بخش غیررسمی در تعادل عمومی: اثر رفاه از اصلاحات سیاست های تجاری

The paper demonstrates the welfare effects of trade policy reforms in a general equilibrium framework, in the presence of an informal sector in the economy. The methodology we developed in the paper allows us to use a full-employment model with wage differential. Tariff cuts in this model have ambiguous effects because of the preexisting wage differential and due to the cross-effects in the three-good structure, which is used in some recent works in trade theory. Complementarity in production may lead to negative welfare effects despite improvements in terms of trade.

Theoretical and empirical policy research in international economics addresses crucial questions about structural adjustments, both in the real and in the financial sectors of the developing economies. Among these, the theoretical papers in trade deal with the use of trade policies, tariffs or tariff equivalents to improve national welfare, appropriately defined. Here we address, how the consideration of informal sector, an area scarcely dealt with in a pure general equilibrium framework, works with more generalized applications of some of the basic theories related to trade policy. A survey of the literature reveals that, so far, considerations of the urban informal sector have been embedded in the rural–urban migration models of the traditional Harris–Todaro (henceforth, H–T) type. Gupta (1993), for example, considers a three-sector static model of a small open economy, with wage and employment determined endogenously in the informal sector. The hypothesis that rural migrants expect to get a job in the urban formal sector with some probability ‘λ’, holds in these models, although, some of the subsidy policies in this structure run counter to those generated by the original model. The problem with these models is that, informal sector offers a wage that has to be lower than the rural wage, because the weighted average of formal and informal wages equals the rural wage. We argue that the poor laborers, moving freely between rural and urban centers, cannot afford to remain unemployed while expecting higher earnings only in the future. They form instead what is known as the urban informal sector, where they earn less than the urban formal wage rate. However, with free mobility of labor between the urban informal and the rural sectors, there is high probability that informal wage is closely related to the rural wage. Accordingly, in our model, we consider them equal. We capture these characteristics in a full-employment general equilibrium model. Subsequently, we wish to check the welfare implications of the trade policy reforms. With this view, we define a welfare parameter and see how it changes when trade policy reforms are introduced at various levels of the economy. In the existing literature, welfare implications of the trade reforms, with the informal sector as an important part of the economy, have not come up for much discussions so far. Leaving out the informal sector fails to capture the actual impact of such policy reforms, because, on an average, about 70% of the labor force in the LDCs belong to the informal sectors. Data from Southeast Asian, East European, African, and Latin American countries show varying rates of urban informal sector employment with a range going up from 15% to 20% in Turkey and Slovakia to 80% in Zambia, or even more, to about 83% in Myanmar. Moreover, considering the state of agricultural and rural activities in these countries, it is quite apparent that the total share of the informal sector in the economy as a whole would be very high (International Labour Organisation (ILO), 1999). This is also corroborated by some of the other studies, like that by Turnham (1993), which provide evidence that in low-income countries like Nigeria, Bangladesh, Ivory Coast, India, and elsewhere, the share of the urban informal sector is at least as high as 51%. Alternatively, seen from the point of view of the ‘minimum wage’ earners, only 11% of Tunisia's labor force is subject to minimum wage; in Mexico and Morocco, a substantive number earns less than the minimum wage; in Taiwan, minimum wage is less than half of the average wage and so on (Agenor, 1996). Once again, the importance of the present theoretical construct is that, in the earlier literature, the informal sector, urban or rural, has not been modeled in a quasi full-employment general equilibrium framework such as this.1Stark (1982), for example, has also noted that there is a need for some more specifications while modeling informal sector in the presence of zero intersectoral transfer cost, perfect information, etc. In the H–T framework, he considers an extension, where the migrant faces a two-period time horizon and undertakes two competing strategies given the probabilities of getting a job in the formal sector in two different periods. In a similar H–T framework, Fields (1975) introduces another variation. According to this paper, open unemployment might exist in the presence of wage flexibility in the informal sector, when the migrant posits a trade-off between informal sector employment and the search for formal sector jobs. The familiar three-sector models of the kind are often used to address policy questions as under the H–T framework and policy effects differ when various assumptions are made regarding the mobility of labor and capital across sectors (Gupta, 1997).2 But, as mentioned earlier, the H–T type models must imply an informal wage rate lower than the rural wage rate — a phenomenon hard to justify with significant labor mobility between the two segments. Now, in order to reemphasize the need for the inclusion of the informal sector in a trade theoretic model, one might want to justify its significance. The term ‘informal sector’ was initially coined by ILO (1972) to mean, “illicit or illegal activities by individuals operating outside the formal sphere for the purpose of evading taxation or regulatory burden.” It may alternatively be defined as, “very small enterprises that use low-technology models and do not refer to legal status” (Webster & Fidler, 1996). Although generally, the informal sector activity pertains to nontraded items in the economy, from street vendors to domestic helps, in many countries they produce exportables and import substitutes with subcontracts from the formal sectors. In such cases, the formal sector adds the capital content (like, the brand name) only. In many other cases, small industries that produce garments, leather goods, small tools and machines, export directly without the formal regulations and procedures (University Grant Commission (UGC), India, 1996). Apart from that, in all the developing countries, agriculture is largely outside the formal net and agricultural outputs and consumer nondurables like fish and meat are largely exported. The domestic productions of these are as well protected at varying rates. Adequate consideration of these activities is therefore important with regard to policy changes, given the high share of employment involved in these sectors. The production structure that we use here bears resemblance to the ones developed in some recent papers in trade theory, dealing with complementarity in production. This is actually an application of the Gruen–Corden (1970) structure, laid out extensively in Jones and Marjit (1992) and Marjit & Beladi, 1996 and Marjit & Beladi, 1999. Our treatment of the informal sector exhibits a quasi-full-employment model amenable to interesting general equilibrium results. For macroeconomic applications of related structures, one may look at Agenor and Aizenman (1999), Agenor and Montiel (1996), etc. In a way, we exploit the notion of informality and complementarity in production to reflect on the welfare implications of liberal trade policies. The plan of the paper is the following. In Section 2, we present the basic model. In Section 3, we check the welfare implications of three policy changes and we conclude in Section 4. Section 5 presents the discussion and objectives of the paper. Appendix A provides the mathematical details and the proof of the propositions that we present in Section 3.

We summarize the basic findings of the paper. In the presence of informal sector in the economy, a tariff cut on the formal sector output might not be welfare-improving. For this to be unambiguously welfare-improving, it requires both negligible cross-substitution effect in other sectors and negligible employment effect in the formal sector. Secondly, a reduction in tariff in the informal sector increases welfare, as long as input demand in the formal sector expands. This may be jeopardized by a rise in XF. If cross-effects are ignored, i.e., if tF is very low, welfare unambiguously rises following a tariff cut in the informal sector. Finally, the rise in price of the agricultural commodity will also be strictly welfare-improving as long as the fall in import demand for the formal good due to P̂R*>0 is negligible. There would nevertheless be a striking possibility that the welfare level in the economy is reduced when there is a fall in import demand for the formal commodity owing to an increase in the price of the agricultural good. The purpose of this analysis has been to provide a simple general equilibrium framework for developing countries characterized by informal sector, and thereby perform the usual trade policy experiments in this set up. Tariff cuts have ambiguous results even if it is a full-employment competitive model, because of the wage differential and the presence of the cross-effects in consumption and production. Typically, when either tF or tI=0, the welfare effect of a tariff cut is usually positive. But with preexisting high tariffs in other sectors and complementarity in production, welfare results can go either way.