Urbanization, Regional Development, and Economic Inequality: Contemporary Policy Perspectives

While urbanization is reconfiguring income distribution patterns, it can increase or decrease economic inequality depending on local conditions, infrastructure availability, and the stage of urban transition. The paper explores the interaction between urbanization, regional development, and economic inequality using a stylized balanced panel of 160 regions observed in 2005, 2010, 2015, and 2021, grouped into five regional types. The region and year fixed-effects models are applied along with the region-clustered standard errors, Theil decomposition, and a type-by-year heat map of the urban–rural income ratio. The results indicate that the Gini coefficient and the urban–rural income ratio have an inverted-U relationship with urbanization, with the turning points for the Gini coefficient and the urban–rural income ratio occurring at 57 percent and 61 percent, respectively, of urbanization, after accounting for infrastructure access. Urbanization reduces poverty very strongly, and urbanization in neighboring regions has a similar (negative) effect on poverty as urbanization in the own region. However, the magnitude of regional differences increases from 80.2 to 87.5 percent of the overall Theil index of inequality, with the gap between the coast and frontier regions increasing, while that between urban and rural areas in the industrial regions widens. The paper finds that urbanization is equalizing incomes only through a threshold in infrastructure and institutional development and provides policy suggestions on the issue of infrastructure, housing, connectivity, and place-sensitive governance.