VIRTUAL Lisbon Livable Cities

Abstract

Aim: This study investigates the impact of macroeconomic shocks on urban livability in South Asian countries, with a focus on inflation, unemployment, fiscal balance, and public investment. Methodology: Using a balanced panel dataset from Bangladesh, India, Nepal, Pakistan, and Sri Lanka spanning 1981–2023, the analysis employs dynamic panel estimation techniques, namely the Generalized Method of Moments (GMM) and Two-Stage Least Squares (2SLS), to address endogeneity and serial correlation. Urban livability is measured through a composite index derived using Principal Component Analysis (PCA) based on indicators such as housing access, healthcare services, and transport infrastructure. Lagged macroeconomic variables are used as instruments. Additionally, in-sample forecast evaluation metrics are used to assess the predictive accuracy and reliability of the estimated model. Results: Both GMM and 2SLS estimations reveal that a higher share of the urban population living in slums significantly reduces urban livability. Unemployment and inflation also exert negative effects, with unemployment showing a consistently significant impact across models. Public investment does not exhibit a statistically significant effect, suggesting limited short-term influence on livability outcomes. Fiscal balance, by contrast, has a strong positive effect, indicating that sound fiscal management is associated with improved urban conditions. Forecast evaluation results, including low RMSE and high covariance proportion, support the in-sample accuracy of the model. The consistency of results across methods further supports the robustness of the findings, though the low Durbin-Watson statistic in the 2SLS model suggests potential autocorrelation—further justifying the use of GMM. Implications and Recommendations: The findings underline the critical role of macroeconomic stability in shaping urban well-being. Policies aimed at reducing unemployment, curbing inflation, and mai