Globalization and Productivity in the Developing World

Abstract
We explore the impact of international trade in a monopolistically competitive economy that encompasses technology choice and an endogenous distribution of mark-ups due to credit frictions. We show that in such an environment a gradual opening of trade (i) may –but not necessarily must –have a negative impact on productivity and overall 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 - while not driven out of the market - may be forced to switch to a less productive technology. Our framework matches several salient patterns in the recent evidence on the impact of trade in developing countries.