حذف حمایت از تولیدات داخلی، سرمایه گذاری خارجی و رفاه در یک مدل از بخش غیررسمی

The paper develops a three-sector general equilibrium model with two informal sectors with complete mobility of labor between these sectors and with a positive relationship between wage income and labor’s efficiency to show that the results relating to foreign capital inflow and removal of protectionism may be counterintuitive to the conventional wisdom. The paper is also devoted to explain why some developing countries implement tariff reforms very slowly compared to others, even after formally choosing free trade as their development strategies, in a more general fashion than the existing tariff-jumping theory.

Until recently, the less developed countries followed a stringent trade policy and adopted an inward-oriented strategy, making use of discriminating policies like tariffs, quotas, restricting free inflow of foreign capital and import of commodities. Only since the conclusion of the multilateral agreement and the formation of the World Trade Organization (WTO) in the Uruguay round of discussions, there have been revolutionary changes in liberalizing international trade across countries whether developed or developing. Liberalization involves both inflow of foreign capital as well as reduction of protection of domestic industries and integrating the domestic market with the world market. It has been observed that some developing countries, notably the non-OECD countries, are relatively slow in carrying out tariff reforms compared to other countries, although they have opted for the policy of free trade as their development strategy and have been able to attract substantial amount of foreign direct investment (FDI) during the last decade. The explanation is provided by the tariff-jumping theory 1 that suggests a positive correlation between the amount of FDI in a country and the tariff rate imposed by it. There is no doubt that the major driving force behind FDI by the multinational corporations (MNCs) in the developing countries is the higher rate of return on their capital in these countries vis-à-vis the international market. Countries with protected domestic markets are likely to attract foreign investment 2, but only for the purpose of jumping the tariff walls and reaping a good harvest by serving their markets directly. On the contrary, reductions of import tariffs imply larger volumes of imports, lower rates of return to capital and smaller amounts of FDI in these countries. While many developing countries undertake tariff reforms slowly and yearn for foreign capital, the effects of inflow of foreign capital in such economies are, in general, discouraging according to both trade and development theorists. Brecher and Alejandro (1977) have analyzed the welfare effects of foreign capital inflow in a two-commodity, two-factor full employment model and Khan (1982) has considered a mobile capital Harris–Todaro model with urban unemployment. The important result, common to both is the following: inflow of foreign capital with full repatriation of its earnings is necessarily immiserizing if the import-competing sector is capital-intensive and is protected by a tariff. However, in the absence of any tariff, foreign capital inflow with full repatriation of its earnings does not affect the welfare. Here welfare is defined as a positive function of national income. In the literature, the Brecher–Alejandro proposition has also been re-examined in terms of three-sector models. The third sector may either be a duty-free zone (DFZ) (sometimes called foreign enclave) as in the works of Beladi and Marjit, 1992a and Beladi and Marjit, 1992b or it may be an urban informal sector as in the works of Grinols (1991), and Chandra and Khan (1993). Beladi and Marjit (1992a) have shown that with full repatriation of foreign capital income, growth in the foreign capital can lead to immiserization in the presence of tariff-distortion even if the foreign capital is employed in the export sector. This generalizes the main result in the existing literature, which primarily focuses on foreign capital movement in the protected sector of the economy. Thus, according to the conventional view, inflow of foreign capital with full repatriation of foreign capital income and in the presence of tariff protection leads to deterioration in the welfare of a small open economy. This is based upon the presumption that it cuts back the volume of trade further for a small open economy and moves it further away from the free trade situation, which is the optimal policy. An increase in tariff protection of the import-competing sector is also welfare reducing for the same reason. However, Grinols (1991) in terms of a three-sector specific factor model with an urban informal sector and Harris–Todaro setting has questioned the validity of the Brecher–Alejandro proposition. In Grinols (1991) inflow of foreign capital in the presence of a capital intensive and tariff-protected import-competing sector is not necessarily immiserizing. This is because of an increase in the return to the sector specific input, which may outweigh the increased cost of tariff protection resulting from an expansion of the protected sector. Chandra and Khan (1993) have presented a paper on the three-sector general equilibrium analysis, which offers a set of models based upon a few alternative concepts of the informal sector to investigate the desirability of inflow of foreign capital. They have found that the Brecher–Alejandro proposition holds in general if the urban sector (formal plus informal) is more capital intensive than the rural sector. Both, Grinols (1991), and Chandra and Khan (1993) are based on the Harris and Todaro (1970) framework. Unfortunately, the labor allocation mechanism in a Harris–Todaro type model is not very realistic. Migration of workers from the rural to the urban sectors takes place so long as the expected urban wage rate, which is the weighted average of the urban formal and informal wage rates, is greater than the actual rural wage rate. If migration is cost-less, the informal wage rate lies below both the unionized wage rate of the formal sector and the rural sector wage rate in migration equilibrium. In a static model like this, where migration involves no apparent costs and given the security of jobs of the workers employed in the formal sector owing to the presence of trade unions, there is no satisfactory answer to why some of those who are unable to find employment in the urban formal sector do not return to the rural sector and ultimately lead to the equalization of the wage rates between these two informal sectors. In other words, the lack of complete labor mobility between the two informal sectors of the economy is not tenable from a theoretical point of view. Second, like most of the static trade models the, labor endowment is measured in physical units and therefore treated as exogenously given. Thus, the role of the Wage Efficiency Hypothesis3, as developed by Leibenstein (1957), Mirrlees (1975) and Bliss and Stern (1978), in determining the labor endowment has been ignored. The basic idea of this hypothesis is that the efficiency of a worker is positively related to the wage rate he receives. In a developing economy, where a lion’s share of the total labor force lives below the poverty line, one simply cannot leave out the possibility of the changes in labor’s efficiency and hence in the labor endowment of the economy in efficiency unit owing to changes in wage incomes. The central objective of the present paper is two-fold. First, it shows that in a production structure appropriate for a developing economy there may be cases where one is able to derive results relating to foreign capital inflow and reduction in import tariff, which are counterintuitive to the conventional wisdom. We have developed a three-sector general equilibrium model with two informal sectors where there is complete mobility of labor between these two sectors and assumed a positive relationship between wage income and labor’s efficiency. In this scenario, we explore the possibilities of welfare improvement with simultaneous increases in labor and capital endowments of the economy, where the latter is caused by inflow of foreign capital while the former is the result of a consequent positive effect on labor’s efficiency of an increase in the labor incomes arising from the reallocation of labor among the different sectors of the economy. We shall show that in the presence of labor market distortions, foreign capital inflow may be desirable both in the presence and absence of tariff protection due to its favorable impact on welfare. This result cannot be found in earlier papers in the Harris–Todaro framework with labor market distortions. Again, quite contrary to the popular belief that reduction of tariff leads to an increase in the volume of trade, thereby improving welfare, we have cited the possibility of welfare deterioration even with slashed tariff rate. Secondly, the paper is devoted to explain why some developing countries implement tariff reforms very slowly compared to others, even after formally choosing free trade as their development strategy in a more general fashion than the existing tariff-jumping theory. The tariff-jumping argument is valid only if foreign capital enters into the import-competing sector of the host country. On the contrary, the present paper shows that the positive correlation between tariff rates and foreign capital flows prevails even if foreign capital comes into the export sector of a developing economy. Moreover, the paper reveals that some countries may endeavor tariff reforms slowly not only because these deter inflow of foreign capital but also because tariff reductions may directly lead to deterioration of the welfare of these economies by lowering the domestic factor incomes and thus reducing the efficiency of labor.

Developing countries have been vigorously implementing trade liberalization policies for the last decade and a half. However, many developing countries are implementing their tariff reforms at slower rates than the average rate, although these are successful in attracting substantial amount of FDI. The present paper provides explanation as to why they are walking behind others with respect to the pace of tariff reforms, more satisfactorily than the existing tariff-jumping theory. It shows that foreign capital inflow may be desirable from the welfare perspective of the developing countries, if there exist two distortions rather than one in the markets: a commodity market distortion in the form of tariff and a labor market distortion in the form of unionized wage, and also if the efficiency of labor is positively related to the average wage in the economy. Besides, the paper has pointed out that a reduction of tariff may act as deterrent to FDI even if it flows into the export sector of the economy. Moreover, tariff reduction also lowers welfare directly by reducing the rental income from domestic capital stock as well as the labor income through reallocation of labor among the different sectors of the economy. However, we need not be too much worried about the static effects of implementing free trade, which are likely to prove costly for the developing countries. In the absence of protection, the inefficiency of the inward-oriented firms will be exposed, and their survival will be difficult unless they adjust radically to the new environment. However, they expect to benefit from the new opportunities generated by the dynamic effects of free trade. Indeed, estimates indicate that further reforms coupled with more domestic and foreign investment could make the benefits of free trade outweigh its costs and actually increase the welfare. Lifting protection is expected to make firms behave more efficiently and adapt to international requirements. The dampening effects of removal of protectionism on FDI can be overcome by other liberalization policies like simplification of repatriations laws, reduction of obligatory export requirements, opening up of hitherto unexposed sectors to the MNCs, etc. These policies, if successfully undertaken, are expected to stimulate FDI, which is crucial. FDI in the export sector shoots up exports and in the import-competing sector reduces the total imports. Expansion of the export sector is expected to increase employment, since in the LDCs this sector is generally the more labor-intensive one. The end result will depend on the net outcome of destruction and creation effects of tariff reduction and stimulation of foreign investment.