Habitat International 139 (2023) 102898

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Habitat International
journal homepage: www.elsevier.com/locate/habitatint

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?
Seong Hun Yoo, Byungwon Woo *
Yonsei University, South Korea

A R T I C L E I N F O A B S T R A C T

Keywords: How do types of foreign financing, such as official development assistance (ODA), foreign direct investment
Slums (FDI), and foreign remittances affect slum upgrading in developing countries? We posit that while inflows of
Official development assistance financial resources would likely reduce slum prevalence in general, the effects will diverge depending on the type
Foreign direct investment
of foreign finance: ODA and remittances will be more effective than commercially motivated FDI in upgrading
Foreign remittance
Regime types
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.

1. Introduction developmental challenges of the 21st century. In the two global-scale

In 2007, the urban population exceeded the rural population for the
first time in human history as a consequence of rapid urbanisation since
1950. This trend is expected to continue for upcoming decades
(UN-Habitat, 2018) and, consequently, the locus of global problems is
likely to shift to urban areas as well. Poverty and inequality are at the
core of the many economic, social, and political problems faced by cities,
and slums encapsulate the worst form of urban poverty and inequality.
Slums are thus strongly correlated with a wide range of negative urban
issues, including infant mortality, political instability, and epidemics
(Buhaug & Urdal, 2013; Firdaus, 2012; Rice & Rice, 2009). Considering
the fact that almost one billion people worldwide were living in slums in
2016, and that the number is growing in many parts of Asia, Africa, and
Latin America, slum-related problems are expected to become even
more serious in developing countries (UN-Habitat, 2016).
Improving the conditions in slums is one of the most significant
initiatives established to solve worldwide problems – Millennium De­
velopments Goals (MDGs; 2000–2015) and Sustainable Development
Goals (SDGs; launched in 2015) – world leaders pledged to improve
slum conditions. Goal 7D of the MDGs, for instance, specifies that ‘by
2020 a significant improvement in the lives of at least 100 million slum
dwellers’ will have taken place (United Nations, 2015a). Similarly, Goal
11.1 of the SDGs aims to ‘ensure access for all to adequate, safe and
affordable housing and basic services and upgrade slums’ (United Na­
tions, 2015b). These goals were set to push the international community
to make various efforts to improve slum conditions or, more commonly,
to upgrade slums. In this context, it is important to understand what
efforts are effective at improving slum conditions, in order to design and
implement more effective policies.
Foreign financing is a key component of the global efforts to upgrade
slums. For instance, Maimunah Mohd Sharif, the Executive Director of
UN-Habitat, highlights the importance of foreign direct investment

* Corresponding author.
E-mail addresses: sh.yoo@yonsei.ac.kr (S.H. Yoo), bwwoo@yonsei.ac.kr (B. Woo).

https://doi.org/10.1016/j.habitatint.2023.102898
Received 26 March 2023; Received in revised form 15 June 2023; Accepted 1 August 2023
Available online 10 August 2023
0197-3975/© 2023 Elsevier Ltd. All rights reserved.
S.H. Yoo and B. Woo
(FDI) and urges African governments to connect FDI to ‘sustainable ur­
banisation by strengthening their urban policies and planning, and
financial and legal systems’ so that they can effectively address slum-
related issues (UN-Habitat & IHS-Erasmus University Rotterdam,
2018). In addition, bilateral official development assistance (ODA) do­
nors and multilateral development banks have repeatedly approved
projects to improve living conditions in slums. Finally, at the individual
level, foreign remittances sent by overseas workers living and working
in foreign countries to their families and relatives in their home coun­
tries can also be invested in slum areas to upgrade their living
conditions.
However, few systematic studies have been conducted to understand
how the different types of foreign financing, such as ODA, FDI, and
foreign remittances, affect slum upgrading in developing countries. This
study attempts to determine the effects of foreign financing on slum
conditions. For this purpose, we first theoretically explore how each type
of foreign financing would have different effects on slum upgrading:
FDI, ODA, and foreign remittances could have a positive effect on
improving slum conditions because they give each country additional
resources. However, the characteristics of each type of finance are
different: FDI is commercial, ODA is development, and remittances are
aimed at improving the living conditions of families who remain in a
poor condition. Therefore, the effect of each type of finance might
appear different.
Furthermore, we contend that the effects of different types of foreign
financing diverge according to the recipient country’s political regime
type. As political incentives for maintaining power are different by each
regime type (de Mesquita & Smith, 2010; Lake & Baum, 2001), we have
assumed that the people living in slums pose different challenges and
opportunities for political leaders in democratic and autocratic
countries.
In particular, we argue that autocratic countries are more motivated
to improve slum conditions than are democratic countries. Autocratic
leaders are often removed from power through irregular political events,
such as large-scale urban demonstrations, which are initiated by
dissatisfied urban populations (Call, 2002; Svolik, 2012; Wallace, 2013).
Slums with highly concentrated populations and poor living conditions
may be the most likely places for these events to occur, and leaders who
recognise this possibility invest various resources, including foreign
finance, to improve slums for their political survival. In comparison,
democratic leaders whose political survival hinges on the formal polit­
ical participation of citizens, such as voting in elections, face fewer in­
centives to cater to the interests of slum dwellers. This is because slum
dwellers’ political participation is limited, both legally and practically
(Habib, 2009; Maiti & Agrawal, 2005; Ullah, 2004). Also, politicians in
democratic countries could reserve the slums as a strategy of forbear­
ance for maintaining their power (Holland, 2016). Accordingly, demo­
cratic leaders would rather allocate resources to issues and areas where
citizens can provide political support rather than to areas where little
political reward is promised. The government can exert a more direct
influence on ODA than on other types of foreign financing, thus we
contend that ODA will be the primary foreign financing that autocratic
leaders utilise for political purposes.
We empirically use an existing cross-national dataset on urban slum
populations in developing countries assembled by the UN-Habitat and
the most widely used foreign financing datasets offered by the OECD,
UNCTAD, and the World Bank. Empirical evidence provides ample
support for this argument. We find the following: 1) foreign remittances
reduce the proportion of urban slum populations, 2) FDI does not affect
slums in developing countries, and 3) ODA reduces slum populations
only in autocratic countries.
The remainder of this paper is organised as follows. Section 2 begins
with a definition of ‘slum’ and discusses how they form in developing
countries and reviews the efforts that the international community has
made to improve slum conditions. In Section 3, we develop theoretical
arguments for why various types of foreign financing, such as ODA, FDI,
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Habitat International 139 (2023) 102898
and foreign remittances, can influence slum upgrading and why ODA’s
effect depends on the recipient’s regime type. Section 4 introduces the
datasets used, details the strategies used to examine the hypotheses, and
Section 5 presents and discusses the empirical results. The concluding
section includes a brief discussion on the policy, scholarly contributions,
and implications of this study.
2. Background and existing studies
2.1. Defining a slum and its formation in developing countries
In popular usage, slums are considered places where poor people live
in low-quality housing. Owing to their multifaceted nature, researchers
conceptualise slums differently (Gilbert, 2007; Sheuya, 2008). For
example, Stokes (1962) defines a slum as an area where housing
development and the resulting social arrangements are vastly different
from normal situations in other urban areas. Davis (2006) defines slums
as poor housing characterised by housing tenure insecurity and a lack of
urban services and infrastructure. Gilbert (2007) defines slums simply as
areas with poor shelter.
More recent studies have adopted the definition of slums provided by
the UN-Habitat in order to avoid confusion from having too many
operational definitions: UN-Habitat (2006, 2016) defines slums as a
household where a group of people reside together in an urban area who
cannot meet one or more of the following conditions: ‘1) durable
housing of a permanent nature that protects against extreme climate
conditions, 2) sufficient living space which means not more than three
people sharing the same room, 3) easy access to safe water in sufficient
amounts at an affordable price, 4) access to adequate sanitation in the
form of a private or public toilet shared by a reasonable number of
people, 5) security of tenure that prevents forced evictions.’ This defi­
nition of a slum is the most widely accepted among existing studies and
is used as the standard for data gathering by the UN-Habitat; hence, we
adopt this definition.
Slums have rapidly proliferated over the past 30 years. The number
of slum dwellers worldwide increased from approximately 700 million
in 1990 to approximately 1.4 billion in 2018, and this trend is expected
to continue in the future (UN-Habitat, 2018). This trend is particularly
salient in developing countries in many parts of Asia, Sub-Saharan Af­
rica, and Latin America. Table 1 shows the number of slum dwellers
across different regions.
The main driving force of slum formation in developing countries is
rapid urbanisation and the resultant growth in urban populations
(Habib, 2009; Maiti & Agrawal, 2005; Ullah, 2004). In many developing
countries, rapid urbanisation is caused by rural-to-urban migration.
With more employment opportunities and better social infrastructure,
urban areas attract people from rural areas, which are often charac­
terised by lower economic productivity, fewer jobs, and inadequate
public amenities and social services. Economic opportunities are
bolstered by economic globalisation in many developing countries (Woo
& Jun, 2020). Thus, those who can move out of rural areas often decide
to move to cities to seek a better life. For instance, many migrants from
rural areas in Bangladesh move to Dhaka, Bangladesh’s capital city, for
better economic opportunities and access to public services (Ullah,
2004).
Many such rural-to-urban migrants settle in slums because many
cities in developing countries lack affordable housing for their rapidly
growing populations (Habib, 2009; Maiti & Agrawal, 2005). Habib
(2009) describes how Dhaka, Bangladesh, is running out of affordable
housing not only for migrants from rural areas but also for the urban
poor. Similarly, Maiti and Agrawal (2005) document shortages in
affordable housing caused by rural-to-urban migration in India. In the
face of affordable housing shortages, people who migrate to cities gather
in existing slums or other vulnerable areas that often become slums.
Governments in developing countries have implemented various
policies to address the affordable housing shortage problem caused by
S.H. Yoo and B. Woo
Table 1
Slum populations by region (1990–2020) (thousand).
Region 1990 2001 2005
World 714,972 912,918 997,767
North Africa 21,719 21,355 21,224
Sub-Saharan Africa 100,973 166,208 199,231
Latin America 110,837 127,566 134,257
East Asia 150,761 193,824 212,368
South Asia 198,663 253,122 276,432
South-east Asia 48,986 56,781 59,913
Central Asia 22,006 29,658 33,057
Oceania 350 499 568
Source: UN-Habitat Urban Indicator Database.
rapid and unmanaged urbanisation, but most have not been successful,
mainly because of insufficient financial resources (Firman, 1999; Mehta
& Pathak, 1998). The lack of financial resources for central and local
governments in many developing countries leads to an insufficient
supply of affordable housing units, which in turn pushes urban dwellers,
old and new alike, towards slums. In addition, rapid urbanisation makes
long-term and systematic urban planning difficult for governments,
resulting in ad hoc housing and housing-related infrastructure (Fox,
2014). Finally, governments in developing countries with little urbani­
sation experience do not possess the expertise necessary to provide
affordable housing or make appropriate institutional arrangements for
the poor (Buckley & Kalarickal, 2006; Ooi & Phua, 2007).
The scarcity of available financial resources for governments in
developing countries in the face of the rapid influx of migrants amplifies
the proliferation of slums. It has been discussed in various organisations
how to better support developing countries in dealing with this issue
Among the organisations that lead various initiatives to assist govern­
ments in developing countries in slum-related issues, the UN-Habitat
and various international NGOs stand out.
2.2. International efforts to upgrade slums in developing countries
The creation of UN-Habitat in 1976 reflects the increasing interna­
tional attention to living conditions in developing countries, but real
actions to upgrade slums only began with the Cities Alliance, a multi-
stakeholder organisation formed in 1999 with the support of the
World Bank and UN-Habitat, among others. Soon after its official
establishment, the Cities Alliance launched the Cities Without Slums
Initiative in December 1999. The City Without Slums Initiative’s initial
goal was to ‘improve the lives of at least 100 million slum dwellers by
2020’, and countries that joined this initiative agreed to make urban
policies more consistent with each other (Cities Alliance, 2001, p. 2001).
The goal of the Cities Alliance was incorporated as a part of two ambi­
tious UN-led campaigns to solve global inequality and poverty: the
MDGs and the SDGs (which replaced the MDGs in 2015). Goal 7D of the
MDGs was to ‘have achieved a significant improvement in the lives of at
least 100 million slum dwellers (by 2020)’ (United Nations, 2015a).
Similarly, Goal 11.1 of the SDGs is also directed at reducing slum pro­
liferation and seeks to ‘ensure access for all to adequate, safe and
affordable housing and basic services, and upgrade slums (by 2030)’
(United Nations, 2015b). These goals signify the increased attention the
international community is paying to upgrade slums in developing
countries.
International efforts to meet the stated goals centre on providing
financial resources for upgrading slums (Ferguson & Navarrete, 2003;
Freire, 2013). Donor countries, international organisations, nongov­
ernmental organisations, and global initiatives are all trying to assist
developing countries financially so that they can supply basic services
and affordable housing infrastructure in urban areas and improve the
quality of shelters for slum dwellers. Additionally, cross-border financial
flows by private actors, including FDI and foreign remittances, can be
channelled to upgrade slums.
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2010 2015 2020
1,115,002 1,246,012 1,392,416
21,062 20,901 20,741
249,886 313,419 393,105
143,116 152,559 162,626
238,061 266,863 299,150
308,611 344,537 384,644
64,073 68,521 73,279
37,860 43,360 49,659
668 786 924
Despite the increased attention of various international actors and
their efforts to provide financial resources, few systematic studies have
examined the effectiveness of international financial flows in upgrading
slums. Jones (2012) argues that the Slum Upgrading Facility, a
UN-Habitat instrument, seeks to attract private financing from com­
mercial banks and capital markets to improve slums in Africa but reports
that these efforts push developing countries further into debt. Davis
(2006) similarly argues that neoliberal globalisation, which is facilitated
by financial resources offered by international institutions such as the
IMF and World Bank, accelerates the proliferation of slums in devel­
oping countries. To gain access to financial resources, international
financial institutions often require governments to reduce public
spending, privatise state-owned enterprises, and reform public services.
These conditions often have detrimental consequences on the poor in
developing countries and lead to slum proliferation (Davis, 2006), Woo
and Jun (2020) disaggregate globalisation into three distinct dimensions
of economic, political, and social globalisation and show that economic
globalisation leads to slum formation.
While the aforementioned studies greatly enhance our understand­
ing of the impact of international factors on slum proliferation, they
have a few limitations. First, existing studies often classify international
economic forces as ‘neoliberal’, thus overly simplifying reality. Outside
commercially motivated financial flows, other types of international
financial flows can exert more positive effects on slum upgrading. Sec­
ond, previous studies have not considered how political dynamics in
developing countries mediate the effects of international financial flows
on slum upgrading. Recognising these shortcomings in the existing
literature, in the next section, we examine the different types of inter­
national financial flows that affect slums and how these effects are
conditioned by domestic political factors.
3. Theoretical argument
3.1. How ODA, FDI, and remittances might influence slum upgrading
We first theoretically explore how each type of international
financing can complement a government’s efforts to upgrade slums; for
instance, FDI is generally made to make commercial profits by multi­
national corporations and will have only a weak and indirect, if any,
effect on slum upgrading. In comparison, foreign remittances have a
positive impact on slum upgrading, as they are sent by family members
working overseas to improve the living conditions of those who remain
in their home country. Given that housing constitutes the core living
condition, we posit that priority should be given to improving housing;
thus, remittances will have a positive effect on slum upgrading. Like­
wise, the effect of ODA would be more positive if its stated goals are to
address poverty and development issues in developing recipient
countries.
3.1.1. Foreign direct investment
FDI is an important source of capital for developing countries and
can potentially provide opportunities for their economic development.
S.H. Yoo and B. Woo
Since the 1990s, the inflow of FDI into developing countries has dras­
tically increased, leading to an optimistic expectation that FDI could be a
major development resource at the 2002 Monterrey Conference. The
potential path connecting FDI and economic development is straight­
forward: FDI fosters economic development by adding capital stock to a
country, which can be channelled to domestic investment. In addition,
FDI may allow the transfer of technologies and knowledge from devel­
oped to developing countries (Rivera-Batiz & Romer, 1991; Uttama &
Peridy, 2010).
Contrary to the unambiguous expectations regarding the nexus be­
tween FDI and economic development, FDI may have ambiguous effects
on slums. Existing studies contend that FDI may be negative for slum
proliferation (Davis, 2006; Woo & Jun 2020). The inflow of FDI in
developing countries is concentrated in labour-intensive industries in
urban areas where low-wage labour is abundant. Thus, FDI inflows can
catalyse more rural-to-urban migration when governments are not ready
to effectively meet increased housing demand. Consequently, FDI may
lead to the proliferation of slums.
However, one can reasonably expect economic development in a
host country to eventually lead to better living conditions, including
housing conditions. Foreign firms can provide certain social welfare
services directly to their workers to increase productivity and may even
invest in basic infrastructure such as electricity and water in developing
countries (Gohou & Soumaré, 2012; Klein, Aaron, & Hadjimichael,
2001). ‘The State of African City 2018’ by UN-Habitat investigates the
impact of FDI on cities in Africa and shows the positive impact of FDI on
slum upgrading. According to the report, FDI in Africa, mostly concen­
trated in cities such as Cairo in Egypt, Lagos in Nigeria, and Johannes­
burg in South Africa, improves slums and the quality of life of their
residents by increasing their supply of food, water, and energy. In
addition, FDI creates stable jobs in formal sectors in places where only
unstable jobs in informal sectors are often available; hence, it addresses
one of the biggest problems for the poor in urban areas of developing
countries. Income from these stable jobs can improve the living stan­
dards of workers and their families, including slum conditions.
FDI can also enhance the government’s capacity to upgrade slums.
FDI inflow provides additional financing for the host country’s market
economy (Mirza & Giroud, 2004). These financial resources add to the
revenues of a host government via taxation, which can be used to pro­
vide social welfare services such as education, health care, and other
basic needs (Blomstrom & Kokko, 1998). In some cases, FDI is used to
develop the host country’s infrastructure such as roads and other utili­
ties (Borensztein, de Gregorio, & Lee, 1998; Zhao, 1995). Based on the
above discussion, we propose the following hypothesis:
H1. The more FDI inflow a country receives, the more likely it is to
experience a decline in slums.
3.1.2. Foreign remittance
Foreign remittances – money sent by overseas workers to their
families in their home countries – will have a positive impact on slum
upgrading, as we believe that priority would be given to improving
housing conditions for families.
While earlier studies on foreign remittances found limited economic
effects in home countries (Hayes, 1991; Lipton, 1980; Russell, 1986),
recent empirical studies report that remittances have a positive eco­
nomic impact (Adams & Cuecuecha, 2010; Adams & Page, 2005; Freund
& Spatafora, 2005; Yang, 2008). With the increase in the volume of
remittances in the past few decades in developing countries, remittances
are spent not only on consumption but are also saved and invested.
Remittances also exert positive effects on improving human capital
when they are spent on education, healthcare, and entrepreneurial in­
vestments (Clarke & Wallsten, 2006; World Bank, 2006).
Given the positive and substantial economic effects of foreign re­
mittances reported in recent empirical studies, we expect foreign re­
mittances to improve in developing countries. First, foreign remittances
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can be used directly to improve the housing conditions of families living
in their home countries. Investment in housing is often prioritised
because housing quality directly affects other daily living conditions.
Additionally, people with available financial resources have incentives
to invest in their houses on a priority because housing is also related to
social and economic life: a house is not just a place to live but a symbol of
the resident’s economic status (de Soto, 2000). Todgha Valley in
Morocco is a great example of the use of foreign remittances to improve
housing conditions in slums (de Haas, 2006). Almost three-quarters of
all real-estate investments in this area are made by households whose
family members work in other countries. Residents used foreign re­
mittances to construct two paved roads running through the valley and
replaced traditional, fortified adobe villages (known as ighrem) in the
valley with more spacious modern houses (de Haas, 2006). There are
other examples in which slum dwellers aggregate remittances at the
local level to fund local public goods and infrastructure projects such as
roads, health facilities, and sewage facilities to improve their living
environments (de la Garza & Hazan, 2003; Habib, 2009).
Second, foreign remittances can strengthen the financial capacity of
governments in developing countries, and some of the increased gov­
ernment revenue can be channelled to upgrade slums. Remittances spent
on consumption and investment are taxed, thereby increasing govern­
ment tax revenue (Chami, Gapen, & Cosimano, 2006; Combes & Ebeke,
2011). Foreign remittances may also be used personally in healthcare or
education, which frees up the government budget. This allows govern­
ments to channel public spending to other areas, including slum
upgrading (Ahmed, 2012).
Based on the reasoning presented above, we propose our second
hypothesis:
H2. The more foreign remittance inflow a country has, the more likely
the country is to experience a decline in slums.
3.1.3. Official development assistance
ODA, the public financial resources typically transferred from a
developed country to a developing one, can be helpful in slum upgrad­
ing. After the establishment of the MDGs, many developed countries
reaffirmed their commitment to continue providing ODA to developing
countries. Consequently, the amount of ODA has steadily increased over
the past few decades. However, the impact of ODA on economic growth
and poverty reduction is controversial (Radelet, 2006) and there have
been few empirical studies on how ODA specifically influences slums.
We expect ODA to positively contribute to slum upgrades in devel­
oping countries. ODA spurs economic development in developing
countries by investing in infrastructure projects. Several infrastructure
projects have directly addressed slum-related issues. For instance, the
Japanese International Cooperation Agency (JICA) ran an ‘Urban Water
Supply and Sanitation Improvement Program’ from 1996 to 2003 in
India and provided capital to the Housing and Urban Developing Cor­
poration to provide water and sewerage services and solid waste
disposal facilities to urban residents in Indian cities (JICA, 2005). The
Korean ODA agency, Korea International Cooperation Agency, part­
nered with the well-known NGO Habitat for Humanity to provide
funding to build new houses and repair old ones, and to set up com­
munity toilets and water stations in Bangladesh (Habitat for Humanity,
2023).
Many multilateral development banks continue to implement ODA
projects to upgrade slums. One such example is the World Bank’s Upper
Egypt Local Development Program (World Bank, 2016a). This program
began in 2016 and has resulted in an investment of approximately USD
500 million. Another example is the World Bank and the Asian Infra­
structure Investment Bank’s co-financing of the National Slum
Upgrading Project in Indonesia that has resulted in an investment of
approximately USD 433 million (World Bank, 2016b). These projects
channel public investment to supply basic services, such as clean water,
drainage, and hygiene facilities, to urban communities and construct
S.H. Yoo and B. Woo
affordable and appropriate housing units for the urban poor.
ODA also improves slums by directly providing funds to individual
slum dwellers. For example, USAID-funded housing programs, including
those providing long-term mortgage credit, upfront demand-side sub­
sidies, and vouchers for low-income households in developing countries
such as Vietnam, Mongolia, India, and Indonesia, are worth more than
USD 110 million per year (Shea, 2008). These specific housing programs
can help upgrade housing units in urban areas. Similar programs have
been implemented in developing countries in Africa, Central America,
and Eastern Europe by European ODA agencies, including Swedish,
German, and Spanish agencies.
Based on the above discussion, we propose the third hypothesis:
H3. The more ODA inflow a country receives, the more likely it is to
reduce slums.
3.2. ODA and regime type
In addition to the differentiated effects among the different types of
foreign financing, we contend that the effects diverge according to the
recipient country’s political regime. This is because political actors’
‘political will’ is the most important factor in improving slum conditions
in developing countries (Fox, 2014). Governments and political leaders
play an important role in deciding whether and how public goods and
services will be provided in slums.
We further posit that people living in slums pose different challenges
and opportunities for political leaders in democratic and autocratic
countries, and in turn, political leaders in democratic and autocratic
countries will try to utilise foreign finance differently to maximize their
hold over political power.
Of the three different types of foreign financial inflows, we argue that
ODA’s effect is most likely to hinge on the type of political regime in a
country. We propose this because a government, whose will is one of the
most important factors in slum upgrading, has the most say in managing
ODA. In comparison, a government has little say in controlling, thus
utilizing, FDI and remittances for slum upgrading purposes.
Generally, ODA goes directly to central and local governments to
finance public infrastructure projects; thus, governments can exert
direct control over how it is spent (Ahmed, 2012; de Mesquita & Smith,
2010). Even when ODA is not directly channelled to slum areas, it can
free up government resources that would have been invested in
ODA-funded projects, which can then be used to upgrade slums.
Compared with ODA, FDI managed by multinational corporations flows
into the private sector; thus, governments have little direct leverage over
how it is used. Foreign remittances go directly to individuals; thus,
governments cannot influence how they are used.
Considering the political incentives autocratic leaders and demo­
cratic leaders face, we contend that ODA will be more effective in
upgrading slums in autocratic countries than in democratic countries,
not because leaders in autocratic countries are more benign, but because
it might help improve their own political survival.
Autocratic leaders are often removed from power through irregular
political events, such as large-scale urban demonstrations, which are
initiated by dissatisfied urban populations (Call, 2002; Svolik, 2012;
Wallace, 2013). Slums exist as a subset of large cities in most developing
countries. Logically, slum dwellers are also a subset of urban dwellers.
Consequently, demonstrations in slums pose a major threat to autocratic
leaders as they both count as urban demonstrations and can also trigger
larger scale urban demonstrations beyond slum areas.
Slums with highly concentrated populations and poor living condi­
tions may be fertile grounds for such urban riots, posing a potential
threat to the political survival of autocratic leaders. The high population
density of slums makes communication between dwellers more active
than that in other areas, thereby increasing the speed at which com­
plaints are distributed and accumulated. Thus, a more effective collec­
tive action against the government is possible. In addition, slums are
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Habitat International 139 (2023) 102898
often relatively close to the seats of government; therefore, slum
dwellers can more directly threaten the government (Buhaug & Urdal,
2013; Davis, 2006). The 2011 uprisings in Egypt and Tunisia are
representative examples of this type of protest. Therefore, politicians in
autocracies are incentivised to control slums or cater to the interests of
slum dwellers.
Recognising the potential threat slums pose to their survival, auto­
cratic leaders are incentivised to channel ODA or free up public re­
sources (thanks to ODA) to upgrade slums and reduce their dwellers’
dissatisfaction. As Svolik (2012) demonstrates, relying on violence and
repression could pose a greater threat to the regime; thus, it is not a
viable option for autocratic leaders. The superior option for political
leaders in autocracies is to provide material benefits to slums in order to
alleviate dissatisfaction and complaints. Wallace (2013) shows that
more redistributive policies are implemented in cities than in rural areas
under autocratic regimes. In this situation, foreign financing coming
from outside the country is a good resource for autocratic regimes to
implement redistributive policies that improve slum conditions. In other
words, the autocratic regime seeks to actively utilise ODA to improve
slums and maintain power, which is effective in improving slum
conditions.
In comparison, democratic leaders, whose political survival hinges
on the formal political participation of citizens, such as voting in elec­
tions, face fewer incentives to cater to the interests of slum dwellers.
Democratic governments are less likely to collapse due to public upris­
ings or rebellions than autocratic ones are. Instead, politicians in dem­
ocratic countries must win elections regularly to remain in power.
Accordingly, politicians tend to provide resources to places that will
help them succeed in elections.
Slum residents’ political participation is limited both legally and
practically, and thus matters less to political leaders in democracies.
According to existing studies, most slum dwellers are internal migrants
from rural areas or smaller cities (Habib, 2009; Maiti & Agrawal, 2005;
Ullah, 2004). Owing to the limited administrative capacities and
informal and extrajudicial nature of slums in many developing coun­
tries, these internal migrants are often unable to acquire proper identity
documents or formal addresses. For instance, in India, urban slum
dwellers often lack formal jobs and do not possess PAN (tax ID) cards,
ration cards, bank accounts, or Aadhaar (ID) cards. Without identifica­
tion documents or stable addresses, urban slum dwellers are prevented
from participating in the democratic political process of elections
(Bhaik, Banda, Sheikh, & Mandelkern, 2014; Kumar & Banerjee, 2017;
Pande, Abhijit & Michael, 2012). With limited public resources at hand,
democratic leaders would rather allocate budgets to issues and areas
where citizens can provide political support rather than to areas where
little political reward is promised (Shamia & Majid, 2014).
In addition, particularly in lower income developing countries, pol­
iticians might use “forbearance.” Holland (2016) introduces “forbear­
ance” as situations that laws go unenforced to mobilize voters in poor
areas and shows the mechanism of forbearance based on the distributive
politics: politicians intentionally close their eyes to illegal situations and
signal their distributive commitments thereby trying to maximize their
support with giving other resources to people. Empirically, Holland
(2016) demonstrates that politicians in Latin America do not enforce
laws against unlicensed street vendors and squatting in urban area. The
implication is that slum upgrading is not the main concern of politicians
in democratic countries. Rather, politicians could gain a greater chance
to maintain their power by consciously neglecting people living in
slums. This is because forbearance for slum dwelling works as a distri­
bution policy for the poor.
In summary, politicians in autocratic and democratic countries face
different incentives when making decisions to channel public resources
to upgrade slums. We theorise that political dynamics in autocratic
countries incentivise their leaders to invest in slum upgrading, whereas
those in democracies provide little incentive for their leaders to do the
same. This logic especially applies to ODA, over which recipient
S.H. Yoo and B. Woo Habitat International 139 (2023) 102898

governments have some discretion. Based on the above discussion, we Table 2

propose the following hypothesis: The summary statistics.

H4. ODA is more effective on slum upgrading in autocratic countries Variables Observation Mean Standard Min Max
Deviation
than in democratic countries.
Slum population 544 47.907 24.36 3.1 98.9
(% of urban
4. Data and empirical methodology
population)
FDI (10-year 544 17.74 4.427 0 24.968
We utilise the cross-national slum dataset assembled by UN-Habitat. average, logged)
As part of this work, we use the proportion of the urban population Remittances (10- 544 16.99 6.352 0 24.849
year average,
living in slums as the main dependent variable. This measurement of
logged)
slums is an indicator used in the SDGs to measure the achievement of ODA (10-year 544 19.386 2.232 0 22.368
slum-related goals. Our study sample included only 104 developing average, logged)
countries in Africa, Asia, Eastern Europe, Latin America, and Oceania for GDP per capita (in 544 7.225 1.131 4.549 9.923
which all relevant data are available for selected years: 1990, 1995, current US
dollar, logged)
2000, 2005, 2010, 2014, 2016, and 2018. The full details of the data
Growth rate (% 544 1.674 5.555 − 47.503 50.237
used in this study can be found in Appendix I. change of GDP
Our main explanatory variables are foreign finance, including ODA, per capita)
FDI, and foreign remittances. For these variables, we use the net inflows Urban population 544 44.736 20.318 5.342 91.749
of each finance dataset from the OECD, UNCTAD, and World Bank. We (% of total
population)
transform all dependent variables to the natural logarithm after 1 is Urban population 544 3.118 1.595 − 3.591 13.456
added to each 0 value to prevent skewing of the distribution and deal growth (%
with relative scales. Before log-transforming the variables, we convert change from t-1
both missing and negative values caused by incomplete information, to t)
loan repayment, or capital withdrawal into 0. This is because adding a
particular constant avoids the loss of any observations and maintains the & Kam, 2007). Therefore, we classify the regime types of the sample
distance between any two values of the variable. This method has been countries according to the Polity2 score provided by Polity IV. This score
widely used in previous empirical studies (Li, 2009). We then average all ranges from − 10 (least democratic) to 10 (most democratic), and a
finance data over 10 years to smooth out yearly fluctuations and country is generally classified as democratic if the score is 7 or higher.
consider the long-term effects of foreign finance inflows. This is a Additionally, we run our models using interaction terms using Polity 2
common practice in aid effectiveness literature (Dreher & Lohmann, score as a continuous variable, which yield consistent results. Appendix
2015; Galiani, Knack, Xu, & Zou, 2017). III reports the results of the interaction models.
In addition, we use control variables such as the economic conditions
of a country and the degree of urbanisation, which are commonly used
5. Results
in previous studies on the proliferation of slums (Arimah, 2010; Fox,
2014; Woo & Jun 2020). We measure economic conditions using GDP
Table 3 reports the main results from the pooled models before
per capita in current US dollars and the GDP growth rate. The natural
running separate models by regime type. We begin with the simplest
logarithm of GDP per capita values is used for the same reasons as for the
specification from columns (1) to (3) to explore the impact of FDI,
dependent variables. We measure the degree of urbanisation in two
foreign remittances, and ODA, respectively, on slums in developing
ways: the percentage of the total population living in urban areas and
countries. All financing are negatively related to the slum population,
the urban population growth rate. By including these variables, we
and they are statistically significant, suggesting that the more financing
control for the impact of urbanisation and population growth on slums.
flowing into a country, the fewer slum dwellers it has. When FDI, re­
All data are obtained from World Development Indicators. Finally, all
mittances, and ODA inflow increases by 1%, the population living in
explanatory and control variables are lagged by one year in our
slums decreases by about 1.28%, 0.65%, and 0.73%, respectively, con­
regression models to reduce the possibility of obtaining biased estimates
trolling other variables.
due to endogeneity. The summary statistics for the all variables are re­
Column (4) combines all the three explanatory variables into one
ported in Table 2.
model. In Column (4), FDI has no statistically significant impact on
To test our hypothesis regarding the effect of foreign financing on
reducing slum populations, and the coefficient decreases significantly
slums, we use regression analyses. For this analysis, we pool observa­
compared with that in Column (2). These results suggest that slum
tions from 1990, 1995, 2000, 2005, 2010, 2014, 2016, and 2018. We
upgrading due to the spillover effects of FDI is incidental and not the
also include year and region dummies to control for year- and region-
primary purpose of FDI and that relying on FDI to improve slum con­
specific effects, respectively. For these variables, we use the year 1990
ditions is unlikely to be effective. However, ODA and foreign re­
and Sub-Saharan Africa as the baseline. Admittedly, it would be great if
mittances still have positive and significant impacts on reducing slum
we could control for the past slum conditions and run analyses in a time-
populations. According to the most comprehensive model in Column
series-cross-sectional setting to explore the temporal dynamics of slum
(4), a one-unit increase in the logged ODA inflow reduces the population
upgrading. Regretfully, the limitation in the existing slum dataset does
living in slums by approximately 0.86%, and a one-unit increase in the
not allow us to do so due to intermittent gaps in between available years.
logged remittance inflow reduces the population living in slums by
At least to control for the past slum conditions, we include all available
approximately 0.64%, holding the other variables constant. These
variables that might be correlated with the past slum conditions.
findings strongly support Hypotheses 2 and 3; however, Hypothesis 1 is
After analysing a pooled model that includes all observations, we
not statistically supported. Overall, the results demonstrate that each
separate models that divide countries into democracies and autocracies
type of foreign financing has a different effect on slum upgrading and,
in order to test our hypothesis about the effect of foreign financing
thus, should be weighted differently when considering slum-related
varying by regime type. Split-sample analysis has the advantage of being
policies.
able to test for statistically significant differences in the coefficients of
Most control variables show results similar to those in related
the independent variables for each regime type, which could not be
studies. Economic conditions in developing countries reduce the slum
confirmed in the pooled-sample analysis of interactive effects (Franzese
population. Specifically, the logged GDP per capita is negative and

6
S.H. Yoo and B. Woo Habitat International 139 (2023) 102898

Table 3 Table 4
Foreign financing and slums: Pooled models. Foreign financing and slums: Regime type models.
Variable (1) (2) (3) (4) Variable (5) (6)

(% Slum Population) FDI Remittances ODA Combined (% Slum Population) Democracy Autocracy

FDI (10-year average, − 0.648*** − 0.130 FDI (10-year average, logged) − 0.124 0.0399
logged) (0.187) (0.205) (0.495) (0.250)
Remittances (10-year − 0.732*** − 0.644*** Remittances (10-year average, logged) − 0.891* − 0.646***
average, logged) (0.122) (0.133) (0.346) (0.157)
ODA (10-year average, − 1.275*** − 0.864* ODA (10-year average, logged) − 0.628 − 0.935*
logged) (0.364) (0.371) (0.640) (0.470)
GDP per capita (logged) − 13.55*** − 13.13*** − 15.53*** − 14.34*** GDP per capita (logged) − 15.27*** − 13.30***
(1.188) (1.166) (1.285) (1.277) (2.158) (1.701)
GDP growth − 0.0297 − 0.0561 − 0.0220 − 0.0207 GDP growth 0.146 − 0.0794
(0.133) (0.130) (0.133) (0.130) (0.213) (0.170)
% Urban population 0.0716 0.0392 0.0746 0.0627 % Urban population 0.0675 0.00748
(0.0563) (0.0547) (0.0564) (0.0553) (0.0773) (0.0821)
Urban population 1.717** 1.932*** 1.900** 2.050*** Urban population growth − 0.754 2.927***
growth (0.580) (0.569) (0.583) (0.569) (1.082) (0.699)
1995 − 2.251 − 1.748 − 2.034 − 1.059 1995 1.201 − 2.782
(3.410) (3.335) (3.413) (3.330) (6.252) (4.073)
2000 − 1.469 − 2.031 − 1.964 − 0.546 2000 − 0.668 − 2.095
(3.460) (3.334) (3.434) (3.385) (6.057) (4.203)
2005 − 1.711 − 1.810 − 2.398 − 0.571 2005 − 4.271 − 0.00122
(3.230) (3.117) (3.195) (3.157) (5.833) (3.937)
2010 3.447 3.436 3.522 5.870 2010 2.518 6.022
(3.597) (3.445) (3.599) (3.568) (6.344) (4.527)
2014 6.465 6.633* 6.552 9.072** 2014 5.672 8.984*
(3.368) (3.219) (3.371) (3.352) (6.192) (4.183)
2016 3.816 4.091 3.966 6.596* 2016 5.735 5.192
(3.290) (3.142) (3.298) (3.285) (5.970) (4.140)
2018 3.487 4.065 3.681 6.599* 2018 5.485 5.484
(3.311) (3.171) (3.324) (3.314) (6.013) (4.199)
Central Asia and − 9.043*** − 6.507* − 8.819*** − 5.663* Central Asia and Southern Asia − 14.58*** − 1.390
Southern Asia (2.655) (2.649) (2.663) (2.657) (4.178) (3.512)
Eastern Asia and South- − 8.794*** − 8.240** − 10.82*** − 8.556** Eastern Asia and South-eastern Asia − 7.454* − 13.81***
eastern Asia (2.657) (2.587) (2.626) (2.610) (3.583) (3.795)
Latin America and the − 4.982* − 2.788 − 4.246 − 2.101 Latin America and the Caribbean − 6.735 1.176
Caribbean (2.438) (2.424) (2.461) (2.432) (3.571) (3.711)
Northern America and − 7.820 − 5.089 − 6.532 − 4.004 Northern America and Europe − 15.45** 3.387
Europe (4.780) (4.707) (4.809) (4.710) (5.929) (9.186)
Oceania − 19.87 − 18.46 − 19.40 − 18.11 Oceania − 16.40
(11.60) (11.35) (11.60) (11.30) (12.28)
Western Asia and − 12.94*** − 9.795*** − 10.45*** − 8.222** Western Asia and Northern Africa − 14.55** − 7.300*
Northern Africa (2.777) (2.776) (2.890) (2.868) (5.411) (3.599)
Constant 150.9*** 148.3*** 177.4*** 170.9*** Constant 189.6*** 161.5***
(7.828) (7.510) (11.96) (11.72) (20.67) (14.83)
Observations 544 544 544 544 Observations 198 346
R-squared 0.579 0.597 0.579 0.602 R-squared 0.607 0.554

Note. Standard errors are indicated in parentheses. All independent variables are Note. Standard errors are indicated in parentheses. All independent variables are
lagged by one year. The baseline year is 1990, and the baseline region is Sub- lagged by one year. The baseline year is 1990, and the baseline region is Sub-
Saharan Africa. Saharan Africa.
***p < 0.001, **p < 0.01, *p < 0.05. ***p < 0.001, **p < 0.01, *p < 0.05.

statistically significant, suggesting that when economic conditions in
developing countries improve, the number of people living in slums is
likely to reduce. The GDP growth rate is negatively related to the slum
population but has no statistically significant effect. By contrast, urban
conditions, which are measured by urban populations and their annual
growth, tend to increase slum populations. Urban population growth is
positively related to slums and is statistically significant. When the
urban population increased by 1% in the previous year, the slum pop­
ulation increased by approximately 2.05%. The coefficient for the urban
population is positive but not statistically significant. The year dummy
variables are positive and statistically significant since 2014, which
means that slums have been proliferating more than in 1990. The region
dummy variables are mostly negative and statistically significant, sug­
gesting that slums in sub-Saharan Africa are more severe than those in
other regions.
Table 4 reports the results of dividing the sample into two regime
types: democracies and autocracies. The results for the control variables
are broadly consistent with those reported in Table 3. We include FDI,
remittances in addition to ODA for two reasons. First, we want to remain
consistent across our main variables. Second, we want to highlight that
only ODA’s effect is different across the regime types. In both autocratic
and democratic countries, the level of national economic development
appears to be the most important variable in reducing slum population.
However, in the case of economic growth, both democratic and auto­
cratic countries have no significant impact on reducing slum population.
The urban population growth shows different coefficients and is statis­
tically significant by regime type. In autocratic countries only, urban
population growth increases slum dwellers. This result implies that
autocratic countries have difficulty controlling the growth of slums in
the face of rapid urbanisation. The urban population is not statistically
significant in both regimes.
However, there are some differences in foreign finance by regime
types. In autocratic countries, ODA and foreign remittances have been
shown to reduce slum populations. In other words, in autocratic coun­
tries, when the ODA inflow increases by 1%, the slum population de­
creases by approximately 0.94%, and when the remittance inflow
increases by 1%, the slum population decreases by approximately
0.65%. However, FDI has no statistically significant impact. In

7
S.H. Yoo and B. Woo
democratic countries, nevertheless, statistically significant results are
not reported in the case of ODA and FDI, and the slum population de­
creases only when the inflow of remittances increases. In democratic
countries, when remittance inflows increase by 1%, the proportion of
slum residents decreases by approximately 0.89%. In summary, while
ODA reports different statistical significance depending on regime type,
FDI have no statistical significance and foreign remittances show sta­
tistical significance in both regime types. These results support Hy­
potheses 4 that the effect of ODA on slum upgrading works differently by
regime type.
6. Conclusion
As described in the introduction, there are considerable attention to
slum upgrading in developing countries. This study examined how the
types of foreign financing affect slums in developing countries. We
contend that ODA, FDI, and foreign remittances are effective in reducing
slum populations by supplementing developing countries’ vulnerable
financial resources. We also theorise that foreign financing, especially
ODA, is more effective in autocratic than democratic regimes because
politicians in autocracies see slums as a greater threat to maintaining
their power than politicians in democracies.
Empirically, we report a positive relationship between foreign
financing and slums in the pooled model, but when considering the
combined effect, only ODA and remittances have a positive effect on
slum upgrading. We also demonstrate that ODA is effective in reducing
the slum prevalence in autocratic regimes but that remittances have a
positive impact on slums in both regimes. These empirical results sup­
port our argument about slum upgrading.
Nonetheless, this study has some limitations. First, this study in­
cludes a lot of factors affecting slums claimed in previous research;
however, other factors, such as country-specific factors, are not
controlled. For instance, the historical context of slums is not considered
in this study. In addition, the quality of the government, which plays an
important role in solving slum-related issues, may vary by country.
Second, we analyse country-level rather than city-level data. Since slums
are city-wide phenomenon, it would be great if we could examine the
effects of ODA, FDI, and remittance at the city level. Many key indicators
that we utilise in this study, however, are not available at the city level.
FDI, ODA, and democracy are all available at the country level. We note
that many qualitative studies of slum upgrading concentrate on the city
level dynamics and thus, our quantitative paper and existing qualitative
studies complement each other in the sense that qualitative studies
focusing on the city level dynamics look at the micro-level processes and
our study looks at the more macro-level processes. Third, sectors of
finical inflows can also have an important impact on slum upgrading.
For instance, ODA might have a stronger influence over the slum when
inflowing the urban or infrastructure sector than when it flows into
other sectors. On the other hand, we also note that because money is
fungible, when ODA flows into less relevant sectors, it can still make a
positive effect on slum upgrading because ODA will free up government
resources that would have been spent on the less relevant sectors; gov­
ernments with enough political incentives then would invest those freed
up government resources to slum upgrading. Lastly, due to the gaps in
available years in the slum dataset by UN-Habitat we are unable to
explore the temporal dynamics of slum upgrading in a full time-series-
cross-section setting. This limitation is fundamental to this study,
because we rely on existing quantitative data. We expect that this lim­
itation will be addressed in future research as global efforts to collect
slum data continue.
Despite the limitations of this study, we believe that it contributes
significantly to the literature on slum upgrading by considering previ­
ously ignored political factors and providing policy implications. Most
importantly, according to our findings, the effect of ODA on improving
slum conditions is paradoxically less visible in democratic countries
than in autocratic ones. This is because politicians in democratic regimes
8
Habitat International 139 (2023) 102898
do not need slum dwellers for maintaining power but can help politi­
cians in autocratic regimes stay in power. This highlights the need for
alternative approaches to address slum upgrading challenges in demo­
cratic contexts. Furthermore, these results suggest that the responsibility
and responsiveness, which is principal component of democracy, do not
work properly for poor people. Considering these challenges in demo­
cratic recipients, ODA donors need to get more engaged and encourage
inclusive more local population and non-governmental sectors involved
when they finance urban infrastructure projects. Thus, institutional
improvements should be made in democratic countries to account for
the desires of slum dwellers to promote their quality of life, social equity,
and ultimately, the sustainable development of communities. For better
understanding of slum upgrading dynamics in developing countries,
future research can continue examining other conditions under which
the effects of foreign finance might be more salient than others.
Author statement
We would like to thank the anonymous reviewers and the editor of
Habitat International for providing thoughtful comments and sugges­
tions. We are also grateful for the research support provided by the BK
21 Four Program of the Department of Political Science at Yonsei Uni­
versity and by the Economic Statecraft Lab. We acknowledge that Seong
Hun Yoo’s MA thesis served as the basis of this article, yet the article has
been significantly and thoroughly revised.
Declaration of competing interest
The authors declare that they have no known competing financial
interests or personal relationships that could have appeared to influence
the work reported in this paper
Appendix A. Supplementary data
Supplementary data to this article can be found online at https://doi.
org/10.1016/j.habitatint.2023.102898.
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