Slums are often seen as a property of rapid economic growth in urban areas. Slums form on the outskirts of economic hubs.They are the product of urbanization and are often highlighted for stimulating upward mobility. Marx, Stoker and Suri (2013) pose an interesting discussion into the contemporary ideas on the value of slums. Slums were normally thought as home for migrants seeking economic opportunity. The wealth of a fast growing city can trickle out to the slums, but this might only leave crumbs.
Many slums are characterized as having poor quality housing, lack of clean water or sanitation, and the need to pay rent. In Kenya, 90% of households do not pay rent. Entering into a slum adds the cost of rent to a individuals budget constraint, lowering real income. Rent can often make up to 20% of total spending within slums. The growing population also exacerbates issues involving hygiene and the spread of illness. The slum Orangi, outside Karachi, Pakistan, more than doubled its population from 2003 to 2006 (from over 500,000 to 1.2 million). The lack of infrastructure in these areas increases the likelihood of a disease spreading. Many households will have to share a single water tap. A slum in Bangladesh reported that over 80% of households had a least one sick family member within a month of being surveyed. A sick population is often less productive. Unpaid sick days mean taking a day off work is the difference between having food on the table. Individuals with a low income can fall behind quickly when there are unexpected losses in income. The lack of proper infrastructure causes market failures in these slums. There is an inability to allocate many public access goods. Utilities, such as water, garbage and electricity, are not managed and so simply do not exist. Intervention would need to occur because of the lack of profitability in supplying public access good to the market.
This market failure creates a poverty trap for its residents. Market forces limit what can be achieved because the lack of markets for certain goods. These “shanty-towns” do not provide the proper necessities of life. An article from The Economist, Down and out, synthesizes many of the points that the full scholarly article makes, which can be found here. 860 million people leave in slums and could be suffering from conditions similar to this. The cities lack the ability to allocate wealth and provide opportunities for those that migrate near the city creating these slums. Market failures need the proper intervention to allocate public access goods.