Notes for Credit, Growth, and Trade Policy∗

We consider a multi-sector Ricardo-Viner model of an economy in which factor mobility is inhibited by a credit market imperfection and use it to address a number of standard questions in trade theory. Opening the economy to trade will tend to increase inequality in a poor country (understood as one with badly developed credit market institutions). Trade volume between poor and rich countries may be very low, while it may be considerably higher among rich countries. Tariffs will induce larger inefficiencies than predicted in standard models, while the effect of export subsidies will be sensitive to the country’s distribution of wealth: if it is relatively egalitarian, they may increase growth in the short run, while if it is unequally distributed in favor of low performing sectors, they will enrich those sectors while inhibiting growth. ∗PRELIMINARY AND VERY INCOMPLETE. We are grateful.