Trade Adjustment Costs in Developing Countries: - World Bank ...

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Credit Constraints and the Adjustment to Trade Reform 327lower demand and reduce output. Credit frictions should be irrelevant for firmexit since they constrain only expansion, but not downsizing. If the adjustmenton the extensive margin increases the availability of external financing for survivingcompanies, they may in fact be able to expand production. In addition, ifthe liberalizing economy has strong financial contractibility, surviving firms maybe able to invest in better or higher quality technology that makes them morecompetitive. Lastly, the removal of import restrictions may give final-good producersaccess to cheaper imported intermediate inputs. This could lower theirproduction costs, and stimulate their domestic sales and foreign exports.4.2 Relevant empirical evidenceAlthough no study has specifically examined the role of credit constraints in theadjustment to trade reform, a few papers offer some indirect evidence.While Manova (2008) focuses on the effects of equity market liberalization onexports, she also confirms their robustness to controlling for trade reforms usingthe Wacziarg and Welch (2003) binary indicator. 8 These sensitivity checks indicatethat when countries reduce trade barriers, their exports rise relatively morein financially vulnerable sectors. This highlights a parallel between trade and financialliberalization: While trade reforms reduce trade costs for a given level offinancial frictions, equity market reforms relax credit constraints for a given levelof trade costs. In either case, the sectors that benefit most are those intensive inexternal finance or intangible assets, where credit constraints are more acute.Moreover, it appears that opening stock markets has a greater impact when tradepolicy is more restrictive. Since the proxy for trade openness is extremely rough,however, these results are only suggestive.A few studies have also argued that credit constraints restrict firms’ and countries’ability to respond to export opportunities arising from exchange rate depreciations.Becker and Greenberg (2007), for example, find that in financiallyadvanced countries total exports are more sensitive to exchange rate movementsthan in countries at lower levels of financial development. Berman and Berthou(2009) provide similar evidence, and show that these effects are more pronouncedin sectors which require more external finance. Desai et al. (2008) instead explorethe advantage that foreign affiliates have over domestic firms because the formercan access internal financing from the parent company. They confirm that the affiliatesof US multinationals abroad increase sales, assets, and investment significantlymore than local firms during and immediately after sharp depreciations.Unfortunately, data limitations do not allow the authors to directly examine howfirm exports respond to currency crises. Further work on the adjustment to exchangerate fluctuations could shed more light on the importance of financialfrictions for the response to trade reforms.8 A country is labeled effectively closed to trade if average tariff rates are at least 40 per cent; nontariffbarriers cover at least 40 per cent of trade; a black market exchange rate exists and is on averagedepreciated at least 20 per cent relative to the official exchange rate; the state holds a monopolyon major exports; or there is a socialist economic system.
328Kalina Manova5. CONCLUSIONCredit constraints and underdeveloped financial institutions have been shown toaffect aggregate trade flows and to restrict firms’ participation in internationaltrade. This suggests that financial frictions would likely also play an importantrole in firms’, sectors’ and countries’ adjustment to trade reform. Future researchis needed to understand these effects and to establish their consequences for aggregatewelfare. 9The results and intuition presented in this paper indicate that the gains fromtrade liberalization may be larger at higher levels of financial development. Thisimplies that countries would respond more to export opportunities resulting fromfalling trade barriers if they strengthened their domestic financial institutionsand liberalized their equity markets and FDI policies. Trade flows may also bestimulated by government-provided subsidized loans and trade credit to exportingfirms. Similarly, countries relaxing their own import restrictions might alleviatethe effects of increased competition on local producers by pursuing financialsector reforms and facilitating credit access. In either case, the sooner the availabilityof external financing improves, the faster the response of aggregate tradeand output would likely be, and the smoother the transition. While intuitive andappealing, these policy prescriptions remain tentative and their confirmation requiresfurther research.Kalina Manova is an Assistant Professor in the Stanford Department of Economics.BIBLIOGRAPHYAmiti, M and D Weinstein (2009). Exports and Financial Shocks. Columbia UniversitymimeoAntràs, P, Desai, M and F Foley (2009). Multinational Firms, FDI Flows and Imperfect CapitalMarkets. Quarterly Journal of Economics 124(3):.1171–1219.Beck, T 2003. Financial Dependence and International Trade. Review of International Economics11, 296–316Beck, T 2002. Financial Development and International Trade. Is There a Link? Journal ofInternational Economics 57, 107–31.Beck, T, Demirgüç-Kunt, A, Laeven, L and R Levine 2008. Finance, Firm Size, and Growth.Journal of Money, Banking, and Finance 40(7), 1371–405Beck, T, Demirgüç-Kunt, A and V Maksimovic 2005. Financial and Legal Constraints toFirm Growth: Does Size Matter? Journal of Finance 60 (1), 137–77Becker, B and D Greenberg 2007. Financial Development, Fixed Costs and InternationalTrade. Harvard Business School mimeoBerman, N and A Berthou 2009. Financial Market Imperfections and the Impact of ExchangeRate Movements on Exports. Review of International Economics 17(1), 103–209 Do and Levchenko (2007) have suggested that financial markets may in fact develop endogenouslyin response to trade openness.
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THE WORLD BANKTrade Adjustment Cost
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Trade Adjustment Costs in Developin
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Trade Adjustment Costsin Developing
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viiiContents10. Trade Adjustment an
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List of Tables2.1 Simulated Adjustm
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List of Figures2.1 Worker Flows 262
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PrefaceThe process of globalization
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2Bernard Hoekman and Guido Portopri
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4Bernard Hoekman and Guido Portoequ
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6Bernard Hoekman and Guido Portowou
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8Bernard Hoekman and Guido Portoass
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10Bernard Hoekman and Guido Portoco
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12Bernard Hoekman and Guido PortoJa
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14Bernard Hoekman and Guido Portoma
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16Bernard Hoekman and Guido Portoju
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18Bernard Hoekman and Guido Portoat
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20Bernard Hoekman and Guido PortoRE
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PART AADJUSTMENT COSTS
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26Carl Davidson and Steven Matusz2.
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28Carl Davidson and Steven Matuszne
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30Carl Davidson and Steven Matuszwh
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32Carl Davidson and Steven MatuszTa
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34Carl Davidson and Steven MatuszSo
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36Carl Davidson and Steven MatuszHi
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38Erhan Artuç and John McLarenof i
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40Erhan Artuç and John McLarenshoc
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42Erhan Artuç and John McLaren1.3
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44Erhan Artuç and John McLarenassu
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46Erhan Artuç and John McLarenin A
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48Erhan Artuç and John McLarenavai
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50Erhan Artuç and John McLarencomp
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52Erhan Artuç and John McLarenFigu
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4Reallocation and Adjustment in the
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Reallocation and Adjustment in the
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5Trade Reforms in Natural-Resource-
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Trade Reforms in Natural-Resource-A
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90Olivier Cadot, Laure Dutoit and M
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100Olivier Cadot, Laure Dutoit and
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7Trade Reform, Employment Allocatio
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Trade Reform, Employment Allocation
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144Gordon H HansonOn the theory sid
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146Gordon H Hansonberg et al. (2008
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148Gordon H HansonThe expansion of
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150Gordon H Hansonshares and factor
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152Gordon H HansonGoldberg, Pinelop
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9Production Offshoring andLabor Mar
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Production Offshoring and Labor Mar
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172Pravin Krishna and Mine Zeynep S
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11Trade, Child Labor, and Schooling
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Trade, Child Labor, and Schooling i
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198Gordon H Hanson3.0%2.8%2.6%2.4%2
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200Gordon H HansonTable 12.2: Share
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202Gordon H HansonWho benefits from
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204Gordon H HansonAn older and larg
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206Gordon H HansonTo date, the lite
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208Gordon H Hansontion surplus was
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210Gordon H HansonSome evidence sug
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212Gordon H HansonBIBLIOGRAPHYAcost
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214Gordon H HansonMishra, Prachi 20
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216James Harrigan• China had been
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218James Harrigan2.2 Price and quan
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220James HarriganFigure 13.1a: Pric
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222James Harrigan4. CONCLUSIONThe e
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224Beata S Javorcikices, thus benef
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226Beata S Javorcikfor plants which
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228Beata S JavorcikAs the majority
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230Beata S Javorcik5. DOES FDI LEAD
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232Beata S Javorcikthough they do n
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234Beata S Javorcik7. FUTURE RESEAR
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236Beata S JavorcikMarkusen, James
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238Chad P Bownthese theories has on
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240Chad P Bownicy changes affect th
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242Chad P Bownis, the policy-imposi
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244Chad P Bownsignificant distortio
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246Chad P Bownaccession period led
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248Chad P Bown2002-03. 16 However,
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250Chad P Bowntive adjustment impac
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PART CFACTORS THATAFFECT TRADE
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256David Hummelsative advantage for
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258David Hummelsprices shift demand
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260David HummelsThe second form of
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262David Hummelsdogenous to how pro
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17The Duration of Trade Relationshi
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The Duration of Trade Relationships
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Page 294 and 295: The Duration of Trade Relationships
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Page 379 and 380: 362Johan F M Swinnen and Kristine V
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378Johan F M Swinnen and Kristine V
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380Johan F M Swinnen and Kristine V
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This book summarizes the state of k
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