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Forbes.com

 

New Land Of Opportunity

May 09, 2011

By Edward Glaeser

If you are alive today, there is a one-in-eight chance that you are living in a slum in the developing world, desperately--often successfully--trying to improve your lot.

Mumbai’s Dharavi slum is the most entrepreneurial place I’ve ever been. In one dark room--open to the street--there are two men recycling boxes by turning them inside out and re-stapling them. Across the dusty street, six women work together sorting great bins of plastic products for recycling. A few doorways down two men are maniacally sewing brassieres, just like on Manhattan’s Lower East Side in 1905. A little ways off craftspeople are painting and firing intricately designed ceramics.

The UN estimates that 828 million people, which is about 12% of humanity, live in slums in the developing world. Slum dwellers are typically defined as urbanites who lack decent housing or sanitation or clean water, or all of the above. They live in places of great deprivation. Disease is endemic, crime serious and corruption rampant.

But slums also offer tremendous economic opportunities. The vast majority of slum dwellers moved there voluntarily, usually to escape subsistence-level rural poverty, almost always looking to improve their lot. Rio de Janeiro certainly has a lot of slums and poor people, but it’s vastly richer than Brazil’s northeastern countryside. Rio has a poverty rate--defined as living on less than a dollar a day--of around 9%, while the rural northeast has a poverty rate of 55%. Cities don’t make people poor; they attract poor people.

The concentration of vast numbers of people on small patches of land may facilitate the spread of disease, but keeping people in rural poverty isn’t the right response. The right response is to follow the path of London and Chicago, Tokyo and Singapore, and invest in the infrastructure that makes cities livable. With clean water, cheap electricity and working transit systems, cities can blossom into places of health and pleasure, as well as productivity. In 1901 a boy born in New York City could expect to live seven years less than the national average, but today life expectancies are almost two years higher in New York.

The need for massive investment in the developing world’s megacities translates into huge opportunities for companies like Germany’s Siemens ( SI - news - people ), France’s Alstom and General Electric ( GE - news - people ), which specialize in building physical infrastructure. A century ago those projects were usually public affairs, but today private enterprise is much more likely to be providing the expertise and banking the profits.

For society as a whole, the benefits of making developing-world cities livable are enormous because those cities can offer a pathway out of poverty for billions. Cities like Bangalore and S�o Paulo are gateways to global markets. Workers in these cities earn more because they produce goods for the world’s richest consumers. The wide range of employers in these megacities provides a form of economic safety and diversity that eludes rural farmers. If one firm goes belly-up, there’s usually someone else looking for workers.

Perhaps most important, cities impart skills. Our greatest gift as a species is our ability to learn from the people around us, and we do that most effectively in cities. In America young traders go to Wall Street to learn their skills in the center of the financial maelstrom. But migrants to Dharavi are also learning skills no less valuable to them, whether core crafts like tailoring or more ephemeral insights into the grocery demands of urban consumers.

During the early industrial eras of America and England the poor came to cities to be part of vast factories that churned out textiles and steel and cars. In some developing cities today the urban poor are also likely to be employees, combining their labor with someone else’s capital, but in many cities slum entrepreneurship is extremely common. The pioneering development economists Abhijit Banerjee and Esther Duflo found that 69% of poor Peruvian urban households own a business. About one-half of poor urban households in Indonesia, Nicaragua and Pakistan own their own businesses. Typically these businesses are tiny--with no paid employees.

Even when slum entrepreneurs do have employees, small scale is the norm, with a couple of workers, like the sewing operation that I saw in Dharavi. Businesses remain tiny because raising capital is difficult and because their small scale enables these urban entrepreneurs to slip past the web of regulations--often opaque to a degree that would make Kafka despair--that bind larger enterprises.

What do the slum entrepreneurs do? Often they cater to the most basic human need--hunger. Banerjee and Duflo found that in Hyderabad, 8% of slum businesses sell fruit and vegetables, 6% sell milk and 17% operate small general stores. Occasionally such enterprises can lead to vast wealth--Carlos Slim Helú’s father began with a dry-goods store in Mexico City, and now his son is the world’s richest man--but far more often their operators just manage to eke out a living. These jobs require little specialized knowledge or capital. Competition is fierce, keeping earnings down. Specialization is actually a bit dangerous for the urban poor, since it is hard to predict what kind of job will provide a living next year.

Most of the time these businesses provide modest returns, perhaps a better living than one in deprived rural areas but not prosperity as Americans understand it. Yet occasionally a truly gifted entrepreneur, like Brazil’s Leila Velez, can catapult out of the bottom rung into the stratosphere. Velez grew up in one of Rio’s favelas and started working for a McDonald’s ( MCD - news - people ) at age 14. Her sister-in-law was a hairdresser, and both women saw the latent demand in the favelas for frizzless hair. They had no scientific background but experimented with strange concoctions on Leila’s husband and came up with an effective hair straightener. Velez raised $3,000 to open a salon by selling her VW Beetle, and today her company, Beleza Natural, sells tens of millions of dollars’ worth of hair products.

Velez provides a hopeful story of an entrepreneur who got rich by providing products initially for poor urbanites, but she had a lot more going in than most of the world’s slum dwellers. She was able to raise $3,000, far more than most slum entrepreneurs can muster. She was able to develop a product and patent it, which requires remarkable energy, skill and a very patient--and occasionally bald--spouse, who put up with being a human guinea pig.

While it is a mistake to miss the economic opportunity that slums provide for the world’s poor, it is also a mistake to idealize them. Abundant land hides many sins, and the abject failure of many developing-world governments can be missed in rural villages. But cities require an effective public sector to provide basics like clean water and honest police. They need better roads and transport to connect the slums with the more successful parts of their cities. They need fewer rules that impose costs on budding entrepreneurs, who must either follow burdensome regulations or bribe their way out of them.

In the slums the costs of bad government can be excruciating, but even here, megacities provide some hope. The revolution that created America was born when the crowded streets of Boston connected agitators like John Hancock and Sam Adams, and the world has recently witnessed Cairo’s mobs topple Hosni Mubarak. Cities enable the density of ideas and the coordination that is critical for political change--and the world’s poor countries will not get good government without change.

Differences in government also help explain why the conditions and prospects of slums are so different across the world. While China’s slum populations remain enormous, China’s economic success means that its slum population will decline significantly. India’s government, both more democratic and less efficient, does a poor job of providing clean water and sewage, but the country’s freedom empowers self-government. Dharavi is safe--not because Mumbai’s police force is so effective but because the community looks after its own.

The favelas of Brazil are more prosperous and often have better infrastructure, but walking around those areas can take real courage. Murder rates are high, as gangs fight each other. In many Latin American slums selling drugs is a common form of entrepreneurship.

The public sector is weakest in sub-Saharan Africa, and slums there are one of our planet’s greatest challenges. Over 70% of that area’s urban dwellers live in shantytowns, like Nairobi’s massive Kibera slum, one of the world’s largest. Conditions are bleakest in cities like the Congo’s Kinshasa, which has swelled as the poor flee a war-torn and starving hinterland. In these places life may still be better in the slums than in the country, but fear is a far weaker basis for urban success than profit.

Developing-world slums provide the best opportunity for lifting billions out of poverty in the coming century. Cities catalyze economic advancement and political change and, on the whole, have made humankind vastly more wealthy and healthy and free. But the transformations wrested by urban mobs in Paris in 1789 or St. Petersburg in 1917 remind us that urbanization is not without danger. Successfully managing homo sapiens’ mass migration from country to city is the challenge--and opportunity--of our lifetimes.

Original Source: http://www.forbes.com/forbes/2011/0509/global-2000-11-edward-glaeser-slums-dharavi-lands-opportunity.html

 

 
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