Tariff Liberalization and Economic Outcomes of a Dual Economy: A General Equilibrium Analysis

This article makes an attempt to examine the impact of tariff liberalization in agricultural sector (the rural or traditional sector) of a dual economy. The theoretical model of the study captures two key characteristics of a dual economy is: presence of unemployment with rural-urban labour migration and interlinked between the two sectors are traditional rural (agricultural) sector and urban manufacturing sector. The traditional sector is the backbone of the economy. It supplies inputs to the manufacturing sector and also participates in the export markets. The considered model in this present study evaluates the potential economic outcomes due to tariff liberalization in agricultural sector. The findings indicate that liberalizing trade (tariff reduction) in the traditional sector leads to a decline in rural wages as result rural-urban wage gap increases but simultaneously contributes to fall in unemployment. The fall in unemployment is executed by the expansion of the manufacturing (urban) sector after the tariff liberalization. The manufacturing sector is benefited from fall in raw materials and absorbs displaced labour from the rural sector during post tariff reform period. However, the rural sector contracts as a consequence of international competition in post tariff liberalization period. Overall study highlights that how trade liberalization in agricultural sector can alter labour market dynamics by boosting manufacturing output and mitigating unemployment in a dual-sector developing economy.