Industry-Agriculture Interlinkage, Agricultural Trade Liberalization and Supply Constraints: A Post WTO Perspective

The objective of the paper is to examine macroeconomic developments of a labor surplus economy in terms of a dual economy framework. We attempt to build up a two-sector dependent economy model, which is open to trade-flows. We focus on specific forms of openness that a labor surplus economy is subject to, particularly in the transition period. The industrial sector is a non-traded sector, which uses an imported intermediate input. The import bill is financed by agricultural export in presence of binding foreign exchange constraint. The paper highlights the role of the foreign exchange contribution of the agricultural sector in the determination of industrial output and employment. The different comparative static exercises attempted in this paper clearly demonstrate that the results of the conventional closed economy models of a labor surplus economy can be seriously altered in an open economy setting, which accommodates multiple supply constraints, namely wage-goods constraint and foreign exchange constraint. The paper provides a critique of conventional demand management and expenditure switching policies and it also offers justification for agricultural trade liberalization. The results obtained in this paper can provide important insights into the nature of industry agriculture interlinkage in an open economy set up, particularly in the post WTO framework.