Rafael Dix-Carneiro

IEA – Could you walk us through the key moments that shaped your path – from your earliest exposure to economic thinking to what sparked your interest in the field, and ultimately what drew you to academic research?

Rafael – My path into economics was largely unplanned. I studied engineering as an undergraduate and then mathematics during my master’s degree. My interest in economics began to take shape while I was working on projects related to electricity auctions. At the same time, my master’s advisor, Aloísio Araújo, strongly encouraged me to apply for a PhD in economics rather than in operations research, which had initially been my first choice. Before then, I had had very little exposure to economics.

Fortunately, I fell in love with the field during my PhD. I discovered that economics offered the perfect opportunity to put my mathematical and computational training to good use while addressing important real-world questions.

What I enjoy most about academic research is that it is a continuous learning process. Every new project begins with a sense of uncertainty: you never know whether the idea will work or where it will lead. That uncertainty can be challenging and unsettling, but it also makes the eventual breakthroughs incredibly rewarding. Few things are as satisfying as seeing a difficult research project finally come together.

IEA – In your research on labor market responses to tariffs, you show that workers often face prolonged adjustment due to labor market frictions. As tariffs regain prominence in global trade policy, what lessons should policymakers draw to protect workers without undermining the broader gains from trade?

Rafael – Economists have long recognized that trade liberalization and globalization create both winners and losers. For many years, however, the prevailing view was that the distributional effects were relatively small compared with the overall gains from trade. Over the past two decades, we have learned that this is not always the case. The distributional consequences of globalization can be substantial, with important economic, social, and political implications. As a result, many countries have experienced a backlash against globalization and a resurgence of protectionist policies.

The key lesson for policymakers is that promoting globalization and protecting workers should not be seen as conflicting objectives. Governments need to acknowledge that some workers and firms will be adversely affected by increased international competition and should complement open trade policies with measures that help ease the adjustment process. If globalization is to remain politically and socially sustainable, its benefits need to be more broadly shared.

In a recent paper for the Journal of Economic Perspectives, co-authored with Brian Kovak, we discuss several policies that can facilitate adjustment while preserving the gains from trade. These include effective retraining programs, wage insurance for displaced workers, subsidies that encourage job search and geographic mobility, gradual tariff reductions that give workers and firms time to adapt, and labor market policies that make it easier for workers to move into new opportunities. The goal should not be to prevent economic change, but to help workers and firms navigate it successfully.

IEA – Your research on Trade and Domestic Distortions: The Case of Informality shows that trade liberalization alone cannot deliver its full benefits when domestic distortions keep firms in the informal sector. In your view, should policymakers prioritize trade liberalization or domestic structural reforms first, or must the two go hand in hand?

Rafael – Many developing countries, including Brazil, impose regulations that can be very burdensome on firms, such as high taxes and rigid labor market rules. At the same time, they often have limited capacity to enforce them. As a result, many smaller and less productive firms choose to operate informally, avoiding taxes and regulations.

This creates a highly inefficient allocation of resources. The informal sector, which is typically less productive, is effectively subsidized through weak enforcement and therefore overproduces relative to the social optimum. Meanwhile, the more productive formal sector bears heavier regulatory and tax burdens and underproduces. The result is substantial misallocation that reduces aggregate productivity and real income.

In recent work with co-authors, published in Econometrica, we show that trade liberalization can partially offset these domestic distortions. By increasing wages and labor productivity, it shifts resources away from less productive informal firms toward more productive formal ones. The gains from trade turn out to be more than twice as large as the traditional gains, because liberalization not only generates the usual efficiency gains, it also helps correct an important domestic distortion. In that sense, trade liberalization may be a particularly attractive policy in many developing countries.

That said, there is an important caveat. Our work abstracts from the transition between the old and the new equilibrium. In practice, some of my previous work has shown that adjustment to trade can be lengthy and painful, especially for lower-skilled workers, who are disproportionately employed in the informal sector. Understanding how workers move from shrinking informal firms to expanding formal ones is therefore essential for designing policies that balance efficiency with equity. This is precisely the question I am currently studying.

Trade liberalization is an important step for many developing countries seeking faster productivity growth and higher standards of living. However, it is not sufficient on its own. In many middle-income countries, burdensome tax systems and regulations give rise to large informal sectors and significant resource misallocation. While trade liberalization can partly alleviate these distortions, it cannot eliminate them. An important challenge for both researchers and policymakers is to design reforms that reduce informality and improve productivity while avoiding unintended consequences, such as higher unemployment.