Jk. Kwon et H. Paik, FACTOR PRICE DISTORTIONS, RESOURCE-ALLOCATION, AND GROWTH - A COMPUTABLE GENERAL EQUILIBRIUM-ANALYSIS, Review of economics and statistics, 77(4), 1995, pp. 664-676
The present paper estimates the welfare cost of both labor and capital
market distortions in South Korea using a computable general equilibr
ium model and expands on earlier studies by distinguishing autonomous
differentials from distortions in accounting for differences in sector
al wages and returns to capital. The results of this paper cast doubt
on the generality of the proposition on the sensitivity of economic ef
ficiency to market distortions. Our results show that removing labor m
arket distortions would increase output by less than 1% of the base ye
ar 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 distor
tions may lead to more rapid capital formation and higher concentratio
n of capital stock. Given the industrial policy configuration in Korea
, we find that financial incentives had more distorting effects than f
iscal incentives.