Earlier inundation of Larracos that displaced the NPCs and preceded Shanty Town's impossible appearance.
Shanty Town appeared soon after the flooding, ostensibly built by the displaced NPCs — though nobody actually built it; the hovels simply sprang up out of nowhere. The flooding also came with a rule: no new NPCs would be added to the town once it was flooded. That rule has apparently been changed or circumvented, since the slums now contain new shops staffed by new NPCs, which is what leads Carl to suspect an Emergency Action Item behind it all.
The prior catastrophe that displaced Larracos's population and set the rule the shanty town appears to break.