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Trade Theory, Analytical Models and Development

Essays in Honour of Peter Lloyd, Volume I

Edited by Sisira Jayasuriya

Trade Theory, Analytical Models and Development, comprises 11 essays offering new contributions on the following topics: trade and wages; factor endowments, factor mobility and political economy of trade; optimality of tariffs; measurement of welfare; customs union theory; endogenous mergers and tariffs; intra-industry trade; state trading enterprises and trade liberalisation; general equilibrium effects of e-Commerce, and trade; economic growth with production and consumption externalities; and environmental pollution and resource degradation.
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Chapter 11: Trade liberalization, resource degradation and industrial pollution in developing countries

Ian Coxhead and Sisira Jayasuriya


Ian Coxhead and Sisira Jayasuriya1 1. INTRODUCTION Economic growth and trade are generally said to have three types of environmental effects: scale effects, associated with increases in the overall size of the economy; technique effects due to changes in production technology; and composition effects, capturing induced changes in the structure of production and factor demand (World Bank, 1992; Grossman and Krueger, 1993). Of these, the first is unambiguously negative (in the sense of creating more pollution or increasing demands on depletable natural resource stocks), and the second is most likely to be positive since new technologies are by and large cleaner than old. Aggregate empirical studies of the nonlinear relationship between income and pollution or demands on depletable resource stocks (the search for an ‘environmental Kuznets curve (EKC)’ as in, for example, Antweiler et al., 2001) are driven by the changing relative importance of these two. But for many purposes, the greater interest is in the sign of the composition effect, about which there are no general prior hypotheses. Whereas scale and technique effects determine the shape of the EKC, changes in the structure of production – the sources of composition effects – displace it vertically, and as such may have more immediate medium-run environmental impacts. The composition effect is of particular importance in studies of trade policy reform since the primary effects of such reform are felt through changes in relative prices, which in turn stimulate the reallocation of resources among...

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