Working Paper: CEPR ID: DP8942
Authors: Katrin Peters; Monika Schnitzer
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
JEL Codes: F1; O16; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade liberalization (F13) | Economic performance (P17) |
| Trade liberalization (F13) | Technology adoption (O33) |
| Credit constraints (E51) | Technology adoption (O33) |
| Credit constraints (E51) | Economic performance (P17) |
| Trade liberalization (F13) | Widening productivity gap (O49) |
| Weaker credit markets (G19) | Higher costs of technology adoption (O33) |
| Less developed credit markets (G19) | Lower productivity gains from technology adoption (O49) |