International Capital Flows, Land Conversion and Wage Inequality in Poor Countries

Conversion of land from agricultural to industrial use has met with strong opposition in many developing countries in recent times. A number of relevant papers study welfare effects associated with willful conversion, no conversion or politically forced and manipulated conversion of land into other activities. No study, however, deals with the evolving skilled-unskilled wage gap consequent upon full or partial convertibility of land in the short and the long run. This paper shows that in a multiple-commodity world with land as a crucial input both for agriculture and industry, an influx of capital for supporting industrial production must widen the skilled-to-unskilled wage gap. If the rate of conversion of land exceeds a critical value in the short-run, the wage gap rises. Even in the long run, possibility of full conversion can raise the wage gap if agriculture is—as is indeed the case—labor-intensive in developing countries. Showing the dependence of wage inequality on the degree to which land is convertible into other uses is the paper’s unique contribution to the literature.