Earlier this week, Tyler Cowen quoted Rajan and Zingales on the question of why poor institutions persist when we know that they are an impediment to growth. The answer, according to R&Z, is that there might be pervese political equilibria favoring existing lousy institutions over reforms that would enhance economic growth.

Yesterday's WSJ has an article ("In India, the Path to Growth Hits Roadblock: Slums," p. A1; no link) illustrating the point. Some excerpts:

They [millions of poor Indians] have the power to derail the best-laid plans of investors and government with votes, protests and the courts. India desperately needs to fix its archaic infrastructure--potholed roads, rundown airports, and decrepit power plants--if it wants to seriously compete with China for investment. Yet getting it done often runs counter to the interests of those just beginning to share in the new prosperity....

But change comes slowly in Mumbai. It took more than five years to shift some 10,000 shanty families away from the railway line that runs down Mumbai's spine. The shanties had so crowded the line that trains had to slow down, delaying service. The chief problem with moving the slums is that they're filled with people whose votes keep politicians in power.

By the way, it appears that much of the demand for shanty/squatter housing is created by misguided government policy:

Slums provide the drivers, maids and mechanics that keep Mumbai running. The tough part is housing them all. Rent control and strict building codes make low-cost housing a high-risk, low-return business.