Trade liberalization and credit constraints: Why opening up may fail to promote convergence

Monika Schnitzer () and Katrin Peters

No 8942, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Recent evidence suggests that despite opening up a country for trade, the productivity gap between developed and emerging economies often does not close. This paper examines credit constraints as one channel held responsible for hampering convergence. Specifically, we extend a Melitz and Ottaviano (2008) type trade model with variable mark-ups to allow for endogenous technology adoption. We consider a framework with two countries that potentially differ with respect to credit market development. Firms have the option to adopt a more efficient technology by paying some fixed cost. A fraction of the fixed technology adoption cost has to be financed externally: in a less developed credit market, the costs of external finance and thus the total costs of technology adoption are higher. A reduction in trade costs raises demand abroad (pro technology-adoption effect) but reduces demand at home because of import competition (anti technology-adoption effect). We find that trade liberalization increases economic performance, that is average productivity and technology adoption, in both countries but that the productivity gap widens. Simulations show that the welfare gap widens too. Opening up without sufficient access to external funding thus fails to promote convergence.

Keywords: Convergence; Financial constraints; Productivity gap; Technology adoption; Trade liberalization (search for similar items in EconPapers)
JEL-codes: F1 O16 O33 (search for similar items in EconPapers)
Date: 2012-04
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Trade liberalization and credit constraints: Why opening up may fail to promote convergence (2015)
Journal Article: Trade liberalization and credit constraints: Why opening up may fail to promote convergence (2015)
Working Paper: Trade liberalization and credit constraints: Why opening up may fail to promote convergence (2012)
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