Modelo de preselección de mercados del Instituto Español de Comercio

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deteriorating effect of foreign capital. A few plausible explanations may be forwarded as follows. First, the immiserizing result has been derived in the context of the standard HOS framework, where the decomposition property holds. So factor prices remain unchanged despite an inflow of foreign capital and welfare deteriorates as the tariff- protected import-competing sector expands. However, in an indecomposable production structure the result might be different.55 _{Secondly, if foreign capital enters into the} import-competing sector, the result should be immiserizing. However, if foreign capital is allowed to enter only into an intermediate input (internationally traded or non-traded) producing sector, as Marjit and Beladi (1996) and Chaudhuri (2001) have shown, it might be welfare improving. Besides, standard trade models do not adequately capture some of the essentials characteristics of a typical developing economy. Even in an HT structure, with agricultural dualism and non-traded commodities, it is possible to show that an inflow of foreign capital might be welfare-improving (Chaudhuri, 2007). Finally, as we have seen in any decomposable two-sector or three-sector Harris-Todaro model despite the presence of labour market distortion inflows of foreign capital worsen welfare. But, if a full-employment structure is followed, as Chaudhuri (2005) has shown, an inflow of foreign capital might be welfare improving even in an otherwise 22 HOS model in the presence of tariff and labour market distortions. Let us explain the Chaudhuri (2005) model in details.

5.3.1. Chaudhuri (2005) Model: Role of Labour Market Distortion

The Chaudhuri (2005) model shows that even in a two commodity–two input full- employment structure with labour market distortion, an inflow of foreign capital without technology transfer may be welfare improving. However, the existence of labour market

55 _{See for example, Jones and Marjit (1992) and Grinols (1991). Grinols (1991) in terms of a}

three-sector specific factor indecomposable system with an urban informal sector and Harris- Todaro setting has argued that an 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.

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distortion is a necessity to obtain this unconventional result. If an inflow of foreign capital takes place concurrently with labour market reform, the possibility of welfare gain due to foreign capital diminishes. On the contrary, if the inflow of foreign capital is accompanied by a transfer of labour-augmenting technology, welfare may improve even in the absence of labour market distortion.

Chaudhuri (2005) considers a small open economy, with two sectors where both the sectors operate at close vicinity. There are two inputs of production  labour and capital. Sector 1 is the informal sector producing a primary export commodity while the formal sector (sector 2) produces a manufacturing commodity. Now it is assumed that labour in sector 2 earns a unionized wage, _W*_{, while the wage rate in sector 1, W, is market}

determined. We shall assume that sector 2 is more capital-intensive relative to sector 1 in value sense. Besides, sector 2 is the tariff-protected import-competing sector of the economy. Two commodity prices are given internationally owing to our small open economy assumption. Production functions exhibit constant returns to scale with positive but diminishing marginal productivity to each factor. All markets except the labour market facing sector 2 are perfectly competitive. Factors of production are fully utilised. The general equilibrium is represented by the set of following equations.

1 1 1W a r P a_L  _K  (5.19) * 2 2 2(1 ) L K a W a r P t (5.20) L X a X a_{L1 1} _{L2 2}  (5.21) K X a X aK1 1  K2 2  (5.22)

Equations (5.19) and (5.20) are the two zero-profit conditions while (5.21) and (5.22) are the two full-employment conditions for labour and capital, respectively. Pi and Xi

denote internationally given price and the output level of the ith _{sector, respectively. L}

and K are the endowments of labour and capital. The capital stock of the economy consists of both domestic and foreign capital and these are perfect substitutes.

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Sector 2 faces a unionized labour market. The relationship for the unionized wage rate is specified as56_:

* _{( , )}

W  f W U (5.23) where U denotes the bargaining strength of the labour unions.

(.)

f satisfies the following properties: _W* _{W for U 0,W}* _{W for 0; , 0.} 2 1 

 f f

U

Equation (5.23) states that _W* _{W when the trade unions exercise at least some power in}

the bargaining over wages. _W* _{is an increasing function of both Wand U. The trade}

union power, denoted by U, is amenable to policy measures. If the government undertakes labour market reforms for curbing union power e.g. partial or complete ban on resorting to strikes by the trade unions or reformation of employment security laws, U

takes a lower value.

There are five endogenous variables in the system: * 1

, , ,

W W r X and X2. Using (5.23), equation (5.20) may be rewritten as follows:

) 1 ( ) , ( _{2 2} 2f W U a r P t a_L  _K   _(5.20.1)

W and rare determined from equations (5.19) and (5.20.1). Then ajis are determined as

functions of input price ratios. X1 and X2 are obtained from (5.21) and (5.22). Finally, *

W is found from (5.23).

We measure welfare of the economy by national income at world prices, I, which is given by

*

1 1 2 2 2 2

L L D

I Wa X W a X  rK tP X (5.24) It is assumed that the foreign capital income is fully repatriated. In equation (5.24),

1 1X

WaL and W a X* L2 2 give the total wage income of the workers employed in sectors 1

and 2 of the economy, respectively. rKD is the rental income from domestic capital.

Finally, tP2X2 measures the cost of tariff protectionof the import-competing sector.