The rent was too damn high!

Over the last ten years we have learnt a lot about living standards in the developing world. I won’t attempt to summarise every single paper here. Mostly these have come from a reconstructions of real wages, one of the easiest economic statistics to reconstruct in historical periods: all you need is information on the nominal wages of unskilled workers and on the prices of the kinds of goods that unskilled workers would buy (mainly grains, and some meat and cloth). To calculate what we might called an ‘Allen welfare ratio’ (after Bob Allen, who pioneered the particular subsistence basket of goods most people now use) you divide the wage by the cost of feeding, clothing and (!) housing a family of two adults and two children. A value of one indicates that a worker’s wage was just enough to purchase the goods necessary for his (almost always his) family to live at a ‘barebones’ level of consumption. One of the interesting findings of the work on African real wages in the colonial period has been that real wages generally improved over the course of the first half of the twentieth century, a result consistent with the idea that the expansion in agricultural commodity production for trade in the developing world increased the standard of living, at least for urban workers.

For example, these are Ewout Frankema and Marlous van Waijenburg’s estimates of real wages in East Africa from 1880–1965.

And, showing similar trends, here are my own estimates for some cities in French Africa (unpublished as yet but hopefully in working paper form soon):

Noticeably, for all of the cities shown here, we observe a rising trend in the last few decades of colonial rule. But as I’ve been working more on my estimates for French Africa, I’ve wondered whether this might not be an artefact of the way we calculate real wages. The method briefly described above—get the nominal wage, deflate it with the cost of a ‘subsistence’ basket of goods—relies in practice on several assumptions. The one that I have been obsessing about relates to housing costs. As a (by First World standards) poor graduate student, I am used to spending a very large fraction of my income on rent: often over 50%. When we calculate these welfare ratios, though, we tend to assume that the cost of a subsistence level of housing is precisely equal to five percent of the cost of all other goods necessary for subsistence consumption. This assumption is a strong one, but by and large it has been accepted due to the difficulty in procuring adequate data to relax it.

Now, there are some conceptual questions that arise here. For example, what is a subsistence level of housing? We can define a subsistence level of grain consumption, because humans have certain physiological requirements for calories and protein, so we can stipulate that, for example, an adult male’s subsistence requirement of rice is 180 kilograms a year. But housing is a lot less easy to define in this way! In a more elaborate paper draft, I use modern microdata from Côte d’Ivoire to try to answer this question in a more theoretically rigorous way, and I generally find that families that we would characterise as living at ‘subsistence’ level (judging either by their income or their food expenditures) tend to spend much more on housing than 5% of their income.

But for now, what I want to show is what happens to estimates of real wages when we use actual historical data on labourer’s monthly rents for housing. The data on rents come from an attempt in the 1950s to draw up a set of national accounts for French West Africa. They give estimates of working class rents for a large number of cities in the colonies concerned, which I’ve combined with a series of real wage estimates for these cities, using archived price and wage data that I found in the Archives nationales du Sénégal in Dakar.

City and colonyWelfare ratio
Traditional method
Welfare ratio
Actual labourer rents
Ségou (Soudan)1.10.8
Niamey (Niger)1.30.9
Ouagadougou (Haute-Volta)1.40.7
Gao (Soudan)1.71.3
Kayes (Soudan)1.81.2
Thiès (Senegal)2.11.1
Dakar (Senegal)2.11.4
Louga (Senegal)2.21
Kaolack (Senegal)2.21.2
Bamako (Soudan)2.31.4
Kédougou (Senegal)2.41.1
Maradi (Niger)2.51.7
Zinder (Niger)2.51.9
Porto-Novo (Dahomey)2.90.8
Cotonou (Dahomey)31.3
Bobo-Dioulasso (Haute-Volta)3.11.4

These magnitudes are, not to put too fine a point on it, huge. Housing in urban centres in mid-century Africa was extraordinarily expensive when compared to the incomes of unskilled labourers. If we fail to account for housing costs properly in, for example, Porto-Novo (a major city in what is now Benin), we may assume that the standard of living of an unskilled worker was 3 times its actual level!

So how do we make sense of this? First, extremely high rents are probably an indication of poorly functioning housing markets—poorly functioning in the sense that the elasticity of supply of housing to rental yields was low. In turn, this suggests that landlords were enjoying supernormal profits from their investments in urban real estate—that is, profits above the level that would have been required to induce them into building homes in the first place. If this is the case, then our estimates of rising urban incomes in the middle of the 20th century are probably true, but only in aggregate: per capita incomes may have been rising, but they were unequally distributed between those who owned property and those who had to rent or buy it. One is reminded of Mohamed Mbodj’s argument in an old essay that the abolition of slavery in French Senegal in 1848 did not lead to a decline in the dominance of the old slaveholding elite, since slaveholders controlled scarce land and buildings on the islands of Saint Louis and Gorée.

I’m going to blog a bit more about this as work on this paper progresses, but I think the evidence here is enough to suggest that we need to devote a lot more effort to collecting historical data on housing costs in the developing world if we want to understand the long-run evolution of living standards and income inequality.

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