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 5: Applied General Equilibrium Models and Methods

Ian Coxhead and Sisira Jayasuriya

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

Extract

5.1 INTRODUCTION The magnitudes of natural resource and environmental degradation values in relation to developing economy GDP have frequently been estimated to be quite large (Chapter 1). These relative magnitudes are due to the importance of the sectors using environmental and natural resource (ENR) assets intensively, particularly agriculture, in relation to the total size of the economy. We have argued that these magnitudes, along with the factor and product market links that connect resource sectors to the overall economy, merit a general equilibrium approach to the measurement of the economic implications of environmental change. In general equilibrium, all prices are assumed to vary endogenously; in general equilibrium, given competitive markets, prices vary until all markets clear. Thus ‘general equilibrium takes account of all of the interactions among markets, as well as the functioning of the individual markets’ (Varian 1992: 313). In practice, computational and information constraints limit the ‘generality’ of the general equilibrium approach. Economists concerned to capture general equilibrium processes face a trade-off between analytical clarity, which requires very highly simplified models, and meaningful numerical results, which require large, very detailed computational models. In Chapters 2–4 we presented the former type of model, to identify and understand fundamental intersectoral and interregional linkages and the mechanisms through which economic ‘shocks’ are transmitted. In the following chapters we present three examples of the latter approach: relatively large, numerical applied general equilibrium (AGE) models, from which we can obtain simulation results that stand up to empirical scrutiny and provide detailed...

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