The slum economy revisited

Such transactions are commonplace in the more commercially valuable locations of a slum, such as the main road margins and junctions. Typically, the buyer converts at least a portion of these houses into shops or small commercial establishments. Often, a number of houses are purchased and amalgamated into a single unit.

There are a number of reasons for encouraging such transactions and consequent renewals. Most importantly, they act as a valuable economic multiplier to the local slum economy. Very often, these new settlers are responsible for setting up essential commercial establishments such as grocery stores, medicine shops and other services. Without these shops, the slum dwellers end up travelling long distances to procure such goods and services. This situation can be best explained with the help of the following parable:

Slumland is a poor country, with a predominantly agricultural and mining economy. It relies on imports to meet all its requirements of capital goods and consumer durables. Its communist government exercised stringent trade controls, and this spawned a flourishing black market. Then, with the collapse of the Soviet Union and the subsequent fall of the communist government of Slumland, the new government opened the economy. Movement of goods, labour and capital was liberalized, and the government reached out to invite foreign direct investment (FDI) to Slumland. Economic growth soon reached double digits.

Now replace Slumland with any city slum and the external investors and FDI with outsiders purchasing houses in these slums, and things fall into place. Just as in the case of any country, investment by outsiders, even if by purchasing the houses allotted to urban poor, has many immediate and long-term multiplier effects on the economy. In fact, it’s even essential for the development of the slum, since such economic activities cannot find investment from within the slum. As is the case with FDI coming to Slumland, it is certainly important that certain regulations govern the terms of these housing transactions and its subsequent use.

There are indirect benefits, too. They help attract good quality private schools and hospitals, banks and other institutions to the slum. They bring in consumers with higher purchasing power, whose spending power can sustain these services.

This also produces an economically efficient solution by allocating the scarce slum resources more efficiently. The road margins and junctions are the most valuable land in the slum, and it is only appropriate that these locations be used for activities that maximize social utility. The poor, original house allottees, get a good deal with the sale of the allotted house fetching a value a few times more than the actual unit cost of the house. The purchaser gets a valuable piece of real estate with great potential for future growth.

Though there is a regulatory solution to achieving the same objective, I have my reservations. It involves earmarking such potentially valuable locations along road margins and junctions, and auctioning them off for commercial development. This is similar to the recent trend of governments searching and allocating valuable land for private industrial or business ventures. Such allocations are generally not demand-driven and suffer from a number of incentive distortions.

Like numerous examples of flawed privatization experiments across the globe, such allotments are most often doled out as political patronage and are vulnerable to corrupt practices. They also end up attracting the wrong set of buyers with incompatible incentives. Further, all such economic developments in any residential colony have a natural momentum and phasing, and one-time allotments disrupt this momentum. There is serious danger of failing to meet goals, faced as it is with a set of strong counter-incentives.

If the objective is that slums should not remain trapped as slums forever, then they should be allowed to develop organically as small open economies, and not as models of development thrust from above.

Gulzar Natarajan is a civil servant. Comments are welcome at theirview@livemint.com

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