We discuss the role of contracting impediments created by the existence of national borders on open economy growth. In a two-good neoclassical Ramsey growth model with lack of enforcement on international trade contracts we show that endogenous trading constraints with positive trade may arise on the transition path towards an open-economy steady state. These constraints may bind more severely low-income economies. Dynamic incentives to fulfill international contracts are easier to provide to high-income agents that have a stronger love-of-variety and investment motives to trade internationally. Investment in capital serves thus as a commitment device. The extent of the impediments may render countries unable to engage in international exchange at all, in effect keeping them in a poverty trap. Countries with dissimilar initial capital per capita may converge to different steady states. Contracting problems in international exchange may block the channel through which, as many researchers believe, international trade affects growth by increasing investment rates. The model provides a new explanation for the correlations observed in the data, for example that the trade/GDP ratio across countries is positively related with income per capita. Our model and its extensions add to the understanding of a number of puzzles (inter alia "the missing trade") in international economics. Using new data on trade credit in international transactions we provide correlations supporting the view that collection risks hinder international exchange. Policy implications stress the role of promoting contract enforcement and trade liberalization.
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Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number
c011_007.
Find related papers by JEL classification: D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law F15 - International Economics - - Trade - - - Economic Integration F34 - International Economics - - International Finance - - - International Lending and Debt Problems F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment O4 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
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