research

This paper investigates how openness to trade reshapes our understanding of the Food Problem—the persistent specialisation of low-income countries (LICs) in low labour-productivity agriculture. In closed-economy settings, these patterns are attributed to low agricultural TFP and to demand-side forces consistent with Engel’s Law, which sustain high agricultural prices and a high labour-to-land ratio. The Food Problem is thus expected to ease with higher agricultural TFP or with trade openness through cheaper agricultural imports. I revisit these implications using a quantitative model of structural transformation and international trade. On the supply side, I infer relative TFPs from trade flows and a production technology that incorporates land. In this setting, the coexistence of low labour productivity and a high labour–land ratio in LICs implies relatively high agricultural TFP. On the demand side, I estimate income and substitution elasticities in an open economy. I perform counterfactual simulations to assess whether trade openness or higher agricultural TFP lowers agriculture’s labour share in LICs, as predicted in the closed-economy literature. The results show the opposite: trade openness reinforces LICs’ specialisation in agriculture while higher agricultural TFP expands the sector by increasing its competitiveness.

We study how monetary policy and exchange rate regimes shape the adjustment to trade shocks in small open economies (SOEs). The analysis highlights different implications for SOEs under different currency regimes, sovereign risk, and trade exposure. We find evidence of incomplete labour market adjustment, with rising unemployment after negative external demand shocks in SOEs under both pegged and floating regimes, with stronger effects in countries facing high-risk premia. We build a dynamic multi-sector trade model with downward nominal wage rigidity (DNWR), intertemporal consumption–savings decisions, and incomplete markets. The model includes two SOE regimes: floating, with endogenous monetary policy, or pegged. Under a peg, a negative external demand shock generates unemployment in the presence of DNWR. Under a float, unemployment can also arise if the monetary policy response limits the nominal depreciation’s ability to restore full employment. Furthermore, a spike in sovereign risk premia can amplify this effect.