Trade, Urbanization and Capital Accumulation in a Labor Surplus Economy

In many developing countries there are abundant supplies of surplus laborfrom rural areas. We examine in a simple, dynamic framework how the existence of this large supply of rural unskilled labor a¤ects trade, urbanization, capital accumulation, factor returns, as well as sectoral and aggregate output and social welfare. We \u85nd that since the migration equilibrium pins down the real unskilled wage, many comparative-static results with respect to changes in trade-related policies in our surplus-labor economy are di¤erent from the conventional model without surplus labor. While these commonly adopted trade protection or investment subsidy policies in a surplus-labor economy need not expedite urbanization as is usually expected, they may even retard capital accumulation and reduce aggregate output. On the contrary, under reasonable factor intensity assumptions, a reduction in migration barriers may likely help immiserization by enhancing capital accumulation, inducing urbanization and enhancing aggregate output. Our numerical results indicate that trade protection in forms of import tari¤s can generate strong intertemporal distortion and may cause severe under-urbanization and economy-wide miserization