$300 house?

Schumpeter

A $300 idea that is priceless

Applying the world's business brains to housing the poor

Apr 28th 2011 | from the print edition: Economist

FRIEDRICH ENGELS said in "The Condition of the Working Class in England", in 1844, that the onward march of Manchester's slums meant that the city's Angel Meadow district might better be described as "Hell upon Earth". Today, similar earthly infernos can be found all over the emerging world: from Brazil's favelas to Africa's shanties. In 2010 the United Nations calculated that there were about 827m people living in slums—almost as many people as were living on the planet in Engels's time—and predicted that the number might double by 2030.

Last year Vijay Govindarajan, of Dartmouth College's Tuck School of Business, along with Christian Sarkar, a marketing expert, issued a challenge in a Harvard Business Review blog: why not apply the world's best business thinking to housing the poor? Why not replace the shacks that blight the lives of so many poor people, thrown together out of cardboard and mud, and prone to collapsing or catching fire, with more durable structures? They laid down a few simple guidelines. The houses should be built of mass-produced materials tough enough to protect their inhabitants from a hostile world. They should be equipped with the basics of civilised life, including water filters and solar panels. They should be "improvable", so that families can adapt them to their needs. And they should cost no more than $300.

Mr Govindarajan admits that the $300 figure was partly an attention-grabbing device. But he also argues that it has a certain logic. Muhammad Yunus, the founder of Grameen Bank, has calculated that the average value of the houses of people who have just escaped from poverty is $370. Tata Motors has also demonstrated the value of having a fixed figure to aim at: the company would have found it more difficult to produce the Tata Nano if it had simply been trying to produce a "cheap" car rather than a "one lakh" car (about $2,200).

Why has a simple blog post led to such an explosion of creativity? The obvious reason is that "frugal innovation"—the art of radically reducing the cost of products while also delivering first-class value—is all the rage at the moment. General Electric has reduced the cost of an electrocardiogram machine from $2,000 to $400. Tata Chemicals has produced a $24 purifier that can provide a family with pure water for a year. Girish Bharadwaj, an engineer, has perfected a technique for producing cheap footbridges that are transforming life in rural India.The attention-grabbing certainly worked. The blog was so inundated with positive responses that a dedicated website, 300house.com, was set up, which has attracted more than 900 enthusiasts and advisers from all over the world. On April 20th Mr Govindarajan launched a competition inviting people to submit designs for a prototype of the house.

Another reason is that houses can be such effective anti-poverty tools. Poorly constructed ones contribute to a nexus of problems: the spread of disease (because they have no proper sanitation or ventilation), the perpetuation of poverty (because children have no proper lights to study by) and the general sense of insecurity (because they are so flimsy and flammable). Mr Govindarajan's idea is so powerful because he treats houses as ecosystems that provide light, ventilation and sanitation.

Numerous innovators are also worrying away at this nexus of problems. Habitat for Humanity, an NGO, is building durable houses of bamboo in Nepal. Idealab, a consultancy, is on the verge of unveiling a $2,500 house that will be mass-produced in factories, sold in kits and feature breakthroughs in ventilation, lighting and sanitation. Philips has produced a cheap cooking stove, the Chulha, that cuts out the soot that kills 1.6m people a year worldwide. The Solar Electric Light Fund is demonstrating that you can provide poor families with solar power for roughly the same cost as old standbys such as kerosene and candles.

Profits and other problems

These thinkers, like the advocates of the $300 house, must solve three huge problems to succeed. They must persuade big companies that they can make money out of cheap homes, because only they can achieve the economies of scale needed to hit the target price. They need to ensure sufficient access to microloans: $300 is a huge investment for a family of squatters living on a couple of dollars a day. And they need to overcome the obstacle that most slum-dwellers have weak or non-existent property rights. There is no point in offering people the chance to buy a cleverly designed house if they have no title to the land they occupy. Solving these problems will in turn demand a high degree of co-operation between people who do not always get on: companies and NGOs, designers and emerging-world governments.

However, the exciting thing about the emerging world at the moment is a prevailing belief that even the toughest problems can be solved. And a similar can-do moment, in the late 1940s, offers a striking historical precedent for the application of mass-production techniques to housing: as American servicemen flooded home after the second world war to start families, Levitt & Sons built Levittowns at the rate of 30 houses a day by mass-producing the components in factories, delivering them on lorries and using teams of specialists to assemble them.

Some emerging-world governments are beginning to realise that providing security of tenure is the only way to deal with the problem of ever-proliferating slums. And big companies that face stagnant markets in the West are increasingly fascinated by the "fortune at the bottom of the pyramid". Bill Gross of Idealab reckons the market for cheap houses could be worth at least $424 billion. But in reality it is worth far more than that: preventing the Earth from becoming what Mike Davis, a particularly gloomy follower of Marx and Engels, has termed a "planet of slums".