Immiserizing Growth for a Quota-Distorted Small Economy under Variable Returns to Scale

Abstract

The authors demonstrate that growth of a small open economy distorted by import quotas, in contrast to the case of tariffs, improves welfare when the industries display identical variable (or constant) returns to scale. Furthermore, growth cannot reduce welfare if the industry that experiences technical progress exhibits a greater returns to scale than the static industry. Conversely, if the dynamic sector displays a smaller returns to scale than the static sector, growth of a quota-distorted small economy can be immiserizing. The authors' results are independent of whether Hicks-neutral technical progress occurs in the importable or the exportable sector.