Working Paper: CEPR ID: DP399
Authors: Jaime de Melo; David Roland-Holst
Abstract: Based on evidence about industrial organization and market structure, this paper develops a CGE model with increasing returns to scale (IRTS) in selected industrial sectors in order to estimate the welfare gains Korea would achieve from abolishing the import restraints (tariffs and equivalent measures) prevailing in 1982. Under constant returns (CRTS) across the board, welfare gains are estimated at 1% of GDP. With IRTS in three industrial sectors, welfare gain estimates range from -0.5% to 10% of 1982 GDP, depending on the assumptions concerning price setting behavior and profit levels that existed under protecti.
Keywords: industrial organization; increasing returns to scale; welfare costs; protection; Korea
JEL Codes: 421; 422; 616
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Removal of protection under constant returns to scale (CRTS) (D24) | Welfare gain of approximately 11% of GDP (D69) |
| Trade liberalization eliminates traditional production and consumption costs associated with protection (F11) | Welfare gain of approximately 11% of GDP (D69) |
| Increasing returns to scale (IRTS) in three industrial sectors (L00) | Welfare gains estimated to range from 5% to 10% of GDP (D69) |
| Protection allowed Korean conglomerates to act collusively (L22) | Additional welfare gain of 13% to 49% of GDP (D69) |
| Unexploited economies of scale (F12) | Total gains between 5% and 10% of GDP (F62) |
| Firms not allowed to earn excess profits under protection (L11) | Potential scale efficiency losses, possibly causing a net aggregate welfare loss (D61) |
| Firms can earn supernormal profits (L21) | Aggregate welfare gains could range from 16% to 60% of GDP (F62) |