Borders, Endogenous Market Access and Growth
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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- Thomas, Jonathan & Worrall, Tim, 1990.
"Foreign direct investment and the risk of expropriation,"
Kiel Working Papers
411, Kiel Institute for the World Economy.
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- Thomas, Jonathan P. & Worrall, Tim, 1990. "Foreign direct investment and the risk of expropriation," Kiel Working Papers 411, Kiel Institute for the World Economy (IfW).
- Thomas, J. & Worral, T., 1991. "Foreign Direcyt Investment and the Risk of Expropriation," Papers 9126, Tilburg - Center for Economic Research.
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"Malthus to Solow,"
257, Federal Reserve Bank of Minneapolis.
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- Daron Acemoglu & Simon Johnson & James A. Robinson, 2000. "The Colonial Origins of Comparative Development: An Empirical Investigation," NBER Working Papers 7771, National Bureau of Economic Research, Inc.
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