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Foreign Capital Inflow, Product Market Imperfection, and the Informal Sector: A General Equilibrium Analysis

Sushobhan Mahata (Department of Economics, University of Calcutta, Kolkata, West Bengal, India)
Rohan Kanti Khan (Department of Applied Economics, Maulana Abul Kalam Azad University of Technology, Kolkata, West Bengal, India)
Soumyajit Mandal (Department of Economics, St. Xavier’s College (Autonomous), Kolkata, West Bengal, India)
Avishek Bose (Department of Economics, University of Calcutta, Kolkata, West Bengal, India; and University of Calcutta, Kolkata, West Bengal, India)

Informal Economy and Sustainable Development Goals: Ideas, Interventions and Challenges

ISBN: 978-1-83753-981-9, eISBN: 978-1-83753-980-2

Publication date: 7 October 2024

Abstract

With the onset of globalization in developing economies, policymakers express serious concerns about the role of the informal economy, a concern also mirrored in the United Nations (UN) sustainable development goals (SDGs). Numerous attempts have been made to analyse the general equilibrium consequences of globalization in terms of foreign capital inflow on the informal sector in a developing economy. These studies examined the impact of foreign capital inflow through the channels of resource reallocation across sectors and adjustment in the factor and commodity prices. Nevertheless, the efficacy of these channels is contingent upon the assumption of perfectly competitive product markets that is pertinent in the majority of the studies. This chapter attempts to incorporate imperfect competition in the informal economy in a Heckscher–Ohlin-type multi-factor, multi-sector general equilibrium setup. We assume the existence of imperfection in both a homogeneous good-producing industry and a product-differentiating industry and examine how foreign capital inflow in the presence of imperfect competition affects the informal workers, industrial and firm output, product diversity, national income, and welfare. We also analyse how the consequences of foreign capital inflow on the informal economy can vary with the degree of product market imperfection. It is obtained that varying degrees of product market imperfection in the informal economy have only quantitative (magnitude) effects; however, qualitative (directional) effects remain unchanged.

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Acknowledgements

Acknowledgement

The authors are grateful to (Late) Professor Sarbajit Chaudhuri for his suggestions and motivations for this chapter. The authors remember him with great fondness and respect.

Citation

Mahata, S., Khan, R.K., Mandal, S. and Bose, A. (2024), "Foreign Capital Inflow, Product Market Imperfection, and the Informal Sector: A General Equilibrium Analysis", Vinodan, A., Mahalakshmi, S. and Rameshkumar, S. (Ed.) Informal Economy and Sustainable Development Goals: Ideas, Interventions and Challenges, Emerald Publishing Limited, Leeds, pp. 127-154. https://doi.org/10.1108/978-1-83753-980-220241007

Publisher

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Emerald Publishing Limited

Copyright © 2024 Sushobhan Mahata, Rohan Kanti Khan, Soumyajit Mandal and Avishek Bose