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 in developing economies? These features create a potential conflict to the extent that traditional notions of comparative advantage lead us to expect that the modern sectors will be squeezed with liberalization. In this paper we investigate this issue by using an applied general equilibrium model calibrated to Cameroonian data. Under perfect competition, we find that the welfare effect is a wash since the beneficial consequence of expanded imports is offset by the reduction in employment in the modern, high-wage sectors. Under imperfect competition, by contrast, trade liberalization produces welfare gains of the order of 1 to 2 percent of income. The key is the pro-competitive effect of liberalization: Domestic firms in the modern sectors now perceive themselves as facing a higher elasticity of demand, which spurs them to increase production. © 1991.