Unemployment Reduction in the Presence of a Rural Based Free Trade Zone

Unemployment Reduction in the Presence of a Rural Based Free Trade Zone: Some Policy Implications

Within the framework of an economy characterized by open urban unemployment a la Harris-Todaro, we analyze the effectiveness of a rural based Free Trade Zone (FTZ), established through a subsidy to either domestic or foreign capital, in alleviating unemployment and increasing national income. We establish sufficient conditions under which the establishment of a rural based FTZ leads to a reduction in the absolute level of unemployment in the economy even though it may worsen national income. We also analyze the effect of policy interventions in both the rural and the urban regions of the post-FTZ economy on labor allocations across regions, the absolute level of unemployment and on national income. (JEL Classification: F21, 018, R30)