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GTAP Resource #7300

"The Welfare and Spillover Effects of Industrial Subsidies in General Equilibrium - Counterfactual Experiments with a Standard Quantitative Trade Model"
by Bekkers, Eddy and Kirti Jhunjhunwala

In a partial equilibrium setting without externalities industrial subsidies promote manufacturing output in the subsidizing region but harm welfare, whereas spillover effects to welfare in other regions are positive. We employ a standard quantitative trade model with perfect competition to analyse the welfare and spillover effects of counterfactually raising industrial subsidies in a general equilibrium setting with multiple sectors and intermediate linkages. The analysis generates six main findings: (1) welfare falls in most regions raising industrial subsidies with variation in the effects depend on the size of the subsidy, the initial size of manufacturing in the economy and the global market share of the subsidized sector; (2) spillover effects of subsidies to other regions are positive for most regions and variation in the spillover effects can be explained by the strength of four effects, a competition effect, a downstream effect, an upstream demand effect, and an upstream competition effect; (3) Revenue neutrality of the subsidy, capital mobility, and the type of tax used to finance the subsidy have a large and intuitive impact on the welfare effects of subsidies. (4) Introducing subsidies in all regions together has a positive impact on most regions with the economic costs paid by a small set of regions (China, EU, Japan, Korea, India and SEA) who tend to have the highest initial share of output in manufacturing; (5) industrial subsidies by BRICS countries compared to OECD countries have a more positive impact on low-income regions because of larger demand for intermediate inputs. (6) More generally, in many countries the positive spillover effects are driven by upstream demand effects raising demand for natural resources. The analysis verifies that in the long run this might not be a welfare increasing strategy if there are positive externalities from specializing in sophisticated sectors.

Resource Details (Export Citation) GTAP Keywords
Category: 2024 Conference Paper
Status: Not published
By/In: Presented during the 27th Annual Conference on Global Economic Analysis (Fort Collins, Colorado, USA)
Date: 2023
Created: Bekkers, E. (4/15/2024)
Updated: Bekkers, E. (5/19/2024)
Visits: 32
- GTAP Data Base and extensions
- Domestic policy analysis
- Economic growth
- Partial and general equilibrium models

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