Agri-Export Subsidy and Urban Unemployment

Abstract

Agriculture plays important role in the export sector in many developing countries. Governments in developing countries have been providing export subsidy to their farmers to boost up their export performance. However, The WTO announced the removal of export subsidy for both the developed as well as the developing countries. The removal of export subsidy helps the developing countries in the international market as they now get higher price for their exportables. If the export sector expands, more labour comes to the rural area and thus, urban unemployment falls. At the same time, the weakest farmers may stop their production when subsidies are washed out. They now move to the urban sector for job. As a result, unemployment grows. Thus, the reduction of agri-export subsidy leads to ambiguous effects on urban unemployment. This paper analyses theoretically the impact of reduction in agri-export subsidy on urban unemployment in two types of settings: unemployment due to efficiency wage and due to job-searching. The theoretical results may explain the observed effect of the removal of agri-export subsidy on urban unemployment in many small open economies.

Keywords: agri-export subsidy, urban unemployment

JEL Classification: E24, J64