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Globalization and Productivity in the Developing World

  • Foellmi, Reto

    ()

  • Oechslin, Manuel

    ()

We explore the productivity impact of international trade in a monopolistically competitive economy with endogenous mark-ups due to credit market frictions. We show that reducing trade barriers in such an environment (i) may - but not necessarily must – have a negative impact on productivity and output; (ii) is bound to increase the polarization of the income distribution. The reason is that the pro-competitive effects of trade reduce mark-ups and hence the borrowing capacity of less affluent entrepreneurs. As a result, smaller firms may no longer be able to make the investments required to operate the high-productivity technology. Our findings are consistent with evidence from developing countries which (i) does not suggest a clear-cut impact of trade on economic performance; (ii) hints at an inequality-increasing effect of globalization.

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File URL: http://www1.vwa.unisg.ch/RePEc/usg/econwp/EWP-1203.pdf
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Paper provided by University of St. Gallen, School of Economics and Political Science in its series Economics Working Paper Series with number 1203.

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Length: 34 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:usg:econwp:2012:03
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  1. Acemoglu, Daron & Zilibotti, Fabrizio, 1998. "Productivity Differences," Seminar Papers 660, Stockholm University, Institute for International Economic Studies.
  2. Pinelopi Koujianou Goldberg & Nina Pavcnik, 2007. "Distributional Effects of Globalization in Developing Countries," Journal of Economic Literature, American Economic Association, vol. 45(1), pages 39-82, March.
  3. Ottaviano, Gianmarco & Melitz, Marc, 2008. "Market Size, Trade, and Productivity," Scholarly Articles 3229096, Harvard University Department of Economics.
  4. Esteban, J.M. & Ray, D., 1992. "On the Measurement of Polarization," UFAE and IAE Working Papers 171.92, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  5. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  6. Song, Zheng Michael & Storesletten, Kjetil & Zilibotti, Fabrizio, 2009. "Growing like China," CEPR Discussion Papers 7149, C.E.P.R. Discussion Papers.
  7. David N. DeJong & Marla Ripoll, 2006. "Tariffs and Growth: An Empirical Exploration of Contingent Relationships," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 625-640, November.
  8. Chang-Tai Hsieh & Peter J. Klenow, 2007. "Misallocation and Manufacturing TFP in China and India," NBER Working Papers 13290, National Bureau of Economic Research, Inc.
  9. Paolo Epifani & Gino Gancia, 2009. "Trade, Markup Heterogeneity and Misallocations," KITeS Working Papers 005, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Apr 2009.
  10. Manuel Oechslin & Reto Foellmi, 2006. "Market Imperfections, Wealth Inequality, and the Distribution of Trade Gains," IEW - Working Papers 266, Institute for Empirical Research in Economics - University of Zurich.
  11. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jenson & Samuel Kortum, 2000. "Plants and Productivity in International Trade," NBER Working Papers 7688, National Bureau of Economic Research, Inc.
  12. Dani Rodrik, 2010. "Diagnostics before Prescription," Journal of Economic Perspectives, American Economic Association, vol. 24(3), pages 33-44, Summer.
  13. Bertola, Giuseppe & Lo Prete, Anna, 2010. "Whence Policy? Government Policies, Finance, and Economic Integration," CEPR Discussion Papers 7820, C.E.P.R. Discussion Papers.
  14. Timothy J. Kehoe & Kim J. Ruhl, 2010. "Why have economic reforms in Mexico not generated growth?," Staff Report 453, Federal Reserve Bank of Minneapolis.
  15. Anthony B. Atkinson & Thomas Piketty & Emmanuel Saez, 2009. "Top Incomes in the Long Run of History," NBER Working Papers 15408, National Bureau of Economic Research, Inc.
  16. Banerjee, Abhijit V. & Duflo, Esther, 2005. "Growth Theory through the Lens of Development Economics," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 7, pages 473-552 Elsevier.
  17. Kiminori Matsuyama, 2004. "Credit Market Imperfections and Patterns of International Trade and Capital Flows," Discussion Papers 1389, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  18. Andrew Warner, 2003. "Once More into the Breach: Economic Growth and Integration," Working Papers 34, Center for Global Development.
  19. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  20. Banerjee, Abhijit & Duflo, Esther, 2010. "Giving Credit Where it is Due," CEPR Discussion Papers 7754, C.E.P.R. Discussion Papers.
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