Semester

Spring

Date of Graduation

2004

Document Type

Dissertation

Degree Type

PhD

College

Eberly College of Arts and Sciences

Department

Economics

Committee Chair

Subhayu Bandyopadhyay.

Abstract

The objective of this dissertation is to incorporate foreign capital goods and underemployment in the welfare analysis of transfers and trade policies. We build a two-good, two-country general equilibrium model, which takes into account the use of foreign capital in the import competing sector of a developing country. The developing country receives transfers in the form of financial resources or capital goods from a developed country. Financial transfers induce changes in commodity terms of trade, which in turn affects capital inflows and the price of imported capital. The welfare effect of financial transfers is considered in the context of induced changes in these variables. In the context of an exogenous export tax, we find that endogenous capital flows aggravate the transfer problem that exists under trade taxation. When trade liberalization is tied to financial aid, we find that the tying of aid may worsen or alleviate the transfer problem, depending on how the existing export tax compares with the optimum. In the case of capital transfers, we find that such transfers can reduce welfare through an adverse price effect and a production distortion. The model is empirically analyzed by estimating a regression model with fixed effects for a panel of 14 countries in Sub-Saharan Africa. Our empirical results substantiate the concerns raised by the theoretical analysis and are robust. We also analyze how trade liberalization affects underemployment and welfare in a small open economy model. Our model shows that liberalizing trade by reducing export taxes has an ambiguous effect on welfare due to the presence of endogenous underemployment. Free trade is not optimal, and a small export tax leads to a welfare improvement. Our results also show that the structure of employment in a typical small open economy causes trade liberalization to increase rather than decrease the level of underemployment. We check to see whether this latter result holds empirically by estimating a regression model with fixed effects for a panel of 19 developing economies. The empirical analysis shows that the result holds and is robust.

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