Urban unemployment, environmental preservation and trade policies in a small open economy with open access renewable resources

Abstract

This study presents a two-sector dynamic analytical model that examines the impact of trade policies on urban poverty reduction and resource conservation, given that institutionally fixed high urban wages are assumed in the context of the Harris-Todaro model. Rural resource-good and urban manufacturing activities generate simultaneous environmental pressures that can detrimentally impact environmental preservation in a small, open economy. Moreover, this study assumes that the polluting manufacturing sector is the primary cause of environmental degradation and represents a relatively more industrialized developing country. The study finds that raising the import tax on rural resource goods can reduce urban unemployment but worsen environmental quality under dynamic resource conditions. Given institutional distortions, the most efficient policy is to implement a rural income subsidy combined with an urban wage subsidy at a lower rate; alternatively, if the income inequality between regions is sufficiently high, an income tax on urban manufactured goods could be considered. Finally, when considering the endogenous resolution of institutional distortions, an increase in the import tax on rural resource goods can resolve rural institutional distortions, shifting from poorly defined resource management to a perfect private management system. In contrast, implementing an export tariff policy on urban manufactured goods reduces the incentive for rural institutional reform while addressing urban institutional failure.