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The allocation of production across firms is a potentially important explanation of the productivity gap between rich and poor economies. Reforms to trade policy and the domestic financial sector are often both key elements of policy packages aimed at reducing productive distortions. However, the impact of each reform in reallocating production within an economy is usually analyzed independently. This paper asks how do such general equilibrium effects of trade and domestic financial sector reforms interact in terms of their effects on productivity, wages and utility. Motivated by recent firm-level studies, I add two-way linkages between firms' production and exporting decisions and their financial constraints to a general equilibrium heterogeneous firm trade model. The interaction effects between reforms appear qualitatively important. Trade and domestic financial sector reforms have complementary effects on the average productivity and size of domestic producers. However, if much reallocative work has already been done through a well-functioning financial sector, the marginal benefits of trade liberalisation for wages and household utility are reduced. Improvements in the ability to use exports as pledgeable collateral enhance both the wage and productivity effects of trade reforms. The model also highlights the potential for financial sector reforms in one economy to be exported via the trade channel, affecting decisions to produce or export in the foreign economy and putting downward pressure on foreign real wages.

Access to Finance --- Agency problems --- Average productivity --- Debt Markets --- Economic Theory & Research --- Emerging Markets --- Equilibrium --- Exports --- Finance and Financial Sector Development --- Financial Sector --- Industrial economies --- International trade --- Labor Policies --- Liquidity --- Macroeconomics and Economic Growth --- Marginal benefits --- Marginal products --- Political economy --- Positive effects --- Private Sector Development --- Productivity --- Social Protections and Labor --- Total factor productivity --- Trade liberalization --- Trade policy --- Trade reforms --- Transition economies --- Value added --- Wages

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Of the major kinds of physical infrastructure, electricity generating capacity has roughly the same marginal productivity as physical capital as a whole. So have roads-plus-rail, globally and in lower-income countries. Telephones, however, and transport routes in higher-income countries, have higher marginal productivity than other kinds of capital; Using panel data for a cross-section of countries, Canning estimates an aggregate production function that includes infrastructure capital. He finds that: The productivity of physical and human capital is close to the levels suggested by microeconomic evidence on their private returns; Electricity generating capacity and transportation networks have roughly the same marginal productivity as capital as a whole; Telephone networks appear to show higher marginal productivity than other types of capital. Panel data cointegration methods used in estimation take account of the nonstationary nature of the data, are robust to reverse causation, and allow for different levels of productivity and different short-run business-cycle and multiplier relationships across countries. This paper - a product of Public Economics, Development Research Group - is part of a larger effort in the group to study the impact of public expenditures. The study was funded by the Bank's Research Support Budget under the research project Infrastructure and Growth: A Multicountry Panel Study (RPO 680-89). The author may be contacted at d.canning@qub.ac.uk.

Capital --- Economic Growth --- Economic Theory and Research --- Externalities --- Externality --- Human Capital --- Income --- Income Levels --- Inputs --- Investment --- Labor Policies --- Macroeconomics and Economic Growth --- Marginal Productivity --- Marginal Products --- Outcomes --- Prices --- Production --- Production Function --- Productivity --- Social Protections and Labor --- Taxation --- Telecommunications --- Theory --- Total Factor Productivity --- Transport --- Transport Economics, Policy and Planning --- Variables