Foreign direct investment: to what extent has it driven the slum growth of developing nations?
Ben Hurd
By 2050 the population of this planet will surpass 9 billion people. 6.3 billion of these people will live in urban areas, with 5.1 billion of them living in cities of the now developing world 1 . These statistics are not all that shocking - population growth in the developing world has been well publicized. However few have emphasized that of these 6.3 billion individuals, 2 billion will live in slum settlements 2 . A UN Habitat report published in 2010 stated 'the world slum population will probably grow by 6 million each year (or another 61 million people) to hit a total of 889 million by 2020' 3 . This gives an incorrect impression that slum expansion will occur at a constant rate. Acceleration of growth is the inconvenient truth, and despite Foreign Direct Investment's benefits, it is largely to blame. Foreign Direct Investment (FDI) occurs when a firm invests directly in new facilities to produce or market in a foreign country 4 Generally it is businesses in developed nations that are the primary contributors to FDI, with many expanding their influence in developing nations for a multitude of reasons. For example to become more competitive in the global marketplace businesses will for example always seek cheaper labour, looser regulation and less taxation. Nations that wish to attract foreign firms must therefore offer these incentives in order to benefit from foreign investment. In this essay I will first explore how slum growth is a direct result of FDI through explosive urbanization, financialization and government debt. I will then outline to what extent poor governance and the existence of informal economies within slums contribute to their development. It is important to first understand why FDI causes mass migration towards cities and away from rural areas. As I have already mentioned foreign businesses will always seek to take advantage of cheap labour, and through globalization and Foreign Direct Investment they are given this opportunity. FDI will nearly always create new jobs, causing individuals and families to relocate to urban areas with hopes of earning higher wages. Existing unemployment in undeveloped or developing nations can provide further incentives for FDI through signalling to firms that there is a large available workforce that will potentially work for very low wages. The creation of new jobs in cities (foreign firms will often only target FDI towards financial centres such as cities from which they can co- ordinate with global markets) will cause large scale urbanization, to the extent that within a short period of time there will not be sufficient housing to accommodate every aspiring labourer. The fundamental issue associated with urbanization is that as an influx of migrants appear, land prices increase at the same time as wages begin to decrease due to the worker surplus 5 . It is extremely likely that demand for jobs will be greater than the supply created by FDI, meaning many new urban inhabitants will become or remain unemployed and therefore be unable to afford housing anyway. It is now possible to link slum development and urbanization. Due to the job creation resulting from FDI a wave of migrants enter urban areas, urban land becomes scarce and therefore expensive, housing becomes out of reach for many individuals and therefore slums form and grow at the same rate as urbanization. Urbanization alone however cannot cause slum growth, there must be a driving force such as FDI that ensures migration continues. Consider for example how and why today’s developed nations 1 http://www.citylab.com/work/2014/01/amazingendurance-slums/8120/ 10/08/2014 2 http://www.citylab.com/work/2014/01/amazingendurance-slums/8120/ 10/08/2014 3 htttp://realtruth.org/news/100326-002-international.html 11/08/2014 4 https://www.youtube.com/watch?v=trvLScaE0YE 21/08/2014 5 Frederick Van Der Ploeg, Steven Poelhekke - Globalization and the Rise of Mega-cities in the Developing World, 2008
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