Within the world’s most advanced economies – including Germany, Spain, the UK and the United States – there are regions that have fallen behind or failed ever to catch up with the most prosperous places. To address this challenge, policy-makers could take lessons from history as well as one other.
Much ink has been spilled on how best to narrow the gap between developed and developing countries. For some of the latter – think especially of East Asia – modern history is a story of successful economic convergence with the world’s richest nations. For others – including most of Africa and the Middle East – progress hasn’t happened.
But a less discussed and more complex challenge is now coming into focus: growing divergence within developed economies themselves. National averages often paint a picture of prosperity, yet they mask wide and persistent divides between regions. In some cases, the economic disparities within countries rival – or even exceed – those between countries. These internal gaps pose a serious threat to inclusive growth and long-term economic resilience.
Rich nations are growing more divided. Within these advanced economies, poorer regions are slipping further behind, failing to catch up with wealthier areas as they did in the past. Today, the typical region near the top (in terms of GDP per capita) is about 70% richer than one near the bottom (see Figure 1). And it’s not just the gap that’s growing: the average speed at which poorer places are closing it has also slowed (see Figure 2).
Figure 1: Rich nations are growing more unequal
Note: Average 90/10 ratio of regional real GDP per capita. The chart only includes advanced economies.
Source: International Monetary Fund (IMF), World Economic Outlook, Chapter 2, 2019.
Figure 2: Convergence in the slow lane
Note: The chart only includes advanced economies.
Source: IMF, World Economic Outlook, Chapter 2, 2019.
Unlike with comparisons between countries, regions within the same nation typically share common institutions, political and economic systems. They also tend to enjoy unrestricted trade in goods and services, and face almost no legal barriers to the movement of capital and labour.
According to economic theory, under ‘perfect competition of inputs and outputs’, workers should migrate across regions in response to higher wages (which are found in more productive areas). In principle, this labour mobility should gradually ‘equalise’ wages across the economy, as an influx of workers into high-wage regions eventually drives down wages (by increasing competition for jobs). But in practice, none of this happens.
Why not? The differences stem from a range of factors, with labour productivity playing a key role. The International Monetary Fund (IMF) indicates that lagging regions tend to have lower productivity across all sectors – not just in a few.
In addition, they are often more reliant on traditionally lower-productivity industries like agriculture and manufacturing, rather than high-growth sectors such as communications, finance and technology. In other words, these regions are typically more rural, with employment concentrated in sectors that have limited potential for productivity growth – making it even harder for them to catch up.
This week on the Economics Observatory, we have explored these issues. To learn from the past and its lasting effects, we have a pair of articles on German reunification and UK deindustrialisation. We also spotlight two current cases shared by Harvard University’s Growth Lab team. Their projects on Andalusia in Spain and Wyoming in the United States shed light on two lagging regions facing distinct challenges. Both are in urgent need of tailored strategies to overcome economic constraints, build new competitive advantages and improve living standards.
It's not just about economic disparities: it’s about health and trust
Regional inequality is not just about productivity and economic growth. A new article by Valeria Rueda (University of Nottingham) shows that job loss can have serious consequences for people's health and it may also lead to higher mortality rates. To the extent that lagging regions experience higher job losses, they will face higher mortality rates and poorer health outcomes.
Deindustrialised regions are the perfect example of this alarming relationship. Former industrial areas are marked by persistent health challenges and limited employment opportunities. In the United States, for example, the decline of manufacturing has been linked to a rise in so-called ‘deaths of despair’ – suicides, drug overdoses and alcohol-related deaths. This is often tied to the erosion of community ties and lower economic stability.
Similar patterns are evident in the UK. Former industrial regions – particularly in the North of England and around ex-coalfields – remain hotspots of poor health and high rates of permanent sickness. Echoing the deaths of despair narrative seen across the pond, these areas also reveal a striking historical link: throughout the 20th century, trends in unemployment and suicide closely tracked each other (Gunnell et al, 1999). Worklessness can be fatal.
Finally, looking at economically lagging regions can help to explain emerging political trends. Poor regional performance has been shown to erode social trust and strain national cohesion, while local income inequality often fuels political polarisation. Both qualitative and quantitative evidence suggest that the interplay between individual hardship and local deprivation is a key driver of populist support globally.
It’s not about years: it’s about generations
Regional disparities are a long-term challenge with repercussions that span generations. Addressing them requires sustained effort over decades, if not longer.
Germany’s reunification offers a powerful illustration of how much time economic integration and regional convergence can take. A new Observatory article by Wolf-Fabian Hungerland (Humboldt, University, Berlin) reveals that economic reintegration takes generations, not years.
Despite sustained efforts since the fall of the Berlin Wall in 1990, substantial disparities between East and West Germany persist. As of 2023, GDP per capita in the east remains roughly two-thirds that of the west (see Figure 3). While massive transfers of wealth from west to east helped to upgrade infrastructure, they fell short in fostering lasting economic convergence between the two areas. Significant east-west differences in social capital, business networks and economic behaviour have endured, despite the adoption of identical formal institutions.
Figure 3: GDP per capita, East Germany as a share of West Germany
Source: Hungerland, 2025
Being left behind doesn't just affect individuals: it shapes generations. The UK’s story of deindustrialisation highlights the enduring consequences of neglecting struggling cities. Evidence shows that persistent health issues and limited job opportunities affect not only those who lost work but also their children and grandchildren.
Economic change can impose severe and lasting intergenerational costs. Research published last year by Valeria Rueda and Bjorn Brey (Norwegian School of Economics) reveals that children born during the coal industry’s decline in the hardest-hit areas are shorter, have extreme under-or over-weight and suffer worse physical and mental health throughout their lives (despite similar health at birth). For Valeria and Bjorn, these are the ‘children of industrial decline’.
It’s not all about jobs – unless you’re young and educated
Ultimately, a lack of job opportunities is a defining challenge for those living in lagging regions. These areas often become concentrated pockets of limited employment prospects. And as discussed above, the absence of work can have severe, even life-threatening consequences.
In a world of perfect labour mobility, people would simply leave low-productivity regions and relocate to more prosperous ones. But in reality, various barriers –ranging from emotional attachment to housing constraints in high-productivity areas – limit this movement.
In the UK, for example, research shows that migration in response to industrial decline tends to be highly localised – people often only move short distances, such as from one neighbourhood to another nearby. This mobility is also uneven: individuals with lower levels of education are much less likely to relocate. As a result, many remain in areas with few opportunities, facing deteriorating job prospects and worsening health.
Young educated people are typically the most mobile, and have the most to lose when labour mobility doesn’t work out. In his article, Wolf-Fabian presents German reunification as a powerful example of what happens when regional disparities are inadequately addressed.
To equalise wages, East German companies were required to pay western-level salaries despite lagging productivity. This mismatch led to widespread business closures and triggered a significant brain drain. Between 1989 and 2006, about 1.8 million mainly young, skilled workers left the east of the country. Even substantial investments in infrastructure and public services failed to reverse the trend. Instead, East Germany’s economy shifted toward lower-growth sectors, increasing dependence on transfers rather than fostering independent growth.
A more recent example comes from the US state of Wyoming. In his piece for the Economics Observatory, Eric Protzer (Harvard Growth Lab) illustrates the challenges that local governments face when investing heavily in education without addressing other growth constraints. Wyoming boasts one of the lowest tax and regulatory burdens in the United States and invests the most in education per capita. Yet, the state struggles with severe brain drain.
A key factor is the lack of substantial urban centres, partly driven by overly restrictive housing regulations. As a result, young people are leaving in droves. By their late 30s, nearly two-thirds of those born in Wyoming have moved to other states, often relocating to larger cities in nearby states. This represents the highest rate of out-migration in the entire country and highlights that education alone cannot stave off population loss without broader economic and housing opportunities.
Andalusia in Spain is another striking case of regional economic challenge. Its lagging national GDP reflects both lower labour productivity and fewer workers, which explains 54% of the gap with the Spanish average.
Our article by Jorge Andrés Tapia and Lucila Venturi highlights that the issue goes beyond simply having fewer workers: social protection systems raise reservation wages, the minimum pays individuals require to accept a job, especially for low-skilled roles, which discourages labour force participation. As a result, Andalusia faces a paradoxical situation: it has the highest unemployment rate in Europe, yet businesses struggle to find workers with the skills that they need.
If the solution takes centuries, what can policy-makers do?
As developed economies pivot from industry to innovation, new opportunities emerge – but not for everyone. Regions still tied to fading sectors risk being left behind. Bridging this divide calls for bold, forward-looking policies to help lagging areas to thrive. But if transformation takes long time, what can be done now to avoid losing another generation?
To achieve meaningful progress, regional disparities must be placed at the heart of policy agendas. Addressing these gaps requires a comprehensive approach that extends well beyond economic growth alone. This involves investing in affordable housing to attract and retain talent; developing efficient transport networks that connect communities to broader opportunities; and fostering education and innovation ecosystems that equip local populations with the skills needed to thrive in rapidly changing industries.
The research from Andalusia offers a compelling framework based on the idea of economic complexity. In short, prosperity depends on the productive capabilities a region accumulates. Rather than simply producing more of the same, places grow richer by developing the skills to create more sophisticated goods and services. Imagine an economy as a language: capabilities are letters, and products are words. The more letters and combinations that a region has in its ‘dictionary’, the more complex (and productive) its economy becomes.
By using this framework, local governments can target investments to boost production ‘sophistication’, allowing them to focus on exporting higher-value goods and services. Since the private sector may lack the incentives needed to drive this shift alone, policy-makers should strengthen ties between academia and industry, rewarding collaboration and knowledge transfer. They should also mobilise international talent to see what each region’s skilled diaspora can bring in terms of essential expertise for strategic sectors.
From the past experiences of Germany and the UK, we also learn important lessons. The experience of German reunification demonstrates that true economic integration involves far more than financial equalisation. It requires nurturing social cohesion, institutional legitimacy and cultural recognition.
Equally important is maintaining realistic expectations. Economic disparities are deeply entrenched, and closing these gaps demands long-term commitment, often spanning generations. This perspective highlights the urgency of sustained and focused action, while cautioning against quick fixes.
Most importantly, it is people who suffer the most from being left behind. The UK’s deindustrialisation experience reveals that joblessness damages not only individuals’ health but also the wellbeing of future generations. Beyond just any job, people want meaningful, fulfilling work that offers purpose and stability. That’s why policies must focus on creating sustainable employment opportunities – building lasting careers rather than simply delaying unemployment while sustaining misery.
