Building our way out of slums

I came across two articles on slums, specifically Dharavi in Mumbai (coincidentally, one after another):
1. From Economist (subscription required):
The idea now in vogue is to bring in a developer, let him put up multi-storey buildings, use some of the flats to rehouse those living on the site and sell others at a profit. Slum-dwellers often have enough money to pay rent, and such deals remove a financial burden from the local authority or landlord. ... Others worry that such schemes will allow corrupt officials and corrupt developers to make huge fortunes at the expense of the poor. ... More generally, he believes that both government and developers have a strong interest in keeping property prices high—and Mumbai's rank among the highest in the world. Vijay Mahajan, of Bombay First, a businessmen's group formed to promote and improve the city, agrees. The higher the prices, the more builders can charge. As for the politicians, they profit from an invisible line that runs directly from slumlord to local politician to state minister to his boss. Money runs up along this line, and so do votes. In return, the government lets the slums remain undemolished. It is a pay-and-stay arrangement.
2. From National Geographic who describes one such developer:
"Talk about doing something about Mumbai slums, and no one pays attention. Talk about Dharavi, and it is Mission Impossible, an international incident," says Mukesh Mehta as he enters the blond-paneled conference room of the Maharashtra State Administration Building. For nine years, Mehta, a 56-year-old architect and urban designer, has honed his plan for "a sustainable, mainstreamed, slum-free Dharavi." At today's meeting, after many PowerPoint presentations, the plan is slated for approval by the state chief minister, Vilasrao Deshmukh.

Dharavi is to be divided into five sectors, each developed with the involvement of investors, mostly nonresident Indians. Initially, 57,000 Dharavi families will be resettled into high-rise housing close to their current residences. Each family is entitled to 225 square feet (21 square meters) of housing, with its own indoor plumbing. In return for erecting the "free" buildings, private firms will be given handsome incentives to build for-profit housing to be sold at (high) market rates. ...

At first glance, Mehta, resident of an elegant apartment building on swank Napean Sea Road, a longtime member of the British Raj–era Bombay Gymkhana and Royal Bombay Yacht Club, does not appear to be a Dharavi dreamer.

"You could say I was born with a golden spoon in my mouth," he remarks at his West Bandra office overlooking the Arabian Sea. "My father came to Bombay from Gujarat without a penny and built a tremendous steel business. An astrologer told him his youngest son—me—would be the most successful one, so I was afforded everything." These perks included a top education, plus a sojourn in the U.S., where Mehta studied architecture at Pratt Institute in Brooklyn.
"For me, America has always been the inspiration," says Mehta, who made a fortune managing his father's steel business before deciding to develop real estate on Long Island's exclusive North Shore. "Great Gatsby country," he says, detailing how he built high-end houses and lived in Centre Island, a white community with "the richest of the rich"—such as Billy Joel, who recently listed his mansion for 37.5 million dollars.

"The slums were the furthest thing from my mind," Mehta says. This changed when he returned to Mumbai. He saw what everyone else did—that the city was filled with a few rich people, a vast number of poor people, and hardly anyone in the middle. This was most evident in the appalling housing situation. The city was split between the Manhattan-priced high-rises that dotted the south Mumbai skyline and those brownish areas on the map marked with the letters ZP for zopadpatti, aka slums. ...

Then it jumped out, as clear as real estate's incontrovertible first axiom, location, location, location: Dharavi, right in the middle of the map. It was a quirk of geography and history, as any urban planner will tell you (the American inner city aside): Large masses of poor people are not supposed to be in the center of the city. They are supposed to be on the periphery, stacked up on the outskirts. Dharavi had once been on the northern fringe, but ever growing Mumbai had sprawled toward the famous slum, eventually surrounding it.

It didn't take a wizard to see the advantages of Dharavi's position. Served by two railway lines, it was ideally situated for middle-class commuters. Added to this was the advent of the Bandra-Kurla Complex, a global corporate enclave located directly across the remaining mangrove swamps, as close to Dharavi as Wall Street is to Brooklyn Heights. Sterile and kempt, the BKC was the future, right on the doorstep of the zopadpatti.

"I approached it as a developer. In other words, as a mercenary," says Mehta, satellite images of Dharavi spread across his desk. "But something happened. I opened an office in Dharavi, started talking to people, seeing who they were, how hard they worked, and how you could be there for months and never once be asked for a handout."

It was then, Mehta says, "I had an epiphany. I asked myself if these people were any different from my father when he first came from Gujarat. They have the same dreams. That was when I decided to dedicate the rest of my life to fixing the slums. Because I realized: The people of Dharavi—they are my genuine heroes."

Back on Rajendra Prasad Chawl, news of the plan's approval was met with a decidedly mixed response. Meera Singh barely looked up from Baba Ramdev's lecture. She had heard often the stories about Dharavi's supposed transformation. Nothing much ever happened. Why should Mukesh Mehta's scheme be any different? Moreover, what reason would possess her to move into a 225-square-foot (21 square meters) apartment, even if it were free? She has nearly 400 square feet (40 square meters). "Informal housing" has been good to her. She receives 1,100 rupees a month from the furniture workers and another thousand from renting her basement. Why should she give this up for a seven-story apartment building where she'll be saddled with fees, including "lift" charges? She doesn't like to ride in elevators. They give her the creeps.

Amit Singh was more outspoken. Mehta's plan was nothing more than "a scam, a chunk of fool's gold." Amit was already drafting an editorial in the Janhit Times demanding a citizen's arrest of "the gangster Mehta."

(The entire article is more engaging than this clip can provide).

But I wondered: Why not just give the people of Dharavi clear title to the land that they are living on? After all, aren't economists currently riding the bandwagon of the importance of property rights and institutions that enforce such rights so that economic growth can become self sustaining?
In an insightful recent book, The Mystery of Capital, Peruvian economist Hernando de Soto notes that the poor in much of the developing world would have property that could be pledged as collateral if its legal status were not murky. For example, houses built in the Dharavi slum in Bombay are solidly constructed and sit on prime land. But since they are encroachments on government or private land, they have no legal status. Because their property cannot serve as collateral, de Soto argues, the poor have no access to finance. The solution to this problem, he suggests, is to offer the poor clear title to their land.

While there is substantial merit to his idea, it is no panacea. If the poor are squatting on someone else's private property, or as is typically the case in the developing world, government land, legalizing encroachment could lead to a free-for-all to occupy the remaining land, leading to widespread insecurity of property, the opposite effect of that intended.

If, on the other hand, the poor had a long history of occupying the land and have the sanction of the community in doing so ... the incentives created by legalizing may not be altogether perverse. But if it is the local community that enforces property rights, then it is unclear that a title from a remote government would be enought to make the property good collateral. It would take a really brave bank officer to attempt to repossess a house in the Dharavi slum against the wishes of the local mafia ... (or the local mafia under a crooked politician who most likely is benefititting from "rents" extracted from those living on the land. See the Economist article for an illustration in Nairobi.)

The above is from Raghuram Rajan and Luigi Zingales, "Saving Capitalism from the Capitalists" (pages 32-33).