Description

Chile has supported its agriculture with the use of price bands on selected commodities namely wheat, vegetable oils and fats, and sugar. In this paper we consider agricultural reform and how urban unemployment, and rural-urban migration, may alter the expected welfare effects of agricultural reform. We utilize a new CGE model of the Chilean economy based on the Harris-Todaro framework, incorporating imperfect labor mobility, and consider both price band removal and more extensive agricultural reform that eliminates all tariffs on agricultural and food commodities in Chile. Results show that if trade reforms damage the rural economy in Chile, potential gains in welfare from lower agricultural prices are offset by increased urban unemployment and lower rural wages resulting in net welfare loss from trade reform.