Trade and industrial policy in emerging economies

Many of the emerging economies that opened up their country to trade in the last three decades experienced large aggregate gains, but also an increase in inequality. There is increasing evidence that these distributional effects can partly be explained by market frictions and failures. In this dissertation, I focus on three sources of transaction costs that are especially prevalent in low- and middle-income countries and study their material impact on the consequences of trade and industrial policy. First, I investigate how firms can overcome matching frictions in international trade using intermediation, and how this shapes the consequences of trade liberalization. Second, I study how domestic trade frictions causally impact the regional gains from trade, and find that the impact of import tariff liberalization on local labor market outcomes is almost nil in places with limited international market access. Finally, I analyse how the use of eminent domain, through its effect on land transaction costs, shapes the effects of an industrial policy focused on stimulating export-oriented manufacturing. I find that the industrial policy attracted fewer entrants into manufacturing but generated more industrial employment after compulsory acquisition was prohibited. In each case, market frictions shape the effects of the policy by influencing the degree to which firms are exposed to said policy. Understanding the heterogeneous impact of market frictions on the consequences of trade and industrial policy is thus of importance for inclusive and effective policymaking.