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- Title
Trade Liberalization in Developing Countries: Do Imperfect Competition and Scale Economies Matter?
- Authors
Devarajan, Shantayanan; Rodrik, Dani
- Abstract
In the presence of scale economies and imperfect competition, the range of possible consequences of trade liberalization is broadened considerably. On the one hand, the traditional welfare gains can be magnified if liberalization leads to a reduction in the monopoly power of domestic firms and a "rationalization" of the industry. On the other hand, with entry and exit restricted, welfare can be reduced if contracting sectors happen to be ones with scale economies and in which prices exceed marginal costs. This issue is of particular importance in developing countries, as they have been subjected to a wave of trade reform in 1980s. Evidence indicates that imperfect competition and unexploited economies of scale are quite prevalent in these countries. Yet, explicit modeling of trade reform, particularly of the general equilibrium kind, in the presence of imperfect competition has been limited to developed countries. The article examines the role of imperfect competition and economies of scale in a general equilibrium model of a developing country.
- Subjects
CAMEROON; COMPETITION; ECONOMIES of scale; IMPERFECT competition; ECONOMIC equilibrium; WELFARE economics; FREE trade; MONOPOLIES; ECONOMETRIC models; TRADE regulation; DEVELOPING countries; MANUFACTURED products
- Publication
American Economic Review, 1989, Vol 79, Issue 2, p283
- ISSN
0002-8282
- Publication type
Article