Quality of Life: A Neighborhood Approach Andrew Powell Regional Economic Advisor Inter-American Development Bank

Description of the Project Six teams selected to analyze cities in six countries through a competitive process:   Argentina: Buenos Aires   Bolivia: Great La Paz (LP & El Alto) and S. Cruz   Colombia: Bogota and Medellin   Costa Rica: San Jose   Peru: Lima   Uruguay: Montevideo

Not a Representative Sample, but Cities are Highly Diverse Source: Various National Statistics.

Diverse in Size and Services Buenos Aires Lima Bogota La Paz Santa Cruz San Jose Montevideo

Growing Literature on Quality of Life in Latin America Several previous analyses generate QoL indices – –Amorin and Blanco 2003, Human Dev. Index for Rio – –Cavalierri et al 2007, Social Dev. Index for Rio – –Acosta 2003 on Colombia using national survey Frequently, the variables to include and/or the weights employed are prejudged In this project: – –the teams let the data speak! Indices constructed from variables found to be stat. significant and with estimated weights – –Focus is on neighborhood characteristics

Each Team… A) Conducted Surveys of Life Satisfaction B) Performed a Hedonic Regression Analysis of House Prices C) Collected Socio-Geographic Data D) Drew Policy Conclusions Related to: – –QoL and main QoL drivers and to – –QoL Monitoring At the neighborhood level

QoL Drivers.. Standard variables – –income, health, education And in addition: – –Housing Variables – –Neighborhood Variables Objective and Subjective

QoL Drivers of Interest: Objective and Subjective Objective Crime Statistics (Homicides/’0000) Subjective Do you feel safe walking at night?

Life Satisfaction Surveys Cities are diverse: what matters in one city may not matter elsewhere, for example: – –San Jose (and Costa Rica): Mountains, volcanoes – –Montevideo: A beach in the city – –Great La Paz : A city in the skies – –Buenos Aires: A large city, transport and traffic important Nevertheless, an attempt was made to gain homogeneity in terms of the methodology adopted

Overall Methodology Selected Neighborhoods Surveys of Individuals Overall Quality of Life Question, and Questions of Quality of Life in Domains – –Work, health, house, neighborhood Particular questions regarding explanatory variables – –House and neighborhood General Controls – –Income, education, age etc

Complementary Empirical Methodologies A one stage regression of overall Quality of Life on variables including housing and neighborhood effects A two stage technique: – –Stage 1: Overall life satisfaction regressed on satisfaction for each domain – –Stage 2: Neighborhood domain life satisfaction regressed on explanatory variables Regressions across different domains and so controlling for psychological traits of individuals…

Safety: a common theme House construction quality important

Access to basic services remains very important

Lima: trust in neighbors turned out to be very important, especially in one neighborhood

These techniques can tell us which features are important The study on Lima focused on 3 quite diverse neighborhoods (La Victoria, Los Olivos and Villa El Salvador). Particular variables in each domain were aggregated using Principal Components Decomposing Overall QOL: – –Neighborhood features accounted for 20% of total – –Trust/Civil Society a further 38% – –Individual attributes the remaining 42%

Valuation As income is also in the regression It is possible to estimate the actual monetary equivalent of a change in one of the Quality of Life Drivers

An Example: Buenos Aires In theory, this can tell a policy maker how much people would value an increase in (subjective) security or an improvement in garbage collection (objective)

Or we can see how QoL would improve given policy changes… In the Study on Bolivian Cities, two simulations were performed How would QoL alter if the provision of public goods improved How would the property tax change if it followed computed QoL for each household

The cumulative distribution of QoL in La Paz: Actual and Simulated Simulated with improvements in public services Improvements in public services especially important for low QoL Households

Using House Prices to Estimate the Value of Neighborhood Characteristics and Quality of Life Each team found data on house prices Plus a set of explanatory variables Again related – –To the House and – –To the Neighborhood

Do housing markets function, do they give useful signals? If they do: – –House prices will reflect goods and bads of housing characs. & different neighborhoods – –Homeowners will be more aware of a relative lack of public goods and demand more – –Public-good provision can be paid through property taxes – –BUT there are risks: segregation (see later)

Significant Variables In Hedonic Regressions (Selected Cities) Many variables significant Surprising consistency Some interesting findings

Significant Variables In Hedonic Regressions (Selected Cities) Safety a concern for San Jose and Bogota

Significant Variables In Hedonic Regressions (Selected Cities) House construction quality is reflected in prices

Significant Variables In Hedonic Regressions (Selected Cities) Basic services valued in house Prices across the board

Significant Variables In Hedonic Regressions (Selected Cities) House prices in San Jose affected by Slope of land and by Eruption vulnerability Altitude an important factor in La Paz

Valuation of Characteristics…

Life Satisfaction vs Hedonic Approach: Substitutes or Complements? If the housing market functions well, house prices should reflect the value of neighborhood characteristics In the Life Satisfaction approach, if income can buy better public services then controlling for income those services may appear insignificant So the approaches are really complementary, and tell us how the housing market is functioning In general, the teams found the Hedonic regressions had more significant variables… – –Housing markets are working well in Latin America – –Are they working too well?

Bolivia as an Example Hedonic=Equilibrium Life Satisfaction=Disequilibrium The conclusion is that the housing markets are working very well indeed!

Do Housing Markets Work too well? Economic Segregation In general house prices are found to strongly reflect many neighborhood characteristics Including the quality of public services This implies wealthier families can buy good public services by purchasing houses in areas with good service

Literature on Segregation (1) Tiebert’s (1956) and Vandall’s (1995) analyses suggest that segregation may not be all bad Different groups with different preferences can sort themselves into different communities and demand different services according to their preferences “Tiebert sorting” may then result in each community obtaining the services that it desires The more heterogeneous people are, the more communities and local governments servicing their needs there should be

Literature on Segregation (2) But this seems to be a world of different “horizontal” preferences with little inequality Vandall shows that if income inequality is high, then economic segregation will be high as high income families will out bid lower income ones for houses in areas with good public services Moreover, such segregation will be deepened the faster is the growth of cities as more new houses come on to the market and turnover is increased LAC is characterized by both high inequality and a very fast growth in urban areas

The inevitable result: segregation Carrasco Pocitos Montevideo: the wealthy buy proximity to the River

Bogota and Medellin: Divided Cities HighLow

Lima, strongly segregated with wealthier areas such as San Isidro and La Molina and the periphery of the city much poorer

Implications Segregation may have serious negative effects: – –It may exacerbate inequality – –It may lead to zones of desperation that foster crime – –There are negative externalities between areas – –Research suggests that expectations are affected and individual attainment

Policy Messages Life Satisfaction and Hedonic Methods Can use Hedonic technique where markets work well and Life Satisfaction where not Interesting and complementary techniques to – –Understand what drives QoL in neighborhoods – –Monitor QoL over time – –Understand how QoL can be improved – –Analyze how proposed public investment projects may affect QoL – –Design compensation schemes ifnecessary

Policy Questions As house prices reflect the quality of public services, property taxes can be used to finance them Property taxes might reflect QoL rather than an arbitrary set of characteristics (nb: titling is still a significant issue in LAC)

On Segregation While there may be positive aspects to segregation it is more likely to be a serious concern To date, rather little policy debate on this important to issue It exacerbates inequality And is likely related to the issue of Crime

Most people feel unsafe

Crime Crime is the number one non-income issue affecting QoL in LAC There is a discrepancy between objective and subjective measures Perhaps crime is not uni-dimensional: Crime that is discriminate may lead to terrible statistics but does not affect that many people A small amount of indiscriminate crime may make people feel very unsafe

Trust and Social Capital An issue to investigate using subjective measures But increasing evidence of its importance for firms and also for individual QoL An important policy question is how public policies can make us all good neighbors