Have Developed Countries Escaped the Curse of Distance?

Abstract

There is widespread evidence that a better access to markets contributes to raising income levels. However, no quantification of the impact of distance to markets has been made on the basis of a sample restricted to advanced - and therefore more homogeneous - countries. This paper applies the framework developed by Redding and Venables (2004) on a panel data covering 21 OECD countries over 1970-2004, and shows that, relative to the average OECD country, the cost of remoteness for countries such as Australia and New Zealand can be as high as 10% of GDP. Conversely, the benefit for centrally-located countries like Belgium and the Netherlands could be around 6-7%. Second, the paper explains why the estimated parameter in the Redding-Venables model is biased upwards in cross-section samples that mix both developing and developed countries, because of the inability to adequately control for heterogeneity in technology levels across countries. The paper also provides a detailed discussion of the links between the "death-of-distance" hypothesis, the evolution of transport costs and the elasticity of trade to distance.

Keywords: economic geography, market access, distance, transport costs

JEL Classification: F12, F15, R11, R12