Economic Distance

ECONOMIC DISTANCE HAS two distinct yet interrelated definitions. One is a relative measure of household well-being based on a percentage of median income, or an absolute difference in per capita income between social groups. For example, economic distance can be measured as the percentage of families with household income that is less than 50 percent of median income, or as the ratio of income for higher-income households versus lower-income households.

A more common usage refers to the spatial or social distance to centers of economic activity and power, or as the costs of reaching markets, including the probability of losses in product quality. The concept has two major aspects: spatial and often social distance between sparsely populated rural areas and urban growth centers; and social and to a lesser extent spatial distance between disadvantaged urban communities and areas of economic opportunity in urban areas. Reducing economic distance is often advocated as a way to reduce rural poverty based on the assertion that a lack of market access limits economic growth and opportunity, and hence plays a key role in the creation of poverty pockets (lagging geographic regions with high rates of poverty and social dislocation).

Examples of such regions include the hinterlands in much of Latin America and the Appalachian and Mississippi delta regions in the United States. J. Jalan and M. Ravallion also provide strong evidence for poverty pockets in their examination of household data from four rural Chinese provinces in 1984 through 1990. Their research concludes that holding initial endowments constant, households within relatively wealthy areas were more likely to escape poverty than their counterparts in poorer regions.

Investment in infrastructure, especially roads and telecommunications, is usually seen as a way to reduce economic distance, thereby engendering economic growth and reducing poverty. For example, a recent publication by the World Bank touts development of the transportation systems as the means for generating employment and reducing poverty in the Balkans. However, Jalan and Ravallion point to growth in agriculture and investments in healthcare as key explanations for the effects of economic distance they observed in China rather than the lack of adequate road systems.

More generally, reductions of economic distance can be a two-edged sword by facilitating out-migration and loss of internal markets to outside competitors. In fact, the controversial phenomenon of globalization is the outgrowth of continuing reductions in economic distance between often distant countries. It is conceivable that reductions in economic distance could in some cases create rather than help eliminate poverty pockets, if the fruits of the resulting gains in efficiency from increased trade are not equitably distributed.

T. Conley and G. Topa found a strong pattern of differences in unemployment rates (and by our extension poverty levels) across Chicago, Illinois, neighborhoods based on geographical differences. This result implies that economic distance also matters in urban settings. However, the pattern was explained by racial or ethnic and occupational distance, that is, by social and educational or class differences between neighborhoods. Their work reveals an overlap in the two definitions of economic distance, in that differences in income level or class distinction correlate with differences in physical location. They suggest unobserved differences in human capital and skill sets, informal networks, and discrimination in labor markets as possible explanations. There is further analysis within the context of physical distance in explaining poverty levels and the lack of economic opportunity.

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