SYNERGY AND INVESTMENT EFFICIENCY EFFECTS OF TRADE AND LABOR-MARKET DISTORTIONS

An alternative mechanism by which trade and labor market distortions affect national income is introduced, namely, the effects of these distortions on the efficiency of investment. For the typical structure of protection of developing countries, the income losses due to reduced investment efficiency caused by trade distortions are likely to be many times larger than conventional losses. The potential synergistic (negative) effects of combining trade and labor market distortions commonly observed in developing countries are also emphasized. The main conclusion is that income losses of even moderate trade and labor distortions are likely to be much greater than usually presumed.