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A general equilibrium analysis of production subsidy in a Harris-Todaro developing economy: an application to India

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  • Abdul Razack
  • Stephen Devadoss
  • David Holland

Abstract

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 welfare in agricultural and manufacturing sectors. Our findings show that agricultural production subsidy increases agricultural production, reduces unemployment, raises the wage rate in the agriculture sector, augments the consumption among the rural and urban households, and increases the rental rate for capital in agricultural sector.

Suggested Citation

  • Abdul Razack & Stephen Devadoss & David Holland, 2009. "A general equilibrium analysis of production subsidy in a Harris-Todaro developing economy: an application to India," Applied Economics, Taylor & Francis Journals, vol. 41(21), pages 2767-2777.
    • Handle: RePEc:taf:applec:v:41:y:2009:i:21:p:2767-2777
    DOI: 10.1080/00036840701335561
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    References listed on IDEAS

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    1. S. Mukherji, 2002. "Urbanization and migration in India: a different scene," Chapters, in: H. S. Geyer (ed.), International Handbook of Urban Systems, chapter 20, Edward Elgar Publishing.
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    Cited by:

    1. Cassey, Andrew J. & Galinato, Suzette P. & Taylor, Justin L., 2012. "Environmental Regulation and Regional Economy: Economic Impacts of the Elimination of Azinphos-methyl on the Apple Industry and Washington State," Journal of Food Distribution Research, Food Distribution Research Society, vol. 43(2), pages 1-22.
    2. Wang, Yanxiang & Ali Almazrooei, Shaikha & Kapsalyamova, Zhanna & Diabat, Ali & Tsai, I-Tsung, 2016. "Utility subsidy reform in Abu Dhabi: A review and a Computable General Equilibrium analysis," Renewable and Sustainable Energy Reviews, Elsevier, vol. 55(C), pages 1352-1362.
    3. Saeed Solaymani, 2016. "Impacts of energy subsidy reform on poverty and income inequality in Malaysia," Quality & Quantity: International Journal of Methodology, Springer, vol. 50(6), pages 2707-2723, November.
    4. Autsawin Suttiwichienchot & Nattapong Puttanapong, 2014. "A Study on Internal Labor Movement and Policy Multiplier in Thailand," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 2(3), pages 57-68.
    5. Solaymani, Saeed & Kari, Fatimah, 2014. "Impacts of energy subsidy reform on the Malaysian economy and transportation sector," Energy Policy, Elsevier, vol. 70(C), pages 115-125.

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