Pro-Competitive Effects of Trade Reform: Results from a CGE Model of Cameroon
How likely is trade liberalization to produce efficiency gains in the presence of imperfect competition, scale economies, and higher-than-average wages in the modern sectors -- all common features of developing economies? These features create a potential conflict to the extent that traditional notions of comparative advantage would lead us to expect that the modern sectors will be squeezed with liberalization. In this paper we investigate the issue by using an applied general equilibrium model calibrated to Cameroonian data. Under perfect competition, the traditional expectations are borne out: manufacturing sectors on the whole contract, and the cash crops sector (mainly coffee and cocoa) is the main beneficiary; the welfare effect is a wash since the beneficial consequence of expanded imports is offset by labor being pulled away from the modern, high-wage sectors. By contrast, under imperfect competition (in the modern sectors only), trade liberalization produces welfare gains of the order of 1 to 2 percent of real income. The key is the pro-competitive effect of liberalization: domestic firms now perceive themselves as facing a higher elasticity of demand, which spurs them to increase production. Therefore, the modern sectors do much better in terms of output than in the perfectly competitive benchmark. The introduction of scale economies amplifies these results. Under reasonable circumstances imperfect competition will make liberalization more desirable, even in the absence of firm entry and exit.
|Date of creation:||Nov 1989|
|Date of revision:|
|Publication status:||published as European Economic Review, July 1991.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Devarajan, Shantayanan & Rodrik, Dani, 1989. "Trade Liberalization in Developing Countries: Do Imperfect Competition and Scale Economies Matter?," American Economic Review, American Economic Association, vol. 79(2), pages 283-87, May.
- Harris, Richard, 1984.
"Applied General Equilibrium Analysis of Small Open Economies with Scale Economies and Imperfect Competition,"
American Economic Review,
American Economic Association, vol. 74(5), pages 1016-32, December.
- Richard Harris, 1983. "Applied General Equilibrium Analysis of Small Open Economies with Scale Economies and Imperfect Competition," Working Papers 524, Queen's University, Department of Economics.
- de Melo, Jaime & Urata, Shujiro, 1986. "The influence of increased foreign competition on industrial concentration and profitability," International Journal of Industrial Organization, Elsevier, vol. 4(3), pages 287-304, September.
- Don, H. & Gunasekera, B. H. & Tyers, Rod, 1990.
"Imperfect competition and returns to scale in a newly industrialising economy : A general equilibrium analysis of Korean trade policy,"
Journal of Development Economics,
Elsevier, vol. 34(1-2), pages 223-247, November.
- Don Gunasekera & Rod Tyers, 1989. "Imperfect Competition and Returns to Scale in a Newly Industrialising Economy: A General Equilibrium Analysis of Korean Trade Policy," School of Economics Working Papers 1989-04, University of Adelaide, School of Economics.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:3176. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.