Spatial Inequality in Rural India : Do Initial Conditions Matter?

Disparities in income and living standards across countries and between regions within countries (spatial inequality) have been the subject of much debate and research in recent years. Spatial inequality is a construct arising out of variations in economic endowments, geography and, socio-political structure across the relevant economic space. It is typically measured as an outcome of differences in mean income or consumption levels across the economic space. The extant literature has examined some of its causes. These include globalisation, variations in availability and quality of infrastructure, and, persistent conflicts. If a significant proportion of overall inequality is spatial in nature then this can produce the preconditions for chronic poverty. Persistent spatial inequality reduces household level mobility in terms of income, occupation etc. Policies aimed at reducing chronic poverty will then have to focus on structural rather than household specific factors. This paper contributes to the literature in number of ways. First, it helps focus attention on the fact that meaningful comparison of incomes across space can be done in the context of representing these incomes as pure returns to location. Differences in income can then be described as resulting from different neighbourhood structures. Second, it is able to control for a wide range of village-level structural variables, thereby overcoming the common problem of unobserved heterogeneity. In the cross-country and cross-region inequality among broad geographic entities, such as states or districts Indian villages mimic small countries that operate in relative autarky (Foster and Rosenweig 2003). Finally, this paper shows that local endowments matter in so far as the local economies interact with a wider geographic space. Such interactions could produce positive as well as negative externalities, some of which are responsive to policy