Exodus or Exitus?

Income inequality in different countries is typically associated with spatial inequality as well. In the US, the decline of industry has left the states in the Midwest and the rust belt devastated while the coastal states tended to do well. In the UK, London has prospered over the last couple of decades while the Midlands and the North of England suffered. And in Germany, the former German Democratic Republic (GDR) in the East of the country never fully caught up with the West. 

Thirty years after the Berlin Wall came down, the German Ifo Institute asked 136 economics professors across the country if they thought that the income and development gap between the western part of Germany and the former GDR will be closed within the next ten years. 69% of respondents said the gap would still persist in a decade’s time. 61% of respondents said there will never be a level playing field between east and west Germany.

The main reason given by economists for this spatial disparity is a persistent negative feedback loop. Because there are no jobs in these poorer parts of the country, young people move away to big cities and university towns. Once there, they start their careers and typically never come back. As a result, prosperous regions become more prosperous while the poorer regions stay poor. This modern exodus is visible in our chart below, which shows the total population change of several states in the US Midwest between 2010 and 2018. Rust belt states like Illinois, Indiana, and Michigan are losing people left and right due to a lack of economic opportunities.

In the 19thand 20thcentury, these regional disparities would have disappeared after a while because the availability of cheap labour in underdeveloped or poor regions would have attracted labour-intensive industries. But in the 21stcentury, these labour-intensive industries no longer exist in countries like the US, the UK or Germany. They have long moved to East Asia and Eastern Europe where labour is even cheaper. And the businesses that thrive in highly developed countries tend to be industries like IT and services that are less labour intensive or require a physical proximity to their customers. Hence, these industries have little incentive to move out of the city into the countryside.

Unless there are strong incentives for businesses to move into these poorer regions (e.g. through government spending programs or lower corporate taxes) the trend of the last decade will continue. And with it we have to expect a further political polarisation between the richer and poorer parts of these countries that will manifest itself in even more dysfunctional politics and may – in the worst case – lead to a complete fracture of society. Such societal fractures have been observed before. They led to the outbreak of the Civil War in the US and the French Revolution as well as the Communist Revolution in Russia and China. Obviously, we are not at such extreme points, yet, but the digital revolution is taking us more and more down that road.

Total population change 2010 – 2018

Source: Liesl Eathington, US Census Bureau.