1.North ― South Trade and the Sustainability of Ec

Chapter1NORTH-SOUTHTRADEANDTHESUSTAINABILITYOFECONOMICGROWTH:AMODELWITHENVIRONMENTALCONSTRAINTSFranciscoCaboGuiomarMartin-HerriinMariaPilarMartinez-GarciaAbstractWepresentamodeloftradebetweentwodifferentregions,NorthandSouth.TheSouthspecializesinanaturalresourceintensivegoodwhichissoldtoandusedasaninputintheNorth.AssuminganenvironmentalR&DsectorintheNorth,whichincreasestheefficiencyofthetradedgood,theNorth-Southtradeandthenaturalresourcemanagementaremodeledinadynamicway.TheexistenceofasustainedgrowthintheNorth,whichallowsapermanentgrowthofconsumptionintheSouthwithoutexhaustingnaturalresource,isproved.Transitionaldynamicsisalsostudied.1.IntroductionThroughtheages,countrieshavereachedbeyondtheirownborderstoobtainrawandessentialmaterials.Today'ssurercommunicationsandincreasedtradehavegreatlyenlargedthisprocessandendoweditwithfar-reachingecologicalimplications.Thus,thepursuitofsustainabilityneedstotakeinternationaleconomicrelationsintoaccount.Moreover,theconservationofecosystemsonwhichtheglobaleconomydependsmustbeguaranteed.Internationaleconomicexchangesmustalsobemadebeneficialforallcountriesinvolved,ensuringtheimprovementoflivingconditionsinpoorercountries.Today,formanydevelopingcoun-tries,neitheroftheseconditionsismet.Inthispaperwepresentamodeloftradebetweentwodifferentre-gions,NorthandSouth,andwestudIInourmodel,internationaltrade2ENERGYANDENVIRONMENTisthechannelthroughwhichpartoftheeconomicgrowthintheNorthistransmittedtotheSouth.Weshallprovethatincomecangrowcon-stantlyinbothcountrieswhileatthesametimeguaranteeingenviron-mentalconservation.Thesustainabilityofeconomicgrowthhasbeenasubjectofgreatattentioninrecentyears.Intheliteratureonendogenousgrowthsev-eralauthorsincludeenvironmentalvariableswithintheirmodelsinordertostudyeconomicpoliciesthatguaranteesustainablegrowth(GradusandSmulders,1993;HuangandCai,1994;LigthartandvandelPloeg,1994;Verdier,1.995;BovenbergandSmulders,1995,1996;Musu,1996;BovenbergandMooij,1997,amongothers).However,allthesemodelsfocusonanisolatedcountryanddonotconsidertraderelationswithothercountries.Infact,mostofthepapersonendogenousgrowthre-gardingenvironmentalproblemsdonotconsidermorethanoneregion.Eventhosethatconsiderseveralcountriesassumethatallcountriesareidentical,see,forexample,Hettich(2000).Unlikethepreviousworks,andfollowingCabo,EscuderoandMartin-HerrGn(2002)wepresentamodelwithtwodifferentregions,NorthandSouth,thattradewitheachother.WithinthisframeworkofNorth-Southtradeandfollowingthestaticapproachlaiddown,forexample,byChichilnisky(1994);Panayotou(1994);CopelandandTaylor(1994,1995),andCabo(1999),weassumethattheSouthspecializesinanat-uralresourceintensivegoodwhichisusedasaproductiveinputintheNorth.TheNorth-Southtradeandthemanagementoftheenviron-mentismodeledinadynamicwaysothatsustainableeconomicgrowthcanbeanalyzed.Auniquerenewableresourceisharvestedtoproducearesourceintensivegood.TheNorthbuysthisgoodintheinternationalmarketandusesitasaninputtoproducefinaloutput.Hereinafter,wewillrefertothisintermediategood,tradedfromSouthtoNorth,astheresource-basedinput.Moreecologicalproductiontechnologiesmustbedevelopedtosustainthecurrentstandardoflivingwithoutdepletingnaturalresources.Oneofthemainachievementsoftheendogenousgrowththeoryistoexplaintechnologicalchangeendogenously.Romer(1990)incorporatesR&Dac-tivitiesinanendogenousgrowthmodel.GrossmanandHelpman(1991)(Chapters3and4),AghionandHowitt(1992)andBarroandSala-i-Martin(1995)(Chapters6,7and8)arealsoclassicalreferences.I11thesemodelstechnologicalprogressisattainedbydevotingresourcestoresearchactivities.Technologicalknowledgeeitheraugmentslaborproductivityinthefinaloutputproductionfunction,expandsproductvarietyorimprovesproductquality.Thus,ifhumaninventivenesshasnolimittheeconomywillgrowindefinitely.Inourpaper,technolog-1North-SouthTradeandtheSustainabilityofEconomicGrowth3icalknowledgeenhancestheproductivityoftheresource-basedinput.Intheliteratureonenvironmentandeconomicgrowth,BovenbergandSmulders(1995,1996)andMusu(1996)consideratechnologicalknowl-edgeofthiskind.AlthoughMusu(1996)assumesthatthetechnologicalprogressisaby-productofcapitalaccumulation,we,followingBoven-bergandSmulders(1995,1996),incorporateanenvironmentalR&Dsectorwhichisdevotedtoincreasingtheefficiencyoftheresource-basedinputintheNorth'soutputproduction.Theengineofgrowthinthispaperisnotbaseduniquelyontechnolog-icalprogress.Asecondsourceofgrowthstemsfromalearning-by-doingeffectwhichindefinitelyraisestheproductivityofthelaborforce.WefollowtheideaofRomer(1986)toeliminatediminishingreturnstothefactors,regardingknowledgeasaby-productofcapitalaccumulation.Afirmthatincreasesitsphysicalcapitallearnsatthesametimehowtoproducemoreefficiently.Additionally,weassumethateachfirm'sstockofknowledgeisapublicgoodwhichspillsoverinstantlyacrossallotherfirmsandatnocost.Thisleadslaborproductivitytobedependentnotoneachfirm'scapitalstockbutonthewholeeconomy'sone.ThesetwoeffectsaretakenintoaccountinourpapertoexplainhowlaboraffectstheNorth'sproductionfunction.ThemodelisstatedasadifferentialgamebetweenNorthand