Sustainable development goals number 1 and number 10 are about poverty and inequality respectively. Economists and policy-makers know well that these two are very different subjects. A country or a city can reduce poverty while increasing inequality. In fact, this is exactly what has happened in many countries (at different levels of development) in the last 30 years. This is what has happened globally as well. Overall poverty has been drastically reduced: some estimates suggest 1 billion people have come out of poverty. Inequality, on the other hand, has increased under all metrics.
Therefore, it is challenging to address these two themes simultaneously in one commentary. However, there is I think one lesson from our recent past that is often overlooked, which can also come to be very useful in the months to come, when the real impact of the COVID-19 global crisis on economies will manifest itself.
The key lesson is that many economic dimensions of human life, poverty and inequality included, can be dealt with very effectively at the local level. In fact, national governments do not have enough financial resources to address poverty effectively through “traditional” redistributive policies. Additionally, as explained very clearly by Branko Milanovic’s latest book, it is very hard to counteract inequality trends with redistributive policies because such trends are reinforced by personal choices; additionally, the increased diffusion of capital income which now overlaps with labor income can make traditionally redistributive policies from capital to labor even counterproductive for inequality. At the same time, in a quickly changing scenario, national governments are likely not have enough information about the different and new dimensions of poverty and inequality. While deprivation is similar in its manifestations, it can be driven by lack of housing, lack of infrastructure, lack of job opportunities. Similarly, inequality – both absolute and relative – can be driven by spatial and urban features: relatively poorer neighborhoods with an abundance of social and public spaces are known to yield better quality of living and better opportunities for young people than relatively richer neighborhoods that suffer from social distance (and therefore isolation) because of their urban planning.
In other words, we all know that globalization in the last thirty years is a history of cooperation, competition and exchange between global cities. The leading role of mayors, for example, is a clear by-product of such increased importance. Research carried out in the last ten years by Enrico Moretti and other economists explains to us the economic drivers of such increased importance of the city for economic variables, and the widespread social consequences.
Despite this centrality of the city dimension, the public discourse on poverty and inequality rarely encompasses a specific focus on cities and this is a mistake. Even when urban poverty is discussed, the approach tends to be remedial. Urban inequality instead is always overshadowed by efforts towards economic growth which, as I said at the outset, can instead lead (when achieved) to increased inequality. Instead: a lot can be achieved by targeting different dimensions of inequality and poverty drivers, by focusing on proximity measures. For example: local estate taxes (a tax paid on inheritance) can be set, or increased, and directly aimed at funding special school programs in disadvantaged neighborhoods. Recent evidence by research from Moretti et al. (2019) suggests that such taxation is beneficial to local finances (the share of older, richer people who move residences because of it is small) and additionally, taxes with a pre-committed use of their revenues are known to be better accepted and in fact better complied with.
Let me give a different example. The expansion of large malls instead of city markets and city shops had the effect of depriving neighborhoods of much-needed social environments and interactions. Malls are a by-product of globalization, the rise of large retail and manufacturing global chains, and of course of financialization, whereby large funds can be applied to serve the needs of large construction sites. However, through smart local regulations and smart local tax incentives, the same large financial instruments can be deployed towards urban renewal and reinvigoration. The widespread use of concessions for services and maintenance could also divert private funds towards schools and other community-based services that can contrast poverty and inequality both effectively and structurally.
In short: what we have seen in the past twenty years is a lack of creativity to match the increased importance of global finance and global trade, with the increased importance and ability of cities to address problems that once were considered to be of the national domain, but over which the state now has much less control. One reason for this mismatch could be that such creativity does not well serve local political dynamics, and/or that the knowledge required to mobilize global instruments to serve social cohesion at a local level is not readily available at the urban level. Whatever the reason, there seems to be something akin to a gap waiting to be filled.
How does this reasoning square with the changes that COVID-19 is imposing on global cities during the current lockdown phase and, more importantly, in the coming future, when facing the economic consequences of the pandemic crisis? The economic crisis is likely to impact cities and territories very differently, depending on the sectors they mostly rely on. So, while poverty is likely to rise in many countries, inequality will increase as well because not all sectors will be similarly hit by the crisis. Aviation, tourism, and other industries heavily dependent on close human interaction will be the most hit. Possibly, many companies and jobs will never resurface because the notion of risk in these sectors will affect relative prices even after COVID-19 will be defeated.
Furthermore: we know from previous research (for example Balland et. al 2020, Nature Human Behaviour)that innovation in different sectors is very concentrated in space, and more generally cities often rely on a limited number of important industries that drive their economy. Hence, some cities will be hit particularly hard.
Therefore, while it will be crucial that nation-wide or even continent-wide macroeconomic policies are put in place to alleviate the worst effect of the economic crisis and to preserve as much production capacity as possible, many initiatives will need to rely on the local level to be effective. Cities will need to find new specializations. Tourism-heavy cities will need to re-orient their cultural capabilities towards other creative occupations. We do not know yet if global value chains will be able to restart in the same configuration as yesterday. While some value chains will restore their operations, new products are likely to develop with a shorter chain to reduce the increased costs of insurance and re-insurance against the new risks we now are more aware of. Such shorter chains will probably mean, for example, that manufacturing will increase its numbers again even in the developed world, and offer new opportunities for displaced workers and capital.
In short: the economic importance of cities in the coming future will not decrease, on the contrary it will increase, and we can expect to see differences in poverty and inequality, also depending on the local-level capacity to design intelligent targeted policies, carefully planned and effectively implemented.