Savings and Finance in Slums

Abstract : Most people think of slum dwellers as living just above subsistence. But that is not often true. People come to cities because of the higher wages there. While those who cannot afford formal housing live in slums, they are also able to save money over time. Until recently, slum dwellers could not put their savings in bank accounts as banks required account holders to have formal addresses and slum dwellers are squatters. Instead, slum dwellers came up with and used alternative investment vehicles. This chapter examines a number of the most common vehicles. One category is rotating credit and savings associations (ROSCA’s). What is intriguing about these is that ROSCA’s are ubiquitous even though they are quite complicated and that males and females participate in different types of ROSCAs. In female member ROSCAs, participants contribute equal amounts at each meeting and then draw straws, with the winner taking the entire kitty. In male member ROSCAs, the participants bid to take a portion of the kitty and the person who bids the lowest portion gets to take that portion, with the rest of the kitty rolled over for the next meeting. We explore how these ROSCAs formed and why males and females have different ROSCA rules. Another category of investment vehicles is homes: people save by building new rooms or floors. We examine why this is the case and how this creates rental markets in slums. It also complicates efforts to regularize slums by giving people low-income homes or land rights. A common dispute is whether benefits should be given to the informal owner of a home or the informal tenant. Our chapter will describe and try to explain how and why these different investment and financing vehicles arose and how new programs such as the government’s new JDY accounts affect economic activity in slums.

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Housing Markets in Slums

Abstract : What makes housing markets in slums interesting is that people build, buy and sell homes, even though they do not own the land underneath their homes. There is even a vibrant rental market because residents save money by building additional homes and renting them out. Even more surprising is that, although courts will not enforce sales and rental contracts by squatters, slum dwellers use formal legal documents to document their housing transactions. Predictably, prices reflect not just home quality but also local amenities, such as access to roads and distance from toilets. More surprisingly, despite frictions from lack of formal enforceability, housing markets in slums may work as well or better than those outside slums because slums' informality means that inefficient housing regulations (e.g., excessive rent control and zoning) are not enforceable in slums. Our paper documents and tries to explain these facts – and how housing transactions are enforced.

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Neighborhood Amenities in Slums

Abstract : This chapter examines how slums obtain utilities such as water, toilets, sanitation, and electricity even though cities, as a matter of policy, do not provide them. It describes how private entrepreneurs – often called mafia, but not nearly as violent as the US movie version – emerge to provide water taps or tankers for slums without water mains and stolen or resold electricity to slums without service from electric companies. We discuss how some slums take up collections to construct and, importantly, maintain toilets. We also describe how other slums take a different tact and organize into so-called vote banks that trade residents’ votes in return for promises from politicians to make the city provide city services for the slum. We discuss, for example, how the quality of toilets predictably falls the more accessible the slum is because accessibility impose more potential free riders and how organization into vote banks becomes more difficult the more caste heterogeneous the slum is. Ultimately, we show how self-produced services, because they operate at a smaller scale and are not the product of specialization, are costlier than similar services provided by the city to formal communities. The result is a poverty tax that slows social mobility.

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