## Righting Globalization’s Wrongs

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**Canonical URL:** [Righting Globalization’s Wrongs](https://www.imf.org/-/media/files/publications/fandd/article/2026/06/hanson.pdf)

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### Overview
- Core thesis: Free trade produced large efficiency gains but also severe, uneven distributional consequences that mainstream economics largely underestimated.
- Key historical moments called out: the formation of the EU in 1992, the enactment of the North American Free Trade Agreement in 1994, and China’s accession to the WTO in 2001.
- Political consequence: widening regional distress contributed to support for nationalist and populist movements that champion economic isolation.

### Why economists missed the disruption
- Three misunderstandings about labor-market adjustment to large shocks:
  - Industrial concentration and import exposure
    - Manufacturing has been highly concentrated geographically since the Industrial Revolution.
    - Manufacturing relocated from major urban centers to smaller and medium-sized industry towns and cities over the 20th century.
    - When China’s manufacturing export growth accelerated in the 1990s, industry towns were “ground zero” for the trade shock; import-competing regions in France, Germany, the UK, the US, and other high-income nations bore the brunt of manufacturing job loss, while superstar cities specialized in business services, finance, high tech, and knowledge-intensive industries saw exports and incomes boom.
    - Economic models of the time were tuned to capture national impacts and therefore missed starkly differentiated place-based winners and losers.
  - Magnitude of scarring effects from manufacturing job loss
    - Manufacturing historically offered a pay premium, especially for workers without a college degree.
    - Factory closures and mass layoffs caused many displaced workers to take lower-wage service jobs or exit the labor force and never fully replace lost earnings.
    - Regionally concentrated job loss aggregated individual scarring into large negative local income shocks, reducing spending on nontraded goods and services, housing prices, and tax contributions—further depressing local incomes.
    - Models that projected simple shifting of displaced workers into expanding-export sectors ignored the largely disjointed sets of people affected.
  - Lack of geographic labor mobility among less-educated and older workers
    - Standard spatial equilibrium assumptions overstated how quickly migration arbitrages regional pay differences.
    - Spatial equilibration to shocks can take decades; interregional migration works slowly.
    - Upward-sloping job ladders accessible to more-educated workers are not equally accessible to less-educated workers; older workers are markedly less agile.

### Regional consequences and policy options
- Observed outcome: widening regional economic disparities, with former industry towns experiencing persistent high joblessness and few well-paying jobs for less-educated workers.
- Four policy response options discussed:
  - Laissez-faire (let market forces act)
    - Outcome: regions may shrink, businesses close, downtowns decline, and young entrants relocate.
    - Caveat: market-assisted spatial adjustment is likely to be very slow.
  - Target individuals via means-tested entitlement programs
    - Examples: unemployment insurance, income support, housing and energy subsidies, subsidized health care.
    - Strength: cushions consumption declines and protects household well-being.
    - Limitation: does not address causes of regional distress or speed local adjustment.
  - Trade protection (tariffs)
    - Rationale: recent US import tariffs have been partly justified to restore manufacturing jobs.
    - Critique: regional distress stems from scarring and adjustment failures, not import competition alone; tariffs do not prevent job loss from technological change or future shocks and have done little to restore manufacturing employment or earnings growth in regions harmed by the China trade shock.
  - Place-based policies that promote local economic development
    - Mechanism: subsidize human and physical capital to upgrade labor productivity, earnings, and regional economic structures.
    - Justification: warranted when social returns on investment are relatively high in communities with elevated joblessness and low wages.
    - Controversy: concerns about rent capture by special interests and informational challenges in program design.

### Evidence on place-based policy effectiveness and design principles
- Less effective approaches:
  - Tax subsidies and subsidy competitions to attract major investment by large firms
    - Tend to transfer most economic surplus to investors and leave regions with a “winner’s curse” of high tax expenditure per job created.
- More effective approaches:
  - Condition subsidies on local distress and monitor compliance with program objectives.
  - Design programs for specific contexts and use ongoing experimentation.
  - Examples of effective interventions:
    - Tax incentives for investing in low-income communities (for instance, rigorous enterprise zone programs with selection and auditing).
    - Sectoral worker training initiatives and active labor market programs applied in many high- and middle-income countries.
- Of the four policy options, place-based policy uniquely and directly targets outcomes that alleviate regional distress: moving out-of-work adults into employment, bringing more well-paying jobs where scarce, and making regions more attractive for future investment.

### Conclusions and policy recommendations
- Public opinion in high-income countries has soured on globalization because many middle- and low-wage workers ended up on the losing end of economic openness.
- To restore faith in global economic integration, policymakers must:
  - Correct past mistakes that left regions behind.
  - Offer a credible alternative to economic nationalism by adopting targeted, well-designed place-based policies.
  - Emphasize program design features: condition assistance on local distress, enforce compliance and monitoring, tailor programs to context, and experiment to learn what works.

*Gordon Hanson, Peter Wertheim Professor in Urban Policy at Harvard University and research associate at the National Bureau of Economic Research.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2026/06/hanson.pdf_