Development Policy And Differential Production Structure In A Harris-Todaro Economy

This paper incorporates informal sector and efficiency wage relation in a Harris-Todaro econmy under differential production structure. The simultaneous existence of the urban informal sector and the urban unemployment has been explained interms of such efficiency wage relation. Two different production structures have been considered in this paper: first, formal capital is specific to the urban formal sector, while informal capital is mobile between the rural sector and the urban informal sector ;second, formal capital is mobile between urban formal sector and the rural sector, while informal capital is specific to the urban informal sector . Our investigation shows that rural subsidization reduces unemployment and raises domestic factor income in both cases.However, such a policy may lower domestic factor income in the original models of Gupta(1997) and Grinols (1992).Subsidization to the urban formal sector raises unemployment and domestic factor income in the two different production structures. However, such a policy may produce ambiguous effect in the original model of Grinols(1991). Interestingly, subsidization to the urban informal sector leads to different effects in the two different cases. In the case of capital mobility between informal sector and rural sector, this raises unemployment and lowers domestic factor income and in the case of capital mobility between formal sector and rural sector this policy lowers unemployment and raises domestic factor income. However, such policy raises domestic factor income in the original model of Gupta (1997); and leads to ambiguous effect in the model of Grinols (1991).Thus, our results have shown that the impact of development policies on unemployment and domestic factor income depends on the nature of the production structures.These theoretical results may guide the policy makers to pursue the development policy in a small open economy.