DP3739 | Distance, Skill Deepening and Development: Will Peripheral Countries Ever Get Rich?

Publication Date

23/02/2003

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Abstract

Do workers in countries located far from global economic activity have lower incentives to accumulate human capital than workers near the centre? 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 their exports and their imports of intermediate inputs, reducing the amount of value added left to remunerate domestic factors of production. As a result, the skill premium and incentives to accumulate human capital will be depressed if skill-intensive sectors have higher trade costs, more pervasive input-output linkages, or stronger increasing returns to scale. Empirically, we exploit structural relationships from the model to demonstrate that countries with lower market access have lower levels of educational attainment and that the world?s most peripheral countries are becoming increasingly remote over