| Author/Presenter |
Wenhui Fan (University of British Columbia) |
| Title |
Poverty, Credit Constraint and Trade |
| Abstract |
Opening an economy to trade can worsen poverty when agents are subject to credit constraints and agriculture is not productive enough. This paper shows with a theoretical model how this sort of outcome can be generated and backs it up with empirical evidence from China. The model has two sectors - `industry' that requires credit and `agriculture' that does not. Agents differ only in their initial wealth which is from the bequest of their parents. Those who get enough bequests can produce in either sector, while those without bequests remain stuck in agricultural sector. Before opening to trade, the economy converges to a low welfare equilibrium where credit constraint is not binding and agents are indifferent between the two sectors. Opening up to trade leads to two wealth equilibria and higher average welfare in the economy. Agents who can overcome credit constraints reach a higher equilibrium than autarky, however, agents who cannot fall into a worse situation. I provide empirical support for the theoretical results using a panel of 4,000 households in 6 Chinese provinces from 1987 -1999. Trade liberalization makes the average household income increase by 151.05 Yuan per year. Households without credit constraints even increase by 205.23 Yuan, while households with constraints decrease by 4.76 Yuan. The results are significant and robust. |
| Web Link |
http://economics.ca/2007/papers/0337.pdf |
|