World Development Report 2024: The Middle-Income Trap

Living in a disadvantaged neighborhood affects adults’ outcomes and children’s trajectories because residential segregation impairs schooling, health outcomes, intergenerational mobility, and the formation of social capital.

Children who grow up in better neighborhoods have improved outcomes in their education and in the labor market. These outcomes could result from being born into a family that would choose to live in these better neighborhoods (sorting) or could be attributable to the neighborhood itself. In developing countries, about one-third of these outcomes stem from the neighborhood itself (that is, living in certain neighborhoods). The benefits of moving to a better neighborhood are larger for younger children because they are exposed to beneficial effects for a longer period.

Neighborhoods matter for children’s life outcomes. First, richer neighborhoods tend to have higher school quality, a major determinant of upward social mobility. Differences in neighborhood-level school quality can arise when schools are financed locally, which is more common in higher-income countries. In middle-income countries, central governments are responsible for the large part of the public expenditure on education, although in many countries provincial governments also contribute. In South Africa, for example, more school funding is allocated to poorer neighborhoods. Yet the quality of schools is lower in poorer neighborhoods in cities and in more remote rural areas, where schools struggle to attract and retain high-quality teachers, doctors, and other service providers because of poorer infrastructure, services, and amenities. Having high-quality teachers not only improves test scores but also can influence important noncognitive and behavioral attributes in positive ways. The absence of high-quality teachers contributes to the poor performance of schools in disadvantaged neighborhoods.

Second, children find their peers and role models in their neighborhoods and form the social networks that can help them in their future job search. Better neighborhoods help in all these aspects. For example, the probability of dropping out of school or committing crimes is similar among children who attend the same school or grow up in the same neighborhood (and are presumably peers). Similarly, children in poor neighborhoods may have strong ties with friends and neighbors, but these are of little use in searching for a job because they do not include contacts with people outside the community.

Third, poor neighborhoods typically have poor infrastructure and services. Lack of sanitation and greater exposure to pollution are common in urban slums. As a result, children growing up in slums are more susceptible to diseases. All these factors have negative impacts on early-life health, human capital, and labor market outcomes.

Fourth, poorer neighborhoods tend to have a high incidence of crime and violence. For example, young children growing up in one of the numerous slums (favelas) in Rio de Janeiro affected by conflicts between drug gangs perform significantly worse at school. Between 2003 and 2009, at least one favela was in a drug-related conflict in Rio de Janeiro during four of those six years. Living in such poor neighborhoods in middle-income countries can carry a social stigma that affects life outcomes for the residents (box 5.2). In addition, violence may disrupt school routines, increase teacher and student absenteeism, and cause major psychological distress that can lower test scores for students exposed to violence. In the United States, children who move to a county with lower crime rates, lower concentration of poverty, less income inequality, stronger schools, and a greater share of two-parent households experience better outcomes. For example, moving a child out of public housing in the United States to an area with a low poverty level when the child is young using a subsidized voucher has been estimated to increase the child’s total lifetime earnings by about US$302,000.

In disadvantaged neighborhoods, occupational choices are limited

Nearly one in six people around the world lives in urban slums, areas characterized by inadequate infrastructure and property status. The largest slums—Khayelitsha in Cape Town, Kibera in Nairobi, Dharavi in Mumbai, Ciudad Neza in Mexico City, and Orangi Town in Pakistan—are located in some of the largest cities in middle-income countries and form their own towns. Many migrants settle in slums in search of better economic opportunities and intend to stay there temporarily, yet often remain there for decades. For some individuals, slums are a “social elevator”—a temporary stop before finding regular housing. For others, slums are a poverty trap they cannot escape. Slum dwellers face risks from criminal gangs, contagious diseases, and pollution, and often struggle with long commutes and relatively high housing costs.

In urban slums in middle-income countries, children can often access education opportunities, but still have limited job opportunities. In the slums in Bangalore, India, parents’ top priority has been investing in their children’s education, which has led the children to have higher education levels than their parents. Although most families experience gains in income and assets over time, longer-term residents (extending to a fourth generation) have not been able to move out. In the slums in Jakarta, Indonesia, intergenerational mobility is higher among younger children than older children because they have benefitted from recent improvements in educational mobility. Educational mobility is also relatively high in favelas in Rio de Janeiro, Brazil. However, educational mobility does not translate into higher occupational mobility in any of these three cities. Most slum residents—particularly women—work in the slums and cannot obtain formal jobs because of their lack of access to job networks and their isolation from city centers. Moreover, slum residents are highly vulnerable to adverse events such as spells of bad health. Overall, residents in the Bangalore, Jakarta, and Rio de Janeiro slums are neither stuck in poverty traps nor are they on a steady trajectory toward the middle class. Their main constraint is securing a better job, particularly outside of their own neighborhoods.

Box 5.2 Living in favelas makes it more difficult to get a job

In her book Favela: Four Decades of Living on the Edge in Rio de Janeiro, Janice Perlman documented the experiences of families living in Brazilian slums (favelas) for more than 30 years.a The respondents were interviewed in 1969 and again in 2001, when the original interviewees and their children and grandchildren were asked for their perceptions about why they were the targets of discrimination. The reasons most frequently mentioned by the original interviewees and their children for not getting a job were their residence in favelas, followed by skin color, their appearance, and being a migrant (figure B5.2.1). Grandchildren, on the other hand, perceived less discrimination than their grandparents based on skin color or migrant status, although they perceived living in favelas and their own appearance as major impediments to obtaining jobs.

Keeping migrants out misallocates talent

Internal migration allows individuals to meet and learn from more productive people, sell their ideas in better markets, and expand job opportunities, thereby contributing to a more efficient allocation of workers across an economy. By contrast, barriers to internal migration are costly for growth. The low internal migration rate in some middle-income countries suggests the presence of high mobility barriers, even among highly educated individuals (figure 5.5).

The lack of information or social networks in the destination, as well as market or policy distortions, can limit migration opportunities. Migration barriers can include caste boundaries in India; government regulations such as hukou in China and propiska in Central Asia; and welfare schemes tied to residence. In China, the hukou system has historically imposed large costs on working and living outside of one’s hukou location, primarily through restricted access to social services and limited employment rights. In 2000, the average cost of moving from rural to urban areas within a Chinese province was equivalent to reducing one’s real income by a factor of nearly 3; moves between provinces were even costlier. Between 2000 and 2005, following a reform of the hukou system, migration costs declined by 18 percent on average and by about 40 percent for moves between provinces.

Location preferences or discrimination can also limit migration opportunities. On average, individuals with a tertiary education (university or beyond) face much lower migration costs than individuals with less education (figure 5.6). For example, on average, migrants with a tertiary education in China need a 39.5 percent wage increase to compensate for their moving costs, while migrants who lack a tertiary education need a 45.1 percent wage increase.