The Open Economy and the Environment

The Open Economy and the Environment

Development, Trade and Resources in Asia

Ian Coxhead and Sisira Jayasuriya

The Open Economy and the Environment asks what globalization means for environmental quality and the use of natural resources in developing economies. The authors develop theoretical models that trace the effects of trade and trade liberalization on sectoral resource allocation, factor returns, income and welfare, as well as incentives to clear forest and degrade agricultural land. The models reflect important developing economy features including spatial distinctions between uplands and lowlands, open-access forest resources and the special features of domestic food markets. The authors also analyze representative economy submodels, explore empirical cases based on applied general equilibrium models of Asian economies, and examine welfare and environmental implications of migration, trade liberalization and development policy.

Chapter 2: Analytical Approaches to the Trade–Environment Relationship

Ian Coxhead and Sisira Jayasuriya

Subjects: development studies, development economics, economics and finance, development economics, environmental economics, environment, environmental economics


2.1 INTRODUCTION An economy making the move from autarky to international trade faces new prices based on valuations established in the world market rather than in the domestic economy alone. Engaging in trade thus results, in the typical case, in alterations in the allocation of resources to production and in the pattern of consumption. Trade also raises real income, and this may in turn induce further changes in the structure of production or consumption. Other changes, in policies, endowments, or technologies, may likewise contribute to the transformation of economic structure. Nearly all production processes – and many forms of consumption – generate environmental damage, whether this takes the form of emissions into air and water or the depletion or degradation of natural resources. Thus virtually any pattern of economic change generated by a shift from autarky to trade – or, more generally, by some change in a country’s exposure to international markets – may be expected to have environmental consequences. By their nature, many forms of environmental damage cannot easily be measured, let alone assigned monetary valuations; conventional measures of national income certainly do a very poor job of capturing them (WRI 1989). Therefore, a complete assessment of the welfare effects of trade must strive to include the consequences of its impacts on the environment along with its effects on utility derived from the consumption of marketed goods and services. In practice, however, measurement and valuation problems make it difficult to aggregate the utility derived from consumption of marketed goods together...

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