FOREIGN ENCLAVES, INFORMAL SECTOR AND URBAN UNEMPLOYMENT: A THEORETICAL ANALYSIS

We consider a small open Harris-Todaro(1970) economy with a rural foreign enclave and urban informal sector. We introduce consumption-efficiency relation to explain the simultaneous existence of informal sector and urban unemployment. The main objective of this paper is to analyse the effects of removal of subsidy, given to the foreign enclave, on urban unemployment and on domestic factor income. Our results shed light on the debate: whether subsidies should be removed from the agri-export sector.