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Factor Price Distortions, Resource Allocation, and Growth: A Computable General Equilibrium Analysis

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  • Kwon, Jene K
  • Paik, Hoon

Abstract

The present paper estimates the welfare cost of both labor and capital market distortions in South Korea using a computable general equilibrium model and expands on earlier studies by distinguishing autonomous differentials from distortions in accounting for differences in sectoral wages and returns to capital. The results of this paper cast doubt on the generality of the proposition on the sensitivity of economic efficiency to market distortions. Our results show that removing labor market distortions would increase output by less than 1% of the base year GDP. Even when capital market distortions are also removed, the GDP increases only by 3.2%, and welfare by 5.6%. The study also examines a consequence of capital market distortions which suggests that distortions may lead to more rapid capital formation and higher concentration of capital stock. Given the industrial policy configuration in Korea, we find that financial incentives had more distorting effects than fiscal incentives. Copyright 1995 by MIT Press.

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  • Kwon, Jene K & Paik, Hoon, 1995. "Factor Price Distortions, Resource Allocation, and Growth: A Computable General Equilibrium Analysis," The Review of Economics and Statistics, MIT Press, vol. 77(4), pages 664-676, November.
    • Handle: RePEc:tpr:restat:v:77:y:1995:i:4:p:664-76
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    Cited by:

    1. Marcus Noland & Howard Pack, 2002. "Industrial Policies and Growth: Lessons From International Experience," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.),Economic Growth: Sources, Trends, and Cycles, edition 1, volume 6, chapter 9, pages 251-308, Central Bank of Chile.
    2. Finnoff, David & Tschirhart, John, 2008. "Linking dynamic economic and ecological general equilibrium models," Resource and Energy Economics, Elsevier, vol. 30(2), pages 91-114, May.
    3. Marcus Noland, 2004. "Selective Intervention and Growth: The Case of Korea," Chapters, in: Michael G. Plummer (ed.), Empirical Methods in International Trade, chapter 13, Edward Elgar Publishing.
    4. Randall Morck & Bernard Yeung, 2017. "East Asian Financial and Economic Development," Working Papers id:12112, eSocialSciences.
    5. Youwen Zhang, 2011. "From Policy-driven Opening to Institutional Opening – A Discussion on Policy-imposed Distortion in China’s Economic Development," Chapters, in: Lilai Xu (ed.), China’s Economy in the Post-WTO Environment, chapter 10, Edward Elgar Publishing.

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