Urban poverty, growth, and inequality: A needed paradigm shift?

• Published date: 01 May 2022
• Author: Edgar J. Wilson,Kankesu Jayanthakumaran,Reetu Verma
• Date: 01 May 2022
• DOI: http://doi.org/10.1111/rode.12866

Rev Dev Econ. 2022;26:941–961.

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941

wileyonlinelibrary.com/journal/rode

Received: 17 March 2021

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Revised: 9 December 2021

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Accepted: 12 January 2022

DOI: 10.1111/rode.12866

REGULAR ARTICLE

Urban poverty, growth, and inequality:

Aneeded paradigm shift?

Edgar J.Wilson

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KankesuJayanthakumaran

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ReetuVerma

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and

reproduction in any medium, provided the original work is properly cited.

© 2022 The Authors. Review of Development Economics published by John Wiley & Sons Ltd.

Faculty of Business and Law, University

of Wollongong, Wollongong, New South

Wales, Australia

Correspondence

Kankesu Jayanthakumaran, Faculty

of Business and Law, University of

Wollongong, Wollongong, NSW,

Australia.

Email: kankesu@uow.edu.au

Abstract

This paper calculates poverty and inequality elastici-

ties using the latest- available World Bank primary sur-

vey household consumption expenditure data for the

rapidly growing urban sectors of India, Indonesia, and

China. Our approach compares the conventional use of

the overly simple headcount measure to the poverty gap

squared (PG2) measures of poverty and focuses the ef-

fectiveness of reducing inequality on the disutility of the

poor using a microeconomic utility- based point elastic-

ity measure of poverty loss. The calculations show that

reducing urban inequality is more effective in reducing

(1) urban poverty than promoting growth and (2) pov-

erty distress more than that in the rural sector. The op-

timal policy prescription is to reduce urban inequality

by targeting the urban very poor using the PG2 measure.

Further research is required to identify and quantify the

determinants of the point elasticity magnitudes and the

possible directions of causation.

KEYWORDS

Asia, growth elasticities, poverty gap squared, urban inequality

JEL CLASSIFICATION

D31; D63; I32; O40; O53; R12

942

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WILSON et al.

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INTRODUCTION

There is continuing debate about the effectiveness of the trickle- down benefits of economic

growth in alleviating inequality and absolute poverty in developing countries. While there is con-

sensus that growth generally reduces poverty, there is less agreement about the relationships be-

tween growth and inequality, mirrored in the wide variation in estimated elasticities reported in

the literature over the past 20years. For example, the inverse responsiveness of poverty to growth

is calculated to vary in the range from 0 to −4, that is, from no influence at all through inelastic

and up to highly elastic effects. There is less reported evidence on the responsiveness of poverty

to changes in inequality, and these elasticity estimates have wider variation from 0 through 15.

We argue that these estimates, while contributing to academic discourse, lack clear directions

to guide development policy. This main issue relates to the predominance of arc elasticities es -

timated from panel data that measures average responses over decades, across large samples of

heterogeneous developing and transition economies. The effects of structural change are unclear,

for example, urbanization, which are not identified in these studies. The results are consequently

sensitive to the selection of data and samples, in addition to the specification and estimation

techniques used. This broad- brush panel approach is also inconsistent with the literature's nar-

row focus on the headcount (HC) measure of poverty, by excluding other poverty metrics, which

will affect the estimated poverty responses and policy directions.

This paper therefore focuses on calculating point, rather than arc, elasticities, particularly for

the rapidly growing urban sectors of individual developing countries. Urbanization is significant

in Asia according to the UN DESA (2018), with the urban population predicted to increase by

just over 720 million from 2020 to 2040, while the rural population is to decrease by over 285

million.1 We focus on the few countries where primary- sourced urban survey data is available;

fortunately, they are the populous India, Indonesia, and the People's Republic of China (PRC)

that are projected to contribute about 75% of the urban increase in Asia.2 While there have been

significant decreases in urban poverty in these countries, this has been at the expense of increas-

ing inequality.

Section 2 reviews the empirical literature on estimated growth, inequality, and poverty panel

elasticities to provide more explanation and details for the wide range of estimates quoted ear-

lier. Section 3 briefly discusses possible trade- offs between reducing urban poverty and urban

inequality as indicated by secular trends in the data for the three countries. Since the sensitivity

of poverty will be affected by how it is measured, Section 4 reviews the common measures and

importantly provides a new economic interpretation of the poverty gap squared (PG2) metric as

a measure of disutility of the urban poor.

Point elasticities and marginal rates of substitution between urban consumption growth, in-

equality, and measures of urban poverty are calculated in Section 5 using the latest- available

World Bank urban consumption expenditure survey data. The calculations justify focusing on

the urban sectors, rather than the rural sectors, in each country and clearly show that the most

effective way to reduce urban poverty is to reduce urban inequality; this is more effective than

increasing urban growth. This new evidence of complementarity, rather than a trade- off between

inequality and poverty, has important policy implications, as is the calculated point elasticities

being more responsive than the panel estimates reported in the literature. Both findings indicate

greater potential to reduce urban inequality and poverty, particularly in reducing the PG2 mea-

sure of disutility.

Section 6 discusses available empirical research on the elasticity effects of other factors on

urban poverty for these three countries. Overall, urban inequality is found to be the major cause