Immiserizing deindustrialization: A dynamic trade model with credit constraints

The paper develops an open economy dynamic model with bequests and credit constraints. The agricultural sector uses only labor, the industrial sector needs an indivisible investment. Under autarky, productive agriculture provides the funds needed for investment in industry and in equilibrium credit constraints are not binding. If agriculture is not sufficiently productive, the price of the industrial good must be high enough to make the industrial sector sustainable. In an open economy, if the country has the comparative advantage in agriculture, deindustrialization may occur over time. Deindustrialization is welfare-reducing when the negative wealth distributional effects swamp the gains from trade.