Trade Policy and Excess Capacity in Developing Countries

Ratna Sahay

IMF Staff Papers, 1990, vol. 37, issue 3, 486-508

Abstract: The presence of quotas on imported inputs that are based on installed capacity can lead to capacity underutilization in manufacturing industries of developing countries. A replacement of such quotas by tariffs leads to full-capacity utilization under both perfectly and imperfectly competitive markets. Furthermore, such a policy also eliminates strategic advantages for oligopolistic firms that arise in quota-based regimes.

Date: 1990
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