A Certain Developing Country Currently Imports All Its Wheat

A Certain Developing Country Currently Imports All Its Wheat But Is

A certain developing country currently imports all its wheat but is considering funding an irrigation project that would allow domestic farmers to grow and sell wheat. The domestically grown wheat would be sold in competitive markets at an estimated price of 15 dubyas per bushel. The wheat the nation currently imports has a CIF price of US $3 per bushel. The official exchange rate is 4 dubyas per dollar. The nation’s tariff on imported wheat is 2 dubyas per bushel. Transportation and distribution charges from the port to a typical market are 2 dubyas and 1 dubya per bushel, respectively. The APR has been estimated to be 0.6 for transportation and 0.8 for distribution.

a. Calculate the market price of imported wheat.

b. Calculate the shadow price of imported wheat.

c. Should the irrigation project proceed?

Assume that a typical unskilled rural worker in a developing country would be paid 2 dubyas a week if he migrates to the city and finds a job. However, the unemployment rate for unskilled workers is 40 percent in the city.

a. What does the Harris-Todaro model predict the worker’s rural wage is?

b. Assume now that the government is considering funding a project in the city that would use substantial numbers of unskilled workers. Using your answer to part a, suggest a reasonable upper-bound and lower-bound estimate of the market wage rate for unskilled workers that the government might use in conducting a CBA of the proposed project.

Paper For Above instruction

The decision of whether to proceed with an irrigation project in a developing country that currently relies solely on imported wheat involves complex economic considerations. Critical among these are the determination of the market price and shadow price of imported wheat, the projected benefits of domestic wheat production, and the impact on labor markets, especially unskilled workers. This paper explores these aspects thoroughly, assessing economic feasibility within the context of international trade, domestic market conditions, and labor market dynamics predicted by the Harris-Todaro model.

Pricing of Imported Wheat and Its Implications

The market price of imported wheat in this context is derived by considering the CIF price, tariffs, transportation, and distribution costs. The CIF price of US $3 per bushel must be converted into local currency. Given the official exchange rate of 4 dubyas per dollar, the CIF price translates to 12 dubyas (3 dollars * 4 dubyas/dollar). Adding the tariff of 2 dubyas per bushel results in a landed cost of 14 dubyas (12 + 2). Further adding transportation and distribution charges—2 dubyas and 1 dubya respectively—total additional costs of 3 dubyas, which, when considering the APRs, should be discounted to reflect present values appropriately. However, for simplicity, assuming these costs are additive, the initial estimated market price of imported wheat becomes 17 dubyas per bushel (14 + 3). Therefore, the market price of imported wheat is approximately 17 dubyas per bushel.

The shadow price of imported wheat considers distortions such as tariffs, transportation costs, and market imperfections. Adjusting the market price involves removing distortive effects like tariffs to reflect the true social opportunity cost. Therefore, the shadow price can be calculated by subtracting the tariff (2 dubyas) from the market price, resulting in a shadow price of approximately 15 dubyas per bushel (17 - 2).

Assessment of the Irrigation Project

Deciding whether the irrigation project should proceed depends on a cost-benefit analysis considering domestic production costs, market prices, and social benefits. If domestic wheat can be produced at or below the shadow price (around 15 dubyas), the project may be justified economically since it can replace costly imports and potentially improve national food security and farmer incomes. Conversely, if domestic production costs exceed this threshold, the project might not be economically viable.

Furthermore, the project's implications on employment, especially in rural areas, and its broader socio-economic impacts, such as rural development and food sovereignty, must be considered. Given the current market price of 15 dubyas per bushel for domestically produced wheat, aligning with the shadow price suggests that the project could be economically justified, especially if it can lower production costs or improve market access for farmers.

Labor Market Dynamics Under the Harris-Todaro Model

The Harris-Todaro model posits that in developing countries, rural wages are typically lower than urban wages due to migration costs, risk, and employment probabilities. The model predicts that the rural wage level stabilizes where expected urban wages, accounting for the probability of employment and unemployment, equal the rural wage. Given an urban unskilled wage of 2 dubyas per week and an urban unemployment rate of 40 percent, the expected urban wage for unskilled workers is calculated as:

Expected urban wage = (Probability of employment) (Urban wage) + (Probability of unemployment) (Unemployment benefit or zero) = 0.6 2 dubyas + 0.4 0 = 1.2 dubyas per week.

This indicates that, per the Harris-Todaro model, the rural wage is approximately equal to the expected urban wage, i.e., about 1.2 dubyas per week. This wage level reflects the opportunity cost and migration incentives faced by rural workers considering urban moves.

Market Wage Estimates for Policy and Cost-Benefit Analysis

For policy purposes, especially in conducting detailed cost-benefit analyses of urban projects, it is prudent to consider a reasonable wage range for unskilled workers. The lower-bound estimate would be close to the rural wage predicted by the Harris-Todaro model, approximately 1.2 dubyas per week, reflecting minimal benefit from urban migration considering unemployment risks. Conversely, a plausible upper-bound estimate should incorporate potential wage premiums due to urbanization or skill premiums that could arise once urban employment becomes more accessible or if migration incentives intensify. Therefore, a conservative upper-bound estimate might be around 2 dubyas per week, aligned with the urban wage for employed unskilled workers. This range allows policymakers to account for uncertainties and variation in labor market responses.

Conclusion

In conclusion, an informed decision regarding the irrigation project hinges on a nuanced understanding of the imported wheat's market and shadow prices, the potential for domestic wheat competitiveness, and the behavior of unskilled labor markets in the context of urban unemployment. The Harris-Todaro model provides valuable insights into rural-urban wage dynamics, which are critical for accurately estimating labor costs in project evaluations. When combined, these analyses suggest that the project could be justified if domestic costs align with the shadow price of wheat and if urban employment prospects are considered in wage estimates. Ultimately, integrating these economic factors ensures that development initiatives contribute meaningfully to sustainable growth and poverty alleviation in developing countries.

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