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CEP discussion paper
Distance, Skill Deepening and Development: Will Peripheral Countries Ever Get Rich?
Stephen Redding and Peter K. Schott
June 2003
Paper No' CEPDP0572:
Full Paper (pdf)

JEL Classification: F12;F14;O10

Tags: economic geography; human capital; international inequality; international trade

This paper models the relationship between countries' distance from global economic activity, endogenous investments in education, and economic development. Firms in remote locations pay greater trade costs on both exports and intermediate imports, reducing the amount of value added left to remunerate domestic factors of production. If skill- intensive sectors have higher trade costs, more pervasive input-output linkages, or stronger increasing returns to scale, we show theoretically that remoteness depresses the skill premium and therefore incentives for human capital accumulation. Empirically, we exploit structural relationships from the model to demonstrate that countries with lower market access have lower levels of educational attainment. We also show that the world's most peripheral countries are becoming increasingly economically remote over time.