a general equilibrium analysis of production subsidy in a harris todaro developing economy an application to india since 1950s india has advocated import substituting industrialization policies to promote its manufacturing sector the end result was creation of a dual economy highly favored manufacturing sector with high and rigid wages and neglected agricultural sector with low wages and poverty because of the higher wages in the manufacturing sector the rural laborers migrate to the urban sector a typical characteristic of the harris todaro developing economy realizing this crisis the indian government recently initiated policies to boost agricultural production to curb the labor migration and improve the welfare of the rural population in this study we develop a computable general equilibrium cge model for india by incorporating harris todaro economic characteristics of unemployment labor migration farm dependant population and labor intensive agriculture we use the model to analyze the effects of agricultural production subsidy policies on employment factor price output price output levels and we

a political economy theory of the soft budget constraint why do soft budget constraints exist and persist in this paper we argue that the prevalence of soft budget constraints can be best explained by the political desirability of softness we develop an infinite horizon political economy model where neither democratic nor autocratic politicians can commit to policies that are not ex post optimal we show that because of the dynamic commitment problem inherent in the soft budget constraint politicians can in essence commit to make transfers to entrepreneurs which otherwise they would not be able to do this encourages such entrepreneurs to support them politically though the soft budget constraint may induce economic inefficiency it may be politically rational because it influences the probability of political survival in consequence even when information is complete politicians may fund bad projects which they anticipate they will have to bail out in the future we show that maybe somewhat surprisingly dictators who are less likely to lose power are more likely to use the soft budget constraint as a strategy to gain political support

trade policies and welfare in a harris todaro economy in many developing countries rising unemployment is often attributed to increases in foreign imports triggered by declining foreign prices of imports to correct the chronic unemployment problem some developing countries chose an import substitution strategy by shutting off imports whereas others adopted an outward oriented policy by promoting exports north american free trade agreement nafta was favored by mexico but opposed by organized labor in this country because it was feared that nafta may increase unemployment in the u s which of these policies is more effective in reducing unemployment and raising domestic income protection has been ardently supported as a practical cure for unemployment in chile and argentina and many other ldcs in latin america similarly india adopted import substitution strategies behind high protection and a considerable bias against exports 1 the literature has also justified the use of tariffs for small countries under uncertainty and unemployment 10 9 but in general protection distorts the trade pattern and magnify the extent of the leontief paradox by limiting imports of capital intensive products into these developing countries that suffer from high labor unemployment 7 in the literature there have been two types of models that analyze trade problems in the presence of unemployment the generalized unemployment models have been developed by brecher 5 6 and batra and seth 3 2 in these models wage rigidity is ubiquitous and unemployment exists in all sectors and they are appropriate to analyze the impact of trade policies on unemployment in developed economies the harris todaro ht hereafter model 13 on the other hand assumes sector specific wage rigidity and permits unemployment only in the urban sector thus the ht model is appropriate for investigating the impacts of trade policies of ldcs that suffer

the curse of natural resources in fractionalized countries abstract this paper develops a model that can explain why natural resources are a blessing for some countries but a curse for others in this model natural resources cause fighting activities between rivalling groups fighting reduces productive activities and weakens property rights making productive activities even less attractive the aggregate production decrease exceeds the natural resources direct positive income effect if and only if the number of rivalling groups is sufficiently large the model thus predicts that natural resources lower incomes in fractionalized countries but increase incomes in homogenous countries empirical evidence supporting this prediction is provided

resource curse or not a question of appropriability this thesis presents three self contained essays focusing on empirical questions in growth and development economics each article addresses specific questions on why countries perform differently in particular i analyse the effect of democracy on economic development the relationship between natural resources and growth and the efficiency of foreign development assistance in the first essay democracy consolidation and growth i analyse the effect of democracy on economic growth in this context i argue that an important aspect to consider is how consolidated political systems are put simply i find that it is not only a question of how democratic countries are but also how long they have been democratic in other words economic performance tends to improve with the duration of uninterrupted democracy the performance of autocracies on the other hand tends to deteriorate over time however for newly established political systems there seems to be a cost of being democratic this implies that democracies only bear their fruit after some time the analysis has important policy implications to overcome initial straits international assistance focused on democratic consolidation may be important and a very good investment in fostering long run development the second essay resource curse or not a question of appropriability together with anne boschini and jesper roine is concerned with the relation between natural resources and economic development for most laymen as well as for most economists it would seem reasonable that countries richly endowed in natural resources also benefit from this wealth however a large literature has found a systematic negative effect of natural resource abundance on economic growth we suggest that this so called resource curse is not determined by resource endowments alone but rather by the interaction between the type of resources a country possesses and the quality of institutions in the country this combination of factors determines what we call the appropriability of a resource the concept of appropriability captures the likelihood of natural resources leading to rentseeking corruption or conflicts which in turn will harm economic development our results suggest that if institutions are good enough the curse may be turned into a blessing this may explain why some countries such as norway and botswana tend to benefit from their resources while others such as angola and sierra leone do not the third and final essay of this thesis foreign sectoral aid fungibility growth and poverty reduction is a contribution to the aid efficiency literature which is concerned with the question of whether aid helps or hinders economic development foreign development assistance is often targeted on specific public expenditure sectors if this aid is not used in the sector for which it was granted e g health education it is said to be fungible and donors may end up financing something completely different from what they intended e g military expenditures the major concern about sectoral fungibility is that the alternative use of aid may be less productive or less socially useful however measuring fungibility is not sufficient to determine whether foreign sectoral aid fungibility is actually harmful what is important is how the funds treated as fungible are used the essay starts by obtaining estimates of fungibility for 57 countries the results suggest that sectoral aid is indeed largely treated as fungible by recipient countries next to assess the economic and health effects of fungibility these estimates are incorporated into an empirical model of aid and growth as well as into a model of aid and infant mortality altogether i find no evidence of more fungible sectoral aid leading to worse performance

optimal dutch disease growth models of the dutch disease such as those of krugman 1987 matsuyama 1992 sachs and warner 1995 and gylfason et al 1999 explain why resource abundance may reduce growth however the literature also raises a new question if the use of resource wealth hurts productivity growth how should such wealth be optimally managed this question forms the topic of the present paper in which we extend the growth literature on the dutch disease from a positive to a normative setting we show that the assumptions in the previous literature imply that the optimal share of national wealth consumed in each period needs to be adjusted down however some dutch disease is always optimal thus lower growth in resource abundant countries may not be a problem in itself but may be part of an optimal growth path the optimal spending path of the resource wealth may be increasing or decreasing over time and we discuss why this is the case

pattern of trade between underemployed economies in this paper the authors analyze the factors determining the pattern of trade between underemployed economies they find among other things that a low wage land abundant country exports the land using labor intensive product to a high wage capital abundant country the authors also find conditions under which a high wage capital rich country may export the labor intensive product the leonteif paradox copyright 1990 by the london school of economics and political science

rent seeking and resource booms abstract this paper develops a model of rent seeking in which the opportunity cost of rent seeking is foregone entrepreneurship it provides conditions under which resource booms tend to lead to an increase in rent seeking activity and those in which they induce entrepreneurship we identify an important difference between the two activities which leads resource booms to bias gains in favour of rent seeking over entrepreneurship but we also show that this bias depends on the nature of the initial equilibrium

why do some resource abundant countries succeed while others do not on average resource abundant countries have experienced lower growth over the last four decades than their resource poor counterparts but the most interesting aspect of the paradox of plenty is not the average effect of natural resources but its variation for every nigeria or venezuela there is a norway or a botswana why do natural resources induce prosperity in some countries but stagnation in others this paper gives an overview of the dimensions along which resource abundant winners and losers differ in light of this it then discusses different theory models of the resource curse with a particular emphasis on recent developments

consumer demand for fair trade evidence from a multistore field experiment abstract we provide new evidence on consumer demand for ethical products from experiments conducted in a u s grocery store chain we find that sales of the two most popular coffees rose by almost 10 when they carried a fair trade label as compared to a generic placebo label demand for the higher priced coffee remained steady when its price was raised by 8 but demand for the lower priced coffee was elastic a 9 price increase led to a 30 decline in sales while consumers attach value to ethical sourcing there is significant heterogeneity in willingness to pay for it

contesting resources rent seeking conflict and the natural resource curse a growing empirical literature links natural resource abundance and pointiness to impeded economic growth and civil strife we develop rent seeking and conflict models that capture the most salient features of contests for resource rents and show how both resource abundance and geographical clustering can be associated with intense contests and sub optimal economic performance however we also show that these relationships are not necessarily monotonous pointiness can trigger more intense contests but can also facilitate the coordination on peaceful outcomes finally we show that contesting resources through violent conflict may yield superior outcomes from an economy wide perspective than contests through rent seeking

a theory of civil conflict and democracy in rentier states the effects of resource rents on the political equilibrium have been studied in two main types of models the first tradition uses models of conflict and studies how resource rents affect the intensity and duration of civil conflict the second tradition uses political economy models where resource rents affect the political equilibrium due to changes in the costs and benefits of buying votes although they provide considerable insight these traditions have little to say about when democracy emerges and about when conflict emerges in this paper by integrating the earlier model traditions we suggest the simplest possible framework we can think of to study the choice between conflict and democracy we show how factors such as resource rents the extent of electoral competition and productivity affect economic and political equilibria

the dutch disease a disease after all many third world oil producers are encountering serious problems in building up a diversified export base while west european oil and gas producers netherlands united kingdom are suffering a decline in their traded goods manufacturing sector induced by real wage pressures it is becoming increasingly clear that high but temporary oil revenues may be somewhat ora mixed blessing the quip of the economist notwithstanding the mechanism behind this unbalance is clear enough part of the oil revenues is spent on non traded goods which leads to a real appreciation i e a rise in the relative price of non traded goods in terms of traded goods this in turn draws resources out of the non oil traded sector into the non traded goods producing sector corden and neary 1982 van wijnbergen 1980 one may say that this is an efficient response to the increase in income from oil production the united kingdom mexico egypt simply should move into oil derived industries and non traded goods and forget about their manufacturing sector until oil reserves are exhausted however many developing countries are hesitant to take this advice after all the post world war ii success stories in economic development involve without exception countries that promoted their traded goods sector aggressively moreover it is a well established stylised fact that technological progress is faster in the traded non sheltered sectors of an economy than in the non traded sector balassa 1964 is an early reference considering the hypothesis that technological progress rather than taking place exogenously with the passage of time is a function of accumulated experience the concern of countries like egypt mexico or indonesia is much easier to understand since solow 1957 and denison 1962 it is known that capital accumulation explain only a small part of economic growth if most of economic growth is caused by learning by doing induced technologica

the quality of political institutions and the curse of natural resources we propose a theoretical model to explain empirical regularities related to the curse of natural resources which emphasises the behaviour and incentives of politicians we extend the standard voting model to give voters political control beyond the elections this gives rise to a new restriction that policies should not give rise to a revolution our model clarifies when resource discoveries might lead to revolutions namely in countries with weak institutions it also suggests that for bad political institutions human capital depends negatively on natural resources while for high institutional quality the dependence is reversed this finding is corroborated in cross section regressions

the voracity effect abstract we analyze an economy that lacks a strong legal political institutional infrastructure and is populated by multiple powerful groups powerful groups dynamically interact via a fiscal process that effectively allows open access to the aggregate capital stock in equilibrium this leads to slow economic growth and a voracity effect by which a shock such as a terms of trade windfall perversely generates a more than proportionate increase in fiscal redistribution and reduces growth we also show that a dilution in the concentration of power leads to faster growth and a less procyclical response to shocks jel f43 o10 o23 o40

urban unemployment and the gains from trade a welfare ranking of alternative commercial policies is constructed for the mobile capital harris todaro economy it is sh own that despite the presence of unemployment most noninterventioni st policies suggested by the competitive model of gains from trade ca rry over to the mobile capital harris todaro economy yet in contradi ction to the competitive model it is shown that all forms of trade i ntervention are not detrimental to welfare only those that reduce th e volume of trade are the export promotion policies so copiously fol lowed by developing countries are vindicated but their import substi tution policies are shown to be without justification copyright 1987 by the review of economic studies limited

imperfect labor mobility and unemployment in ldcs in the two sector two factor general equilibrium literature generic unemployment has been introduced under the assumption of decreasing returns to scale in production see e g batra and seth 1 295 306 and yu 10 399 404 whereas sector specific unemployment has been introduced under the assumption of sticky wages e g harris and todaro 6 136 42 corden and findlay 5 59 78 khan 8 527 47 and marjit 9 527 47 in either case however labor is assumed to be perfectly mobile between two sectors the latter assumption has recently been a major topic of further research in the two sector general equilibrium literature specifically it is argued that in a perfectly competitive environment despite significant intersectoral wage differential caused by various parametric policy changes enough labor do not move from the low wage to the high wage sector to equate the wage rates in two sectors even in the long run locational preferences attachment to existing arrangements and also the high costs of relocation are usually cited as the possible reasons behind the sluggish movement of labor from one sector to the other casas 2 747 61 in a pioneering article has modeled this phenomenon of general immobility of labor in a standard two sector model of production in his model however casas assumes full employment of labor the purpose of the present paper is to extend the casas model further by incorporating unemployment caused by sector specific sticky wages of the harris todaro variety and examine the effects of growth and trade policies on output employment and welfare of a small country we will highlight the role of the elasticity of labor mobility parameter in our main results and demonstrate that there exists a critical minimum value of the elasticity of labor mobility parameter that will ensure the validity of the conventional results even in the world of imperfect labor mobility several interesting results emerge from our analysis in particular we have shown that capital accumulation causes urban unemployment to rise and the optimal tariff for a small open economy is positive the paper is organized as follows in section ii we lay out the basic model of labor immobility and unemployment and in section iii we derive the basic comparative static results in

natural resources education and economic development economic growth since 1965 has varied inversely with the share of natural capital in national wealth across countries four main channels of transmission from abundant natural resources to stunted economic development are discussed a the dutch disease b rent seeking c overconfidence and d neglect of education public expenditure on education relative to national income expected years of schooling for girls and gross secondary school enrolment are all shown to be inversely related to the share of natural capital in national wealth across countries natural capital appears to crowd out human capital thereby slowing down the pace of economic development

the narrow moving band the dutch disease and the competitive consequences of mrs thatcher notes on trade in the presence of dynamic scale economies abstract this paper presents a model of trade in which comparative advantage instead of being determined by underlying attributes of countries evolves over time through learning by doing in this model arbitrary patterns of specialization once established tend to become entrenched over time the model sheds light on three widely held views that do not make sense in more conventional models first is the view that temporary protection of selected sectors can permanently alter the pattern of comparative advantage in the protecting country s favor second is the view that seemingly favorable developments such as the discovery of exportable natural resources may lead to a permanent loss of other sectors and reduce welfare in the long run third is the possibility that a temporary overvaluation of a currency due to tight money can lead to a permanent loss of competitiveness in some sectors

natural resources rent seeking and welfare abstract a new and very simple mechanism to explain why natural resource abundance may lower income and welfare is developed in a model with rent seeking a greater amount of natural resources increases the number of entrepreneurs engaged in rent seeking and reduces the number of entrepreneurs running productive firms with a demand externality it is shown that the drop in income as a result of this is higher than the increase in income from the natural resource more natural resources thus lead to lower welfare

institutions and the resource curse countries rich in natural resources constitute both growth losers and growth winners we claim that the main reason for these diverging experiences is differences in the quality of institutions more natural resources push aggregate income down when institutions are grabber friendly while more resources raise income when institutions are producer friendly we test this theory building on sachs and warner s influential works on the resource curse our main hypothesis that institutions are decisive for the resource curse is confirmed our results contrast the claims of sachs and warner that institutions do not play a role

comparative politics and public finance we propose a model with micropolitical foundations to contrast different political regimes compared to a parliamentary regime the institutions of a presidential congressional regime produce fewer incentives for legislative cohesion but more separation of powers these differences are reflected in the size and composition of government spending a parliamentary regime has redistribution toward a majority less underprovision of public goods and more rents to politicians a presidential congressional regime has redistribution toward powerful minorities more underprovision of public goods but less rents to politicians the size of government is smaller under a presidential regime this last prediction is consistent with cross country data

increasing returns and the genesis of american resource abundance the usa became the world s leading mineral producing nation between 1870 and 1910 a development paralleled by the rising resource intensity of american manufacturing this paper challenges the premise that resource abundance simply reflected the country s geological endowment of mineral deposits instead in the century following 1850 the usa exploited its natural resource potentials to a far greater extent than other countries and did so across virtually the entire range of industrial minerals the paper argues that natural resource abundance was an endogenous socially constructed condition that was not geologically preordained it examines the complex legal institutional technological and organizational adaptations that shaped the us supply responses to the expanding domestic and international industrial demands for minerals and mineral products it suggests that strong positive feedbacks even in the exploitation of depletable resources were responsible for the explosive growth of the american minerals economy

evaluating the role of subsidy reform in addressing poverty levels in malaysia a cge poverty framework abstractmalaysia as one of the top subsidised countries around the world has launched to reduce subsidies to capture its development goals this study therefore analyses the effects of the subsidy reform on the macroeconomic welfare and poverty levels of malaysia by applying a cge model the findings suggest that subsidy removal leads to significant falls in both income and consumption of rural urban and non citizen households and consequently decreases their welfare however poverty levels among rural households will most likely increase significantly when compared to urban households due to their relatively low level of income compared to other groups

learning by doing and the dutch disease this paper develops a model of learning by doing and the dutch disease that extends the earlier literature in two ways first it is assumed that both the traded and the non traded sector can contribute to learning second it is assumed that there are learning spillovers between the sectors it is shown that within such a model a foreign exchange gift results in a real exchange rate depreciation in the long run due to a shift in the steady state relative productivity between the traded and the non traded sector in contrast to standard models of the dutch disease production and productivity in both sectors may go up or down the conditions for the different cases are worked out

impacts of energy subsidy reform on the malaysian economy and transportation sector malaysia is paying a high level of subsidies on the consumption of energy about 5 of its gdp therefore reforming the energy subsidies as planned by the government will have a significant impact on household welfare and energy intensive sectors such as the transport sector this study employs a computable general equilibrium cge model to highlight the transmission channels through which the removal of energy subsidies affects the domestic economy the findings show that the shock increases real gdp and real investment while decreasing malaysian total exports and imports the removal of energy subsidies also decreases the aggregate energy demand and consequently decreases the level of carbon emissions in the malaysian economy in addition households experience significant falls in their consumption and welfare the transport sector is significantly influenced through an increase in production costs due to an increase in the prices of intermediate inputs the total output and total exports of the whole transport sector decrease while its imports increase in addition the use of all kinds of transport by households decreases significantly the malaysian energy subsidy reform leads to an initial decrease in co2 emissions and demand for electricity gas and petroleum products in the entire transport sector

kleptocracy and divide and rule a model of personal rule many developing countries have suffered under the personal rule of kleptocrats who implement highly inefe cient economic policies expropriate the wealth of their citizens and use the proceeds for their own glorie cation or consumption we argue that the success of kleptocrats rests in part on their ability to use a divide and rule strategy made possible by the weakness of institutions in these societies members of society need to cooperate in order to depose a kleptocrat yet such cooperation may be defused by imposing punitive rates of taxation on any citizen who proposes such a move and redistributing the benee ts to those who need to agree to it thus the collective action problem can be intensie ed by threats which remain off the equilibrium path in equilibrium all are exploited and no one challenges the kleptocrat kleptocratic policies are more likely when foreign aid and rents from natural resources provide rulers with substantial resources to buy off opponents when opposition groups are shortsighted when the average productivity in the economy is low and when there is greater inequality between producer groups because more productive groups are more dife cult to buy off jel o12 h00

constitutions and the resource curse abstract utilizing the fact that natural resources are randomly distributed among countries we investigate how public income shocks have different long run economic effects dependent on constitutional arrangements we find that i the so called resource curse is present in democratic presidential countries but not in democratic parliamentary countries ii being parliamentary or presidential matters more for the growth effects of natural resources than being democratic or autocratic and iii natural resources are more likely to reduce growth when proportional electoral systems are in place than when the electoral systems are majoritarian the two first effects appear very robust the last effect less so

utility subsidy reform in abu dhabi a review and a computable general equilibrium analysis abstract electricity and water consumption in abu dhabi has increased substantially in recent years along with rapid economic and population growth as one of the oil producing economies located in arid regions abu dhabi s electricity and water are produced predominantly with fossil fuel based power water co generation which generate carbon emissions the consumption of electricity and water is heavily subsidized to support industrial growth lower cost of living and distribute state wealth to the population the low utility prices however may have contributed to high per capita carbon emissions for the emirate this paper reviews critical literature on energy subsidy policy for oil exporting economies we then examine the economic and environmental effects of water and electricity subsidy reduction in abu dhabi using a computable general equilibrium analysis the result shows that utility subsidy reduction alone increases gross domestic product gdp of the emirate through expanding the high value added service sector and reduces carbon emissions with decreasing carbon intensive industrial and utility productions meanwhile private consumption declines with decreasing wage electricity subsidy reduction in general has greater economic and environmental effects than water subsidy reduction the positive economic and environmental gains may incentivize utility subsidy reform in the long run when the negative wage effect is mitigated

political foundations of the resource curse in this paper we argue that the political incentives that resource endowments generate are the key to understanding whether or not they are a curse we show 1 politicians tend to over extract natural resources relative to the efficient extraction path because they discount the future too much and 2 resource booms improve the efficiency of the extraction path however 3 resource booms by raising the value of being in power and by providing politicians with more resources which they can use to influence the outcome of elections increase resource misallocation in the rest of the economy 4 the overall impact of resource booms on the economy depends critically on institutions since these determine the extent to which political incentives map into policy outcomes countries with institutions that promote accountability and state competence will tend to benefit from resource booms since these institutions ameliorate the perverse political incentives that such booms create countries without such institutions however may suffer from a resource curse

economic backwardness in political perspective government policies and institutions shape economic incentives and via this channel have a first order impact on economic development why then do many societies adopt policies that discourage investment and maintain institutions that cause economic backwardness perhaps politically powerful groups elites are not in favor of economic growth but why it would appear that economic growth would provide more resources for these groups to take over or tax increasing their economic returns so why don t powerful groups always support economic development in this paper we develop a theory of inefficient government policies and institutions all else equal politically powerful groups would welcome superior institutions and technologies but in practice all else is not equal because superior institutions and technologies may reduce their political power and make it more likely that they will be replaced at the center of our theory is therefore the idea that changes in institutions or the introduction of new technologies often create turbulence eroding the political advantages and future economic rents of incumbent elites alternatively new technologies may enrich competing groups increasing their threat to incumbents these considerations make politically powerful groups fear losing power and oppose economic and political change even when such change will benefit society as a whole to understand the mechanism at work and its potential applications consider a concrete example industrialization in the nineteenth century bairoch 1982 estimates that between 1830 and 1913 world manufacturing output increased by a factor of 5 see table 1 panel a nevertheless this process was highly uneven across regions and countries bairoch also calculates that over the same period manufacturing output in developed countries europe and north america increasedbyafactorofover10 whereasitdeclinedinthe third world among developed countries there were