Limas urbanization process

Enver Figueroa
Economist, MPP, MPA (c)

Contents

Introduction ........................................................................................................................................... 2
Literature review and theorybased diagnosis. ...................................................................................... 3
Empirical estimation of the demand for housing ................................................................................ 11
References ............................................................................................................................................ 17

Introduction
Lima, the capital city of Peru, has been one of the fastest growing cities in the world for decades.
Lima is currently among the 30 world largest cities, in area as in population.
But that is not good news. In 2012, the Economist Intelligence Unit ranked Lima in the spot 88
out of 120. Among the main difficulties that hinder a good life in Lima we can mention the
transport system. It may take 1 hour to cover 6 km in rush hour on weekdays. Also, there a lot of
families yet without basic public services such as drinking water and sewer, mostly settled in the
edges of the city, a kind of sorting that closely follows the income distribution.
Growing crime, low educational standards, pollution, an others, have added to those mentioned
above. It has been so long that Lima has borne those problems that citizens have got accustomed
to them and policymakers as well as analysts call them structural.
But being as enduring as there are, is somehow surprising not having a pile of studies about, at
least speculating on possible solutions. Maybe such a shortage is due to a lack of scholars that had
produce analyses sharp enough to enlighten policymakers so as to try potentially successful
alternatives.
According to Caldern (1998), in a span of 53 years (1940 to 1993), Limas population increased
10 times, meaning that roughly every 10 years it doubled its population. In approximately the same
period (1940 to 1995) the urban area of Lima grew 11 times, from 42 km2 to 507km2. In the last
20 years (1993 to 2013), however, Limas growth had a sharp braking, because its population and
its area grew almost equally little 34% and 39%, respectively.
Those broad facts let us draw an early conclusion: it seems that the structural problems of Lima
generated from 1940 to 1993, and the preliminary evidence indicates that the culprit is the
combination of a superfast population growth and a disorganized territorial expansion.
Therefore, the present document seeks to offers reasonable answers to two basic questions: why
Lima grew that much, and what led to the sorting Lima exhibits. At doing that, we would help us
with the insights and predictions from the Basic Urban Model (Alonso, Yinger, Glaeser, and other
authors).

The document is organized as follows. After this introduction, we develop a literature review
intended to come up with a theory-based diagnosis. In the following section we outline what might
be a theoretical model for Lima, which may be used to make predictions about the further moves
of this metropolis. In the last section, we would try to support our propositions with data collected
from Lima.

Literature review and theorybased diagnosis.

In 1940 Lima city had 650 mil inhabitants (Rodriguez, 1968) and occupied an urban area of 42
km2, some 10,379 acres (Caldern, 1998). In 1967, the urban area of Lima extended to 190 km2
and with a population of 2.39 million people, meaning larger by 352% in extension and 268% in
population.
Caldern (1998) shows that in a span of 53 years (1940 to 1993), Limas population increased 10
times, meaning that roughly every 10 years it doubled its population. In approximately the same
period (1940 to 1995) the urban area of Lima grew 11 times, from 42 km2 to 507km2. In the last
20 years (1993 to 2013), however, Limas growth had a sharp braking, because its population and
its area grew almost equally little 34% and 39%, respectively.
Those facts let us advance that the structural problems of Lima generated from 1940 to 1993, and
the preliminary evidence indicates that the culprit is the combination of a superfast population
growth and a disorganized territorial expansion. Consequently, it is important to try to answer why
Lima grew that much, and what led to the sorting Lima exhibits.
Griffin (1980) offers an interesting view of the evolution of the Latin American cities in contrast
with the common pattern followed by AngloAmerican cities. The author brings up that LA cities
were not supply places of services for industry and trade, and for that, working places of their own,
but instead as administrative and political centers. They never played the role Central Business
Districts (CBD), in the first place.
The typical configuration of those cities was a downtown around a plaza, with the most important
city buildings around: the catholic temple, the municipality building, and the very first conquerors
or founders houses, while the houses of all residents were placed in the blocks surrounding the
plaza in a way that the nearest ones were for the wealthiest and so going farther to reflect social
and economic status. Businesses scattered across residences, run by artisans and shopkeepers in the
first floor of their houses, all in strictly comply with the Laws if Indies.
3

Figures 1 and 2.

As Figures 1 and 2 show, kept a certain distance from the coast in order to protect it from the
attacks of pirates, for what Lima also held for long a city wall (demolished as late as 1869). Around
the city there was agricultural land, filling the gap between it and the shore.
Lima like other LA cities made the transit from the colony to the Republic in the 19th century
without many changes in their economic functions as well as their configuration. On the contrary,
while the Industrial Revolution would take place in Europe and masses of labor workers were
displaced from the farms to the new factories, the shortage in food supply was covered by a
growing agricultural production. That pattern dominated during the 19th century and the first
third of the 20th century and so it reinforced the role of the cities as administrative centers, not
productive locations that would attract labor force.
It wasnt until well advanced the 20th century that the industrialization in Europe and the US
started to affect Limas cityscape. As foreign enterprises began to arrive, the demand for space and
services started also to put pressure on the citys capacities. Since urban services and amenities were
concentrated in the downtown, it was natural that the incoming businesses took on progressively
many of the residences, increasing the land values and so displacing first the upper and after the
middle class families out of the city center, who did not either whish live any longer in downtown
due the new congestive dynamics going on there.
As Griffin points out, elites started to make their way out of the city center but in a pattern that
differs from that predicted by the Basic Urban Model (Yinger, 2006; Glaeser, 2008), meaning, not
uniformly around the CBD, but along a mall (or alameda, as we call it in Spanish) that extend
outward from the downtown to their favorite resort (lower right parts in Figures 3 and 4). In Lima
4

that mall was the Arequipa Avenue, created in 1919 by President Augusto Legua. It had sidewalks
adorned with palm trees and gardens, scattered with benches, and illuminated by streetlights. Of
course there other malls or walks created shortly before or after, such as the Nicolas de Pirola Ave,
the Salaverry Ave, or the Arica walk, but there were all close to each other while it was not clear yet
where the elites were to head farther.

Figures 3 and 4.

But, since expansion in the center was limited by the presence of the house of government, the
Congress building, the Cathedral, the City Hall, and other important structures either by political
or religious grounds, also business started to move outwards the downtown. Before the 30s, four
avenues were made to ease the transit from the haciendas on the way to El Callao and vice versa:
the Progreso Ave (today Venezuela Ave), the road to El Callao (named after Colonial Ave and
currently Benavides Ave), the Arica Ave, as an upgrade of the Arica walk, and the Argentina Ave
(see the upper-left part of Figures 3 and 4). That last one would became the main industrial of the
city.
At this point the expansion of Lima was ordered and organized and the proximity of the nascent
industries to the city center was explained by the limited scope of public services and amenities
such as drinking water and electricity, but also by their need to stay close to governmental offices
and the elites, who were not only power holders but also the educated and bilingual labor force to
manage the foreign companies.
When Lima entered the 40s it had begun to follow the Anglo-American city growing pattern and
transform its city center in a CBD, but then the context changed dramatically.
5

There were three main trends that caused the overflowing growth of Lima dwellers. By that time
vaccination spread over the countryside dramatically reducing mortality rates. Also a concentration
of land property process reached a high point, starting to drive out peasants towards the big coastal
ranches (haciendas) first, and then to the coastal cities, especially Lima (CIRED & ONEC, 1974),
where the government would promote a nascent national industry (Industry Promotion Law of
1959 and the General Law of Industries of 1974; Abugattas, 1999).
The population Lima increased from 1940 to 1972 in a context in which the countrywide
population doubled and the urban population growth rate averaged 5% per year over that period.
Now we remember the figures offered by Rodriguez (1968) that from 1940 to 1967 Lima grew
38% in extension and 268% in population. Provided that the average population growth rate in
Peru was around 2.2% annually, then we may impute 2.8% to immigration.
While in 1940 only 17.4% of the Limas population were immigrants, by 1960 they were 27.9%,
and 43.5% by 1970. It has been proved that from 1961 to 1970, Lima received its largest migratory
wave (CIRED & ONEC, 1974). By that time, Lima already had 25.6% of its population living in
slums outside the urban boundaries of the city, all of them immigrants (CIRED & ONEC, 1974).
The Figure 5 below shows what Lima looked like after receiving successive waves of immigrants.

Figure 5.
6

How migration affected housing and land prices? How these factors intertwined? How was their dynamics?
What can the BUM tell us about?
Lets start by responding the last question: a lot.
We describe now the way in which migration, land market and housing are linked, based on the
information provided by Rodrguez (1968), Caldern (1998), and INEI (2007).
To Rodrguez (1968), the immigration brought about by itself a dramatic change in the residential
structure of Lima. The result was a sorting based on the income distribution. That sorting worked
through highly speculative rental and housing markets and was heavily influenced by social
prejudices and ethnic discrimination against the immigrants who came from the highlands.
He grounds his argument by pointing out the skyrocket increase in houses and apartments prices
as well as rents during the period 19401967. The average housing index price calculated by the
government for that period was 484, (an increase of 384%), but then Rodriguez collects more than
4500 newspaper advertisements and records the prices asked for new houses and apartments sales
and rents. He calculates the price and rent indices for new houses and apartments comparing their
data to the 1940 official levels. Thus he comes up with a rent index of 7,524 for new houses and
7,220 for new apartments.
The rents for houses ranged from 1,223 soles 1 to 7,975 soles (3 rooms, on average) and from 916
soles to 4,794 soles for apartments (2 rooms, on average), while 72% of the households had
monthly incomes lower than 7,000 soles, a range that included most immigrants. That means that
around 72% of the population, most likely immigrants were excluded of the rental market. The
only option left for them was to rent small rooms in the city center and the neighborhoods that
the middle class had started to abandon in their move outwards behind the upper class (a process
that Griffin called filtering-down).
Then the immigrants, at the time almost half of Lima peoples, faced this dilemma: living in city
center or nearby, enjoying amenities but in crowding versus relinquishing amenities and going for
space beyond the very edges of the city.
What may have been an immigrants decision in that case? The distribution of immigrants in the
economic active population by activities gives us a hint. Roughly 60% of immigrants did a manual
activity for a living and 53% of them worked in the tertiary sector. Although we do not know the

The Peruvian currency at that time.

conditional distributions of those processes, we can still say that, roughly speaking, a third of
immigrants could decide where to live not based on labor considerations just because they could
perform the same kind of activities anywhere and, therefore, able to move away from the city
center.
The decision of an immigrant family of moving out the city center may be consistent with the
assumption that the services from the house and the amenities could be perfect substitutes (see
Figure 8), the opposite of what Zabel (2003) assumes to estimate the demand for housing.
Many years after Fernndez (2012) provides evidence for the sorting predicted by Rodriguez. The
Figure 6 below shows the concentration of socioeconomic strata by districts in Lima towards 2004.
The green stands for high and middle-high income families, the orange is for middle class, and the
red for mid-low and low income. The further a family goes away from the city center, the lower
tends to be its income.

Figure 6.

Caldern (1998) has given a perspective that goes in the same direction, but provides mores
elements that enrich the analysis. He jumps up directly to an advanced stage in the sorting process,
but stresses the role played by capital restrictions, the informal land market, and the inadequate
public policies.
For him the sorting had two moments. First, the immigrants were pushed out of the city, towards
the barren land beyond the green belt that since the colony surrounded Lima (here is where a
driver lacks). Lima was at that time somewhere thee 40s and the 70s and agricultural rents were
still larger than urban.
But then two things happened. In 1968 the military government decreed the Agrarian Reform by
which every agricultural lot with irrigation larger than 150 hectares were to be expropriated. The
policy exogenously reduced the expected value of agricultural land, meaning a reduction in of
the BUM (movement from A to B in Figure 7). In the meantime, more immigrants had been
arriving to Lima, placing in the city center first, but as the bid for room and services pushed the
prices of housing beyond the reach of their little incomes, immigrants started to move in the
barren land beyond the green belt that was twice as big as the urban area (Caldern, 1998). That
was the inflection point for the sorting that has characterized Lima for decades.
In a second moment, several agents (lawyers, notary publics, financial agents, even banks) collide to
covertly sell agricultural land to groups of immigrants gathered in pro-housing associations or
cooperatives, so as to avoid expropriation and that the government takes over the transactions.
Among those agents were some landowners themselves, who this way abandoned farming for
realty.
In a first moment, the shock by the Agrarian reform caused an exogenous decrease in along with
an exogenous increase in land supply for urban use L. One of the predictions of the BUM is
skyline in the CBD due to the bidding for housing, given a fixed amount of land. But because the
land supply exogenously rose, the land rent drawn from the urban uses of land dropped:

K {u}
= qR {u}
L {u}

where

A (1 a )
q=

Cr

1a

The fall in caused an expansion in the city, as the BUM predicts. But in a second moment, as
immigrants kept coming over to the city, they provoked a movement outwards in the BF for
9

housing, pushing up the land rent (although in through the informal market). As Figure 7 shows,
Lima ended up bigger and the land more expensive.

Figure 7.

We should wonder why K did not grew so as to offer adequate room for the immigrants. If that
that had been the case, we had seen Lima building height, a prediction that conforms the BUM.
But, it was not the case. Although data regarding investments in urban development is not
available for that time (until the 90s), we can infer that these kept constant. The hypotheses range
from capital restrictions, incomplete markets (lack of professional realtors) or, as Caldern (1998)
has suggested, prejudice and discrimination against the immigrants.
The last hypothesis states that upper and middle class families that held properties did not want
them living across the street and for that they increased the rents. However, the Caldern does not
provide evidence of that prejudice, or at least that the prejudice had been the main driver for the
rise in rents over the increased demand for housing by the continuous flow of immigrants. Due to
the evidence available, the demand-based explanation prevails in this case.
The Figure 8 shows how immigrants were developing settlements in the barren lands beyond
Limas green belt, which were called barriadas.

10

Figure 8 2

By the early 90s, a series of reforms freed land and housing markets, and allowed private
investment in urban infrastructure. It was also a time when the immigrants and their descendants
started to consolidated economically, socially, and politically.

Empirical estimation of the demand for housing.

Many things have changed since the 90s in Lima. The economic growth spread out throughout
Lima converting the ancient barriadas in new urban centers plentiful of economic activity. This
new dynamics, closer to those of the cities in industrial countries, may have had the effect of
changing the sorting.
In order to assess if Lima behaves in line with the main predictions of the BUM, we decided to
estimate the price for housing in Lima using an hedonic approach, as well as the demand for
housing, following Zabel (2003).
2

http://www.amigosdevilla.it/historia/antecedentes02.html

11

For that, we have got the National Household Survey from where have extracted a set of variables
including: households income and spending; house ownership; rents effectively paid and
imputed; number of family members; schooling, age, gender, and employment status of the
household heads; spending in transportation (as a proxy for distance); physical characteristics of
the houses; and, availability or access to amenities (telephone, internet, cable, electricity, drinking
water, and sewage).
We have collected the information for the years 2004 to 2012 and for the 43 districts (or towns)
within Lima, although at this initial stage we have only worked with the 2012 data.
In order to comply with the theoretical insights of the BUM, the coordinates of two city centers
have been calculated: the historical city center that comes from the colony times, and the modern
financial center. Using the geocode and timetravel Stata commands, as well as manual
calculations, the distances from every district to the financial center are reported, and subsequently
used as an explanatory variable in the housing demand function.

Hedonic estimation of the price for housing.

Having data of rents, and assuming an infinite time horizon (which is reasonable since a house
normally surpasses an individuals lifetime) the following equivalence has been used:

Rent (in each period t) = Price per unit of housing . Units of housing = P. H
And:

House price = Rents NPV = P. H / r

First of all, a series of dummies were created to account for house characteristics such as the
number of rooms, the materials of which the houses floor, ceiling and walls are made, and
whether the house has an independent access. Also a series of dummies to reflect the number of
amenities available (basic services such as drinking water and sewage) were generated.
Then, an hedonic housing price model is estimated taking the rents (either declared or imputed) as
proxies of the houses prices. The model estimated is that of the equation (14) in Zabel (2003):
= 0 + 1 + 2 +
12

The equation estimated in the second column of the Table 1 shows the houses value
decomposition into neighborhood value and structure value [Zabels eq. (14)].

Table 1.
habitac

lnrenta

lnrenta

0.0807***
(0.0036)
[22.2810]
[0.0000]

0.1372***
(0.0101)
[13.5989]
[0.0000]

habitac2

-0.0050***
(0.0008)
[-6.0533]
[0.0000]

pared_adec

0.2875***
(0.0236)
[12.1860]
[0.0000]

0.2804***
(0.0237)
[11.8433]
[0.0000]

piso_adec

0.2735***
(0.0313)
[8.7471]
[0.0000]

0.2687***
(0.0312)
[8.6248]
[0.0000]

techo_adec

0.4034***
(0.0191)
[21.0720]
[0.0000]

0.3988***
(0.0192)
[20.7348]
[0.0000]

agua_red

0.1669***
(0.0336)
[4.9647]
[0.0000]

0.1955***
(0.0220)
[8.8826]
[0.0000]

alcant_red

0.0609*
(0.0336)
[1.8136]
[0.0698]

telef

0.2488***
(0.0155)
[16.0174]
[0.0000]

0.2430***
(0.0155)
[15.6327]
[0.0000]

cable

0.1497***
(0.0146)
[10.2449]
[0.0000]

0.1540***
(0.0146)
[10.5443]
[0.0000]

internet

0.2277***

0.2261***

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Constant

Observations
R-squared
AdjR2
F
RSE

(0.0161)
[14.1781]
[0.0000]

(0.0161)
[14.0639]
[0.0000]

6.6104***
(0.0312)
[211.9280]
[0.0000]

6.5253***
(0.0344)
[189.8793]
[0.0000]

8,621
0.4739
0.473
861.1
0.382

8,621
0.4755
0.475
873.9
0.382

Standard errors in brackets

*** p<0.01, ** p<0.05, * p<0.1

The outcomes are such that the effect of the number of rooms becomes 0 when it is 13. The net
effect of an additional room is 13% increase in houses rent.
From the last equation, we recovered the part of the rent explained by house and neighborhood
characteristics. The remaining part (the residuals) must be then the value of a basic housing unit.
Then, with the estimated coefficients we calculated the price indices of housing per district (the
Zabels pjs), following Zabel (2003)s equation (15).
Hence, by dividing the houses values by the pjs calculated above, we revealed the housing demand
[equation (17) from Zabel (2003)], where the discount rate was assumed to be 10%.
= . [0+1 +2 ]

Finally, we use the rest of the variables in the database to come up with an explanatory model for
the housing demand following the theory developed across the course, similar to equation (5) in
Zabel (2003). In that model, household spending was used as a proxy of permanent income.
= 0 + 1 + 2 +

The Table 2 outcomes show that the housing demand price elasticity is 10%, inelastic as expected.
The elasticity to income is 53%, which makes housing a normal to superior good, as predicted by
theory. Lastly, we have proven that, as the BUM predicts, there is a positive relationship between
distance and housing demand: more housing is sought as we move away from the city center. In
Limas case, the semi-elasticity calculated says that 30 minutes farther increases housing demand in
9%.
14

Table 2.

lnhousing

lnprice

-0.1015***
(0.0104)
[-9.7728]
[0.0000]

lngasto

0.5319***
(0.0226)
[23.5024]
[0.0000]

viv_indep

3.3776***
(0.1376)
[24.5497]
[0.0000]

sin_ing

0.1221***
(0.0378)
[3.2256]
[0.0013]

escolares

-0.1614***
(0.0388)
[-4.1596]
[0.0000]

dist_car_time

Constant

Observations
R-squared
AdjR2
F
RSE

0.0031**
(0.0013)
[2.3703]
[0.0178]
-3.1936***
(0.2753)
[-11.5995]
[0.0000]
8,920
0.4353
0.435
227.8
0.382

Standard errors in brackets

*** p<0.01, ** p<0.05, * p<0.1

15

Sorting
Finally, building upon the results just obtained, we explored if in recent years the sorting in Lima
was the same observed in the past decades. For that, the data have been ordered by income
quintiles.
Figure 9 shows that middle-high and high income families have started to move outwards the city
center.
Figure 9.

distance (km)
70
60
50
40
30
20
10
0

Figure 10.

housing demand
450
400
350
300
250
200

Likewise, Figure 10 shows that housing demand increases by income. Together the two trends just
looked over manifest that Lima now exhibits the normal sorting predicted by the BUM: highest
income people live away from the BDC in order to afford more housing.
16

References
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industrial: la experiencia peruana. CEPAL, Santiago, Chile.
Caldern, Julio (1998). Mercado de tierras en reas agrcolas y periurbanas de Lima. DEBATE
AGRARIO N 28. Centro Peruano de Estudios Sociales CEPES, Lima Per.
Comit Internacional para la Coordinacin de las Investigaciones en Demografa CIRED and
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Fernndez de Crdova Gutirrez, Graciela (2012). Nuevos patrones de segregacin socio-espacial
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Griffin, Ernst (1980). A model of Latin American City Structure. Geographical Review, Vol. 70,
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Ciencias Aplicadas, Lima Per.
Rodrguez, Alfredo (1968). Oferta de vivienda y terrenos en Lima Metropolitana 1940 1967.
Desco, Lima Per.
Yinger, John (2006). Housing and Commuting: The Theory of Urban Residential Structure. Ebook, version 1.4.
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