Dual Economy Interlinkage in a Monetary Framework: A Post WTO Perspective

Abstract

The objective of the paper is to examine macroeconomic developments of labour 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 labour surplus economy is subject to, particularly in the transition period. The industrial sector is a non-traded sector which uses an imported intermediate input, while the agricultural sector is a traded sector. An important aspect of the paper is the role of the stock of primary commodity as assets in a financial repressed economy and we study effect of forward looking food price expectations. The different comparative static exercises attempted in this paper clearly demonstrate that the results of the conventional closed economy models of a labour surplus economy can be seriously altered in an open economy setting. The model clearly suggests that short run and long run multiplier effects of shocks, either policy induced or otherwise, are significantly different and hence, short run effects cannot be a very reliable guide to the design of macroeconomic policy. The results obtained in this paper can provide important insights into the nature of industry agriculture interlinkage in transitional, emerging market economics, particularly in the post WTO framework.