Abstract
AbstractThis paper investigates how poverty reduction and natural resource preservation can be simultaneously achieved in a small open dual economy with urban wage rigidity, open access rural resources, and rural-urban migration. An increase in the export tax rate on the rural resource good increases urban unemployment in both the short run and the long run with resource dynamics. Given the institutional failures, the first-best policy is an urban wage subsidy combined with either a rural wage subsidy at alowerrate or, if the urban output price is sufficiently high, a ruraltax. When the institutional failures can be resolved endogenously, an increase in the export tax on the resource good can induce rural institutional change away from open access. However, tariff protection of urban manufacturing hinders such a rural institutional change.
Highlights
Poverty reduction and environmental preservation are fundamental challenges for many developing economies
This paper considers whether rural resource preservation could be compatible with urban poverty reduction, in general, in a dual economy
We investigate whether and how rural resource preservation and a reduction in urban unemployment could be compatible in a small open dual economy with an institutionally-fixed high urban wage and open access rural resources
Summary
Poverty reduction and environmental preservation are fundamental challenges for many developing economies.
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