Heterogeneity in Development

Abstract

Globalization, trade liberalization, and the lowering of trade barriers have generally led to increased opportunities for producers in developing countries to integrate into the world economy. While gaining new markets access, producers face greater competition. The trade-off between these two forces has made trade liberalization controversial. The studies in this thesis focus on the uneven impact on producers experiencing a fast transition of further integration into the world economy. First, we analyze the empirical heterogeneity among manufacturing and services sector firms and suggest some necessary improvements for theoretical models in international trade. We pay special attention in illustrating the actual productivity distribution, using micro-firm level data from 15 developing countries in Latin America, while previous studies provide evidence from individual developed countries only. Our innovative treatment allows consistent comparison of the productivity distribution in countries at different stages of development and different degrees of internationalization. The results show no clear productivity cut-off for business viability or distinction between exporters and domestic enterprises. Instead, in contrast to the current theoretical models, there is a gradual transition from one mode of operation to another. Second, we develop a theoretical model that can provide the basis for our empirical findings, namely the absence of the standard productivity cut-off level in distinguishing exporter from domestic firms. By introducing fixed cost heterogeneity into the Melitz model, the result provide strong implications for the assumptions made about the underlying distribution of producers’ productivity and fixed costs. Third, while most studies in international trade focus on manufacturing and less on services sectors, producers in the agricultural sector are even less mentioned in the literature. We investigate the heterogeneous impact of farmers in Indonesia when given the opportunity to access a new marketing channel, the supermarket, which is characterized by its advanced supply chain management and adherence to higher quality and safety standards. Existing studies identified the supermarket as a critical channel giving agricultural producers the chance to improve their welfare in the same way as exporters did. However, the answer to whether growth is inclusive remains inconclusive. The results suggest initial productivity differentials between producers significantly affect their investment decisions, which in turn affects their welfare. We also find that information asymmetry significantly reduces producers’ ability to fully benefit from participating in the modern food retail channel. Fourth, we provide a comprehensive review of the latest empirical studies in Geographical economics models. The overview provides a solid foundation for four important implications in the literature, namely: (i) improved market and supply access leads to higher wage, (ii) market access is an important determinant of firm location decision, (iii) trade liberalization influences regional specialization patterns and in some case leads to regional divergence, and (iv) exogenous shocks can have long-term economic consequences. Fifth, and finally, we estimate the bilateral flow of trade-base money laundering activities using the gravity model. We found that trade and GDP are strong and positive drivers of illegal money flows, while the usual geographical indicators (border and distance) significantly deter such flow.