3.4. Rental System 54 4.4. Urban Housing Problems and Their Social Impact 55 4.4.1. Urban Housing Problems 55 4.4.2. Social Impact of the Housing Problems 62 4.5. New Housing Goal and Housing Policy Questions 64 CHAPTER 5. URBAN HOUSING POLICY RE-EVALUATION AND HOUSING COMMERCIALIZATION IN CHINA 5.1. Impact of Economic Reforms 66 5.1.1. General Increase of Living Standard 66 5.1.2. Housing Problems Placed at the Top of the Government Agenda 67 5.1.3. Housing Achievement Since 1979 68 5.1.4. Housing Goals vs. Housing Problems 6 9 5.2. Housing Policy Re-evaluation 70 5.2.1. The Origins of Housing Problems 70 5.2.2. Housing as a Commodity 71 5.2.3. Is Housing a "Non-productive" Sector? 74 5.3. Rationale for Housing Policy Changes and Housing Commercialization 74 5.3.1. Rationale for Housing Policy Changes 74 5.3.2. What is Housing Commercialization? 76 5.3.3. Advantages of Housing Commercialization 78 5.4. The Housing Commercialization Pilot Program 79 5.4.1. Subsidized Housing for Sale Program 79 5.4.2. Rental Reform vs. the Wage System 82 5.4.3. Public Opinion Polls 84 5.4.4. Expansion of Policy Experiments in Housing Commercialization 84 5.5. Obstacles to Housing Commercialization 85 5.6. Conclusion 87 C H A P T E R 6. A COMPARISON BETWEEN CHINA AND HUNGARY 6.1. Similarities and Differences in Urban Housing Policies, Housing Delivery Systems and Housing Problems 88 6.1.1. Nature of Housing Policies 89 6.1.2. Housing Delivery Systems .90 6.1.3. Urban Housing Problems 91 6.2. Factors Associated with the Housing Policy Reforms 92 6.2.1. Increase in National Housing Investment 92 6.2.2. Economic Difficulties vs. Economic Growth 93 6.2.3. Similarities and Differences in Housing Policy Justification 94 6.2.4. Different Starting Points 95 6.2.5. More Difficulties for China's Housing Policy Reform 95 6.3. What can China Learn from Hungary? 96 C H A P T E R 7. SUMMARY AND CONCLUSION 7.1. Review of Hypotheses and Conclusion 98 7.2. Recommendations for the Implementation of China's New Housing Policy 100 BIBLIOGRAPHY 103 V I LIST OF TABLES Table 1. Investment in Housing as a Percentage of Total Investment Outlays in National Currency (1950-1976) 12 Table 2. Surplus/Deficit: Household and Housing Unit Data in Hungary 16 Table 3. Surplus/Deficit: Marriage and Housing Unit Data in Hungary 17 Table 4. Population Changes in China (1949-1985) 44 Table 5. State Housing Investment in China (1950-1982) 51 Table 6. Changes of Per Capita Living Space in China's Cities 58 Table 7. Survey on Housing Facilities in China's Cities 59 Table 8. Urban Housing Construction in China (1979-1985) 68 vii LIST OF FIGURES Figure 1. Housing Management System in China 48 Figure 2. Schematic Illustration of Sources of Housing Investment in China 50 Figure 3. Urban Housing Situation in China (I) 57 Figure 4. Urban Housing Situation in China (II) 58 Figure 5. A Traditional Courtyard Housing in Beijing 60 Figure 6. A New Appearance of Courtyard Housing in Beijing 61 Vil l ACKNOWLEDGEMENTS I would like to acknowledge the following people: Professor J. David Hulchanski and Professor Brahm Wiesman for their generous personal encouragement and support during my stay in Canada and for their consistent help and guidance in this research; and Professor Graham E. Johnson, Professor Alan F. J. Artibise and Professor Terry McGee for their invaluable critiques and advice on this study. I would also like to acknowledge Mike Beazley, Erasmus Morah, Barbara Pettit and my other colleagues in the planning school for their comments on this paper and for their help in editing with such skill, - patience, and good humor. In particular, I would like to thank Kent Munro, my friendly office mate, for his help in the past two years and his generosity in allowing me to use his computer. Acknowledgement is also due to my parents, whose guidance, encouragement, and values have provided me with the tools to pursue a happy and meaningful life; and my wife, Zhuangyi Zheng, for her understanding, support, and appreciated effort in collecting the Chinese literature relevant to this research. Last but not least, I would like to acknowledge the Education Committee of the People's Republic of China and the University of British Columbia for their financial support during my two-year education in Canada. CHAPTER 1. INTRODUCTION 1.1. Problem Statement In early stage of the development of a socialist economy and society, the crux of housing policies was that housing was a public good. In other words, housing was not perceived as a market commodity. Socialist states1 assumed full responsibility for housing investment, construction, distribution and maintenance. Today, however, this policy orientation is being widely questioned, re-assessed and modified in many socialist countries, as the demand for adequate shelter in these countries continues to exceed supply despite dramatic increases in residential construction. Thus, in countries such as China and Hungary, there is an increasing trend to consider housing as a commodity rather than a pure public good. One major housing policy change, for example, in China is the introduction of a program of housing commercialization. This program seeks to encourage a gradual increase in individual investment in housing as a means of supplementing the state investment in the housing sector. China recently began a series of small scale subsidized housing for sale programs to experiment with housing commercialization methods. To the extent that this fundamental ideological shift (accompanied by significant policy modifications) is a fact in many contemporary socialist countries, the primary focus of this research is to understand: why housing is now viewed as a commodity in an attempt to solve the tenacious housing problem which the majority of socialist countries have faced 1 By "socialist states" I include those that have formally incorporated the doctrines of "Marxist-Leninism" into their systems of government. Those are: Albania, Bulgaria, China, Czechoslovakia, German Democratic Republic, Hungary, Poland, Romania, the Soviet Union and Vietnam. All these countries' housing policies, with some minor differences, have a common origin - the housing policy model of the Soviet Union, which was initiated by the government of the Soviet Union based on a Bolshevik interpretation of Marx's thought on cities and housing. A detailed discussion on the Soviet Union's model can be found in A. Nove's (1893)The Economics of Feasible Socialism. 2 for over thirty years, and as a corollary, why the previous housing policy orientation, treating housing as a welfare good, was not able to successfully serve the demand of urban citizens? To address this research question, the paper undertakes a comparative study of China and Hungary's urban housing problems and housing policies. The following questions are also addressed: 1. What is meant by housing as a public good and how did the socialist housing system function? 2. What is the nature of the urban housing problem faced by socialist countries, what are the causes of these problems, and why have the previous housing effort failed to solve these problems? 3. What does the literature reveal about the social impact of previous housing policies and problems in China and Hungary? And what are the similarities and differences between these two countries? 4. What specific factors, both internal and external, precipitated the re-examination of the housing policy? What are the reasons for housing being viewed as a commodity in socialist societies? 5. What is housing commercialization and what are its mechanisms? Why is housing commercialization viewed as a feasible solution to various housing problems? 6. What are some of the obstacles to implementing policies for housing commercialization in China? What approaches must be taken in order to ensure a positive outcome for urban housing policies? 1.2. A Clarification of "Housing Commercialization" The term "housing commercialization" in this paper is used to describe major current housing policy changes, in China and Hungary. It means that housing is no longer considered a pure public good. It is now also viewed as a commodity which has a market value. However, this by no means implies that housing has become 3 purely a commodity which can only be bought and sold at a fair market price. The concept of "housing commercialization" reflects the governments' intention to commercialize housing to a certain extent so as to encourage a gradual increase in individual financial participation in residential construction. Some literature, especially that regarding China's housing policy, uses the term "commodification" in place of "commercialization" or use both interchangeably. The term "commodification" is considered inappropriate in this paper because it seems to suggest that housing be treated as a pure commodity. In reality, the vast majority of programs involving housing built for sale currently introduced in China require high subsidies by both government and work units.2 Other literature, especially that regarding Hungary's housing policy, uses the word "privatization". It is possible for Western readers to associate this terminology with the interpretation of capitalist housing markets because it is commonly used literature in English. In view of this, Tosics (1987) devotes a whole paper to an attempt to explain how the meaning of "privatization" in Hungary differs from that of Western privatization. Still, English literature on Hungary's housing policy tends to use "privatization" more than either "commodification" or "commecialization". The term "privatization" is considered inappopriate in China's cases because "privatization" appears to imply private ownership but these so called "home owners" in China have paid only a percentage of the full cost for their housing units. Thus, this research chooses the term "commercialization" for this paper's title because it reflects the essence of housing policy changes in both China and Hungary and because it avoids possible misleading interpretations. As the paper develops, a fuller explanation of "housing commercializtion" will be given. 2 A work unit is a generic term which refers to any workplace such as governement offices, factories, universities or any other institutions in which people work. 4 1.3. Hypotheses The following four hypotheses will be tested in this paper: 1. Perennial housing problems and housing development in China and Hungary are evidence that previous socialist housing policies have been ineffective. 2. Housing commercialization as a major element of new housing policies has both positive and negative impacts on equality of housing provision. 3. The policy of housing commercialization is a feasible approach to improve current urban housing conditions and to rationalize the housing system in China. 4. The lessons learned through housing policy reform in Hungary are valuable to the formation and implementation of housing policy in China. 1.4. Thesis Objectives The objectives of this thesis are to: 1. contribute to the literature in English on housing policy and development in socialist countries by drawing on a comparative study of China and Hungary; 2. present a more accurate and comprehensive picture of housing issues in China, as there is a great deal of counterfactual and misleading literature in this regard; and 3. identify and analyze the origins- of housing problems, the rationale and impact of housing policies and the difficulties of introducing a new housing policy; 4. provide valuable experience and lessons for the benefit of China's housing policy reform by studying housing development in Hungary. 5 1.5. Scope The focus of this thesis is urban housing in China and Hungary. The analysis of housing policies and housing delivery systems focuses mainly on the impact of the high subsidy and low official rent policy. The thesis concentrates on the feasibility of the housing commercialization program rather than other relatively small scale housing programs. Although this thesis is specifically concerned with the examples of China and Hungary, references to cases in capitalist and other socialist countries are relevant and helpful in comparing and clarifying some concepts. 1.6. Methodology This research is based primarily on an extensive review of the available literature in English and Chinese as well as the contributions of advisors, some practitioners and colleagues. There are many similarities in the housing problems and policies of socialist countries making a comparative study of the two selected socialist countries most appropriate. 1.7. Why Compare China with Hungary? The selection of China and Hungary for this study is based on the following. Both countries are characterized by a highly centralised "socialist" economic system. Also, both have experienced significant political upheavals in their socialist development which resulted in serious stagnation of housing construction. Despite distinctive differences in population size, geographical area and culture (which are significant factors pertaining to housing policy analysis), there are many similarities between China's and Hungary's housing policies, housing delivery systems and housing problems. These common characteristics make a comparative study of housing policy in the two countries sound and feasible. 6 Because the pace of housing policy reform in Hungary appears quicker than that of other socialist countries, both theoretical and empirical aspects of housing issues have been debated more broadly and in greater depth. In addition, there is more English literature available about Hungary's housing issues than other Eastern bloc socialist countries. As such, this comparative study is significant because China may learn valuable lessons from Hungary's experience. 1.8. Thesis Organization The thesis consists of seven chapters. Chapter Two describes and analyses the housing policies, housing delivery system and problems in Hungary. Chapter Three reviews and summarizes arguments that re-examine previous housing policies and justify new housing policies in Hungary. Chapter Four focuses on the discussion of housing development in China. A framework similar to the Hungarian case is employed to discuss the China's case in Chapters Four and Five. Chapter Six compares the experience of the two countries and identifies some aspects of Hungary's recent housing policy changes which deserve attention in China. Finally, Chapter Seven concludes with a review of the previously stated hypotheses and with some recommendations for housing policy in China. 7 CHAPTER 2. URBAN HOUSING POLICY, HOUSING DELIVERY SYSTEM AND PROBLEMS IN HUNGARY This chapter describes Hungary's housing policy and housing delivery system as it operated until the late 1970s, and examines various urban housing problems as well as their accompanying social and economic impact in that housing policy setting. The increasingly widespread dissatisfaction with the housing situation eventually brought the housing policy and delivery system into question. 2.1. Indices Relevant to Housing Development The following three categories of information, which are most relevant to housing development in Hungary, provide a general picture of Hungary's population changes and their relation to housing development. 2.1.1. Demographic Changes Hungary had a population of 10.6 million in 1986. Before 1980 the population had increased steadily by an average annual rate of 0.4 percent (Bureau of the Census 1987, p.816). After 1980, the population started to decline at an average annual rate of 0.1 percent. Between 1960 and 1975, the growth of the total population was less than anticipated (Baross 1985, p.l). The number of households, however, had increased dramatically. This unexpected increase is attributed to factors such as the large number of young people starting families, high divorce rates, and the rapid growth in the number of single person or "incomplete" households (Baross 1985, p.l). As a consequence of these significant demographic and household formation changes, there were 337,000 more independent families in need of housing than the "planned for" 3,542,000 between 1960 and 1975 (Baross 1985, p.l). 8 2.1.2. Population Migration Although detailed data indicating the trend of population migration from rural to urban areas are not available, most literature pertaining to Hungarian housing issues agrees that the continuing population migration from villages to cities has created a significant pressure on the supply of housing in urban areas. Rapid industrialization has attracted large numbers of rural migrants to work in newly built or expanded factories in cities and towns but has failed to build an adequate number of dwellings to house them. It is believed that the current high level of migration will be maintained as the government continues to pursue a policy of rapid industrialization. 2.1.3. Housing Production vs. Households One widely employed criterion for measuring the quality of living conditions is the ratio between households and housing units. This is expressed in two ways. Firstly, an adequate and acceptable living condition implies that the number of housing units available for occupancy in a country should exceed, or at least roughly equal, the number of households, arid secondly each individual should have a room of his or her own (Morton 1979, p.304). The former was reflected in the housing goals declared by Hungarian government in 1960 to be achieved by the end of the 1960-75 housing plan. Unfortunately, to date, Hungary is still suffering from a deficit of housing units in relation to the number of households (Morton 1979, p.304). Hungary in the past two decades has reached a commendable achievement in housing construction. The implementation of the 1960-70 housing plan resulted in the construction of one million new dwellings. This helped decrease the number of families per dwelling unit from 1.3 to 1.12 and the number of persons per room from 2.36 to 1.57 (Baross 1985, p.l). Despite the significant increase in the number of dwellings, however, 470,000 families were estimated to be unable to procure a house of their own by the end of the plan period. This problem, regarded as the "permanent housing 9 crisis" in Hungary as well as in other Eastern European countries, means that there are not enough self-contained housing units, apartments, or homes for every household. This housing shortage is discussed in greater detail in Section 2.4 of this chapter. 2.2. Housing Policy and the State's Role 2.2.1. The Ethos of Housing Policy - Housing as a Public Good In the early stages of the development of a socialist economy and society, in Hungary as well as in other Eastern European socialist countries, housing policy was based on the economic concept that housing is not a marketable commodity. Consequently, housing had been removed from the open market and become a public good which was allocated according to need or merit by administrative processes. Rents were low and bore no relation to cost. It was believed that the state should assume full responsibility for the provision of adequate housing. In principle, each family should benefit equally from housing investment and from the overall growth of the national economy. Eventually, every household would acquire its own dwelling through the mechanism of socialist allocation rather than ability to pay which is the allocative device in most capitalist countries. 2.2.2. The Goal of Housing Policy -- Egalitarianism The promotion of equality has been a major preferred goal of housing policy in socialist countries. "One of the major principles applied in the solution of the housing problem is that of providing approximately equal living conditions, as far as possible, to virtually the entire population" (Nechemias 1981, p.l). Guided by this housing goal, most formal statements of housing policy were primarily egalitarian in nature. In reality, however, this goal has not been achieved. In fact, the housing allocation mechanism in Hungary seems to generate new inequality in the distribution of housing. 10 This is further examined in Section 2.4 of this chapter. 2.2.3. Roles of the State and National Housing Plan The mechanisms of the market did not play a significant role in the housing sector in Hungary as the government assumed comprehensive responsibility for housing. The proportion of state budgets for housing investment, the scale of house building and major forms of construction were determined by the requirement of a broader economic strategy. Housing programs, as an integral part of the national economy, were prepared by central planning commissions in accordance with the successive economic plans, while the building and distribution of houses in the programs were mainly organized by regional and local levels of government. In 1960, the first 15-year housing program was launched in which the state promised "an individual dwelling for every family" (Baross 1985, p.l). A second 15-year housing plan was prepared in 1975 which took into account demographic changes and once again declared that "the 'quantitative' housing deficit will disappear when all the planned houses are constructed" (Baross 1985, p.3). 2.2.4. Housing -- a "Non-productive" Sector In Hungary, the state has given firm promises to eliminate the deficit in housing; however, adequate levels of capital investment have not been allocated to the housing sector. The major concern is economic growth, residential construction was considered part of the "non-productive" sector of the economy - a drain on the economy. Consequently, housing development received a low investment priority compared to other "productive" industrial sectors. Between 1950 and 1955, Hungary experienced a surprising decline in residential construction. The rate of house construction fell below the level of the 1940s, 1930s and even the 1920s (Szelenyi 1983, p.30). This decline was a deliberate component of the state's economic policy. 11 In those early years under the new regime, the economic policy was committed to promoting extensive and rapid industrialization. It was believed that only the rapid development of heavy industry would serve the long term economic interests of the whole society. Starting in 1961, Hungary increased its housing investment dramatically. It spent 4.5 times as much money on housing in 1976 as it did in 1960 (Morton 1979, p. 311). Also, the percentage share of the total national capital investment has increased to 17.8 percent in 1976 in Hungary, exceeding all the other Eastern European countries (see Table 1). The change of investment patterns in Hungary clearly indicated the increasing concern of the government in satisfying the housing needs of its citizens. However, the higher investment rate did not correspond with a significant increase in the construction rate of dwelling units. As Morton explains: This was largely due to rising expenses: housing units built in urban areas were larger and better equipped in 1976 than in 1960 and therefore more costly; inflation of building materials and wages also raised construction costs (more for some countries than for others) and widespread use of individual prefabricated component parts for multi-dwelling units may have been more expensive than traditional construction methods..." (1979, p.311). When the state's sources of investment were limited and the housing sector did not have priority in national capital investment, it was difficult for the state alone to produce sufficient housing stock to meet the increasing housing demand. Table 1. Investment in Housing as a Percentage of Total Investment Outlays in National Currency 1950-1976 (Million) 1950 Capital Investment % 1960 Capital Investment % 1965 Capital Investment % 1970 Capital Investment % 1976 Capital Investment % Bulgaria 78 21.1 193 14.1 238 12.0 345 9.7 580 10.8 Czechoslovakia 3,368 17.0 8,916 15.3 9,445 14.7 15,789 17.3 16,444 13.9 G.D.R — — 1,911 11.9 1.596 7.8 1,888 5.8 3,841 8.4 Hungary 4,180 20.0 6,628 15.6 8,194 16.8 16,432 16.6 29,416 17.8 Poland 4,538 11.7 24,159 21.7 28,872 18.7 35,918 15.8 68.304 12.6 Romania 708 11.2 4,340 15.7 5,053 10.7 7,859 9.8 13,476 9.0 U.S.S.R. 2,300 18.0 9,456 22.5 9,638 16.9 13,439 16.4 16,444 13.9 Source: Statisticheskii ezhegodnik stran-chlenov Soveta Ekonomicheskoi Vzaimopomoshchi, 1977 (Moscow: Statistika, 1977), pp. 137, 143; Statisticheskii ezhegodnik stran-chlenov Soveta Ekonomicheskoi Vzaimopomoshchi, 1971 (Moscow: Statistika, 1971), pp. 141, 148. 13 2.3. Housing Delivery System 2.3.1. Housing Redistribution at the Initial Stage of Socialism The first overall assessment of the housing stock in socialist Hungary, conducted in 1949, revealed severe housing problems such as overcrowding, lack of basic facilities and insanitary living conditions. A sharp contradiction existed in large cities such as Budapest: massive worker tenements and squatter areas versus luxurious villas in the elegant districts of the city. These housing problems were believed to have been created by the previous social system and would be readily solved once that system was overthrown (Engels 1872, p.30). In order to provide shelter for the homeless and to eliminate the social injustices of earlier years, the primary tasks of socialist reconstruction of the housing sector appeared to be clear: the immediate redistribution of the housing stock to make maximum use of surplus accommodation, the repression of the market mechanism to avoid sharp price competition for what existed and the development of an efficient (socialist) construction industry, which could rapidly increase the production of new units (Baross 1985, p.5). The approach of "immediate redistribution", initiated according to egalitarian principles, was implemented by nationalizing or confiscating privately owned (mainly large landlords') properties and re-allocating surplus rooms to needy urban residents. As a result of this redistribution effort, some severe housing problems were temporarily relieved. 2.3.2. Dominant Position of the Government in Housing Distribution The implementation of the aforementioned primary tasks soon led to the establishment of the state's dominant position in directing resources to residential construction and regulating housing distribution. The state determined the proportion of the national income that could be allocated for housing and established various institutions to carry out housing activities. Thus, it assumed general responsibility for 14 meeting the housing needs of the society. 2.3.3. Public Ownership vs. Private Ownership Through the consistent effort of the state to promote nationalized building companies so as to increase the number of dwellings in state ownership, the annual new housing construction financed by the state has increased from 16.6 percent of the total housing stock built in the country in 1950 to 41.1 percent in 1970 (the highest percentage in history) (Morton 1979, p.316). After 1970, the state's share of annual new housing construction started to decrease because of economic difficulties. A significant proportion of housing construction, therefore, remained within the private sector. It is important to note that despite the fact that the private housing sector was neither favored by the state's housing policy nor given any subsidy or financial support, it survived. In fact, it played an important supplementary role to the public housing sector as the state has never been able to supply adequate public housing to all urban inhabitants. 2.3.4. Rental System « Low Official Rents and Rent Control In Marxist thought, private landlords and rents have been regarded as symbols of the exploitation of man by man. Therefore, it seems natural for socialist countries to abolish both of them together. After nationalizing housing, the state redistributed the houses to needy social groups and required only a nominal rent from the recipients. The adoption of this low rent policy at the beginning of socialist Hungary was viewed as a transitional one which eventually would lead to the provision of free housing (Donnison 1967, p. 121). Official rents were so low that they barely covered one third of the cost of maintenance and depreciation (Baross 1985, p.6). Rents accounted for only a negligible proportion of a family's income. By 1970 rents consumed only 2 to 3 percent of the 15 average family budget. Therefore, it became necessary for the state to subsidize housing heavily. Normally subsidies were given to the institutions that administered the housing stock rather than to individual residents, meaning that the subsidies benefited all dwellers, regardless of income. The high subsidy and low official rents is one of the most outstanding features of housing policy in Hungary and most other socialist countries. The rationale for this policy in most European socialist countries derives mainly from the inequitable social and economic conditions they inherited. As Andrzejewski points out: It was thanks to this policy that the socialist countries were able, immediately after the war, to introduce radical changes in the housing conditions inherited from the capitalist economy and to even out inequalities through the distribution of dwellings newly constructed with public funds (1967, p.153). Moreover, Baross observes that: The housing shortage that existed in Hungary in 1945-50 would have led to sharp rises in rents had the capitalist market mechanism been allowed to prevail (1985, p.5). Rent control was another approach employed to mitigate the market pressure on the housing sector. Uniform rent levels were institutionalized in 1950 for both public and private rental housing, with minor variations which took into account floor space, level of services, quality, age and location of housing stock. Controlling rents at a very low level ensured that the lowest income group was able to afford rental housing. 2.4. Urban Housing Problems and Their Social and Economic Impact Although some, like Engels, thought that most needs could be met by the redistribution of housing ownership (1872, p.30), urban housing problems in socialist countries did not vanish. This apparent misconception can be explained partly by the fact that it was difficult for theorists to foresee the changes that occurred in the size and structure of the population and the pace of migration to cities. Despite abolishing the capitalist system, many urban housing problems which are common to capitalist 16 societies still remain in Hungary, and some of them have become even more acute. 2.4.1. Urban Housing Problems Shortage. After more than thirty years of socialist construction, the shortage of housing remains the most critical housing problem in Hungary. There is no doubt that the severe housing shortage has been eased to a great extent compared to the 1950s. Yet the promise of "an individual dwelling for every family" remains unfulfilled for thousands of urban inhabitants. In 1975, some 470,000 families were not able to find a housing unit of their own, of which 65 percent were in Budapest and other towns (Sillince 1984, 303) (see Table 2). This has meant that a considerable number of unrelated families still live in co-tenancy or sublease arrangements, sharing kitchen, bath, and toilet facilities with strangers. Table 2. Surplus/Deficit: Household and Housing Unit Data in Hungary Number of Number of Housing Year Households Housing Units Deficit (000s) (000s) (000s) 1949 2,746 2,480 266 1960 3,067 2,720 347 1975 3,880 3,410 470 1981* 4,022 3,650 372 1991" 4^070 4,000--4,100 * Estimates Source: Based on P. Baross, "Managing the Housing Queue: The Current Debate on the Character of Socialist Housing in Hungary", p.25. The ratio between the annual number of marriages and the annual number of new housing units built is another indicator of the deficit of housing units in Hungary. Table 3 indicates that in no year did the number of housing units built exceed the number of marriages. Even though the deficit has been sharply reduced from 18,900 dwellings in 1971 to 875 in 1975, the cumulative deficit of dwelling units built 17 (269,010) compared with the number of marriages (1,149,203) is overwhelming.3 This is why most newly married couples still have to wait years before moving into a flat of their own. Table 3. Surplus/Deficit: Marriage and Housing Unit Data in Hungary U n i t s + S u r p l u s M a r r i a g e s U n i t s b u i l t Year M a r r i a g e b u i l t - D e f i c i t p e r 1000 p e r 1000 p o p u l a t i o n p o p u l a t i o n 1960 88 ,566 5 8 , 0 5 9 - 3 0 , 5 0 7 8 . 9 5 . 8 1965 8 9 , 6 1 1 5 4 , 5 9 7 - 3 5 , 0 1 4 8 . 8 5 .4 1966 93 ,230 5 5 , 5 9 2 - 3 7 , 6 3 8 9 . 2 5 .5 1967 96 ,199 6 2 , 6 3 3 - 3 3 , 5 6 6 9 .4 6 . 1 1968 95 ,613 6 7 , 0 8 4 - 2 8 , 5 2 9 9 .3 6 . 5 1969 95 ,614 6 1 , 8 4 5 - 3 3 , 7 6 9 9 .3 6 . 0 1970 96 ,612 8 0 , 2 7 6 - 1 6 , 3 3 6 9 .3 7 . 8 1971 94 ,202 7 5 , 3 0 2 - 1 8 , 9 0 0 9 . 1 7 . 3 1972 97 ,710 9 2 , 1 9 4 - 5 ,516 9 .4 8 .7 1973 101 ,614 , 8 5 , 2 1 1 - 1 6 , 4 0 3 9 .7 8 .2 1974 99 ,775 8 7 , 8 0 0 - 1 1 , 9 7 5 * 9 .5 8 .4 1975 100,457 9 9 , 6 0 0 857 9 . 8 9 .5 T o t a l 1 ,149 ,203 8 8 0 , 1 9 3 • - 2 6 9 , 0 1 0 * Due t o a p e r c e i v e d m i s c a l c u l a t i o n , t h i s f i g u r e has been c o r r e c t e d . S o u r c e : Based on W. H. M o r t o n , " H o u s i n g Prob lems and P o l i c i e s o f o f E a s t e r n E u r o p e a n d t h e S o v i e t U n i o n " , p . 3 0 6 . With a vacancy rate of zero, the urban housing deficit is really much larger than the figures indicate. These figures do not take into account the large number of commuters who would have moved into cities if they could have done so. Also, the lengthy waiting list does not give a place to those people who wish to move out the extended family housing. The housing shortage is still the problem which overshadows all others. As a result, government housing efforts have constantly addressed this issue, which to some extent has diverted attention from other manifestations of the housing problem. 3 A more accurate measure would subtract the number of housing units which become available through the death of the occupant. Adequate data, however, are not available. 18 Deterioration. Necessary maintenance and rehabilitation of the existing housing stock was frequently neglected because rents did not cover maintenance costs. In addition, state subsidies were normally targeted for new construction because it was more convenient and physically and socially more attractive to replace old housing units than to improve them. Consequently, existing houses were not properly maintained and timely repairs were largely neglected. Between 1950 and 1975 approximately 335,000 dwellings were demolished, equal to about 20 percent of all new housing built in the same period (Baross 1985, p.7). More seriously, there is an even greater number of housing units requiring urgent repairs. Visual monotony and quality problems. The overwhelming impression of the new urban landscape that a visitor usually gains is one of unbroken and unaesthetic uniformity. This is also the view of the inhabitants, architects and officials. Morton observes: Most new residential areas resemble others. They consist of row after row of rectangular buildings of five and eleven stories placed on a grid with little angular differentiation to relieve the stark monotony (1979, p.319). Szelenyi, a leading Hungarian sociologist, in his influential work Urban Inequalities Under State Socialism has an even more vivid and interesting depiction of this bleak urban phenomenon in Eastern European countries: Go for a walk in a new housing development in Budapest, Prague, and Moscow -- it will take you some time to find out which country you are in. Visit a fellow sociologist in East Berlin or Warsaw -- the size of his flat will be about the same as yours in Budapest or Sofia, he will pay about the same proportion of his income as you do for rent, you could probably swap furniture without noticing a change (1983, p.2). This situation is mainly attributable to the state's monopoly over the construction process. All the medium and high rise apartment buildings are built by the state, which are usually rigidly alined on a large piece of land. The building process is characterized by assembling large prestressed component building parts at the site. This highly industrialized method of construction is believed to be more cost-effective and time-saving. Unfortunately, although the problem of visual monotony is acknowledged, 19 the overwhelming demand for housing has exhausted most of government's housing efforts so that little remains to solve aesthetic concerns. There is a considerable dissatisfaction expressed by those living in state built housing. Many residents complain about the rigid layout of houses which allows little flexibility for changes in life style. In addition, the exterior and interior of buildings are frequently poorly finished. 2.4.2. Social and Economic Impact of the Housing Problems Common ' property problems. The redistributive policy institutionalized new tenure concepts of "co-renters" and "sub-renters" since many unrelated families were required to share dwellings. Unfortunately, problems of overcrowded living, and tensions caused by shared kitchens, bathrooms and toilets by unrelated and frequently hostile families soon occurred and became acute. "By the mid 1960s, many 'social problems' in Hungary were linked to the 'housing problem' of co-renters and sub-renters', such as the high divorce and suicide rates and the lowest birth rate in Europe" (Baross 1985, p.5). Couples having their first child while they still live in co-tenancy are unlikely to have a second if it means suffering from even greater crowding and lowering their living standards. These problems caused a great deal of public resentment towards the urban policy and housing policy in particular. Problems of manpower. Acute urban housing problems have resulted in far-reaching economic and social consequences as well. Most cities suffer from acute manpower shortage and a high mobility of labor. Factories and government institutions are frequently unable to hire workers and employees because there are no houses to accommodate them. In turn, poor accommodation is one of the major factors causing frequent job changes. Cities have a large number of pensioners and too few people of working age. The shortage of manpower has seriously interfered with the social and economic development of urban areas. 20 Informal housing sector. The market mechanism in Hungary has not been eliminated completely despite the dominant role of administrative allocation and the implementation of rent control. Both private and state owned housing transactions can occur informally. As Baross observes, two important loopholes created a "black" market for housing, which is an expensive way for some families to resolve their housing problems. One was the possibility of exchanging dwellings among those who already occupied them. In the process, the agreement among families often involved (undeclared) cash payments which reflected the real qualitative differences (location, size, level of comfort, etc.) between the dwellings. The payment could be as high as five times the annual rent (Baross 1985, p.6). The other expensive housing solution for families who do not want to wait in the housing queue was sub-renting. As long as the chief tenant (or owner) lives in the same apartment, sub-renting is in line with the state encouraged. "voluntary" reduction of space consumption. However, rent control is not enforced in this sub-market, leaving the state with no control over rents paid by subtentants. Unequal distribution of housing. In the early 1970s, an increasingly vocal group of housing professionals began to raise questions regarding equality in housing distribution. The core of their argument, supported by empirical documentation, was that administrative allocation of housing by the state had produced strong housing inequalities among various sectors of the population (urban/rural, managerial/worker, housed/homeless) (Baross 1985, p.3). Actually, these new kinds of inequalities were discussed as early as the late 1960s by Szelenyi and his colleague Konrad. Szelenyi supported the housing inequality argument with convincing empirical data. The survey recorded in his work shows that it is mainly the middle class - clerical workers, professionals, intellectuals, bureaucrats, and the like - who live on these housing development [the housing estate financed and built by the state]. Skilled workers are reasonably well represented, but the bulk of the working class is nowhere to be seen. This meant that the state housing was being allocated to the higher income groups and not to the proletariat (1983, p.6). 21 Szelenyi ends the book with two conclusions about Hungary's housing system: housing inequalities are being created now, as those with higher incomes get the better housing; and these inequalities are being created by administrative allocation, i.e. by the distinctively socialist mechanism which was supposed to replace the capitalist market method of allocation (author's emphasis; p.6). Obviously, it is not the state's intention to create inequality through the implementation of such a policy. However, the limited available resources and the government's low priority on housing investment did not help produce sufficient housing units for all citizens. Thus, much more narrow criteria are used to allocate the highly subsidized state housing. One of the major criteria is to reward achievement by providing bureaucrats, teachers, doctors, and other key personnel with the best and newest state housing at very low rent. In contrast, the majority of those in need of housing but with relatively low social status have access to only older state housing which is usually in poor condition and has few amenities. Worse yet, many people in this latter social group have to build a dwelling themselves or buy one in the "black" market. Gradually, the administrative allocation mechanism has created these new housing inequalities under the socialist economy. 2.5. Has the Housing Policy and Housing Delivery System Failed ? In view of Hungary's acute and tenacious urban housing problems and the associated social and economic impact, it is imperative that the previous housing policy and delivery system be questioned. By formulating and implementing the ambitious 1960-75 housing plan, and by promising the goal of an "individual dwelling for every family" to be achieved by 1975, the government made a great commitment in an attempt to improve significantly housing conditions for its people. Indeed, housing investment has increased year after year to achieve the quantitative housing construction target outlined in the plan. There was undoubtedly some improvement of the housing situation as a whole. For instance, the falling number of homeless and of families living as boarders is one of the most obvious indications of the improvement. There 22 were also improvements in housing quality and facilities. However, it is argued by Szelenyi that the general improvement was not mainly due to state construction or state distribution. He demonstrates that "individual effort, hard-working self help and mutual help, and family connections and inheritance provided for many more families than did the state's much-publicized housing activities" (1983, p.67). Thus, it is maintained by many that a housing policy based on the conception of housing as a public good has not led to a significant improvement in urban housing conditions. Nor has it been able to meet the growing demand of urban citizens in spite of successfully increasing the number of housing units built each year. Moreover, in view of the rapid population migration and other demographic and household formation trends, the state alone was simply not able to generate additional sources of capital to react to these unexpected factors. These facts clearly suggest that serious shortcomings exist in Hungary's housing policy and housing delivery system. However, it would seem unreasonable to conclude that they have failed. Had the government given high priority in capital investment to the housing sector and made a greater commitment to residential construction from the very beginning of the socialist state, and had state resources not been concentrated on supplying free or near-free housing to a privileged minority, but instead had been distributed more widely and evenly among all population groups, housing policy might have operated successfully to meet increasing housing demand and to alleviate housing inequality problems. Though impossible to prove, it is reasonable to believe that such alternative policies might have created a better housing situation. The widespread dissatisfaction with the present housing situation has provoked a serious re-examination of the housing policy and delivery system. As a result, certain modifications of housing policy have been made. In preparing the second 15-year housing plan, the government has again promised to provide an individual housing unit for each family by the year of 1990. In the next chapter, critiques of the previous 23 housing policy and delivery system and the rationale for housing policy modifications are examined at length. 24 CHAPTER 3. URBAN HOUSING POLICY RE-EXAMINATION IN HUNGARY The previous chapter presents housing policy and the housing delivery system as it operated until the late 1970s as well as housing problems and their associated social and economic impact. This chapter reviews housing policy changes in Hungary since then and examines reasons for these changes. 3.1. Economic Difficulties and Questions on Housing Policy 3.1.1. Economic Difficulties The recession experienced by western economies in the middle of the seventies did not by pass Hungary, but it arrived some years later. The end of 1970s saw Hungary encountering great economic difficulties. This economic crisis aggravated the already serious shortage of national resources for housing investment. As a result of the state's reduction of housing investment, the production of housing, which had peaked in the second half of the seventies, began to decrease slowly. It was soon clear that a housing policy dependent on heavy subsidies could not be maintained for long (Tosics 1987, p.70). 3.1.2. Questions on Housing Policy One central housing policy question at the end of the 1970s was how to satisfy the need for a substantial quantity of housing and the growing quality requirements. In view of limited national resources, it was dubious that the current housing policy would be effective in solving the housing problems of shortage and low standards. As dissatisfaction of many urban residents with their housing situation became more intense, 25 the government started to realize that the existing housing policy had to be revised. Another significant question for housing policy, first, raised by Szelenyi and Konrad in their provocative and influential report on the housing survey of two Hungarian cities, is that housing inequalities were being created by administrative allocation - higher status groups were allocated most of the good quality housing almost free. That is, higher status occupational groups (senior bureaucrats, intellectuals, technicians and clerical workers) paid proportionately much less of their income for housing than did lower status occupational groups. These higher status and higher income groups benefited most from the government's highly subsidized housing while lower status and lower income groups had to rely mainly on their family financial resources to obtain housing. After intensive debate by housing experts, it was agreed in principle that the existing housing policy and delivery system was responsible for the occurrence of new housing inequalities under the socialist economy. By the beginning of the eighties, the political leaders of Hungary had realized that re-orientation of housing policy and reform of the housing delivery system was essential in order to increase housing production and to mitigate the problem of housing inequalities. 3.2. Re-examination of Housing Policy 3.2.1. A Vicious Circle Housing had been viewed as a public good rather than a market commodity since the establishment of socialist Hungary. The state thus assumed general responsibility for meeting housing needs of the society. Based on this approach, housing had been officially removed from the market place and distributed at artificially low rents. As expressed officially, the state had to provide for housing through central redistribution of national income. Therefore, wages did not include costs of housing and those of infrastructure in general. This implies that by right everyone in Hungary was 26 entitled to housing provided by the state. However, housing is such an expensive and durable consumer item that it has long been considered the most financially unprofitable of all consumer goods to produce in Hungary. It normally requires a considerable amount of initial capital investment. Even if housing is treated as a market commodity, it usually takes a much longer term to recover costs or realize profit than other consumer goods. Thus, it is not surprising that economic planners saw housing investment as "returnless expenditure" because housing units were distributed to urban inhabitants nearly free of charge (Szelenyi 1983, p.32). Influenced by this conception, the state had continued to place its investment priority on socialist industrialization, hoping that the growth of productive industrial sectors would generate more national income and hence there would be more financial resources available for other "non-productive" sectors such as housing construction. This expectation turned out to be contrary to results. The severe social and economic consequences of housing problems actually impeded rapid industrial development. Consequently, a vicious circle was created: housing problems caused social and economic problems; the latter hindered economic growth and generation of greater national wealth; this then resulted in less available funds for residential construction. Moreover, other factors such as population migration to urban areas and household formation changes exerted even greater pressure on residential construction. As a result, housing demand seemed bottomless and it became increasingly difficult for the state to allocate sufficient funds for residential construction. 27 3.2.2. Housing as a Commodity According to Marxist theory, socialist countries, upon their establishment, would soon expect a much more rapid rate of economic growth than capitalist countries. Therefore, the socialist societies could accumulate enough wealth for the improvement of people's living standard including the provision of better housing. Unfortunately, this anticipated greater economic development has not occurred. Now it is clear that compared to highly industrialized capitalist countries, Hungary was and still is a less developed country with a low average level of wealth and limited resources. Based on this fact, it may be argued that it was inappropriate in the first place for the state to assume full responsibility for providing adequate and decent housing for all citizens. Even assuming that the state had placed its national investment priority on housing construction from the very beginning of its efforts to develop a socialist society, it is questionable whether there was ever enough national income to allocate to the housing sector to provide good housing for all. Therefore, it seems natural to ask why housing is not treated as a commodity under socialist economy. Housing never entirely lost its market character in Hungary. This is manifested in Szelenyi's observation: Capitalist production and marketing of housing ceased. People could still buy, sell, or exchange their own private houses; they could barter house for house with the state distributors of housing; in some conditions they could buy new housing from the state builders; and they could co-operate and barter with one another to build houses for themselves (1983, p.28). In addition to the state's dominant role in the housing sector, an informal housing market has continued to exist, in which housing is rented or sold at market prices or even at speculative prices because demand always exceeds supply. The state has taken a laissez-faire attitude toward this phenomenon since it has never been able to provide adequate public housing for all urban inhabitants so as to eliminate the need for this "black" market. No statistics show how many informal transactions, including both co-operatively and privately financed housing, are realized each year. But it is 28 reasonable to believe that the co-operatively and privately financed housing construction has played a significant role in the housing sector. This is because the state was able to subsidize less than half of the total housing stock built annually. The highest percentage of the state built housing units out of the total housing units in the country was 41.1 percent in 1970 (Morton 1979, p.316). It is important to recognize the actual role of the informal housing sector. However, this does not necessarily justify the argument that the state should have treated housing as a commodity from the beginning of socialist development. Both the housing redistribution at the beginning of the socialist country to make maximum use of surplus accommodation and the repression of the market mechanism to avoid sharp housing price competition had to a great extent relieved severe housing problems and eased the social injustice of the earlier years. It is important to note that societies where housing is treated as a pure commodity are also characterized by various housing problems. Therefore, it would be equally inappropriate if the state had left the housing sector entirely to market mechanisms. The continuing existence of the informal housing sector and its role as an important supplement to the state housing sector point to the possibility of treating housing as a commodity. Socialism is not morally incompatible with market distribution of housing. In fact, a state agency, the National Saving Bank (NSB), has already operated in the housing market, building apartments for sale to individuals. The NSB uses the population's savings to build houses. Housing built by the NSB, mostly high-rise flats with inadequate landscaping and parking, hardly differs in physical terms from those built by the state. The difference is mainly in the financial regulation under which these flats are sold. Families who buy the flats pay much more of their income than those live in the state built housing units (Sillince 1985, p.310). Unfortunately, in the sector where the NSB operates the market functions badly because the NSB uses its monopoly of particular types of construction to maintain a seller's 29 market (Szelenyi 1983, p.90). It is widely believed that for the state to neglect the informal housing market further would be an unwise decision. What is important and should be explored in depth is how a policy of viewing housing as a commodity could help provide more and better quality housing for all people. Moreover, to what extent such a policy should be implemented under a socialist economy so as to avoid new housing problems created by market mechanisms. 3.2.3. Roles of the State Economic difficulties and tenacious urban housing problems have triggered a re-examination of the role of the state in Hungary. By the end of the 1970s, the government realized that it was impossible to solve increasingly urgent urban housing problems by depending exclusively on national budgetary resources. Other sources of finance had to be found to expedite residential construction. By the beginning of the 1980s, the government was prepared to revise its housing policy in order to acknowledge the role of the informal housing market and to urge individual efforts in resolving housing problems. Laszlo Ballai, head of the Economic Policy Department of the Central Committee of the Hungarian Socialist Worker's Party, indicated the nature of the changes in government's housing policy in an October 2, 1982 speech: ... the conditions and circumstances of the national economy for realizing our housing policy aims have been changed ... the deteriorating foreign economic conditions have reduced the central resources devoted to housing activities and maintenance. This, however, means that we will be forced to rely on the material strength and work of the population, to a greater extent than before, in the future (Tosics 1987, p.63). His speech suggests that the state would work together with individuals to prevent a further stagnation in residential construction and the resolution of housing problems. 30 3.2.4. Equality vs. Inequality It is evident that, like market mechanisms in capitalist countries, the administrative allocation of housing in Hungary also creates housing inequalities. The examination of the history of public statements and policy directives in Hungary indicates clearly that that the occurrence of inequalities in housing allocation are not the official purpose of the state housing policy. One of the primary official purposes of housing policy is to reduce housing inequalities as much as possible. By redistributing the existing housing stock at the beginning of socialist Hungary, the state intended to eradicate social inequalities in housing inherited from the previous society. Furthermore, by assuming a fundamental responsibility for housing provision, the state intended to ensure that every citizen had equal access to state built houses. However, these good intentions did not automatically guarantee that the outcome of housing policy would create equality. Housing equality could only be achieved by constantly constructing sufficient housing to satisfy basic demand and by allocating available houses to people according to their needs. Unfortunately, both of the conditions have never been met. As noted earlier, the economic policy in Hungary deliberately favored industrial development rather than residential construction. To allocate resources to housing seemed, to those policy makers, "like eating the original egg before it had hatched the magic goose that would one day lay the golden eggs" (Szelenyi 1983, P.30). As a result, sufficient capital has never been allocated to residential construction. Year after year, the deficit of dwelling units accumulated. Under conditions in which need was always much greater than supply, the criteria for housing allocation become crucial. In addition, wages in Hungary are officially set to exclude the cost of housing as well as a variety of other goods and services. Thus, housing and other goods and services must be administratively allocated to all people, including those with high incomes. Because housing happens to be scarce, with only a small fraction of units available for allocation annually, the available 31 units are most likely to be allocated to the most meritorious citizens in the most essential jobs, who tend to be those with highest incomes. As Szelenyi asks, "How could the state say to its rising managers and bureaucrats, 'If you get promoted you will reduce your housing chances?"'(author's emphasis; 1983, p. 10). Moreover, since the costs of housing are not passed through personal incomes, even the highest income groups will not willingly pay real costs or high rents for their housing. Consequently, through the state's housing delivery system, the better-off groups get most of the available good quality housing at low rents. Many citizens with unfavorable social positions, especially those with low incomes, have remote prospects for obtaining state housing. In view of the long waiting time for a state housing unit, many actually do not seriously expect that the state will provide them with a house. Behind this inequality in access to the state's housing units, there exists another aspect of housing inequality. Rents are set low and the same for all. In practice, the policy of low rents and high subsidies are enjoyed only by those who already have adequate housing and who have been lucky enough to be allocated a state housing unit. From the above analysis, it can be seen that the socialist mechanism of the urban economy has created housing inequalities. The government certainly does not want to see any further inequities in housing distribution. In view of the scale and severity of housing problems and the limited national financial resources, the government realizes that housing policy has to be changed and the housing delivery system reformed. Also, the state needs to tap the financial resources of individual households in order to improve overall housing conditions in a shorter time. Housing units are so expensive, durable, comparatively indivisible, and fixed in particular neighborhoods that equality is harder to achieve in housing than in any other sphere of distribution. Nevertheless, Hungary is determined to do something about this situation. 32 3.2.5. Social Politicians vs. Reform Economists In the period of preparation for housing policy changes, great publicity was given to papers dealing with urban housing problems. In this vehement debate, views were sharply polarized. One of them, which was commonly referred to as the view of "social politicians", concentrated on the dangers of aggravating social problems. In order to reduce existing housing inequalities, they believed that "administrative adjustment in allocation, emphasizing some objective 'social need' (family size, current housing situation) could correct the shortcomings together with the expanding role that public housing would play in the overall delivery system" (Baross 1985, p. 13). This proposition seemed to suggest no radical institutional changes. The other view, which was promoted by "reform economists", stressed the benefits of a further increase in the role of the market. They argued that "it is the operation of the public housing subsystem itself which is at the root of problem and needs to be largely dismantled, not only in the sphere of allocation but in the sphere of production as well" (Baross 1985, p. 13). In their view, the financial resource consumption of the public housing strategy strangles the overall efficiency of housing production and is responsible for the social inequality in housing in two ways. First, it retards housing production and hence increases the number of families in the housing queue. Second, it creates competition for subsidized dwellings, a competition which has historically been won by those citizens with higher social status who have privileged access to bureaucratic distribution channels, rather than those who need better dwellings. Thus, they propose that the role of the housing market in housing allocation and construction should be expanded. Their program is to "dismantle current limitations which obstruct the realization of the housing good as a marketable commodity" (Baross 1985, p. 15). This debate finally instigated the government's decision to change housing policy. The government tended to favour the view of "reform economists". Their proposals 33 were partially adopted in the new housing policy. 3.3. Housing Policy Re-orientation and Justification 3.3.1. Housing Policy Re-orientation in 1982 A mixed housing economy. The main aim of housing policy re-orientation in Hungary has been to reduce the housing shortage and to alleviate the extent of housing inequalities. In Szelenyi's point of view, neither market mechanisms nor administrative mechanisms of distribution alone would solve Hungary's housing problems. He suggests that, in Hungarian circumstances, it is necessary to make the housing sector more market-oriented by adopting some extension of market methods. That is to say, a mixed housing economy which combines market and non-market methods should be introduced in order to achieve the main housing goals. Szelenyi's view, shared by many other reform economists, was eventually acknowledged by the Hungarian government. In 1982, Hungary's government decided to reduce direct state control of housing and to increase the role of the housing market. It was believed that the "strongly subsidized public housing program blocks private initiative and fails to incorporate a significant share of private savings into the housing sector" (Baross 1985, p. 14). Thus, in view of budget difficulties, the state started to reduce its contribution to housing finance (Tosics 1987, p.62). A portion of the most subsidized housing forms came to an end, and the proportion for construction of rented dwellings was greatly reduced. The housing cost burden of the population was generally increased. The remaining state financial support for house building and buying were practically equalized among various housing classes and producers; grants and subsidy assistance were directed towards families in need, rather than the housing objects. The major criterion for allocating subsidies to families was family size (Tosics 1987, P.63). 34 In addition, factories and institutions could utilize their profit to support their employees with housing loans or collective building projects. Ultimately, the role of direct distribution and financing by the state decreased in every respect. Rental reform. A new rental policy is the most important part of the housing policy re-orientation. Previously, rent increases had been slow and rents were traditionally around 4 percent of personal income, very low by Western standards. Rent increases started in 1970 and stayed unchanged after 1972. In 1983, the state decided to continue the rent reform. From June 1983, rents would increase by 120 percent over a 5-year period (Sillince 1985b, p. 143). The rent rises took size, level of service, quality, age, and location of housing stock into account. From 1983 the maintenance cost of all newly constructed or renovated buildings would be passed on to renters, who might form "residents co-operatives" to manage the renovation and maintenance work. Besides the modest rent rises over years, there were measures instituted by the state to help the poor. For instance, the most subsidized housing was made available only to the very poorest groups; large families were given privileged access to state subsidized housing units; and in case of rented housing, rebates were available depending on incomes and number of children. Recognition of Private Residential Construction. Private residential construction has long been an element in Hungary's urban housing sector, but it has virtually been ignored by the government. The housing policy re-orientation gave the private house construction sector official recognition because the government finally admitted that the role of the private housing sector in Hungary had been seriously underestimated. The new housing policy gave private residential construction practically the same conditions as other forms of housing construction for receiving assistance from the state (Tosics 1987, p.64). Individuals were urged to utilize their own savings and the state's loans to build houses of their own or to buy houses from the private housing market so that they could withdraw from the long waiting list for state 35 housing. 3.3.2. Housing Policy Justification Insufficient national resources and tapping the population's savings. One important feature about Hungary which should be kept in mind is that Hungary is still not a wealthy country compared with many highly developed capitalist countries. The country possesses only limited resources which are not sufficient to support a high rate of development in both industrialization and residential construction. The housing shortage can be solved only by committing sufficient resources to residential construction. However, the construction of the required number of housing units and the maintenance of the existing stock require too much funds, labor and materials for the state to be able to ensure a satisfactory improvement of the housing situation. Even though the state is now willing to allocate more resources to the housing sector, it still needs to seek additional resources in order to aggregate a significant amount for housing investment. For this reason, Hungary decided to tap the population's savings, offering in return the possibility of obtaining a housing unit in a shorter period of time. In addition to aggregating more funds for residential construction, there are other advantages to involving urban households financially in residential construction. First, it can help relieve pressure on the government as the main source of housing investment. Second, it can reduce available consumer spending power that would have been used to shop for goods in short supply. Better housing for all. Under the new housing policy setting, higher income groups are provided opportunities to obtain better housing if they are willing to pay more. It is believed that with little help from the state, these better-off households should be able to obtain their own better-than-average housing from the housing market or purchase the better quality housing built by the state for sale. It is also believed 36 that the growing prosperity of society as a whole and the increase of individuals' living standard should make it possible for the majority of the people to afford using a significant portion of their savings to obtain their own houses. Therefore, the housing resources which pass through the national budget should then be directed to assuring that housing of a necessary standard is available to all who still lack it. To be more specific, the housing resources, especially those that convey elements of subsidy, should be directed to the social groups who need them most. With the better-off population groups being taken care of mainly by the housing market, the state should be able to devote its major effort to helping the disadvantaged social groups improve their housing conditions. After all, the socialist state attempts to enable all population groups to improve their housing conditions. Housing as an award. Supposedly, housing policy based on the principle of equality must guide housing distribution according to need. However, when need exceeds supply so overwhelmingly, it is hardly practicable to assure impartial distribution. Good housing is regarded as an important material incentive and as a means of manipulating the deployment of manpower resources. Hungary's government has implicitly used housing to reward those "more important" workers in society. During the 1960s, the average value of the highly subsidized state housing of high quality was eight times the average annual income (Sillince 1985b, p.305). Therefore, there was a large difference between the lucky person who did receive it and the person who did not. The best and most subsidized housing was administratively allocated to the highest occupational groups. Since the society already rewarded its "more useful" members with relatively higher incomes, the housing reward further increased their real incomes. The new housing policy urges the better-off population groups to use their savings to obtain better houses. This is "justified on the ideological ground that the socialist society rewards the labour contribution of their workers at the sphere of 37 production (workplace)" (Baross 1985, p. 15). Thus, it avoids those better-off members of the society receiving dual rewards (housing and incomes). By introducing parts of the market mechanism into the socialist housing sector, it is hoped that the previous pattern of partly and wholly concealed benefits such as housing subsidies be brought into the open and incorporated plainly into a visible distribution of income. In Baross' words, the state intends to "develop a housing policy which provides a greater possibility that families' housing situations reflect the usefulness of their labour contribution to the society" (1985, p. 15). Promoting home ownership. Home ownership in Hungary is more a rural than an urban phenomenon: only 33.6 percent of those in Budapest own their own home, whereas the proportion for the towns is 63.5 percent and for the villages 91.5 percent (Sillince 1985b, p.309). The government envisages promoting home ownership as a potential solution of urban housing problems. Since the mid of 1970s, in the wake of the economic recession and other social problems, the government has attempted to attract private investment in housing in the form of greater incentives for home ownership. This attempt was further emphasized in the housing policy changes in the early 1980s. In fact, to encourage individuals to solve their housing problems without recourse to state built housing units by becoming owner occupiers is the most important aim of the housing policy reform (Sillince 1985b, p. 309). There are three ways of achieving private home ownership: first, building a house oneself without the help of a "self-build group".4 About 15 percent of home ownership is acquired in this way. In this case, often family members and neighbors do nearly all the work with the inexpensive supervision of a private builder or civil engineer. This has become possible (or legal) since the relaxation of controls on private companies. Second, joining a "self-build group"; about 38 percent of home ownership is acquired in this way. This kind of dwelling is cheaper than ready-built ones and offer * A "self-build group" appears to be a small housing construction group which assists individuals in the building of their house. 38 greater choice, but take longer to be completed (average time is four years). Third, buying a ready-built dwelling; about 47 percent of home ownerships are acquired in this way. Two third of dwellings for sale are financed by the National Savings Bank, and one third are built by the state to sell. Buying a ready-built dwelling is slower than building it yourself (Sillince 1985b, p.310). 3.4. Consequences of the Housing Policy Reform There is little literature on the effect of the early 1980s housing policy changes. Nevertheless, by putting bits and pieces of information together, some consequences of the housing policy reforms can be noted. 3.4.1. Reduction of Housing Inequalities The measures taken in 1983 have led to a reduction of inequalities in the financial burdens on different social groups and in the differences between the cash conditions attached to the different methods of acquiring a dwelling. Also, the share of the heavily subsidized state housing occupied by the better-off population groups has been reduced. The disadvantaged social groups have been given priority in allocating various forms of subsidies from the state. The state subsidies, which have been reduced in volume, are more evenly distributed among the different housing forms. 3.4.2. Growth of the Market Mechanisms The new housing policy introduced in 1983 has resulted in an expansion of the market mechanism. At the same time, the direct distribution of housing by the state has been reduced. In the private market sector, the size and quality of dwellings depend more and more on the financial capacity of the households. 39 3.4.3. Preventing Reduction in House Building An essential achievement of the Hungarian housing policy reform is that, in addition to the above mentioned reduction of housing inequalities, the new housing policy succeeded in preventing a drastic reduction in house building as more of the population than before have been drawn into the financing of residential construction. Consequently, the housing industry has maintained its momentum despite the country's economic difficulties. 3.4.4. More Choices and Aesthetic Improvement As a result of the strengthening of the private housing market, freedom of housing choice has become much greater than before. This is especially true for the better-off population groups. As many better-off families obtain better quality houses, more of their previously occupied housing units are filtered down to other social groups. Moreover, the reform has increased the freedom of choice of families interested in an exchange of dwellings. As to the aesthetic aspects of housing, the increase in the number of private housing construction organizations active in the housing sector, has resulted in a move away from monotonous styles of building. 3.4.5. Decrease of Subsidized Housing Production Because of difficult economic conditions, the state has reduced its contribution to residential construction, diverting funds to other economic sectors. This led to a steep drop in the absolute number of state built dwellings. The rate of state built, housing plummeted from an average of 30 percent during the previous three decades to 12 percent (Hegedus 1988, p.l). Thus, there are less state subsidized housing units available for allocating to those in need of houses. 40 3.4.6. Housing Polarization Despite the reduction of housing inequalities in terms of financial burdens on different social groups, inequalities in housing consumption has not been reduced but increased to some extent. It tends to be even more difficult than before for the poor to obtain dwellings. This is because the state has reduced its housing investment and because the price of house building is rising at a rate never experienced before (Tosics 1987, p.71). As a result, most of them can not afford housing units sold at market prices and only a small proportion of them receive the state's subsidies. Thus, differences of housing conditions between the better-off and the poor become even more distinctive. 3.5. Major Concerns Regarding the New Housing Policy The introduction of a more market-oriented housing policy has helped to transform housing construction and provision into a more economical operation. However, the emphasis on. the market approach and the reduction of the state financial commitment have left low income groups with even less opportunities to improve their housing conditions. In view of the increase of inequalities in housing consumption and the steep reduction of the state built housing, concerns regarding the new housing policy are now being voiced by many housing experts. Hegedus argues that "The only way a new housing reform will be successful is if it is combined with an effective social welfare policy" (1983, p.492). The more extensive the reliance on the market approach, the more necessary it is to provide subsidized housing to the low income groups. Can Hungary succeed in providing each household with a modern self-contained unit by 1990 as promised? Compared to other Eastern European socialist countries, Hungary appears to have greater potential to realize this goal. However, if economic conditions force the government to reduce overall capital outlays, it seems likely that 41 the housing sector will be among those sectors that suffer most. If so, then the housing shortage will very likely persist beyond 1990. Clearly, many aspects of urban housing problems, housing policy change and the detailed procedures for policy implementation in Hungary which have been discussed in this paper require further clarification. However, this initial examination of Hungary's experience in dealing with urban housing problems and in formulating new housing policies is certainly sufficient and useful for the purpose of a comparative housing study. The next two chapters examine China's urban housing problems and housing policy changes. 42 CHAPTER 4. URBAN HOUSING POLICY, HOUSING DELIVERY SYSTEM AND PROBLEMS IN CHINA Since 1979 China has introduced economic reforms, first in the rural sector and later in the urban economy. In the housing sector, the Chinese government has initiated new policies and programs to increase housing finance and residential construction. The year 1979 was a turning point for housing investment and construction. From 1979 to 1984, the total investment in housing reached 70.1 billion yuan,5 equalling 65.5 percent of the total housing investment over the 35-year period from 1949 to 1984. Moreover, the completed housing floor space in the six years was 472.4 million square meters, 47.5 percent of the total over the previous 35 years (Lin 1986a). Despite these notable achievements, urban housing problems' such as housing shortages, unequal distribution and corruption remain unresolved and have become issues of great concern to China's urban residents. In view of this, the government recognizes that further major reforms in housing policy, finance and management are imperative. Thus, a far-reaching debate on the theory and practice of government housing policy began in the mid-1980s. This was followed by radical housing policy changes, the focus of which relates to housing commercialization. In order to analyze these urban housing policy changes, it is necessary to review housing development in China and outline the socio-economic context within which housing policies operate. This chapter presents an overview of urban housing policy, the housing delivery system and current housing problems in China. 5 In 1987, the official rate of exchange was US $1 = 3.7 yuan (China's monetary unit; People's Daily). It was lower at early periods. 4 3 4.1. Indices Relevant to Housing Development 4.1.1. Demographic Changes In 1986 China's population was 1,045.5 million (Bureau of the Census 1987, p.816). It is estimated that the total population will pass the 1,100 million mark by the end of 1988, which is earlier than government statisticians predicted (The Globe  and Mail 1988). Since its founding, China has witnessed rapid population growth (see Table 4). Recently, urban demographic change is characterized by three major features. First, household size in urban areas has become smaller, decreasing from an average of 5.30 persons per household in 1964 to an average of 3.82 persons per household in 1985 (State Bureau of Statistics 1986, p.667). Second, the children of the 1960s baby-boom generation have reached marriageable age, rapidly increasing the number of married couples. Third, because of the implementation of the family planning policy of "one couple one child", more three-person families are being formed. These demographic factors have jointly exerted great pressure on the urban housing supply. Table 4. Population Changes in China (1949-1985) ( m i l l i o n ) T o t a l U r b a n P e r c e n t a g e Year P o p u l a t i o n P o p u l a t i o n o f u r b a n P o p u l a t i o n 1949 541.67 5 7 . 6 5 1 0 . 6 1950 551 .96 6 1 . 6 9 1 1 . 2 1951 563 .00 6 6 . 3 2 1 1 . 8 1952 574 .82 7 1 . 6 3 1 2 . 5 1953 587 .96 7 8 . 2 6 1 3 . 3 1954 602 .66 8 2 . 4 9 1 3 . 7 . 1955 614 .65 8 2 . 8 5 1 3 . 5 1956 6 2 8 . 2 8 9 1 . 8 5 1 4 . 6 1957 6 4 6 . 5 3 9 9 . 4 9 1 5 . 4 1958 6 5 9 . 9 4 1 0 7 . 2 1 1 6 . 2 1959 672 .07 1 2 3 . 7 1 1 8 . 4 1960 662 .07 1 3 0 . 7 3 1 9 . 7 1961 6 5 8 . 5 9 1 2 7 . 0 7 1 9 . 3 1962 6 7 2 . 9 5 1 1 6 . 5 9 1 7 . 3 1963 691 .72 1 1 6 . 4 6 1 6 . 8 1964 7 0 4 . 9 9 1 2 9 . 5 0 1 8 . 4 1965 7 2 5 . 3 8 1 3 0 . 4 5 1 8 . 0 1966 745 .42 1 3 3 . 1 3 1 7 . 9 1967. 7 6 3 . 6 8 1 3 5 . 4 8 1 7 . 7 1968 785 .34 1 3 8 . 3 8 1 7 . 6 1969 8 0 6 . 7 1 1 4 1 . 1 7 1 7 . 5 1970 829 .92 1 4 4 . 2 4 1 7 . 4 1971 852 .29 1 4 7 . 1 1 1 7 . 3 1972 871.77 1 4 9 . 3 5 1 7 . 1 1973 8 9 2 . 1 1 1 5 3 . 4 5 1 7 . 2 1974 908 .59 1 5 5 . 9 5 1 7 . 2 1975 924 .20 1 6 0 . 3 0 1 7 . 3 1976 937.17 1 6 3 . 4 1 1 7 . 4 1977 949 .74 1 6 6 . 6 9 1 7 . 6 1978 962 .59 1 7 2 . 4 5 1 7 . 9 1979 975 .42 1 8 4 . 9 5 1 9 . 0 1980 987 .05 1 9 1 . 4 0 1 9 . 4 1981 1 , 0 0 0 . 7 2 2 0 1 . 7 1 2 0 . 2 1982 1 , 0 1 5 . 4 1 2 1 5 . 5 4 2 0 . 8 1983 1 , 0 2 4 . 9 5 2 4 1 . 2 6 2 3 . 5 1984 1 , 0 3 4 . 7 5 3 3 0 . 0 6 3 1 . 9 1985 1 , 0 4 5 . 3 2 3 8 2 . 4 4 3 6 . 6 N o t e : I n t h i s t a b l e , u r b a n p o p u l a t i o n i n c l u d e s a l l p o p u l a t i o n l i v i n g w i t h i n a c i t y o r t o w n ' s b o u n d a r y . The s h a r p i n c r e a s e o f u r b a n p o p u l a t i o n i n 1984 was due t o t h e e s t a b l i s h m e n t o f a l a r g e number o f new c i t i e s and t o w n s . S o u r c e : S t a t e Bureau o f S t a t i s t i c s , C h i n a ' s S t a t i s t i c a l Y e a r b o o k , 1986, p . 9 1 . 45 4.1.2. Urbanization The process of urbanization in China was very slow from the late 1950s until the late 1970s.6 The proportion of the urban population to total population in the world rose from 28.2 percent in 1950 to 40 percent in 1980, increasing by an average of 0.39 percent annually (Zhou 1987, p. 16). During the same period, the proportion of China's urban population rose from 11.2 percent to 19.4 percent, an average increase of only 0.27 percent 7 (see Table 4). Of this urban population increase in China, about two-thirds is attributed to natural growth and only one third to the migration of rural population (Zhou 1987, p. 17). It was not until the early 1980s, after the Chinese government adopted an "open door policy" and introduced rural economic reforms, that China's urban population started to increase rapidly. This is mainly due to an increase in agricultural productivity and the concomitant migration of rural population to urban areas. In addition, as a result of the rapid development of the urban economy and culture, many existing cities and towns expanded and a large number of new ones were established. According to the data issued by the State Bureau of Statistics, urban population in China reached 382.4 million in 1985, accounting for 36.6 percent of the total population8 Although the percentage of urban population in China is still lower than the average percentage of urban population of the world as a whole, it is important to bear in mind that China has an extremely large population base amounting for about one-fifth of the total world population. Thus, the total urban 6 According to figures collected by Chan (1985, p.597), the urban population in China was 10.6 percent of the total population in 1949 and 19.8 percent in 1960. The urban population doubled in the first decade of the People's Republic of China. Since the late 1950s, the percentage of urban population had stayed relatively unchanged. By 1982, China's urban population amounted to 20.6 percent of the total. 7 Due to a lack of standardized method of calculating urban population before the 1980s, many scholars estimated a much lower percentage of urban population. For instance, Zhou (1987) believes that the proportion of China's urban population rose from 9.05 percent in 1950 to 13.65 percent in 1980, increasing by an annual average of 0.15 percent. 8 This figure is believed by some to be an over-estimate because the state's statistics include all people who reside within a boundary of a city as urban population (Chan 1985, pp.585-589). 46 population for which the Chinese government has tried to provide adequate housing is nearly fifteen times the total population of Canada in 1987. It is apparent that the tremendous growth of China's urban population has a significant influence on the urban housing sector. 4.1.3. National Wealth China's economy has expanded enormously since 1949. However, because New China had a rather poor foundation to start with and, in particular, because it has constantly experienced political campaigns and upheavals, the country is still characterized by some economically well developed areas coexisting with vast areas that are underdeveloped and impoverished. Its per capita GDP still ranks among the lowest in the world. By 1986, China's per capita G N P was US $300, which was slightly higher than India's ($290), considerably higher than bulk of the Third World countries', but only a fraction of the per capita GNP of the industrial market economies.9 China is still a developing country with very limited national wealth and resources. The state, following "socialist" development models (notably the USSR), has always given priority in national capital allocation to the industrial sectors, which is considered the major approach to the accumulation of national wealth. 4.2. Housing Policy and Housing Finance In 1979 the Chinese government sincerely started to commit itself to a serious attempt at resolving housing problems. Before examining what has happened to China's housing sector since 1979, it is essential to have a good understanding of housing policy, finance and the delivery systems which operated over the previous thirty years. 9 Data can be found in World Bank, World Development Report: 1988, New York: Oxford University Press, 1988, pp.222-223. 47 4.2.1. Housing as a Public Good and the State's Role When the People's Republic of China was established in 1949, the new Communist government immediately adopted the Soviet Union's housing system model. The fundamental principle of this model was that housing was considered a public good rather than a commodity. In theory, regardless of social status, personal contributions to society or income, every citizen was entitled to state built housing. The government believed that housing should be treated as a welfare provision in order to achieve the goal of housing egalitarianism, which implied equal access to state built housing. This housing goal is in line with the objective of establishing an egalitarian socialist country. The state has been responsible for construction, allocation, maintenance and management of all state owned housing. These functions were performed by various housing construction and management agencies. Figure 1 indicates relationships among those government agencies. The dash-lined arrows show a relationship of leadership and the solid-lined arrows a relationship of consultation. More than two-thirds of state owned housing is under the management of work units.1 0 Thus, in reality, the state's control over housing management is rather loose because different work units have different ways of managing housing. Moreover, because the state has emphasized the promotion of nationalized building enterprises, private construction of housing is severely restricted in urban areas. Refer to page 3 for a detail explanation of this term. Figure 1. Housing Management System in China The State Council M i n i s t r y of Construction Housing Bureau of the M i n i s t r y 1 Work Units Housing Management Departments P r o v i n c i a l £ Large Municipal* Governments 1 r . " i i P r o v i n c i a l & Large Municipal Construction Departments Municipal Housing Management Bureaus m X D i s t r i c t Housing Management Bureaus T Neighborhood Housing Management Groups This includes three large m u n i c i p a l i t i e s d i r e c t l y under the c e n t r a l government: B e i j i n g , Shanghai, and T i a n j i n . Source: Based on J . Wang, "Urban Housing Construction and Management"(in Chinese), 1987, p.154. 49 4.2.2. Housing Finance Sources of housing investment. Unlike most developed countries where household savings are the predominant source of funds for housing construction, urban housing development in China is financed primarily by the state as part of its capital construction budget. Figure 2 summarizes various sources of housing investment in China. On average, prior to 1980, annual housing funds allocated from the state capital construction budget amounted for 89.9 percent of all housing investment (Ke 1987, p.3). Housing -- a "non-productive" sector. Marxist and neo-Marxist theory does not provide explicit ideas on how the socialist economy and the housing sector are to be reconciled (Pugh 1986, p.88). Housing was not a primary investment priority in China prior to 1979. Housing expenditure was classified as unprofitable -- as consumption of national income and as a "non-productive" sector. In contrast, it was firmly believed that the advance of socialist industrialization was the most important task of economic planning. Thus, for a long period of time, only a very small percentage of national wealth was allocated to residential construction. Table 5 indicates that annual growth rates of state housing investment frequently fluctuated and from 1954 to 1978 the state had never invested more than 10 percent of its capital in housing. 50 Figure 2. Schematic Illustration of Sources of Housing Investment in China Central Government A l l o c a t i o n Regional & P r o v i n c i a l Governemnt A l l o c a t i o n Local Government Funds Departments D i r e c t l y Under Central Government State-owned Work Units State Budget Funds from Local Levels Renewal Funds from State-owned Work Units Funds from C o l l e c t i v e l y Owned Work Units Private Investment Bank Loan Foreign Investment Others Investment i n C a p i t a l Construction Other Investment Total Investment for Residential Construction Source: Based on J . Ke, "The General Housing Context i n China", 1987, p.3. 51 Table 5. State Housing Investment in China (1950-1982) Housing Annual Percentage Year investment growth rate of t o t a l c a p i t a l ( m i l l i o n yuan) (%) investment (%) 1950 125 n/a 11.0 1951 285 128.0 11.0 1952 448 57.2 10.3 1953 997 123.5 12.5 1954 884 -15.3 9.3 1955 616 -27.0 6.6 1956 1274 106.8 8.6 1957 1282 6.3 9.3 1958 810 -36.8 3.0 1959 1347 66.3 3.9 1960 1570 16.6 4.1 1961 743 -52.7 6.0 1962 396 -46.7 5.9 1963 728 83.8 7.7 1964 1116 53.3 8.0 1965 943 -15.5 5.5 1966 877 -7.0 4.4 1967 496 -43.4 3.8 1968 521 5.0 5.0 1969 1021 96.0 5.5 1970 762 -25.4 2.6 1971 1370 79.8 4.3 1972 1797 31.2 5.7 1973 1985 10.5 6.2 1974 2155 8.6 6.5 1975 2294 6.5 5.9 1976 2181 -4.9 6.1 1977 2506 14.9 6.9 1978 3754 49.8 7.8 1979 7379 96.6 14.8 1980 11950 61.9 20.0 1981 13300 11.3 n/a Source: J . Ke, "The General Housing Context i n China", 1987, p.4. According to a rough estimate made by Zhiqun Lin (1986b, p.43), Director of the Housing Bureau in China, the state's capital construction investment in housing projects in the years 1950 to 1978 was almost 37 billion yuan, which represent only 0.7 percent of the country's GDP during the same period. As a result of this low investment in housing, urban living conditions in the late 1970s had fallen to a level below those of the early years of the People's Republic. 52 4.3. Housing Delivery System 4.3.1. Housing Redistribution at the Initial Stage of Socialism With the establishment of the People's Republic of China in 1949, housing problems in the cities were desperate. The housing stock was depleted by the devastation of the Anti-Japanese War (1938-45) and the Civil War (1945-49). Housing poverty was very extensive in cities. For example, in Shanghai, a large number of slum areas were scattered all over the city. As described by Pugh: Rent burdens were high relative to income; typically over 24 people would live together in small houses, with four families per house; the houses would be partitioned into small cubicle spaces; and such diseases as typhus, cholera and tuberculosis afflicted the population. Opium dens and beggars added to the dismal urban social environment (1986, p.91). On the other hand, there were the bourgeoisie and the better-off social groups enjoying their vast and luxurious villas. Thus, in order to eliminate the social injustices inherited from the old society and to alleviate the urgency of the housing problem, the Communist government confiscated houses of those defined as the exploiting classes and transferred the majority of privately-owned urban housing into public ownership.1 1 Controls were introduced on private rental housing, with a requirement for registration of property. Former landlords and owners of private housing were allowed to maintain a certain amount of living space for their own use based on the size of the family, which was usually less than 100 square meters (Laurence 1981). By doing so, the government was then able to redistribute all surplus houses among the needy social groups. The recipients were required to pay only a negligible amount in rent. This low rent approach ensured that all social groups were able to afford houses. 1 1 The amount of housing transferred varied from one city to another. For Guangzhou, see Guangzhou Nianjian BianZhuan Weiyuan Hui (compiler), Guangzhou Nianjian 1987 (Guangzhou Yearbook: 1987), Guangzhou: Guangzhou Wenhua Chuban She, 1987. 53 The process of housing redistribution was a significant success. The urban slum areas were cleared. Public health and living standards among the poor were dramatically improved. Moreover, through this process, the basic framework of the housing system in Socialist China was established. 4.3.2. The State's Dominant Role in Housing Distribution The process of housing redistribution led to the establishment of the state's dominant role in housing distribution. Administratively, each city set up a Bureau of Housing Administration to manage housing and to develop new public housing. In terms of housing investment, the central government determined the proportion of national capital to be allocated to the housing sector. Moreover, housing allocation and rent levels were controlled solely by the state. As such, the state assumed general responsibility for meeting housing needs of all urban citizens. 4.3.3. Housing Tenure Housing tenure and management can be categorized into three major types: housing owned and managed by work units, including state-owned work units and collectively-owned work units; municipally-owned housing under the management of municipal housing bureaus; and private housing. The vast majority of the housing stock is owned and managed by the state-owned work units. This type of housing is supported entirely by the government and housing investment comes directly from the government's planning department. Eighty three percent of the state's housing investment goes to this sector (Carlson 1986, p.24), which became the major thrust of new housing development; whereas the collectively-owned work units receive much less funding for housing construction from the government. Consequently, urban residents who work in state-owned work units obtain substantially more subsidies for housing from, the state than those who work in 54 collectively-owned work units. Municipally-owned housing mainly serves the needs of the relatively few senior citizens who have never had a job and of those working in the private economic sector. These individuals must apply to the municipal housing bureau for accommodation. Enterprises and other work units, which usually are of relatively small scale and unable to build their own housing, also refer their employees to the municipal housing bureau. This type of municipally-run housing still plays an important role in housing supply. The third type of housing, private housing, is difficult to assess. Different cities have different proportions of private housing within their total housing stock. Generally, private housing constitutes only a small percentage of the total housing stock. For instance, in the city of Xian, 10 percent of the overall housing belongs to the private sector (Hall 1988, p. 124). 4.3.4. Rental System Low official rents and high state subsidies has been the primary approach to the provision and maintenance of housing in urban areas in China. This model used to be a showpiece of socialist countries. Rents have been maintained artificially low since 1949. This was established in accordance with China's low wage and low-price systems, which are believed to have played a positive role in ensuring everyone the basic necessities of life (Ye 1988, p.33). Levels of rents vary from one city to another; but they seldom amount to more than 10 percent of a family's monthly income. A 1980 survey of Wuhan city reveals that an average household paid only 2.3 percent of monthly income for its housing (Carlson 1986). In the city of Tianjin, total rents per month average from 6 to 10 percent of family monthly income (Friedman 1983). According to a survey of 15 cities in 1982, the average rental payment per month was 0.10 yuan (3 cents(US)) per square meter for public housing. Some enterprises charged only 0.04 yuan per square meter per month for their 55 employee's houses, which was too low to be of any significance (Zhang 1986, p. 11). As one popular Chinese saying goes: "Monthly rents equal only the cost of a packet of cigarettes" (yi yue fang zu, yi bao yan qian). Returns from rental payment are not enough to cover maintenance costs not to mention depreciation, management and construction costs. Therefore, all public owned housing are highly subsidized by the state or work units. But most housing offices find it difficult to obtain sufficient funds to keep up the existing housing stock. 4.4. Urban Housing Problems and Their Social Impact Despite the adoption of such a radical socialist housing policy in China, some previous urban housing problems persisted. In addition, there have been some new housing problems, and their accompaning social impact. 4.4.1. Urban Housing Problems Various surveys conducted recently in different circumstances in China indicate that the problem of greatest concern to people was housing. A vast majority of respondents to these surveys said they would tackle housing problems before anything else if they were "in the shoes of mayors". Quoted by People's Daily on March 8, one city dweller said "Trying to find an apartment to rent is harder than finding a spouse". It is not surprising that housing is seen as a major problem by the majority of urban inhabitants. Five aspects of China's urban housing problem are summarized as follows. Shortage. The first national building survey of 39.77 million urban households containing more than 150 million urban residents was completed in 1986. This survey revealed that 10.54 million households out of the total households surveyed were identified as having a lack of essential living space. This group represents 26.5 56 percent of the total households surveyed and includes households who are homeless, sharing or lacking basic amenities and overcrowded (Urban and Rural Construction 1987, p.24). Overcrowding is extensive in most cities. But the severity of the housing shortage varies among different cities. Usually, the larger the size of a city the more severe the housing shortage. For example, in Shanghai, the largest city, the average living space is less than two square meters per person (Sun, Jinlou 1984, p.79). It is not uncommon to find that unmarried teenagers (16 years old or over) and their parents are not always able to have separate bedrooms. Figure 3 contains a cartoon which depicts a family of four living in one room as large as a king-sized bed. Another common urban phenomenon is that thousands of couples are waiting for a room before they get married. Figure 4 satirizes the housing shortage problems facing these unlucky young couples. Figure 3 . Urban Housing Situation in China (I) Cartoon II. A family of four lives in one room as large as a king-sized bed. Source: Y. Sun, China Daily, September 22, 1986. 58 Figure 4. Urban Housing Situation in China (II) Cxi*-* T/vi-Y . [ul-jxvf . S.-f>r."J. i"('«t Cartoon I. Groom: "Welcome to my soon-to-be wed's house: my fridge, washing machine, color TV...." Source: F. Wang, China Daily, September 2, 1986. Table 6 indicates that per capita living space decreased in the first 30 years of socialism in China, with the lowest point occurring in 1979. This decrease is attributable to many factors such as the reduction in state housing investment, the rapid population growth and increasing urbanization. Table 6. Changes of Per Capita Living Space in China's Cities (square meters) Year Beijing Average for 192 c i t i e s 1949 4.29 4.5 ' 1956 3.02 n/a 1979 2.81 3.6 Source: C. Pugh, "Housing Policy and Theory" in International Journal of Social Economics, Vol. 13, No. 4/5, 1986. 59 Deterioration. A great deal of the existing housing stock in cities is very old and in urgent need of repair. Even worse, some dwellings are structurally unsound and in danger of collapse. However, most housing offices have neither the incentive nor the financial ability to carry out repairs and maintenance. As a result, the rate of housing dilapidation is accelerating. In 1977 5.33 million square meters of housing was in disrepair, while in 1980 it increased to 8 million square meters, and in 1982 to 13.11 million square meters. Though a lot of these units have been demolished, half of the urban housing stock remains in a poor state of repair (Zhang 1986, p. 11). In Beijing, for example, about 18 percent of the housing stock is rated as dilapidated. In Shanghai, about 10 percent of the living space is registered as being slum-like and a further 10 percent as dilapidated (Taubmann 1985). House collapse happens very often. During 1980-1982, 134 houses collapsed in Chongqing resulting in 30 casualties (Zhang 1986, p. 11). Substandard housing. There are still many residents living in houses with no running water and sewage. It is common to find two or three families sharing one kitchen and bathroom. Table 7 shows that a large percentage of urban households still either share kitchens, washroom and running water outlets or live in houses or apartments without these basic facilities. Table 7. Survey on Housing Facilities in China's Cities (1986) (percentage of the tota l households surveyed) F a c i l i t i e s Self-contained Shared D e f i c i e n t Kitchen 63 6.5 30.5 Washroom 24 10 66 Running Water 57 16 27 E l e c t r i c i t y 96 4 Source: Based on "A Br i e f Report on the F i r s t National B u i l d i n g Survey" i n Urban and Rural Construction ( i n Chinese), 1987, No. 1, B e i j i n g , p.24. 60 According to personal observation, in Shanghai, many residents still live in garrets and attics. In Beijing, many patios of traditional courtyard houses are crowded with self-built, low quality and structurally unsound shanties. Figure 5 shows a typical traditional courtyard house in Beijing, which is full of amenities for living. To date, however, much of this type of housing has become very unpleasant and unsanitary (see Figure 6). Figure 5. A Traditional Courtyard Housing in Beijing Source: D. L i u , History of Architecture i n Antient China, 1980, p.316. 61 Figure 6. A New Appearance of Courtyard Housing in Beijing Source: Q. Xia, People's Daily, May 8, 1987, p.2. Visual Monotony. Many urban residents, including urban planning and architectural professionals, complain of the visual monotony of newly built apartments. A vast majority of recently built houses follow the same pattern, without any endemic characteristics and distinguishable features. A common urban landscape is one of row after row of identical five or six storey walk-up apartments rigidly lined up in neighborhoods. Children sometimes get lost because they cannot identify their homes. The problem of visual monotony is mainly due to the state's monopoly over the housing construction processes. The creativity of Chinese architects is largely constrained by monopolized building material and construction companies as well as insufficient housing investment. Although the problem is acknowledged, little has been done to change the situation because other housing problems appear to be much more pressing. 62 Interior layouts of apartments are usually standardized and very rigid due to the standardized sizes of building materials. Housing generally display no flexibility for residents' own design input and lacks adaptability to changing life styles. Overloaded and outworn infrastructure. Urban infrastructure has not kept pace with housing development since 1949. It was totally neglected during the Cultural Revolution (1966-76). As a result, the infrastructure in already built urban areas is either overloaded or outworn. Power failures and water cutoffs are regular occurrences. Ironically, many houses cannot be occupied after completion because necessary services are not available and because infrastructure construction is often delayed. 4.4.2. Social Impact of the Housing Problems Unequal housing distribution. Although statistics indicate that the average living space per urban resident has increased significantly since 1979, the percentage of households suffering from housing distress shows no sign of decline. This signifies growing disparities in housing supply. In theory, every citizen has a right to a state built house. However, in reality, many citizens have not been properly taken care of by the state. For example, housing problems tend to be increasingly serious for those who are self-employed, or who are not attached to any specific work units. Another example is that workers in state-owned work units always get greater housing funds from the state than those in collectively-owned work units regardless of their real needs. Inequality is also manifest in the implementation of the housing subsidization policy. The more living space a family occupies the more housing subsidies it gets from the state (Cheng, Zengze 1985, p. 32). Since most families who enjoy better housing are those with higher incomes such as cadres and managers, the effect of state housing subsidies actually widens income disparities. 63 Corruption in housing distribution. The state has invested a lot in housing construction over the past three decades and more. But under the current system, some people abuse their positions and power to demand several apartments, while ordinary people frequently live in overcrowded conditions (Beijing Review 1988, p.8). Because housing is so scarce and because it is allocated administratively, housing administration has become notorious for breeding nepotism and corruption. One Chinese contemporary saying goes: "Sons rely on their father's official positions for their houses" {erzi zhu fang yao kao laozi). Many cadres not only occupy comfortable and large houses but they also use their power to help their children gain access to better housing. This is why there is such a strange urban phenomenon: on the one hand, there are thousands of citizens on waiting lists for a house or apartment; on the other hand, many completed apartments remain unoccupied. One investigation conducted in Tianjin in 1986 revealed that 70 thousand habitable rooms were unoccupied (Liu, Xinxin 1987). More shocking, it was found that some registered household heads were still infants. Relatives and friends of many cadres can likely obtain houses sooner by taking a "back door" approach (bribery or other illegal means). Citizen's resentment. Many surveys indicate that a large number of urban residents have been dissatisfied with government housing policies and with housing conditions. Sources of the dissatisfaction include not only shortages and general living conditions but also unequal opportunities to access state built houses and nepotism in housing distribution. Stronger yet, most urban commoners resent the fact that some Communist cadres live in much larger and more comfortable houses provided by the state and pay very little rent (Hu 1988). In theory, Communist cadres should always consider the public interest first and should never take advantage of their positions to enjoy more than the masses. Unfortunately, the theory does not measure up to the practice. Moreover, because of unfairness in housing distribution, hostility results among the people involved such as fighting and quarreling with each other, committing suicide and bringing matters to civil courts (Liu, Xinxin 1987). Sometimes, employees' 64 dissatisfaction with housing distribution even engenders sabotage of business and industrial production processes. In recent years, the resentment of citizens about housing has attracted increasingly greater concern throughout Chinese society.1 2 4.5. New Housing Goal and Housing Policy Questions The Chinese government has established an ambitious housing goal to double the current average 4 square meters per capita living space to 8 square meters by the year of 2000. This means that each family will have one complete dwelling unit of its own, containing a kitchen and a toilet and meeting most of the basic physical requirements of its daily life (Zhang 1986, p.6). Many experts and scholars believe that this goal can be achieved. However, it is no easy task. Although the necessity for more and better housing for all citizens is clearly recognized by the government, it is unreasonable to expect that the state will invest an even greater amount of its scarce financial resources in the urban housing construction and rehabilitation sector when resources are badly needed to achieve the proclaimed goals of the "Four Modernizations", namely industry, agriculture, national defense, and science and technology. In order to accomplish the ambitious housing goal, in view of the limited state financial resources available for housing development and the severity of the current housing situation, it is essential that the existing housing policies, housing delivery, financing, management and construction systems be reformed. This notion is commonly agreed upon. However, in terms of the specific housing policy changes and reform approaches, controversies inevitably occur. The following chapter examines the origins of China's urban housing problems, the rationale for housing policy reform, the recent introduction of the new housing policies and the obstacles being experienced in implementation of the new policy. 1 2 Popular resentment to the administration of urban housing is new. In "My Neighborhood" in Mao's People, Frolic (1980) describes vividly a case about various problems associated with the urban housing administration in Shanghai during the Cultural Revolution. 65 CHAPTER 5. URBAN HOUSING POLICY RE-EVALUATION AND HOUSING COMMERCIALIZATION IN CHINA At the third Plenary Session of the 11th Communist Party Central Committee in December 1978 - two years after the official end of the Cultural Revolution -- new key tasks for the government were established: the modernization of the economy, the reform of rural and urban economic structures, and the opening of China's door to the outside world. During the thirty years before 1978, especially after 1966, "class struggle" was identified as the primary task of the government and both the government and the masses were constantly engaged in seemingly endless political campaigns and political and social upheavals. Since the re-orientation of the government's policies, especially the implementation of rural and urban economic reforms, China has experienced dramatic economic growth and a marked rise in the standard of living. In terms of residential construction in urban areas, the state has allocated an increasing amount of national capital every year to improving the living conditions of urban residents. However, the state's increasing efforts in residential construction have not resulted in any significant relief of the pressing housing shortages and of the dissatisfaction of many urban residents. This situation inevitably stimulated a debate on the government's housing policies in the mid-1980s. In the meantime, the government started to adjust its housing policies and introduce experimental programs of housing commercialization in a few selected cities. This chapter first assesses the impact of the economic reforms on the urban housing sector, then examines various aspects of the previous housing policies and finally discusses recent housing policy changes. 66 5.1. Impact of Economic Reforms Both the rural and urban economic reforms, beginning in 1979 and 1984 respectively, have had a significant impact on the urban housing sector. A result of the rural economic reforms was that a large amount of surplus labor began to migrate into China's urban areas. This exerted further pressure on the already desperate urban housing situation. In addition to this, and as a result of the economic reforms, several very significant changes occurred which eventually led to the re-evaluation of government urban housing policies. 5.1.1. General Increase of Living Standard Since 1979, the per capita income has increased and living standards have risen. The amount that urban residents spent on living expenses increased from 494.5 yuan per capita in 1982 to 916 yuan in 1987, with an average annual growth of 6.3 percent after adjustment for inflation (Li, Peng 1988, p.23). In urban China in the late 1980s, as a consequence of the overall economic growth, the majority of citizens can now satisfy their needs in terms of food and clothing. Besides the expenditure on these two basic needs, many families are now able to afford luxury goods, such as color television sets, washing machines and refrigerators. In addition, the urban citizens' savings have increased significantly. The housing situation for some of urban residents has been greatly improved because a considerable number of state subsidized housing units were completed in the past nine years. However, because the demand for adequate shelter in urban areas continues to exceed supply, the majority of the urban population, even though some have become rich enough to devote a large proportion of their income to housing consumption, have not seen any significant improvement in their housing conditions. 67 5.1.2. Housing Problems Placed at the Top of the Government Agenda Urban housing problems have attracted renewed attention as the government is making a greater effort to achieve a general improvement in the living standard of the population. On a number of occasions, top government leaders have stressed publicly the importance of improving housing conditions. For example, in March 1980, Deng Xiaoping, the de facto leader of China, stated: We must tackle the question of urban housing provisions. This would involve a series of policies in relation to housing allocation. I mean the urban residents can buy or even to build their own houses (Zhang, Xiaqiu 1986, p.9). In 1981, in his "Report on the Work of Government" delivered at the Fourth Session of the Fifth National People's Congress, Zhao Ziyang, the then Premier of the State Council (China's highest governing body), pointed out that the housing problem was the major issue affecting people's quality of life in cities and that improvement in the housing situation as soon as possible was a key task of every level of government. It is clear that the Chinese government is determined to solve the housing problem. The government believes that this is in the public interest and, to use an expression common in China: "it accords with the will of the people and the general trend of events" (ren xin suo xiang, da shi suo qu). The government's commitment to helping all people gain sufficient and better housing is a crucial factor in the development of the urban housing sector in China. More important, it is widely noted that the government will continue to strive to solve the housing problem. This is clearly reflected in the "Report on the Work of the Government" delivered by Li Peng, Premier of the State Council, at the Fifth Session of the Seventh National People's Congress in 1988. He stated that one of the ten major tasks of the State Council over the next five years will be the following: On the basis of increased production, raise the incomes of urban and rural people and improve their material and cultural life. The starting point and the end of result of socialist construction are the satisfaction of the material and cultural needs of the people. Government at all levels will, as always, work energetically to raise the people's living standards (1988, p.42). 68 5.1.3. Housing Achievement Since 1979 A major element of China's housing policy since 1979 has been residential construction. The state built 1.005 billion square meters of housing from 1979 to 1986. This figure represents 65.39 percent of the total new urban housing built since 1949 (Ye 1988, p.34). Table 8 demonstrates a dramatic increase in the state's total housing investment and in annual house construction since 1979. Table 8. Urban Housing Construction in China (1979-1985) Year Investment ( m i l l i o n yuans) Floor Space ( m i l l i o n square meters) Change of per cap i t a f l o o r space (square meters) Number of apartments (m i l l i o n ) 1979 7730 62.56 3.7 1.25 1980 12370 82.30 3.9 1.83 1981 13500 79.04 4.12 1.88 1982 17910 90.20 4.4 2.36 1983 18600 81.25 n/a n/a 1985 21530 88.13 6.1 n/a Source: Based on G. Brent H a l l and J . Zhang, " C i t y P r o f i l e : Xian", p.122. The rapid increase in housing investment in recent years can also be seen in its increased proportional share of China's GDP. In 1979, capital construction investment in housing was 2.04 percent of the annual G DP 1 3; in 1980, it rose to 2.68 percent; in 1981 it was 2.50 percent; in 1982, 2.94 percent; in 1983, 2.43 percent; and in 1984, 2.10 percent1 4 (Lin 1986b, p.45). These statistics indicate that the government has committed increased resources to residential construction. However, because the increase in capital investment in residential construction means a decrease in the amount of capital investment in other sectors, such as industry, many analysts suspect 1 3 This figure was calculated based on the assumption that the GDP was 1.13 times the Gross National Income; same for all subsequent years. 1 "This figure has been adjusted because in that year there was an officially announced GNP figure. 69 that such a high level of capital investment in housing will be difficult to sustain (Lin 1986, p.45). It is argued that the national capacity for construction is still limited and too rapid an increase in housing investment will not result in a balanced development of the national economy. 5.1.4. Housing Goals vs. Housing Problems The Chinese government has established an ambitious housing goal to double the current average of 4 square meters per capita living space to 8 square meters by the year of 2000. A rough estimate shows that in order to achieve this goal, in the thirteen years from 1988 to 2000, more than 400 billion yuan is needed to construct new houses. If the investment in support items,1 5 such as service facilities and public utilities, is included, the total investment required is about 600 billion yuan (Ma 1987). If the cost of maintenance and repair is taken into account, the amount of the total housing finance needed would be much larger. Based on the state's ability to invest in the housing sector in the past, it will be very difficult for the state to provide this level of funding in the next decade. Those citizens who were able to obtain state subsidized housing in the last few years have had their living conditions greatly improved. But, in general, it appears that the state's increasing effort in residential construction has not made any significant improvement in the urban housing situation. Under existing housing conditions, it has been discovered that some people abuse their position and power to demand several apartments, while the majority of ordinary people still live in over-crowded conditions. Factors such as these contribute to the fact that urban housing problems are becoming more acute and that housing distribution has become a severe social problem. Consequently, it is important to examine in depth the origins of urban housing problems 1 5 In a planned development of a residential district or housing estate in China, all the structures except the main ones, e.g., the apartment buildings, are referred to as support items, including the service facilities and public utilities (Lin 1987, p.274). 70 and the need to make housing policy changes. 5.2. Housing Policy Re-evaluation 5.2.1. The Origins of Housing Problems Today's urban housing problems in China originate from various interrelated factors. Taubmann has summed up the reasons for the present housing problem. His summary finds general agreement in Chinese literature. Those regarded as most important [reasons] are: the appalling situation at the time when the People's Republic was established, the rapid population growth in the cities, a long period of accumulation favoring one-sidedly the productive and, above all, the heavy industrial sector, up to 1960 the erection of too numerous and too costly public prestige buildings, year-long disregard of building maintenance, lack of building material, inefficient and therefore uneconomic organization and working methods in construction administration and building industry (1985, p. 184). Two other elements also contribute to the problem. One is that the children of the 1960s baby-boom generation have reached marriageable age, rapidly increasing the number of married couples in recent years. This trend is expected to continue into the next decade. Another factor is the rapid migration of rural population to urban areas due to the impact of rural economic reforms and the concomitant increase in agricultural productivity. More important, it has been widely argued that the policy of low rents and high subsidies is inappropriate in a developing socialist economy. There is much evidence suggesting that this policy is a direct cause of China's urban housing problems. First, because rents are kept extremely low, rental return is not sufficient to cover routine maintenance costs, let alone the costs associated with administration, depreciation and construction. As a result, necessary repairs are frequently deferred and, therefore, rapid deterioration occurs. Second, since there is little return on the state's housing investment, the more state subsidized houses are built the heavier the financial burden 71 the state has to bear in order to maintain the existing housing stock. Due to the rapid increase of costs of building materials, it has become more difficult for the state to allocate funds to maintain the housing stock. Third, the policy of low rents creates a hotbed of inequalities and nepotism in housing allocation. It costs very little for a family to occupy a large house. Better yet, the more living space a family occupies the more subsidies it receives from the state (the state assumes that a family living in a larger house is a large family usually with a lower average income per family member). In view of all these benefits that accrue to the occupacy of a large house, many take advantage of their power and positions to obtain more housing space for themselves or to practice favoritism in housing allocation. 5.2.2. Housing as a Commodity Housing has long been viewed as a welfare good rather than a commodity in China. Little thought was given to justify this perception. It was simply taken for granted that the concept of housing as a commodity was fundamental only to capitalist societies, and that in a socialist society, the government should take care of everything, including housing. A serious debate on whether housing in the socialist economy is a commodity was not initiated until recently when the Party adjusted its basic line to concentrate on economic development. Zhao Ziyang, the general secretary of the Communist Party, states, "The theme of the economic reform is to develop a socialist commodity economy" (1987, p. 18). China has begun to change from a completely planned economy to a planned commodity economy. While it is beyond the scope of this paper to explore the reasons behind this switch, it is important to note that this debate over the nature of housing is clearly in line with the government's economic policy changes. The debate over the nature of housing in the socialist economy can be categorized into two major schools: "single commodity attribute" and "dual attributes". 72 The former maintains that housing be considered purely as a commodity. Yet, the latter holds that housing should be considered as a commodity as well as a welfare good. While both schools agree that housing has a commodity attribute, they argue whether housing also has a welfare attribute. The concept of housing as a commodity is shaped by the nature of the socialist economy. In general, the socialist economy is a planned commodity economy based on public ownership of the means of production playing a primary role in economic activities. In other words, although public ownership is a major component of the socialist economy, private and semi-private ownership of the means of production are important supplements to the socialist economy. In addition to nationally planned production, commodity production and market exchange still exist. Under these circumstances, it is believed that, like' other commodities, housing should also be considered a commodity because housing has both value (i.e., it involves labor input) and use value (i.e., it is useful to occupants). In short, it is argued that because there exists commodity production in the socialist economy, the consumption of housing should be subject to the law of value and to the mechanism of buying and selling (Wang, Yuqing 1986, p. 14). Advocates of "single commodity attribute" go further, arguing that: There is no essential difference between the socio-economic attribute of housing and that of other commodities. If we say that commodity under socialist conditions is no longer a commodity in the original sense, then this should also hold true not only for housing but also for all the other commodities. Housing is not an exception (Wang, Yuqing 1986, p. 15). Moreover, it is argued that the history of housing development in China has proven that the government is incapable of assuming exclusive responsibility for the provision of housing as a public good. Thus, it is asserted that housing should be viewed only as a commodity in socialist China. Those who maintain "dual attributes" hold that because commodity economy co-exists with production economy in a socialist economy, the commodity attribute of 73 housing co-exist with the commodity economy and its welfare attribute co-exist with the production economy (Wang, Yuqing 1986, p. 14). This view does not accept the notion of totally neglecting the welfare attribute of housing simply because many drawbacks have been associated with the sole emphasis on the welfare attribute in the past thirty-odd years. It is further argued that: the nature of distribution of national income determines the welfare attribute of housing. Under the socialist system, laborers are not paid with all the value they have created. Our country practises a low-wage system, and therefore the share each laborer gets from the society basically does not include the payment for house rent which has a pure commodity attribute. If our workers and staff members were asked to pay for housing expenses according to the value of commodity, their wages would hardly be enough to maintain the simple reproduction of the labor force, and they would find themselves homeless for their failure to pay housing expenses (Wang, Yuqing 1986, p.15). In addition, the advocates of "dual attributes" maintain that housing is a special commodity different from other commodities. Housing is a kind of consumer good with an extremely high value and at the. same time it is a basic means of subsistence. Therefore, the socialist state should employ appropriate national economic policies to ensure that every worker has a house. Although the controversy over the housing attributes has not been resolved, both schools recognize that housing has a commodity attribute in a socialist economy. Also, it is commonly recognized that housing as a commodity in a socialist economy is different from that in the capitalist economy: housing production, marketing, management and maintenance in the socialist economy are under the guidance of the plans of the national economy. Based on these agreements in the discussions, the government decided to reform its housing policy accordingly. 74 5.2.3. Is Housing a "Non-productive" Sector? The housing sector had always been viewed as a "non-productive" sector in socialist China. It can be argued that this notion is untenable. Although it is not the purpose of this research to analyze in depth why the housing sector should not be viewed as "non-productive" sector and as a mere consumption of national income, it is worthwhile to point out some of the apparent aspects which indicate that housing can enhance economic growth, not reduce it. First, it is obvious that housing conditions can affect individuals' job opportunities, performance at work, and even their children's education. Good housing will help nurture more qualified and productive labor for a society and hence contribute to its socio-economic development. Second, an increase in housing investment will promote the development of the building industry and create more employment. In this sense, it is erroneous to perceive housing investment as "returnless expenditure". Third, housing provides a physical space in which households and individuals consume various domestic products such as TV sets, refrigerators and washing machines etc. Thus, adequate housing will permit and encourage consumption of various consumer goods that will contribute to general economic development. In order to provide better quality housing to all citizens and to advance the socialist economy, it is therefore important to give more economic significance to housing as a potentially productive sector. 5.3. Rationale for Housing Policy Changes and Housing Commercialization 5.3.1. Rationale for Housing Policy Changes The housing policy re-evaluation in the previous section has already indicated the importance and necessity for housing policy changes in China. The following summarizes some of the key factors which have led to the government's decision to reform housing policies and to introduce housing commercialization programs. 75 Tenacious housing problems. The scale and severity of the urban housing problem as well as its accompanying social impact has become so serious that it has hindered further social and economic development and has attracted a great deal of concern in the country. Under the guidance of the previous housing policy, the government, since 1979, has made a consistently greater effort to mitigate the urban housing problem. However, the effort did not seem to result in any significant improvement of housing conditions. Consequently, a re-orientation of housing policy became crucial. Demographic changes and urbanization. Although the implementation of the birth control policy has been very successful in China, the momentum of population increase will continue at least until the end of this century. In addition, it is generally agreed that the process of urbanization will accelerate as the country energetically continues its economic reforms. The pressure created by these two trends on the already problematic housing sector has inevitably brought previous housing policies into question. Insufficient resources. Residential construction requires such a considerable amount of input of resources that the state has experienced difficulty in increasing national investment in the construction of heavily subsidized public housing. China is still a poor country with limited resources. To promote industrialization is certainly no less important than to improve housing conditions. Even though increased economic resources have been allocated to residential construction in recent national economic planning, it is still important to maintain a balance between the expansion of production and construction and the rise in the people's standard of living. Therefore, in addition to the state's continued allocation of a reasonable and significant proportion of national capital to residential construction, to improve urban housing conditions, other possible sources of finance have to be sought. 76 Possible alternatives. In view of the limited financial resources available for housing development, promoting a more efficient use of national housing investment is obviously one of the most logical ways to accomplish China's ambitious housing goal. Clearly, this could be only fulfilled by reforming the existing housing financing, management and construction systems. To reform the housing system which has prevailed for nearly fourty years is rather complicated and will take a long time to accomplish. In view of the significant increase of living standards of Chinese in recent years, one possibility is to tap individuals' savings in order to speed up residential construction. This proposition would have been unthinkable when housing was viewed as a pure welfare good. But since the notion of housing having a commodity attribute in the socialist economy has become more widely accepted, the proposal to encourage individual financial participation in residential construction seems justifiable in theory. However, two practical questions arise: what proportion of the urban population possesses enough savings to participate in residential construction and what percentage of their income can this group of the population effectively contribute? It was decided that the best way to address these questions is to experiment with the idea. In 1982, an experimental housing commercialization program based on the principle of encouraging individuals' financial participation in residential construction was introduced in four selected medium-sized cities: Changzhou, Zhengzhou, Shashi and Siping. Before examining this program in detail, it is necessary to clarify what "housing commercialization" means in China. 5.3.2. What is Housing Commercialization ? "Housing commercialization" is a term used to reflect the state's housing policy changes in China. It has the following meanings. , First, it suggests that housing be no longer viewed as a pure public good. Instead, it is considered to have both 7 7 commodity and welfare attributes. That is to say, housing is considered a marketable commodity. Selling and buying houses under state price control is permitted. At the same time, housing being a welfare good implies that the state will continue to help all citizens obtain adequate and better quality housing by means of various subsidization programs. Second, the major purposes of introducing the concept of housing commercialization are: (1) to change the traditional notion that the socialist government should be responsible for the provision of all urban citizens' housing; (2) to mobilize all work units and all levels of government to develop housing; and (3) to encourage a gradual increase in individual financial participation. Through implementing the policy of housing commercialization, it is believed that considerably more financial resources will be allocated to the housing sector (Zhang, Xianqiu 1986). Third, although "housing commercialization" means an increased role for the market mechanism in the socialist housing economy, there are fundamental differences compared to how the market works in capitalist economies. One difference is that the function of the market approach in China is based on the public ownership of the means of production, which means that the state controls various production resources. Another difference is that production and exchange of housing in China is still guided by the state's overall economic plans. As such, the state has effective control over the market mechanism. A further difference is found in the objective of adopting the market mechanism. In China, the introduction of the market approach is intended to eliminate those weaknesses associated with the administrative mechanism so that the country can resolve its urban housing problems and provide better quality housing for all citizens in the shortest period of time. In contrast, the market mechanism in capitalist countries is characterized by the objective of obtaining maximum profits. 78 5.3.3. Advantages of Housing Commercialization It is envisaged that the promotion of housing commercialization will benefit housing development in the following ways. First, as a result of the implementation of the commercialization policy, there will be more funds available for residential construction. Resources available for housing development will now include the state's allocation of national capital, more funds from various work units and reasonable proportions of individual households' income and savings. Second, it will alter the way in which housing construction funds circulate so that the state's investment can be recovered to a certain extent. This will then enable the state to maintain the existing housing stock properly and to carry out necessary repairs promptly. Eventually, the state intends to terminate the vicious cycle that the more housing the state builds the heavier the financial burden it shoulders. Thus, "the urban housing sector could become financially more healthy and self-sustaining and less of a burden on the state's investment resources" (Carlson 1986, p.25). Third, the implementation of the commercialization policy will help change the composition of families' consumption so that excessive demand for other commodities can be reduced. Many families have accumulated considerable savings. This has resulted in a high demand for more domestic consumer items than the economy can currently supply. To direct some proportion of a household's savings and income into residential construction will change household spending patterns. Fourth, it will promote a sense of home ownership and an incentive to maintain dwellings. Consequently, housing units may last longer. Under the present housing system, because most of the urban housing stock is owned and operated by the state, many dwellers do not take good care of their houses • and some even abuse their dwellings. Thus, houses dilapidate at a higher rate. 79 Fifth, to some extent, housing commercialization will associate a family's housing standards with its financial capacity. As such, unreasonable housing demand may be stopped and corruption and nepotism in housing distribution prevented. Above all, because of the increased level of financial resources, a higher rate of housing production can be achieved. More better quality housing can be constructed and more housing choices created. Eventually, living conditions of all urban citizens' can be improved significantly. 5.4. The Housing Commercialization Pilot Program In 1982 the central government decided to carry out an experimental housing commercialization program in four cities. The major purpose was to gain experience by trial and error so that better programs could subsequently be formulated for other cities across the country. This initial experiment with housing commercialization was later extended to eighty cities including Beijing, Shanghai and Tianjin (Zhang 1986, p. 10). However, only a small percentage of the state built houses have been authorized for sale while the vast majority are still allocated through the administrative approach. The implementation of the policy of housing commercialization has proceeded cautiously. By the early 1988, the State Council decided to launch a nation-wide housing reform and carry out housing commercialization programs in more cities. 5.4.1. The Subsidized Housing for Sale Program The housing commercialization program implemented in the four cities consists of two major facets: one is a highly subsidized housing for sale program; another is reform of the rental system. Subsidized housing for sale. Few people can afford to buy housing sold at actual cost due to the low level of incomes. Therefore, the subsidized housing for sale 80 program, with slight variations among the four cities, was introduced. Typically, a prospective buyer pays one-third of the total cost of construction with the local authority and the buyer's work unit equally sharing the remainder. In this way, although only one-third of the initial investment was recovered for reinvestment in more residential construction, the state perceived a great potential in the subsidized housing for sale program. Given the continuing rise in living standards, it could be reasonably expected that the buyers' payment will be gradually increased. The price of houses built for sale ranged from 300 to 1000 yuan per square meter in the subsidized housing for sale program (Su 1988). Assuming a rate of 600 yuan per square meter, an apartment of 50 square meters floor space would cost 30,000 yuan. A buyer who paid one-third of this cost would require 10,000 yuan. This subsidized price still seemed to be beyond the purchasing power of the average urban residents whose annual income ranged from 700 to 1,000 yuan (Kim 1987, p. 223). Originally, there was some concern that all the housing units built for sale would not be sold because the huge gap between the cost and wages in spite of the significant subsidies. However, when the experiment was announced, there was an active response from would-be buyers, who far exceeded the number of housing units designated for sale (Xiao 1987, p.40). Why, then, one might ask, were there so many prospective buyers despite the apparently high price? Most of the buyers were not individuals but work units which needed apartments badly for their increasing number of employees and which wanted to keep their competent employees from transferring to other work units which were able to provide better housing. About 80 percent of the buyers were work units (Dai 1986). These work units then sold houses to their employees at much lower prices or simply allocated them according to need and merit. For individual buyers, it was discovered that many were families with only average or low incomes. How could they afford to buy the high-priced houses? 81 Further investigation revealed that many of the family buyers were supported financially by their kinsmen. For example, in order to satisfy their long-felt housing need, couples would borrow money from their parents and relatives to buy houses (Liu, Xinxin 1987). To many families, the subsidized housing for sale program was like a welcome rain after a long drought. The experiment showed that this kind of housing sale was welcomed by many people. Also, it indicated that the sale of a limited number of new housing units benefited a few families but hurted none (Carlson 1986). Rent Increases. All four cities also changed their rental systems. Rents were raised but by very little.1 6 The increased rents still did not cover the cost of maintenance and depreciation since any excessive rise in rents would not be consistent with the present generally low salaries. After rents were increased, subsidies of varying amounts were paid to individuals or families based on their income. Special care was given to those with very large houses or very low incomes so that inordinate increases in their expenses could be avoided. Conditions of tenure. In the heavily subsidized housing for sale program, as the buyer was not required to make mortgage payments on the two-thirds of the cost, the question of conditions of tenure arose. Publicly, the state claimed that the ownership of the sold housing units belonged to buyers. The owners could sell their houses to whomever they preferred. But the transaction had to be processed by the state agencies and selling prices were regulated by the state. These rules aimed to restrict individuals from making a profit by buying and selling houses. Moreover, each household was allowed to occupy only a certain amount of floor space even though it could afford to buy a larger house. This rule would ensure that living space could be allocated to more needy households. In addition to these rules, however, no other conditions of tenure were yet clearly defined. More research on this matter was 1 6 The literature available which covers the housing commercialization program in the four selected cities does not go into much detail about rent increases. This suggests that the change in rent level was not significant. 82 expected to be conducted. It is generally agreed that the experiment with the housing commercialization program in the four selected cities has proven successful. From the late 1982 to the end of 1983, there were altogether 1746 dwellings sold through subsidy in these four cities. The built area was 92,000 square meters and the investment was about 13.3 million yuan. Return on investment was 2.67 million yuan. It is expected to receive another 1.22 million yuan which together will make up 30 percent of total investment. Workers are very keen to buy their own houses (Zhang 1986, p.10). Upon the initial success of the housing commercialization experiment, various housing commercialization programs, largely identical but with minor differences, were then introduced in eighty cities. However, things still proceeded cautiously. 5.4.2. Rental Reform vs. the Wage System It is widely agreed that readjustment of the present rental system is the key element for the commercialization of housing. In the present low-rent situation, many people who already live in the state built low-rent houses feel that it is not worth buying a house. In addition, some people pay little rent for their spacious dwellings and simultaneously receive more government subsidies because, according to present policy, subsidies are directly proportional to the amount of living space. Since a majority of urban residents still live in public housing at low rent rates, it is obviously unfair to make those house buyers pay much more for their houses. Most of the house buyers decide to buy a house not because they are better-off but because they are in badly need of a house. This is evident in that the house buyers in the four cities include a large percentage of newly-wed couples who had waited for many years for a house to be allocated by their work units. It is widely argued in China that ideally, monthly rental payments should include: (1) housing depreciation; (2) maintenance fees and repair cost; (3) management cost, (4) real estate taxes; and (5) interest on housing investment. Based on this, it is 83 estimated that the rent for one square meter of floor space should be 1.56 yuan (the State Council 1988). Calculating according to this rate and assuming a household occupies an apartment unit of 30 square meters, it should pay 46.40 yuan for rent, which is more than half of the monthly income of an average urban worker. If rents have to be raised to this level for the purpose of promoting housing commercialization, obviously, the present low wage system has to be changed. This is a rather complicated issue because a change in the wage system will affect national economic planning, the price system, and the well-being and interests of the general public. Therefore, rental reform is not only an economic question but also has political and social implications. It is beyond the scope of this research and beyond the author's knowledge at this moment to explore this issue in any depth. However, it is important to bear in mind that there is an economic chain effect in the wake of rental reform. In order to minimize the negative impact of rental reform, it has been suggested that increased rent be instituted incrementally. Meanwhile, continued government subsidies to low-income families will be necessary. Many cities have issued vouchers to families affected by rent increases based on their income. The vouchers can be used only for payment of rent or for a savings account which may only be used for purchasing a house. This kind of subsidy is referred to as a change from "concealed subsidies" for all to "open subsidies" for those in need. In this way, rents are increased while poorer households do not bear an excessive additional financial burden. The housing commercialization programs in the eighty cities are still in the experimental stages. The government hopes to work out a more satisfactory system for eventual implementation in all parts of the country. 84 5.4.3. Public Opinion Polls Governments at various levels have been very careful about the implementation of housing commercialization programs. Through mass media and public meetings, the governments have attempted to explain the policy of housing commercialization to the public and to provide urban citizens with opportunities to voice their concerns. Surveys conducted in cities of Fujian, Heilongjiang and Hubei provinces indicate that although some urban residents worried that their standard of living would go down as rents went up and complained they could not afford to buy their own apartment, more than half of the urban residents surveyed were in favor of reforming the housing distribution system (Beijing Review 1988, p.8). In the city of Yantai, before a housing commercialization program was activated, a public opinion poll was carried out in fourteen work units which represented different social groups. The opinion poll showed that 61.19 percent of the participants were in favor of the program, 13.66 percent adopted an indifferent attitude, 22.81 percent were against the program and 2.34 percent abstained. Through extensive public participation, the government intended to make the housing commercialization programs more workable and to gain wider public support. 5.4.4. Expansion of Policy Experiments in Housing Commercialization On February 15, 1988, the State Council of China decided to extend the implementation of housing commercialization policies to a larger group of cities over the next three to five years. In 1988, experiments with housing commercialization would still be limited to the eighty cities. From 1989, however, the policy of housing commercialization would be implemented in more cities and on a greater scale. According to the State Council's plan, every province, municipality and autonomous region will select several cities or counties as pilot areas for the housing reform. Experiences gained in these areas will then be used by other cities. By the end of 85 1987, China had 381 cities and more than 10,000 towns and counties (the State Council 1988). All these areas, except for those in border, remote and economically underdeveloped regions, are expected to have implemented housing reform by 1990. As outlined in the Circular, "On the Implementation of Housing System Reform by Stages and in Groups", prepared by the State Council, the aim of the housing reform is to replace the current housing system whereby the state builds housing units and distributes them through work units. Under the new housing policy, housing units will be sold in line with the demands of the socialist planned commodity economy (Beijing Review 1988, pp.8-9). The tasks of housing reform in the coming three to five years include reforming the rental system for state-owned housing units, easing housing shortages and encouraging urban residents to buy houses for themselves. Housing reform will contain the following major facets: -- Changing the system of distributing state funds from subsidies for housing construction and maintenance to subsidies for wage earners; - Replacing the current planning and management system, which considers housing construction as fixed capital investment, with a system that regards it as commodity production; - Forming a housing fund to rationalize various funding channels through reforms in financing, taxation, wages and prices, and real estate management; - Launching a real estate market and developing real estate financing . (Beijing Review 1988, p.9). 5.5. Obstacles to Housing Commercialization In most capitalist countries, housing has always been treated as a commodity to be bought and sold. But in China, it will be extremely difficult to change the popular concept of housing as a welfare good. Quoted by Economic References on May 24, 1987, one senior worker in Bengbu, Anhui Province complained, "The 'old' Communist gave us houses; but why did the 'new' Communist want us to buy houses?". Although his view may not be shared by many people, it indicates that the implementation of housing commercialization will not be easy. 86 The reform of the housing finance, management and construction is inevitable because the government has shown an inability to meet the ever increasing demand for housing when housing was viewed as a pure welfare good. The readjustment of the rental system and the experimental subsidized housing for sale programs are considered to be a suitable starting point. Even this first step, however, is beset with difficulties. From an economic point of view, the need to reform the present policy is apparent. Nevertheless, the change is a difficult political decision for the government to implement because raising rents or restructuring the rental subsidy program could mean vast modification to the economic system and generate fears that the beneficiaries of the present housing system will be hurt. To be more specific, the commercialization of housing will lead to the redistribution of benefits among various social groups. The difficulty is that decision-makers themselves are the ones who benefit most from the present form of housing policy. With regard to the subsidized housing for sale program, it is argued that many moderate and low income households are unable to participate in the program and will remain in intolerable housing conditions. In addition, many work units are reluctant to contribute their subsidies because they believe their available funds could be used more productively in other areas. Other work units are financially constrained and cannot help their employees. Thus, it is argued by some that such a strategy cannot over the long time be too successful. Moreover, difficulties for the housing reform also come from those work units where employees have already benefited from the policy of low rents and high subsidies, and enjoyed better housing conditions. Most important of all, the change from the distribution of housing by housing bureaus or work units to the sale of state built housing units is a very complicated issue which requires simultaneous alteration of various political, social and economic departments such as the national socio-economic planning, financial, resource and banking departments. Therefore, this easier-said-than-done housing policy reform has so far 87 progressed in a gradual and cautious manner. 5.6. Conclusion The recently initiated strategy of the commercialization of housing has not yet resulted in any major improvement of housing conditions. It is still to early to evaluate in any depth the effect of the housing commercialization policy. However, it is clear that the government is determined to solve urban housing problems and firmly believe that the policy of housing commercialization is a potential solution. . This intention is stated in The Seventh Five-Year Plan (1986-1990): We should commercialize housing in the cities and towns and speed up the growth of residential construction industry, making it a pillar of the national economy. ... (Carlson 1986, p.l). Some aspects of the issue of * housing commercialization have not been analyzed in-depth in this research since there is little available literature. Clearly, follow up research on the reform of housing policy in China, which affects 200 to 300 million people, is of special significance to the world-wide struggle to improve human settlement conditions. 88 CHAPTER 6. A COMPARISON BETWEEN CHINA AND HUNGARY This chapter attempts to draw a tentative comparison between China and Hungary in terms of urban housing policies, housing delivery systems and problems as well as rationales for recent housing policy changes. By doing so, it is hoped that Hungary's experience in implementing a housing commercialization policy could provide useful lessons that could benefit China's future housing effort. 6.1. Similarities and Differences in Urban Housing Policies, Housing Delivery Systems and Housing Problems Economically, Hungary is a much more developed country than China. Hungary's GNP per capita in 1983 was US $2,429, which was several times higher than that of China in the same year (UNIDO 1986). Demographically, Hungary's total population in 1986 approximately equaled the size of Beijing. However, Hungary with 57.3 percent of its total population as urban people 1 7, is a much more urbanized country than China. Despite these distinct differences, significant similarities between Hungary and China exist in terms of the nature of housing policies, housing delivery systems and urban housing problems. 1 7 According to figures collected by the United Nations, the following countries's urban population as a percentage of their total popualtion in 1982 were: Albania 33.7%, Bulgaria 63.9%, China 20.6%, Czechoslovakia 73.7%, German Democratic Republic 76.5%, Poland 59.3%, Romania 48.5% and the USSR 64.1%. See Demographic Yearbook, 1986. 89 6.1.1. Nature of Housing Policies Prior to recent housing policy changes, both countries' urban housing policies were formulated on the basis of the economic concept that housing in socialist economy was not a marketable commodity but a public good. As such, the states assumed full responsibilities for providing adequate housing for all urban citizens. In theory, all urban citizens in both countries were entitled to the state built housing stock. This accorded with one of the housing goals common in both countries — providing approximately equal living conditions to all citizens, although, in reality, this explicitly stated goal was not accomplished. The role of the state in the urban housing sector was also similar in the two countries. The state determined the proportion of national income to be allocated to residential construction and outlined the quantitative housing goals of the respective countries for a particular period of time. Then, the state-run building companies carried out specific residential construction tasks. Housing policies in both countries favored the development of the state-owned building enterprises and private housing activities were not encouraged. Consequently, the states dominated nearly every aspect of urban housing. Both governments considered residential construction a "non-productive" sector. As a result, the housing sector received low investment priority in national economic planning. Both countries' economic policies were deliberately committed to promoting extensive and rapid industrialization. But, in practice, unlike Hungary, in the years before 1979, China had a political leadership which devoted more importance to "class struggle" than to the economic development of the country. 90 6.1.2. Housing Delivery Systems Hungary and China developed two very similar urban housing delivery systems. At the beginning of their socialist economic and social development, both countries redistributed the urban housing stock among different social groups in an attempt to ease the immediate urban housing problem and alleviate inherited social injustices. Houses confiscated by the state were administratively re-allocated more evenly to needy urban residents. Through this redistributional approach, both states firmly established their dominant roles in the urban housing sector. In both countries, residents who occupied state-owned housing units were required to pay only nominal rents. Rents, in both countries, were usually less than 10 percent of a family's monthly income. This policy of low rents and high subsidies was in line with the low wage system in the two countries. It was commonly believed that this approach would enable all population groups to afford rental housing. In addition, the states were responsible not only for housing construction and allocation but also for housing management and maintenance. In terms of housing tenure, the situation in Hungary differs greatly from that in China. Despite government housing policy not favoring the private housing sector in Hungary, the private housing market has survived and played a significant supplementary role to the public housing sector. The state was able to finance at most about half of the total annual housing starts, leaving the remaining to be financed either privately or co-operatively. Therefore, in reality, Hungary has taken a laissez-faire attitude towards the private housing sector. In contrast, the Chinese government has strictly prohibited the development of the private housing sector. For a "rather long period of time, private enterprise in China was considered the "tail" of capitalism which was ideologically and morally incompatible with socialism. As a consequence, most cities have less than 10 percent of the housing stock in private ownership, most of which was inherited from the previous society (Hall 1988). 91 However, as urban living conditions become overcrowded, the state has been unable to stop private housing activities. For instance, according to personal observation, many urban households "illegally" constructed extentions to the state owned properties so as to improve their own living conditions. But, most of these self-built flats were of very low quality and lacked basic facilities. 6.1.3. Urban Housing Problems Urban housing problems, such as shortages, a large proportion of deteriorated housing stock, visual monotony, poorly finished housing units and inflexible floor plan arrangements, are commonly, found in both countries. In addition to these problems, many houses in China's cities are characterized by a lack of basic living facilities such as kitchens, washrooms and running water. Moreover, the infrastructure in many of China's cities are either overloaded or outworn. In general, urban housing problems are much more severe and at a much greater scale in China than in Hungary because socialist China had a less developed economic foundation to start with and, more importantly, because the Chinese government has neglected residential construction for a much longer time. The foremost urban housing problem in both countries is chronic shortage. The Hungarian government is hoping to resolve this by 1990. The Chinese government is endeavoring to ease this problem by the year 2000. The severe urban housing problems in both countries have resulted in negative social and economic impacts. In Hungary, it was discovered that urban housing problems contribute to high divorce and suicide rates and a very low birth rate. Also, housing problems have resulted in the lack of manpower in cities and have unintentionally activated the informal housing sector. Above all, the issue that has attracted the greatest concern of society is housing inequality within the sphere of housing distribution. Against the principle of egalitarianism, the majority of the better quality state built housing has been allocated to the population groups of higher social 92 status and higher income. Conversely, the majority of lower social status and lower income groups have access to only older state housing of lower quality, or have to buy a house on the "black" market or build one for themselves. In China, there are also inequalities in housing distribution. But the inequalities are more commonly found between people working in different work units, especially between those in the state owned work units and those in collectively owned work units or those who are self-employed. The former usually have better opportunities to be allocated state built housing than the latter. Nevertheless, in China, one of the most outstanding social issues accompanying the severe urban housing problems is the practice of corruption among officials in the area of housing distribution (Beijing Review 1988). This issue has created a widespread public resentment and distrust of many government officials (Frolic 1980). Although Chinese and Hungarian urban citizens have different major concerns about the urban social problems arising from the housing sector, it is important to note that both have major concerns in the sphere of administrative housing distribution. This similarity suggests that the administrative approach to housing distribution has some vital weaknesses which are difficult to avoid in a socialist economy. 6.2. Factors Associated with the Housing Policy Reforms 6.2.1. Increase in National Housing Investment Interestingly enough, prior to the recent housing policy re-orientations, the governments in both countries had made great efforts to improve urban residents' housing conditions by allocating increasingly greater proportions of national capital investment to residential construction. In Hungary, this process occurred from 1960 to 1976 and in China from 1979 to the present. These changes in investment priorities in both countries was indicative of the increasing concern of the governments to improve living conditions. Nevertheless, the consequences of the higher investment rates in the 93 two countries differed somewhat. In Hungary, the higher investment rate in residential construction did not correspond with a significant increase in the construction of housing units. It is believed that this was mainly due to labor wage rate inflation, rising costs of building materials, and better household equipment for the newly built units. As a result, the urban housing shortages still remain. In contrast, in China, the increase in national housing investment has resulted in a considerable rise in the number of housing units completed, the majority of which were better equipped than those built before 1979. However, this achievement in residential construction did not seem to lead to any significant improvement to urban housing conditions in general. This is not surprising because residential construction in China had been neglected for more than two decades and the urban housing problems had already become extremely intensified. It is unreasonable to expect the government to solve urban housing problems overnight. The improvement of urban housing conditions requires a long term effort. The major question related the government's effort in recent years lies in the fact that the completed housing stock could have been allocated to a greater proportion of urban residents in need of shelter had the current administrative approach been able to prevent illegal practices in housing allocation. 6.2.2. Economic Difficulties vs. Economic Growth The economic situations prior to the housing policy changes in the two countries were rather different. Hungary encountered great economic difficulties by the end of 1970s. As a result, the state had to reduce its total national capital investment, which led to the shrinking of national investment in residential construction. The government realized that housing policy reform was essential in order to prevent a sharp decrease in housing construction. Thus, one of the major purposes of the housing policy re-orientation in 1982 was to encourage the individuals' financial 94 participation in residential construction so that the total amount of housing investment would include both the state's and the individuals financial resources, and hopefully the momentum of residential construction in the previous years could be maintained. In contrast, China' urban housing policy reform should be seen in the context of rapid nation-wide economic growth. The recent rural and urban economic reforms have resulted in a significant increase in both national wealth and individuals's living standards. Consequently, the state has been able to contribute more of its national income to residential construction and many urban households have been able to save a large proportion of their income. In view of the tenacious severity and scale of the urban housing problem, the state decided to introduce housing commercialization programs so as to direct a certain proportion of the individuals' savings to residential construction and to mobilize various work units' initiatives in housing investment. In this way, the total amount of housing investment and the rate of residential construction could be increased. 6.2.3. Similarities and Differences in Housing Policy Justification Although the circumstances for housing policy reforms vary from each other, the approaches used by the two countries are similar. Despite the different terminologies used by housing experts in the two countries to refer to the reform approaches, in essence, both governments have begun to use market mechanisms to supplement the weaknesses associated with the administrative mechanisms and for private savings and spending to bear an increasing share of the burden of housing investment which would otherwise fall entirely on state resources. The main aim of the housing policy reforms in both countries is to alleviate housing shortages and to significantly improve urban residents' housing conditions. The governments in both countries have established ambitious housing goals, which appear to be supported by their citizens. The new housing systems which combine both the advantages of the administrative mechanism 95 and the market mechanism are considered necessary means to achieve these goals. 6.2.4. Different Starting Points It is important to note that China and Hungary have very different starting points for the official introduction of the market mechanism. In Hungary, the private housing sector has been operating since the establishment of socialism and has actually played an important supplementary role to the state housing sector. Prior to the housing policy changes, approximately 50 percent of the annual housing construction involved private efforts, either financially or physically. Moreover, a state agency, the National Saving Bank, had already operated in the housing market, building housing units for sale and providing loans to the individuals for the purchase of houses. Thus, in a sense, what the housing policy re-orientation in 1982 really meant was to give official recognition to the role of the private housing sector. In contrast, there had been very little individual participation in China's urban housing sector prior to the housing policy changes. The majority of China's cities started their housing commercialization programs with little experience in the operation of market mechanisms. The government was trying to create a housing market within the framework of the state's subsidies and controls. Nearly every aspect of housing commercialization was newly formulated. Thus, the new housing policy in China implies that a great deal of ideological, economic, and institutional changes will have to take place in the near future. It is clear that the further implementation of the new housing policy in China will not be easy. 6.2.5. More Difficulties for China's Housing Policy Reform In comparison with the situation in Hungary, China has more severe urban housing problems, fewer available national resources and much less experience in operating and controlling the newly introduced housing market. This would indicate 96 China is likely to have great difficulty in implementing the new housing commercialization policy. In addition, the rapid urbanization process and the high rate of population increase make it more difficult for the Chinese government to predict and control increasing urban housing needs. Furthermore, the recent reform of urban enterprise management systems and the price reforms have led to many new urban problems such as unemployment, inflation and speculation with scarce goods. All these factors will significantly affect the implementation of the new housing policy. In view of these difficulties facing the Chinese government, it was a wise decision to undertake the experimental housing commercialization programs and to implement the new housing policy in an incremental fashion. 6.3. What Can China Learn from Hungary? Based on the examination of housing problems and housing policy changes in Hungary and China, there are three aspects of Hungary's experience which are relevant to China. First, although it is generally true that each country can learn from the experience of other countries, each country is characterized by unique contexts and situations. Hungary's government started to introduce the new housing policy under very different circumstances from those in China. Therefore, it is important to examine Hungary's specific housing approaches within their context if China intends to take any similar approaches. This notion deserves attention from those who like to refer loosely to the experience of the Eastern European socialist countries as a way of justifying the Chinese government's housing policy. Second, it should be noted that in Hungary the expansion of the market mechanism has resulted in the reduction of housing inequalities in terms of the financial burden shouldered by different social groups. However, it has also generated new housing inequalities in terms of housing consumption. The higher income groups are 97 able to satisfy their housing demands in the housing market. Conversely, the lower income groups find it even more difficult to obtain dwellings because the price of market housing has increased and at the same time the state has reduced its total amount of national investment in residential construction. This consequence of Hungary's housing changes should be looked into very seriously by China's decision makers and housing experts. In order for China to introduce housing commercialization programs successfully, it is essential that the Chinese government continues to commit sufficient resources to residential construction and devote special attention to the lower income and disadvantaged groups in society. Third, one of Szelenyi's criticisms is that the National Saving Bank in Hungary has not been able to function effectively in the housing market (1983, p.90). However, he does not provide any in depth explanation as to why the NSB has not worked well. It is apparent that establishing an effective banking system in China to help urban citizens manage their savings toward buying a house is an important element of the policy of housing commercialization. Therefore, further research on aspects concerning the structure and operation of the National Saving Bank in Hungary would benefit the implementation of China's policy of housing commercialization. 98 CHAPTER 7. SUMMARY AND CONCLUSION 7.1. Review of Hypotheses and Conclusion Four hypotheses were articulated at the beginning of this paper. This section reviews these hypotheses based on the previous analyses of Hungary's and China's urban housing policies and problems. 1. Perennial housing problems and housing development in China and Hungary are evidence that previous socialist housing policies have been ineffective. The analyses presented in this research support this hypothesis. Viewing housing as a pure public good and as a "non-productive" sector in the previous housing policy framework in both Hungary and China, the governments did not committ sufficient resources to residential construction. By the time both countries decided to devote greater impetus to housing investment, urban housing problems and the concomitant social and economic problems had already become very intense. Despite the states' increasingly greater efforts in residential construction, many urban housing problems persist and the housing conditions of many urban residents have not improved significantly. In addition, the social problems such as housing inequalities and corruption among housing officials involved in housing distribution suggest that various weaknesses associated with the previous housing policies exist. 2. Housing commercialization as a major element of new housing policies has both positive and negative impacts on equality of housing provision. 99 Based on the examination of changes in Hungary's housing policy, this research suggests that while the implementation of new housing policies has resulted in the reduction of inequalities in terms of financial burdens shouldered by different social groups, the inequalities, in terms of housing consumption by different social groups, are increasing. Therefore, the policy of housing commercialization in Hungary has both positive and negative effect on equality of housing provision. In China, the implementation of the housing commercialization policy is still at an early stage. It is, therefore, too early to make a conclusive statement with respect to this hypothesis. 3. The policy of housing commercialization is a feasible approach to improve current urban housing conditions and to rationalize the housing system in China. The research indicates that there is sufficient evidence for both the Chinese government and housing experts to conclude that the policy of housing commercialization is a feasible approach to improving current urban housing conditions and to rationalizing the housing system. However, the policy of housing commercialization requires radical changes to many political, social and economic systems which have prevailed for nearly forty years. Therefore, it will take a long term effort for China to develop a more rational and effective urban housing system. 4. The lessons learned through housing policy reform in Hungary are valuable to the formation and implementation of housing policy in China. The research has identified some lessons experienced in the process of the Hungary's housing policy reform that deserve the attention of China's government. However, due to the lack of sufficient literature pertaining to specific aspects of Hungary's housing policy changes, the research has been unable to make a close examination of those valuable lessons. 1 0 0 7.2. Recommendations for the Implementation of China's New Housing Policy In order to ensure an optimum outcome for China's housing commercialization policy, continuous efforts in improving various aspects of the policy are necessary. Based on this comparative study, the following five aspects regarding the implementation of the commercialization policy in China are recommended. First, it is suggested by some that as more financial resources of individuals are absorbed into residential construction, the state would be able to gradually reduce its share of housing investment. This theory appears to be unsound because China is still a very poor country and its urban living conditions are still very low in comparison with those in the developed countries. The resolution of urban housing problems requires a continuous and broad ranging effort rather than a single action or program. It is understandable that the state needs more resources to invest in the industrial and agricultural sectors. But it must be remembered that the development of the housing sector can also contribute to economic growth and the accumulation of national wealth. Therefore, it is important that the state continue to allocate a reasonable proportion of national resources towards the improvement of housing and related services. Second, Hungary's experiences, as well as those in capitalist economies, suggest that a well developed housing market could address the housing requirements of higher income residents but could fail to adequately address the housing problems of those with lower incomes. Previously, socialist countries intended to provide all population groups, regardless of their social status and incomes, with better quality housing by means of administrative approaches. However, most socialist countries have so far been unable to achieve this goal. Therefore, it is clear that neither a pure market approach nor a pure administrative approach can successfully satisfy all of the population's housing needs. By introducing the market mechanism into the socialist housing economy, the Chinese government hopes to ease housing shortages, to rationalize the process of housing distribution and eventually to provide good and adequate housing to all people. 101 If the Chinese government intends to improve living conditions for all and not just those who are better-off and more "valuable" citizens, it is important that the policy of housing commercialization should include a set of effective approaches aimed at the population groups with lower social status and lower incomes. Third, in comparison with the development of the market housing sector in the capitalist economy, the housing sector in the socialist economy is still at an infant stage. Marxist theory, which in China is still firmly considered the principal guideline of socialist construction, does not outline in any detail the framework for the socialist housing economy. Thus, the development of the socialist housing economy has to depend largely on experiments with different policy alternatives. Also, it is important for the socialist countries to learn from each other and to experiment with some approaches which have long been employed in the capitalist economy. Those methods that have proven effective in the capitalist economy may not be applicable in the socialist economy, but this can only be determined through scientific assessment and experiment. It is self-deceiving to label whatever originated from the capitalist economy incompatible with the socialist economy. Studies on the pros and cons of housing systems in the capitalist economy are of special significance to the implementation of housing commercialization in China. Fourth, the first housing commercialization programs need to be reviewed and monitored closely in order to provide important lessons for subsequent program implementation. Continuous program evaluation is required to inform and improve housing policy and programs. In this way, problems that arise in the process of implementing the housing commercialization policy can hopefully be detected and stopped promptly before they become severe and widespread. Fifth, commercialization of housing in urban areas requires systematic research and a comprehensive plan because it involves the participation of various government departments, work units and individuals. The approach of "experiment, feedback, 102 correction" seems insufficient for such a complex issue. Macro research on all the relevant factors such as the wage, banking, financing, housing management and construction systems, to list only a few, should be conducted. To conclude, it is worthwhile once again to emphasize the importance of comparative housing studies between China and other countries, including both socialist and capitalist economies. The current housing policy reform in China is in many ways like entering "uncharted waters". China can certainly learn from the experiences of other countries. China is unique in the sense of both the scale of the country and its housing problem. To adequately house one fifth of the world's population is not an easy task. 103 B I B L I O G R A P H Y Ahmed, Rafeeuddin (1988), Housing and Economic Adjustment, New York: United Nations. Andrzejewski, A. (1967), "Housing Policy and Housing-system Models in Some Socialist Countries", Chapter 12 of The Economic Problem of Housing edited by A. A. Nevitt, London: Macmillan. 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