We explore the consequences of liberalized credit markets for
growth and inequality in a lifecycle economy with physical and
human capital accumulation, populated by households of different
abilities, and calibrated to match the longrun economic performance
of a panel of emerging countries. Relatively modest improvements in
extending credit to the ablest households appear to have large
economic consequences: upfront costs (slower initial growth, higher
income inequality) followed by delayed benefits (faster long-run
growth). Reform also lowers lifecycle utility for a substantial
majority of currently active households. Premature liberalization
in the least developed countries (low TFP or capital intensity) may
redirect economic growth towards a poverty trap.