Globalization Boosts Some Regions, Marginalizes Others

Growth and opportunity are clustered in major cities while once thriving industrial areas are left behind.

The skyline of Detroit, Michigan, July 18, 2009
The skyline of Detroit, Michigan, July 18, 2009 (Michael Kumm)

The Economist reports that globalization has marginalized once thriving industrial areas, such as Scranton, Pennsylvania, Teesside in the United Kingdom and France’s Pas-de-Calais.

It is no coincidence that Donald Trump, Brexit and Marine Le Pen got some of their highest vote shares in those regions.

Global trends

Economists once thought that, over time, inequalities between regions and countries would naturally even out. And for much of the twentieth century there was evidence to back this up: income gaps between American states, European regions and Japanese prefectures shrunk dramatically up to around 1980.

But then things changed. Regional inequalities within rich countries started to increase while poor countries began to catch up.

These trends are connected. When low-wage workers in developing countries compete with those in developed ones, pay for similarly skilled positions converges. Hence salaries for factory workers and truck drivers in Europe and North America have stagnated.

Clustered opportunity

Meanwhile, growth and opportunity has been clustered in urban areas. Financial firms do well in London and New York, and tech startups in Barcelona and Silicon Valley, because that’s where their clients, customers and talent are.

This is not a unique phenomenon. During the industrial era, capital cities and factory towns were booming and people moved to the new centers of progress. Manchester’s population doubled from 1811 to 1841 — just as Shanghai’s did from 1980 to 2010.

Immobility

What’s changed is that Westerns have become less mobile. Just 2 percent of Americans move across state lines every year. Only 1.5 percent of Europeans move between regions within their home country. Less than .4 percent move between EU countries.

The Economist sees two reasons for this:

  1. The pull exerted by successful places is offset by policies that restrict population growth, such as stringent planning rules; while
  2. The welfare state has weakened the push to leave failing places.

The result: Among OECD countries, the average productivity gap between the most productive 10 percent of regions and the bottom 75 percent has widened by nearly 60 percent in the last twenty years.

Political consequences

This has political consequences. The segregation of cities into a small set of haves and a much larger set of have-lesses means that elites, in business and politics, rub elbows only with each other.

That makes them ever less sensitive to the costs of regional inequality. The growing concentration of corporate offices in the vicinity of Washington DC is a particularly obvious example of this.