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be amended to accommodate, among other things, the welfare effects of changes in scale efficiency. Illustrative numerical calculations also show that the magnitude of the welfare gains or losses from trade policy intervention are sensitive to the determinants of firm entry and exit.

Calculations comparing trade policies that achieve neutralityof incentives between sales to domestic and those to foreign markets found such policies to be generally superior to policies creating non-neutral incentives. Numerical results also suggest that export promotion is likely to be more beneficial than protection for sectors with increasing returns to scale. Finally, illustrative calculations of optimal trade policy packages suggest that the benefits of departing from the principle of neutrality, or nondiscrimination between domestic and export sales, may be insufficient to justify their higher administrative costs.

# **_Notes_**

The research reported here is part of the World Bank research project "Industrial Competition, Productive Efficiency and Their Relation to Trade Regimes." RPO 674-46. The numerical work is based on a model developed in de Melo and Tarr (forthcoming). The views expressed here are those of the authors and should not be attributed to their affiliated institutions.

1. See Harris (1989) and Helpman and Krugman (1989) for surveys of this work. 2. Imperfect substitutability in the allocation of sales implies that **_F; /_** _Fyi_ varies along a convex transformation frontier. Lower case letters indicate partial derivatives.

3. The archetypal economy was obtained from the free trade solution of a seven-sector CGE model calibrated to the Korean economy for the year 1982. For a description of the data set and parameters values, see de Melo and Roland-Holst (forthcoming).

4. The cost disadvantage ratio is the difference between average and marginal costs, divided by average costs. It is a measure of unrealized economies of scale.

_5._ The aggregate scale efficiency measure is calculated by usiig currcnt outputs as weights. For further discussion, sce de Melo and Roland-Hoist (forthcoming).

6. The magnitude of this effect is small for the functional forms specified here and is not reported. For a discussion of its magnitude, see de Melo and Roland-Holst (forthcoming). Also, see Devarajan and Rodrik (1989).

7. Frischtak et al. (1989) document the pervasive barriers to competition in the manufacturing sectors of developing countries. Eastman and Stykolt (1962) is an early example of a model in which protection leads to firm entry. The typical example is the automobile industry in Latin America (see Baranson 1968).

8. In this regard, the Korean experience during the 1970s is instructive. An activist industrial policywas successful in promoting the growth of large conglomerates and reaping the benefits of scale economies. While exports benefited from this policy, oligopolistic marketsdeveloped, and avigorous antitrust policvwas established in theearly v980sto promote greatercompetition in domestic markets. For further discussion, see Lee, Urata, and Choi (1988) and World Bank (1987).

9. Since there is no guarantee that the optimal vector of subsidies is unique, numerical verification of Lerner symmetry is a useful computational check.

10. While the results of these optimal calculations appear reasonable, there is no guarantee that the comnputed optima are global optima rather than local optima. Hence these results should be viewed as suggestive and subject to further scrutiny.