Import Substitution with Labor Misallocation
This paper argues that relying on major policy distortions to create a domestic automotive industry through import substitution generates significant costs for the economy, in terms of foregone output, lower consumption, and reduced overall welfare...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2018
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/208411533652637345/Import-substitution-with-labor-misallocation http://hdl.handle.net/10986/30232 |
| Summary: | This paper argues that relying on major
policy distortions to create a domestic automotive industry
through import substitution generates significant costs for
the economy, in terms of foregone output, lower consumption,
and reduced overall welfare. To bring this issue into sharp
relief, the paper focuses on the extreme case of an outright
vehicle import ban (complemented by an export subsidy),
which gives rise to a misallocation of resources that will
ultimately reduce the overall productivity of labor. More
specifically, a share of the labor force is diverted to the
production of previously-imported vehicles, which would have
not happened in the absence of import restrictions. In
particular, the output of the final good goes down;
consumption is lowered; and overall welfare is reduced.
Importantly, the equilibrium stock of vehicles available in
this economy is also reduced, defeating the purpose of the
imposition of import substitution. Additionally, the
creation of an automotive sector is not neutral with respect
to factor prices: the resulting lower wages imply that
revenues in the newly-created sector are generated at the
expense of labor income. Technological change in the
automotive industry might act as a countervailing force for
labor misallocation, albeit only partially. |
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