Inflow of Foreign Capital and Trade Liberalization in a Model with an Informal Sector and Urban Unemployment

Abstract

The paper has made an attempt to analyze the effects of liberalized trade and investment policies on welfare and open unemployment in a developing economy in terms of a three sector Harris-Todaro type general equilibrium model. Following empirical evidence it is assumed that there is wage rigidity in the urban sectors, which leads to the simultaneous existence of open unemployment and an urban informal sector in the migration equilibrium. The paper deserves special attention for its interesting results which are completely opposite to those generated by the standard Harris-Todaro model.

Keywords: Rural-urban migration, urban open unemployment, inflow of foreign capital, trade liberalization

JEL Classification: F2, F21, O17