Millions of Indians live in slums.  It is a problem decades in the making that the Indian government is trying to solve.  One difficulty in doing so is that the government needs to recognized that it has been a part of the problem for at least four decades and must take remedial policy steps before it can successfully be a part of the solution.

The “License Raj”

India developed two interrelated policies in the 1970s and before to control urbanization.  The first was to discourage migration to major urban centers, instead trying focus growth on smaller cities.  The second and more draconian policy was the intentional limiting of utilities and and building permits to limit the pace of urban growth.

The problem is that the cities remain magnets for rural Indians seeking a better life.  Urban centers offer more employment opportunities at better pay than can be found elsewhere.  Economics, like nature, abhors a vacuum; the gap between India’s planning policies and economic reality was filled with slums.

A slum stands on the edge of a creek in Mumbai, India. Pic: AP.

Those policies allowed the infamous license raj, a thicket of government regulations and red tape that often makes it difficult to get things done in India, to become an enemy to India’s urban poor.  Even if a slum dweller has a job with a steady income, the relative dearth of available housing pushes prices out of reach.  Slums have grown even as productivity and income have increased.

Perhaps the most infamous example is Mumbai, which has seen an increase in population from 10 million in 1981 to 12 million in 2001 with no net increase in the number of housing units.

What to do?

So what can the government do to end a problem it helped create?

First, here is the way not to control slums: the willy-nilly destruction of them during periodic urban renewal projects.  This just scatters the slum dwellers to similar committees nearby while destroying what little in assets they have built up over the years.

Patricia Annez, Alain Bertaud, Bimal Patel and V. K. Phatak, writing in a report backed by the Rockefeller Foundation, concluded that the government can be a part of the solution to the slum problem by working with the market rather than against it.  The first step, sure to warm the hearts of economic liberals everywhere, is to remove government restrictions on the creation of new housing in urban centers.  Even the construction of more upscale unit would help with the housing problem as upper and middle class urbanites move up, forcing owners of older units to market to poorer populations.

The team’s solution also includes a provision that would make the left happy: government subsidies.  They argue that subsidies would have to be narrowly targeted in order to be affordable for the government.

If you are in the mood for a dry read, here is their full report (pdf).