Trade Liberalization
Korean industries

Following a drive to develop heavy and chemical industries in the mid-1970s, Korea found itself with an extremely concentrated industrial structure in the early 1980s when it embarked on cautious trade liberalization. Government policies had erected entry barriers to those sectors in the hands of conglomerates and also granted a high level of protection from import competition. In many ways, Korea resembles the ideal case so often considered in recent research on trade policy in an imperfectly competitive environment, where unexploited economies of scale interact with exit and entry barriers in oligopolistic markets to determine the costs of protection.
In Discussion Paper No. 399, Research Fellow Jaime de Melo and David Roland-Holst briefly review trade and industrial organization policies in Korea and evidence indicating high profit rates in protected sectors, and they outline the structure of a sectoral simulation model with which they assess the welfare and resource allocation effects of a removal of tariffs (and of tariff equivalents of quotas) prevailing in 1982. They find that consumer goods, producer goods and heavy industrial sectors have increasing returns to scale while the remaining sectors are all characterized by constant returns to scale.
De Melo and Roland-Holst develop a computable general equilibrium model with increasing returns to scale in selected industrial sectors in order to estimate the welfare gains Korea would achieve from abolishing the import restraints (tariffs and equivalent measures) that prevailed in 1982. They estimate across-the-board welfare gains of 1% of GDP under constant returns to scale. Their estimates of the welfare gains for the three industries exhibiting increasing returns to scale range from -0.5% to 10% of 1982 GDP, however, depending on the choice of assumptions about pricing behaviour and the profit levels that existed under protection.
They find that in the case of Korea the elimination of protection would favour industry, since agriculture is the most heavily protected sector. This contrasts with the experience of many other semi-industrial countries, such as Chile, where the elimination of protection has involved a resource shift out of manufacturing and a relative expansion of agriculture.

Industrial Organization and Trade Liberalization: Evidence from Korea
Jaime de Melo and David Roland-Holst

Discussion Paper No. 399, July 1990 (IT)