Liberalization and Welfare Conditions of a Developing Economy: A General Equilibrium Analysis

The paper attempts to analyze the impact of trade liberalization policy, in terms of FDI, on the level of informal competitive wage rate as well as on the size of the informal sectors of a developing economy with dualistic economic structure in a general equilibrium framework. The wage rate earned by the informal workers has been considered here as a proxy for their living standard. In this paper it is found that FDI raises the level of wage rate of the informal workers and consequently raises their standard of living. It is also found in this paper that FDI expands both formal and informal manufacturing sectors in the urban areas whereas it contracts the rural agricultural informal sector. In this structure an attempt has also been made to analyze the effects on the welfare level of the economy for a drive towards liberalization through FDI by assuming Sen (1974) type social welfare function which considers inequality in income distribution.