Economic growth, trade and environmental quality in a two-region world economy

This paper examines the linkages between international trade, environmental degradation, and economic growth, in a dynamic North-South trade game. The North produces manufactured goods by employing capital, labor, and a natural resource that it imports from the South, using a neoclassical production function subject to an endogenously improving technology. The South extracts the resource using raw labor, in the process generating local pollution. Genetic algorithms (GA) are used to search for optimal policies in the presence of local pollution and technology spillovers from North to South. In the GA search for optimal regional policies, both noncooperative and cooperative modes of trade are considered. Noncooperative trade results in inefficiencies stemming from externalities. Though cooperative trade policies are efficient, they lack credibility. A joint maximization of the global welfare shows that transfer of technology is a viable route to improve world welfare.