Urbanization can help reduce income inequality

Guanghua Wan,Xiaoling Zhang,Mengxue Zhao

doi:10.1038/s42949-021-00040-y

Abstract

The global community has been confronted with rising income inequality, in particular, for those least developed countries (LDCs), since the same level of inequality as in advanced countries would push many LDCs into abject poverty. This paper focuses on income inequality in developing countries, particularly LDCs. First, we demonstrate the infeasibility of fiscal measures in resolving income inequality even in developed countries. Second, we show that inequality in LDCs can be largely explained by urban-rural gap. Third, we uncover the benign impacts of urbanization on urban-rural gap. This leads us to propose an out-of-box strategy—containing income inequality by promoting well-managed urbanization. Fourth, we reveal a misperception that may have contributed to the neglect of urban-rural gap in constituting national inequality. This has possibly caused anti-urbanization mentalities and practices, with adverse distributional consequences. Finally, we provide evidence-based policy suggestions aimed at reducing income inequality and poverty—two major goals of SDGs.

Highlights

Income inequality represents one of the most challenging issues confronted by the global community today
As is well-known, conventional wisdom relies on taxation and fiscal transfers to address income inequality
This paper intends to advance our understanding of the relationship between urbanization and income inequality

Summary

Introduction

Income inequality represents one of the most challenging issues confronted by the global community today. It should be stressed that the distributional problem is more urgent and important in developing countries, least developed countries (LDCs). This is because (1) they account for approximately 85% of the global population; (2) it is infeasible for them to allocate enough fiscal resources for redistribution, even in economies with a middle-income level development status. On average, upper-middle and high-income countries spent 4.60% of Gross domestic product (GDP) on social programs in the latest year whereas this percentage is only 1.54% for other countries; (3) with a lower development status (a smaller pie), a same level of inequality (how the pie is divided) will push many more into abject poverty in developing countries than in developed economies; and (4) worse still, inequality is expected to rise further as the countries take off or continue to grow[2,3]

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