Sources of the rural-urban productivity disparities and the policy implications on rural development in Korea

This paper investigates the effect of trade cost changes on the spatial productivity distribution in Korea. Data on gross value added and primary factors for 163 spatial units during 2000-2005 are assembled to estimate local TFP using a value-added function. In our application, we control for agglomeration economies so as to identify factors shifting the regional raw-productivity distribution over time. The TFP estimation results show that the Korean regional economy exhibits constant returns to scale, along with significant localization economies. We find that and trade costs reduction and infrastructure improvement significantly shift to the right all percentile values of the regional productivity distribution, while amenity does not affect the movement of the distribution. An important policy implication of this study is that a country pursuing foreign market opportunities to boost economic growth and to raise incomes, like Korea, should also consider the consequent spatial realignment of resources. Also, productivity enhancements along with transfers to alleviate adjustments to trade-cost changes cannot be space blind.