Credit constraints and economic growth in a dual economy

Abstract

Pervasive credit constraints have been seen as major sources of slow growth in developing economies. This paper clarifies a mechanism through which an inefficient financial system can reduce productivity growth. Using a two-sector model, second, we examine the implications for employment and the distribution of income. Both classical and Keynesian versions of the model are considered; saving decisions are central in the classical version while firms' investment and pricing decisions take center stage in the Keynesian version. We find that, although boosting the asymptotic rate of growth, a relaxation of credit constraints may reduce the share of the formal sector, increase inequality and underemployment, and have little or no effect on the medium-run rate of growth.

Credit constraints and rural farmers’ welfare in an agrarian economy

“…The combination of external and internal financing factors affects significantly on farm productivity, and due to insufficient cash flow many farms demand external finances ( Li et al., 2018 ). The slow growth process is evident in least developed countries due to pervasive credit constraints and poor financial system ( Skott and Gómez-Ramírez, 2018 ). When the farmers are unable to get credit at lower interest rates they ultimately get credit at high interest rate.…”

Credit Constraints and Investment in Mexico, an Empirical Test

“…Unfortunately, they have not materialized. Exports have increased but have not translated in growth for the economy as a whole; Moreno-Brid and Ros (2009), de Souza and Gómez- Ramírez (2018). Macroeconomic stability in the form of low inflation and reductions in the fiscal deficit may have been achieved, but even these achievements should be seen in the context of severe crises in 1982-1983, 1986, 1995, and 2008-2009.…”

“…Lending must be carefully targeted and carefully administered. Furthermore, as shown in Skott and Gómez-Ramírez (2018), in the context of an economy with a significant informal sector like Mexico, easing access to finance for formal firms although would very likely increase their capital accumulation does not guarantee formal employment would grow too; supplementary policies may be needed to achieve the latter.…”

Credit constraints and structure: a theoretical model of extractivism and slow-growth dynamics

“…It is consensually accepted that credit constraints may be growth deterring (Fazzari et al., 1988;Banerjee and Duflo, 2014;Khwaja and Mian, 2008). However, there has been little theoretical work, particularly in the case of developing economies (Skott and Gómez-Ramírez, 2018). In particular, a prominent feature of some developing economies has not been considered from a theoretical perspective.…”

“…This paper belongs in the literature where economic dualism is dynamically modelled in relationship to trade and accumulation (Ros, 2013b). Our most immediate references are Skott andGómez-Ramírez (2018), andGómez-Ramírez (2019), who examine credit constraints and growth in Mexico. We however offer an extended model, the case of an economy which also exhibits a third, "extractive" sector.…”