The IMF Warns About Rising Regional Inequality

Enlarge this image OLIVIER DOULIERY/AFP via Getty Images OLIVIER DOULIERY/AFP via Getty Images

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Last week, Gita Gopinath, the head of the International Monetary Fund's Research Department, kicked off the Annual Meetings of the World Bank and IMF, in Washington, D.C. Wonks flew in from around the globe to mix, mingle, and deliberate at the headquarters of these two multilateral institutions, which lend tons of money to countries in distress. Everyone was well-dressed, except us schlubby journalists, who were also there.

Gopinath presented the World Economic Outlook, the IMF's biannual report on the state of the global economy, and it was a downer. In her words, "the global economy is in a synchronized slowdown." She singled out "rising trade barriers and growing geopolitical tensions," especially between the U.S. and China, for driving much of the decline.

It probably wasn't a coincidence then that, a few days later, Gopinath took the stage again to present a study about a trend that many blame for these rising trade barriers and political tensions: regional inequality within advanced nations. Think, the Rust Belt vs Silicon Valley, or London vs the rest of England. Then think Donald Trump, and Brexit.

Standing in front of a giant screen with animated maps showing that regional inequalities within countries often dwarf inequalities between them, Gopinath said, "These are important issues to grapple with. They are severe. They're affecting the economic landscape. They're affecting the political landscape."

The study Gopinath presented can be found in Chapter 2 of the World Economic Outlook. It looked at regional economic performance within 20 advanced countries across the industrialized world over the last few decades. The authors find that after a long period of catching up to the rest of their countries, poorer regions began lagging behind in the 1980s. They estimate it's about a fifth of all the regions in their sample.

Natalija Novta, one of the co-authors of the study, told us these lagging regions all exhibit similar patterns. Whereas leading regions tend to be urban, educated, and specialized in services, like technology, finance, law, design, and hospitality, lagging regions tend to be rural, less educated, and specialized in old-school occupations such as those in agriculture, mining, manufacturing, and construction.

"And these are generally low-productivity sectors compared to some of the high-productivity service sectors," Novta says. Lower productivity generally means lower wages. Lagging regions have higher unemployment rates too, which helps explain why they see a whole range of social problems, like higher infant mortality rates and shorter average lifespans.

Why?

The two leading suspects for increasing regional inequality since the 1980s are automation and trade with developing nations, especially China.

Based on an influential paper a few years ago, "The China Shock," you'd think free trade is guilty. It found that, between 1999 and 2011, a flood of Chinese imports to America killed around one million American manufacturing jobs. Even worse, these job losses were concentrated in small towns and cities, devastating many regions of the country.

But the IMF economists find the China story unfolded differently abroad. "We see that, on average, looking across advanced economies, these effects of trade are not as adverse as what has been found in the United States," Novta says. In the United States, trade with China led to prolonged job losses in lagging regions, but that was not true across their sample. It confirms previous studies that have found that countries like Germany fared much better with Chinese trade. German economists have attributed their country's success to industrial policies that enhance competitiveness and also sheer luck (Germany, for instance, manufactures a lot of industrial equipment, and China needed a bunch of that as it industrialized).

Novta says, however, the story is more somber when it comes to automation. Lagging regions, which are less educated and innovative, were found to be less resilient to technological changes, and the IMF suggests this is a significant cause of growing regional disparities since the 1980s.

What Should We Do About It?

Not all the countries the IMF analyzed had lagging regions. Austria, Norway, and Finland are all relatively equal when it comes to their geography. But these are also tiny countries compared to the United States. None has more people than New Jersey. But we were still curious what Gopinath thought about why they're so much more equal. She suggested it had to do with better education systems and social safety nets. "In general, when you have more uniformity in access to some of these basic necessities," she said, "you end up seeing more convergence." Gopinath also stressed the importance of policies that encourage flexibility in labor markets, making it easier for workers to retrain, move, and adapt to economic declines in their hometowns.

Washington, D.C., which hosted the event, is one of the leading "superstar" cities that has seen a huge portion of the nation's economic growth over the last few decades. The federal government, and the vast industrial complex it feeds around it, has become the foundation of a vibrant economy that fares well even when the nation heads into recessions. A number of leaders, including members of the Trump Administration and presidential candidate Andrew Yang, have called for relocating some federal agencies out of DC as a way to cut costs and spread the wealth of federal spending to lagging regions. Leading economists have also been calling for "place-based policies," which target government aid to struggling regions. Such policies might help close the widening geographic gap.

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