Credit Market Frictions and Trade Liberalization (with Alessandro Dovis)
[Online Appendix]
We use the case of trade to distinguish between two widely used models of credit market frictions. The first is collateral constraints, where firms can borrow up to a fixed fraction of their capital stock. The second is limited enforcement, where debt limits are determined endogenously by a default decision. We show that these models have very similar implications for firm dynamics, but different implications for the gains from undergoing reform. We show that trade liberalization provides a means of distinguishing between them. Using firm-level data from a reform in Colombia we find evidence in favor of limited enforcement constraints.

Growth-Led Exports (with Pau Pujolas)
What role does trade policy play in starting the process of rapid growth in developing countries? The experience of China, Korea and many other growing countries shows that rapid growth in GDP is accompanied by large increases in trade openness and loosening trade restrictions. However, the experiences of Mexico and other Latin American countries show that trade liberalization, even if it results in large increases in international trade, does not necessarily lead to an increase in growth. We examine dozens of trade liberalization episodes from the last 50 years and discover some clear patterns. First, before 1980 trade liberalization almost always occurred after the economy began to rapidly grow, or during a period of cross-industry reallocation. Countries that liberalized during this period were growing before the liberalization and continued to grow after. Second, after 1980 trade liberalization usually occurred in countries that were not growing, and they were not associated with large increases in growth. We rationalize all these observations with a model of endogenous trade reform. We argue that tariffs persist because removing them requires costly reallocation. However, in periods when there is growth or other forms of reallocation anyway, countries endogenously choose to liberalize. Using a series of counterfactuals, we show that the ability to liberalize trade is very beneficial to growing economies, and that liberalizing may not be beneficial to countries that are not growing.