Types of foreign finance and slum upgrading: How do official development assistance, foreign direct investment, and foreign remittances affect slum upgrading across regime types in developing countries?

Abstract

How do types of foreign financing, such as official development assistance (ODA), foreign direct investment (FDI), and foreign remittances affect slum upgrading in developing countries? We posit that while inflows of financial resources would likely reduce slum prevalence in general, the effects will diverge depending on the type of foreign finance: ODA and remittances will be more effective than commercially motivated FDI in upgrading slums. We further theorise that the effects of ODA, over which governments can exercise greater discretion, will be stronger in autocratic countries than in democratic ones. This is because there are stronger political incentives for autocratic leaders to channel public resources into slums to avoid an urban uprising – a significant threat to the political survival of autocratic leaders. In comparison, those who live in slums in democracies often face legal and practical challenges in participating politically; thus, political incentives for democratic leaders to cater to the interests of slum dwellers are weaker, resulting in less public investment in slums in democracies. Utilizing the existing datasets of populations living in slums and foreign financial flows, we find the following: 1) FDI exerts no statistically significant effects on reducing slum populations; 2) remittances reduce the number of slum dwellers in both democratic and autocratic countries; and 3) ODA reduces the number of slum dwellers only in autocratic countries. These findings suggest that the types of foreign financing and domestic institutions in developing countries should be accounted for when devising strategies for slum upgrading.