INTERNATIONAL TRADE AND ITS IMPACT ON BIOLOGICAL DIVERSITY

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1 INTERNATIONAL TRADE AND ITS IMPACT ON BIOLOGICAL DIVERSITY RAFAT ALAM Unversty of Ottawa N.V. QUYEN Unversty of Ottawa Abstract Usng a general equlbrum model, ths aer shows how free trade can have negatve macts on the bodversty stock of the South. It also shows that even wthout trade, the unsustanable oulaton growth alone can delete bodversty resources. Free trade added wth Southern rad oulaton growth and agrcultural extensons are the man reasons of bodversty loss. In the long run, as the terms of trade decreases for the South wth ncreased bodversty loss, the South eventually s worse off both wth resect to trade and resources. Demand sde mechansms lke dscountng of bodversty deletng roducts and suly sde mechansm lke eco-frendly agrcultural technologes can have a ostve mact to decrease bodversty loss. But all these mechansms can only slow down the deleton of the bodversty stock, can not sto t fully. So, besdes these mechansms, we should robably look for other more ro-actve measures.. INTRODUCTION For the last 5 years, the world s movng towards a free trade regme. At the same tme the concern for mact of free trade on envronment s ncreasng. Most of the theoretcal works on envronmental macts of free trade deal wth the consumton and roducton sde macts of free trade towards envronmental olluton. But ths theoretcal works can be extended to the mact of free trade on resources too. Ths aer uses a general equlbrum model to show and exlan how free trade deletes the bodversty resources and how that rocess of deleton can be slowed down. Ths aer theoretcally exlans how free trade combned wth agrcultural growth; oulaton growth and unsustanable consumton atterns delete bodversty resources. Already, the deleton of bodversty resources has outaced than any other erod n the hstory of manknd. It s a grave concern for human exstence as t s an rreversble loss.

2 Another crtcal fact s that most of the world s bodversty les n the oulated and oor south. The South s rch n natural resources and overburdened to meet the demand of ther own oulaton usng these resources. Free trade uts an added ressure on the bodversty resources of the South and they over exlot t. Trade lberalzaton may brng growth and develoment for the develong countres n the short run. But the develoment may not be sustanable and may lead to rreversble degradaton of natural resources. Poulaton growth has been ndcated as another major drvng force for bodversty degradaton. The resent oulaton of the world s roughly 6 bllon and t s rojected to grow to 0 bllons. Nnety fve ercent of the net brths wll be n develong countres. Average er cata ncome s rsng % a year. At the current growth rate er cata ncome wll double by 035 and quadrule by 070. But the natural resource base of the world s fxed. These huge oulaton, consumton and roducton growths are uttng enormous ressure on the fxed resource base. For examle, between 960 and 990, 0% of the world s trocal forest was cleared; some 58% of world s coral reefs and 34% of all fsh seces are currently at rsk from human actvtes. Wth ths enormous oulaton ressure the bodversty rch south s faced wth cyclcal overty. Almost two-thrd of the world oulaton lves n the LDC's and on average 60%-80% of them are below the overty level. Poverty, nsecure and unsustanable lvelhoods, uneven ncome dstrbuton and unequal access to assets, resources and nuts are all contrbutory factors n the thrd world that accelerate natural resource degradaton 3. Trade lberalzaton and oulaton growth causes both extensfcaton and ntensfcaton of the agrculture, forestry and fsheres. Extensfcaton comes at the rce of convertng margnal lands lke hllsdes, forest and wetlands nto agrcultural land 4. Both the extensfcaton and ntensfcaton of agrculture uroot the small and subsstence farmers WTO Secal Study, 000. World Resource Insttute, UNEP and WB, Davd Pearce et.al., (99). 4 WTO Secal Study, 000.

3 who move nto margnal lands and degrade the natural resource base. The contnung emhass on exort-led agrculture mostly gnores the resource requrements of mllons of subsstence farmers whose needs are not satsfed through the mechansm of market. Poor farmers lackng fnancal means and techncal suort overexlot the natural resource base 5. To cature these macts of oulaton growth, agrcultural extenson and free trade, we buld a North-South trade model whch uses just two nuts labor and land. In our model bodversty s measured by a roxy undeveloed land n the South. We assume that only the South has bodversty resource stock and ths stock s located n the undeveloed land of the Southern countres. We are usng undeveloed land as the roxy for bodversty for several reasons. Frstly, there s defntonal ambguty and lack of consensus among academcs on the unt of measurement of bodversty resources. Secondly, usng a satal scale s better cature the ecosystem functons of bodversty. Thrdly, t s never ossble to value all the asects of bodversty lke the drect and ndrect use value, the oton value, bequest value, the exstence value, the cultural, aesthetc, relgous, srtual and socal values, nor we should try to do so. Due to ths valuaton roblem, t s better to use satal measure lke undeveloed land than the number of seces. Fourthly, f we thnk bodversty as an rreversble resource stock, then satal scale wll be a better safeguard from the conservaton ont of vew. Ffth, a major shortcomng of economc valuaton s that Economcs try to analyze everythng on the bass of margnal analyss. But the margnal value may be so small that t may not be economcally effcent to conserve the bodversty. If we rely on that economc rncle of valuaton of bodversty, we may wat to conserve tll the extreme end when the bodversty stock s very small. So, t s better to reserve bodversty n a satal scale to reserve ts enormous unknown otentals. Another concet we are usng n our aer s that references are senstve to bodversty loss. We assume that bodversty s also a source of utlty to the consumers. The concet of bodversty as a source of utlty was used by Cabo (999). Cavgla-Harrs et.al. 5 Fantu Cheru, (99). 3

4 (003) tred to ncororate demand sde olces to ensure sustanable use of natural resources. In ths aer, by ncororatng consumers senstvty towards bodversty loss we also try to establsh that demand sde olces are also romsng for bodversty conservaton. In our model, we use the concet of nternatonal trade n vertcally dfferentated roducts. In the lterature of ndustral organzaton, roduct qualty and roduct dfferentaton have been modeled extensvely. Our analyss s n the lne of the lterature by Dxt (978), Dxt and Norman (978), Flam and Helman (98), Coeland and Kotwal (995) on vertcal dfferentaton of roduct qualty. We assume that there are two tyes of agrcultural roducts one roduced n the South that clears bodversty rch land and hence s of lower qualty and the other roduced n the North that does not clear land and s assumed of hgher qualty. Under free trade ths qualty dfferentated goods are traded n the nternatonal market. But most of the models on dfferentated roducts are done n a artal equlbrum framework, whereas we follow a general equlbrum framework. We are modelng a two sector economy where one of the sectors s manufacturng and the other s agrculture. The agrcultural sector s land ntensve and the manufacturng s labor ntensve. The land ntensve agrcultural sector destroys bodversty by clearng land. Though we are consderng agrculture, but the model and ts results wll not dffer substantally f we consder any other roduct that s roduced usng land or other natural catal and where that same natural catal or land also rovdes bodversty when untouched. The South s land abundant and the North s labor abundant. Here the labor s more n the sense of sklled labor. The South has a comaratve advantage n the land ntensve agrcultural goods and the North n the sklled labor ntensve manufacturng goods. So, when the two countres oen u for free trade, the South exorts agrcultural goods and the North exorts manufacturng goods. Wth ths very smle model, we get some very mortant results. Frst, we fnd that free trade ncreases the clearng of undeveloed land n the South and n that way destroys 4

5 bodversty. Second, the rce of the Southern agrcultural good ntally rses when t moves from Autarky to free trade, but n the long run the terms of trade for the South decreases and the South eventually loses. Ths s due to the reference related dscountng of the Southern agrcultural goods by the Northern consumers as t destroys bodversty. Thrd, f the Southern consumers also become senstve towards bodversty loss, ther utlty decreases wth oenng u the economy for free trade. Fourth, f the stuaton s more realstc and there are two tyes of consumers n the North one s the green consumers who are senstve to bodversty loss and the other s the gray consumers who are nsenstve to the bodversty loss lke the Southern consumers, free trade destroys more bodversty. Ffth, as the ncome share of the green consumers ncreases n the North, the bodversty loss decreases. Sxth, even wth the absence of trade, only Southern oulaton growth can decrease the stock of bodversty. Free trade uts an added ressure on ths trend. Under free trade, oulaton ncrease of the North also ncreases bodversty loss. But the oulaton ncrease n the South affects the bodversty at a greater extent than the oulaton ncrease n the North. Lastly, f there s some technology that decreases the use of land n the Southern agrculture and f the North subsdzes that technology, then the bodversty loss decreases. Ths transfer ncreases the utlty of the Southern consumers, but decreases the utlty of the Northern consumers. The structure of the aer s that: secton descrbes the model, secton 3 exlans the mact of free trade on bodversty, secton 4 exlans the mact of trade on bodversty when there are two tyes of consumers n the North one green and the other gray, secton 5 exlans the mact of oulaton growth on bodversty, secton 6 exlans the mact of technology and subsdy on bodversty and secton 7 concludes the aer. 5

6 . THE MODEL.. Technologes Consder a world n whch there are two countres called country (the North) and country (the South), resectvely. Each of these countres roduces two goods one manufacturng good, called good, and one agrcultural good, called good, from labor and land. In what follows the countres wll be ndexed by, =,, and the goods by j, j =,. In each country, the ndustres roducng the two goods are assumed to be erfectly comettve. For each and each j, let L j Aj () Y j = mn, j aj be the technology for roducng good j n country. In (), Y j, Lj, and A j denote, resectvely, the outut of good j roduced n country, the labor nut, and the land nut, resectvely, used to roduce ths outut. Also, j and a j are two ostve constants reresentng, resectvely, the labor nut and the land nut requred to roduce one unt of the good n queston. The labor endowment and the land endowment of country are denoted by L and A, resectvely. In each country, art of the land endowment has already been develoed and s ready for use as nut n the roducton rocess; the remanng art s stll n a state of wlderness, and must be cleared before beng used as a factor of roducton. Let A be the amount of land n country, =,, that has already been cleared and s currently avalable for use as nut n the roducton rocess. We shall assume that all the land n the North has been develoed,.e., A = A. In the South, the wlderness regon, wth area A A, s rch n bologcal dversty and art or all of ths regon can be cleared and used for food roducton or conserved. We shall assume that the total amount of labor needed to clear A unts of wlderness land n the South s 6

7 () C( A ) = γ 0 + γ A + γ ( A ), where γ 0, γ, γ are ostve arameters. Thus f A unt of wlderness land s cleared, the total amount of land offered for rent n the South wll be A +. A.. Preferences In what follows, we shall assume that the land nut used n the manufacturng sector comes from the stock of develoed land. The land nut n the agrcultural sector comes from what s left of the stock of develoed land and, ossbly, from art of the wlderness land after t has been cleared. Ths assumton reflects the revalng vew that ncreasng agrcultural roducton, drven by oulaton ressure, s the man cause of the bodversty loss n the South. Consumers n the North who are senstve to ths bodversty loss wll dscount the benefts of the agrcultural goods roduced n the South when these goods are roduced by convertng wlderness land nto agrcultural land. Therefore, the utlty of the northern consumers s affected not only by the amount of these goods but also the damage nflcted on the envronment by ther roducton. To cature these deas, we shall assume that the references of a consumer n the North are reresented by the followng utlty functon: α ε A (3) u ( x, x, x) = x x + ( ) x. A A In (3), x reresents the amount of the manufacturng good consumed by a consumer n the North, whle x and α x reresents, resectvely, the amount of the agrcultural good whose orgn s from the North and the amount of the agrcultural good whose orgn s from the South that such a consumer urchases. Also, ε and α are two arameters n the range 0,). ( As can be seen from (3), the exresson [ A /( A )] A ε reresents the weght assgned to one unt of the agrcultural good roduced n the South. Note that when A = 0, there s no further bodversty loss, and the agrcultural goods roduced n the South are consdered to be of the same qualty as those roduced n the North. Ths 7

8 weght declnes lnearly as more and more new land s brought nto roducton and s equal to 0 when all the wlderness land s converted nto agrcultural land. As for consumers n the South, the references of each of them are reresented by the followng utlty functon: α ε A (4) u ( x, x, x) = x x + ( ) x, A A where x, x, and x reresent, resectvely, the consumton of the manufacturng good, the consumton of the agrcultural goods roduced n the North, and the consumton of the agrcultural goods roduced n the South. Also, ε and α are two ostve arameters strctly less than. As secfed by (4), the references of consumers from the South are allowed to be dfferent from those of consumers from the North. Frst, consumers from the North and consumers from the South mght have dfferent references about bodversty loss. We shall assume that ε < ε,.e., consumers n the South care less about bodversty loss than consumers n the North. Second, ther references between the manufacturng and agrcultural goods are also allowed to be dfferent when α α. α.3. Proft Maxmzaton Let j, =,, j =,, be the rce of good j whose orgn s n country. Because the manufacturng sector n the South s not assumed to damage the envronment, the same rce must aly to the manufacturng goods roduced n both the North and the South; that s, = =. However, f some of the wlderness area n the South s converted nto agrcultural land to grow food, we mght have. Also, let ω and r denote, resectvely, the wage rate and the rental rate of land n country, =,. For each and each j, the reresentatve frm n sector j of country solves the followng roft maxmzaton roblem: (5) max, )[ Y ω L r A ]. ( L A j j j j j j 8

9 As for the comettve frms that hre labor to convert wlderness land nto agrcultural land n the South, they solve the followng roft maxmzaton roblem: (6) max [ r A ω C( ) ], A A where, we recall, A reresents the art of the wlderness area cleared to be used as nut the roducton of the agrcultural goods..4. Utlty Maxmzaton The reresentatve consumer n the North solves the followng utlty maxmzaton roblem: (7) max α ε A subject to the followng budget constrant: x ( ) (,, ) x + x x x A A (8) x + x + x m 0, = where m reresents her ncome. The soluton of ths utlty maxmzaton roblem s smle. Frst, observe that a fracton of ncome equal to α wll be sent on the agrcultural goods and the remanng fracton to the manufacturng goods. More recsely, the demand for the manufacturng goods s gven by ( α) m (9) x =, and the demands for the agrcultural goods from the North and from the South are gven, resectvely, by αm ε A (0) x =, x = 0 f ( ) <, A A αm ε A () x = 0, x = f ( ) >, A A ε A α m ε A () x + ( ) x = f ( ) =. A A A A x α 9

10 The reresentatve consumer n the South solves the followng utlty maxmzaton roblem: (3) max ε A subject to the followng budget constrant: α ) ( x A A x,, ( ) x + x x x (4) x + x + x m 0, = where m s ths consumer s ncome. The soluton of ths utlty maxmzaton roblem s gven by ( α) m (5) x =, αm ε A (6) x =, x = 0 f ( ) <, A A α m ε A (7) x = 0, x = f ( ) >. A A ε A α m ε A (8) x + ( ) x = f ( ) =. A A A A α.5 Autarkc Equlbrum Frst we wll look nto the autarkc equlbrum. In autarky, the economes are closed and they consume what they roduce domestcally. By a rce system we mean a lst P ( ) ω r, and by an allocaton we mean a lst A=,, = ( ) j j= = ( ( j, Lj, Aj ) j ),( X, X ) ). Y. For the South, A s added n ths lst. A ar (P,A) s = = = sad to consttute equlbrum f the followng condtons are satsfed: Frst, for each and each j, the roducton lan Y, L, A ) maxmzes the roft of the ( j j j reresentatve frm n sector j of country when the rce system P revals. 0

11 Second, A s the art of the wlderness area converted to agrcultural land n the South when the rce system P revals. Thrd, X, X ) s the consumton bundle that maxmzes the utlty of the ( reresentatve consumer n country, =,, subject to the aggregate budget constrant. More recsely, X, ) s the soluton of the roblem consttuted by (7) and (8), ( X where the ncome of the reresentatve consumer n country s gven by (9) m = GDP = Y + Y For smlcty and wthout loss of generalty, we assume that ε = 0,.e., consumers from the south are totally nsenstve to bodversty loss. Then the solutons are: ( α) m (0) x =, αm () x =, ( X X, ) s the soluton of the roblem consttuted by (3) and (4), where the ncome of the reresentatve consumer n country s gven by () m = GDP = Y + Y The solutons are: ( α ) m (3) x =, α m (4) x =, Fourth, the followng market-clearng condtons must hold for the North and South: ( α )( Y + Y ) (5) Y =, ( Y + Y ) (6) Y = α, (7) L = Y + Y,

12 (8) L = Y + Y + C ), ( A (9) A = a Y + a, Y (30) A + A = a Y + a. Y In what follows, we consder an equlbrum under whch the outut of each sector n each country s ostve,.e., Y j > 0, =,, j =,. Because the technology n each sector s lnear, roft maxmzaton mles that the reresentatve frm n each sector makes zero rofts. The zero roft condtons are exressed by the followng equatons: (3) = ω + ra, =,, j =,. j j j Furthermore, n the South wlderness land wll be cleared untl the margnal cost of land clearng s equal to the rental rate of land,.e., (3) r = ω γ + γ ). ( A For the South, equatons (), (3), (4), (5), (6), (8), (30), (3), (3) consttute a system of 9 equatons n 9 unknowns: j =,, ω, r, A, Y, j,, X, X. Due j, j = to Walras law, only 8 of these equatons are ndeendent. Choosng the wage rate n the South as the numerare, we wll have 8 ndeendent equatons n 8 unknowns, whch can be solved to fnd the equlbrum of ths autarky n the South. For the North, equatons (9), (0), (), (5), (6), (7), (9), (3) consttute a system of 8 equatons n 8 unknowns: j =,, ω, r, Y, j,, X, X. Due to Walras law, j, j = only 7 of these equatons are ndeendent. Choosng the wage rate n the North as the numerare, we wll have 7 ndeendent equatons n 7 unknowns, whch can be solved to fnd the equlbrum of ths autarky n the North. Although the model can be solved algebracally, the large number of arameters makes t dffcult to nterret the results. Therefore, we have tred to solve the model numercally by assumng some reasonable values for the arameters that characterze the model. Numercal solutons are useful because they reveal a number of mortant results of the model. For smlcty and wthout loss of generalty, we assume that ε = 0,.e.,

13 consumers from the south are totally nsenstve to bodversty loss and that γ 0 = γ = 0. Also, we assume that the technology used by the agrcultural good s land ntensve and the one by the manufacturng good s labor ntensve. It costs more to roduce agrcultural good n the North.e. the North uses more er unt labor and land to roduce the agrcultural good than the South. In the same lne of argument, we assume that t costs more to roduce manufacturng good n the South. The solutons to the Autarky equlbrum gve us the followng results and conclusons. From the assumtons, we fnd that the South s more land abundant and t has technologcal advantage to roduce the land ntensve agrcultural roduct at a lower cost. On the other hand, the North s more labor abundant and t has technologcal advantage to roduce the manufacturng good at a lower cost. So, the South has a comaratve advantage to roduce the agrcultural good and the North has a comaratve advantage to roduce the manufacturng good. It s also reflected through the rces of the two goods n the North and South n Autarky. The followng table shows the results. Table Autarky Prces of the Agrcultural and Manufacturng Goods Prce of Agrcultural Good Prce of Manufacturng Good North South The above table clearly shows that under Autarky, the rce of the agrcultural good s lower n the South than the North and the rce of the manufacturng good s lower n the North than the South. It roves that the South has a comaratve advantage n agrcultural good and North n manufacturng good. So, when the two economes wll oen u for trade, South wll exort agrcultural good and North wll exort manufacturng good. 3

14 .6. General Equlbrum under Free Trade When the two economes are oened u for free trade, the world markets wll clear u. The soluton rocedure wll be smlar as before excet that few more varables and equatons wll be added n the system of general equlbrum. Now we assume that two tyes of good are roduced. One s n the South that destroys bodversty whle roducng t and the other one s n the North. These are denoted by ( X & X ) resectvely. ( X, X, X ) s the consumton bundle that maxmzes the utlty of the reresentatve consumer n country, =,, subject to the aggregate budget constrant. More recsely, ( X, X, ) s the soluton of the roblem consttuted by X (7) and (8), where the ncome of the reresentatve consumer n country s gven by (33) m = GDP = Y +, Y Here the solutons are: ( α) m (34) x =, ε A αm (35) x + ( ) x =, A A and ( X, X, ) s the soluton of the roblem consttuted by (3) and (4) where the X ncome of the reresentatve consumer n country s gven by (36) m = GDP = Y + Y The solutons are: ( α ) m (37) x =, ε A α m (38) x + ( ) x =, A A Also, the followng world market-clearng condtons must hold: ( α)( Y + Y ) ( α )( Y + Y ) (39) Y + Y = +, (40) Y = X +, X 4

15 (4) Y = X +, X Equatons (7) to (3) must also hold for ths free trade case. Here also, we consder an equlbrum under whch the outut of each sector n each country s ostve,.e., Y j > 0, =,, j =,. Also, because the manufacturng good roduced n the South s assumed not to be harmful to the envronment, ts rce must be dentcal to the rce of the manufacturng goods roduced n the North. Hence (4) =. Now n general equlbrum f the North morts the agrcultural goods roduced n the South, then we must have A (43) ( ε ) =. A A When (43) holds, () ales for the reresentatve consumer n the North, and we have ε A α( Y + Y) (44) X + ( ) X =. A A Also, when (43) holds, (7) wll aly for the reresentatve consumer n the South due to the assumton ε < ε, and we have (45) X 0, = ( Y + Y) (46) X = α. Together, equatons (33), (34), (36), (37), (39) to (4), (7) to (3), (4) to (44) and (46) consttute a system of 7 equatons n 7 unknowns:, =,, j =,, ω, =,, r, =,, A, Y, =,, j,, X, X, X,. Due to j j = X Walras law, only 6 of these equatons are ndeendent. Choosng the wage rate n the South as the numerare, we wll have 6 ndeendent equatons n 6 unknowns, whch can be solved to fnd the equlbrum of ths two-country world. In the same fashon as the autarky soluton and wth the same assumtons, we have tred to solve the model numercally by assumng some reasonable values for the arameters that characterze the model. We found some very nterestng results through these solutons. 5

16 3. IMPACT OF TRADE ON BIODIVERSITY 3.. From Autarky to Free Trade There s a domnant vew n the lterature that free trade degrades the envronment and accelerates bodversty loss. The model can be smulated to fnd out f ths vewont can be suorted. In the numercal solutons, we comute the amount of new agrcultural land cleared by labor n the South and used n food roducton. The followng table shows the result for dfferent levels of oulaton or labor force. Table Change n the Amount of Cleared Land under Autarky and Free Trade for Dfferent Szes of Poulaton Varables L =.5 L = Autarky Free Trade Autarky Free Trade A U U /L U U /L P Note: In the above table, L = The sze of the labor force n the South A = The change n agrcultural land or the amount of cleared land U = The total utlty of the Southern consumers U /L = The er cata utlty of the Southern consumers P = The rce of the agrcultural good The results from the above table clearly show that the amount of cleared land ncreases as the South moves from autarky to free trade for both the oulaton szes. It suorts the much-roclamed vew n the lterature that free trade ncreases bodversty loss. The result s qute ntutve. As the South has a comettve advantage n agrcultural goods, t wll exort these goods as the economy oens u for trade. In autarky, the South was 6

17 roducng food only to feed ts own eole, but now t wll also roduce food for exorts. Ths ncreases the ressure on land resources. To roduce more agrcultural goods, the South clears the untouched bodversty-rch land and brngs t nto agrculture. Also, as the utlty of Southern consumers s not senstve to bodversty loss, movng from autarky to free trade ncreases both total and er cata utlty n ste of the ncrease n bodversty loss. Ths ncrease n utlty rovdes an ncentve for the South to ush for more exort by clearng more land and n the rocess causng bodversty loss. Observe that the rce of the agrcultural good rses when the economy moves form autarky to free trade. For the North, both the gross and er cata utlty of the Northern consumers ncrease as t moves from autarky to free trade. It s obvous, as they can now consume more agrcultural good at a lower rce. But t s also mortant to note that both the gross and er cata utlty of the Northern consumers decrease n free trade as the oulaton n the South ncreases. Ths s due to the oulaton growth nduced ncrease n bodversty loss n the South whch n turn affects the utlty of the Northern consumers. 3.. The Imact of Postve Envronmental Senstveness of the Southern Consumers In the model above we assumed that the Southern consumers are nsenstve to the loss of bodversty.e. we assumed that ε = 0. But nstead f we assume that ε > 0, there wll be an mact on the utlty of the Southern consumers. The solutons for the varables wll be the same as before. But a ostve senstveness of the Southern consumers for the bodversty loss wll decrease the gross and er cata utlty of the Southern consumers. Ths result s very straght forward. As the Southern consumers also now care about the loss of bodversty and as free trade ncreases the loss of bodversty, the utlty of the Southern consumers decreases than the case when they had no senstvty towards bodversty loss. Ths s shown by the followng table. 7

18 Table 3 Imact of Postve Envronmental Senstvty of the Southern Consumers on ther Utlty ε U [Autarky] U [Free Trade] It s nterestng to see n the above table that, both n Autarky and free trade, the gross utlty of the Southern consumer s decreases as ther senstvty towards bodversty loss ncreases. Moreover, when the South moves from autarky to free trade and the Southern consumers have ostve senstvty towards bodversty loss (.e. ε > 0), the gross utlty of the Southern consumers decreases. It mles that free trade may decrease both the utlty of the Southern consumers and the stock of bodversty f the Southern consumers are senstve to bodversty loss. If the senstvty of the Southern consumers become hghly ostve and ε > ε, then the South may lose the comaratve advantage n agrcultural goods and start mortng t also from the North. 3.3 The Imact of Bodversty Loss on the Terms of Trade The model assumes that Northern consumers are senstve to bodversty loss and these references are reflected n ther utlty functon. The consumton of the agrcultural good roduced n the South, whch destroys bodversty, s dscounted by the northern A consumers through the dscount factor ( ε ). Also, when the Northern consumers A A urchase both the agrcultural goods roduced at home and the agrcultural good roduced n the South, then we have: ) A A A ( ε =, accordng to (43). Now the terms of trade for the South whch s gven by the rato of the rce of the exorted good over the rce of the morted good,.e., (47) P P ε A = A A 8

19 It can be seen from (47) that the terms of trade deterorates when A rses,.e., when bodversty loss ncreases the South. As more wlderness land s cleared, more bodversty wll be lost, wth the ensung declne n the weght of the Southern agrcultural goods n the utlty functon of the Northern consumers. As the good becomes less desrable, the Northern consumers are less wllng to ay a remum rce for the Southern agrcultural goods, whch causes the South s terms of trade to deterorate. 4. TWO TYPES OF CONSUMERS IN THE NORTH In ths secton, we extend the model to the case n whch there are two tyes of consumers n the North. One tye, called the green s senstve to bodversty loss and the other tye, called the gray s ndfferent to bodversty loss. Furthermore, the later s assumed to behave lke the Southern consumers who are also nsenstve to the degradaton of ther envronment. The greens are assumed to consttute a fracton θ, 0 < θ <, of the Northern oulaton. The sze of the grays, as a fracton of the total oulaton s thus equal to -θ. To concentrate on the queston of how dfferent references for bodversty affect bodversty loss, we shall assume that all the Northern consumers, excet ther dfferent references for bodversty, have the same ncome. Furthermore, the utlty functons of the two tyes of consumers n the North are gven by: (48) u ε A α green( x green,, x green,, x green,) = [ x green,] x green, + ( ) A A green x green, α green (49) u ε A α gray( x gray,, x gray,, x gray,) = [ x gray,] x gray, + ( ) A A gray x gray, The budget constrant of a green Northern consumer and the budget constrant of a gray Northern consumer are gven, resectvely, by - (50) x + x + x m 0. green, green, green, θ = (5) x + x + x ) m 0. gray, gray, gray, ( θ = The world market clearng condtons rovdes that, A ( ε ) = A A. α gray 9

20 The solutons to ths maxmzaton roblem for the green consumers wll be as the followng. The demand for the manufacturng goods wll be - ( αgreen) θm (5) x green, =, And the demand for the agrcultural goods from the North and from the South s: ε A α greenθm (53) x green, + ( ) x green, =. A A As from the world market clearng condton we get, > and the gray consumers n the North are nsenstve to bodversty loss, they wll only consume agrcultural goods exorted from the South as t s cheaer to them. So, ther utlty maxmzaton wll rovde demand for the manufacturng and agrcultural goods as the followng: ( αgray )( θ ) m (54) x gray, =, (55) x gray, αgray ( θ ) m =. Wth these new utlty maxmzaton values we can get a dfferent set of solutons for ths two consumer grou case. The results that we get through the numercal solutons for ths extenson of the model are nterestng and suort our revous clam. The followng table shows the comaratve cture of the key varables under autarky, free trade and free trade wth two tyes of Northern consumers. Table 4 Change n the Amount of Cleared Land under Autarky, Free Trade when All Northern Consumers are Green and Free Trade wth Two Tyes of Northern Consumers Varables L = Autarky Free Trade Free Trade wth Two Grous A U U /L P P / P Note: In the above table, P / P = The terms of trade for the South 0

21 The above table also clearly establshes our revous clam that bodversty loss through clearng of land ncreases f a country moves form autarky to free trade. It even ncreases further f a orton of the northern consumers s nsenstve to bodversty loss. Both the total and er cata utlty n the south ncreases from autarky to - free trade to - free trade wth two grous of northern consumers. Also the rce of good and the terms of trade for the South ncrease from free trade to free trade wth two tyes of Northern consumers. Both of the above two events work as ncentves for the Southern economes to clear more land and ncrease the exort of agrcultural goods. Next we look at the case when the ncome share of the Northern green consumers ncreases. Table 4 shows, as the ncome share of the 'green consumers' n the North becomes larger, the clearng of land and n the rocess, bodversty loss decreases further. It mles that only reference related dscountng of the northern consumers could slow down the bodversty loss n the south. As more northern consumers dscount the southern agrcultural goods, the bodversty loss slows down n the south. But ths s true only f there s no oulaton growth n the south. Table 5 Change n the Amount of Cleared Land under Free Trade wth Two Tyes of Northern Consumers and Dfferent Levels of Income Shares for the Green Consumers' (L = ) Dfferent Values of θ A IMPACT OF POPULATION GROWTH ON BIODIVERSITY We can also get mortant nsght from the above models on what s the mact of oulaton growth on bodversty. It s a oular clam that rad oulaton growth n the South s a major cause of global bodversty declne. As the oulaton grows n the

22 South, they try to feed the ncreased oulaton by clearng more land whch s bodversty rch and brngng t nto agrculture. Our results suort ths clam. Table 6 The Imact of Poulaton Increase n the South on Bodversty Varables Autarky Free Trade Free Trade wth two grous L =.5 L = L =.5 L = L =.5 L = A U U /L P P / P Table 6 shows that n all three cases - autarky, free trade and free trade wth two grous of Northern consumers - as oulaton sze ncreases, the amount of cleared land also ncreases whch n the rocess ncreases bodversty loss. Poulaton growth joned wth free trade make the stuaton worse and oulaton growth joned wth free trade wth two northern consumer grous make the stuaton worst. Also under both the cases of free trade, the total utlty of the South and ts terms of trade mrove wth oulaton ncrease. These two factors work as an ncentve to ncrease the exort of agrcultural goods and causes more land clearng. But at the same tme the er cata utlty declnes wth oulaton ncrease n the South and t should also be taken nto account by the South. So, oulaton ncrease may brng growth n total utlty of Southern consumers and mrove the trade scenaro for the South, but t s accomaned wth er cata utlty declne and bodversty losses. The later two trends may deterorate the natonal welfare n the long run. Not only the oulaton ncrease n the South, but the oulaton ncrease n the North can also create ressure on bodversty and ncrease ts loss. Though the Northern consumers are senstve to bodversty loss, yet wth ncreased oulaton, ther demand

23 for agrcultural good wll ncrease and they wll mort more of the Southern agrcultural good. Ths wll hel to exand the agrcultural sector n the South and t wll clear more untouched land whch wll eventually ncrease bodversty loss. Table 7 The Imact of Poulaton Increase n the North on Bodversty under Free Trade Varables Free Trade L = 3 L = 3.5 L = 4 A U U /L P / P It s evdent from the results resented n table 7. Also note that wth oulaton ncrease n the North, the gross and er cata utlty of the Southern consumers and the terms of trade of the South ncrease too. Ths wll agan work as an ncentve for further exanson of the Southern agrcultural sector and ncrease bodversty loss. Bodversty loss ncreases most f the oulaton n both the North and South ncreases. It s evdent from table 8. If we comare columns to 3, only the Northern oulaton ncreases and the amount of cleared land ncrease from.6486 to.93. Between columns and 4, only the Southern oulaton ncreases and the amount of cleared land ncreases from.6486 to So, more land s cleared for an ncrease n oulaton n the South than n the North. Fnally f we comare columns and 5, both the Southern and Northern oulaton ncreases and the amount of cleared land are hghest n ths case. It mles that oulaton ncrease s one of the man reasons for bodversty loss. Also under free trade, bodversty s destroyed more n the case of oulaton ncrease n the South than oulaton ncrease n the North. 3

24 Table 8 The Imact of Poulaton Increase on Bodversty under Free Trade when Poulaton Increases both n the North and South Varables L = 3 L = 3.5 L = 3 L = 3.5 L = L = L =.5 L =.5 A U U /L P / P 6. IMPACT OF SUBSIDY We make a fnal extenson of the model, to fnd the mact of subsdy on bodversty and on the utltes of the Northern and the Southern consumers. The model wll be same as the free trade case wth mnor extensons. We assume that the North rovdes a lumsum subsdy of the amount T to the South. Ths subsdy T s subtracted from the Northern GDP and added to the Southern GDP. We further assume that ths subsdy s used by the South to mrove technologcal effcency n the agrcultural sector, so that less amount of er unt land s used to roduce the agrcultural good. In ths way t decreases land clearng n the South and decreases bodversty loss. It s reflected through the followng equaton that s added to the model. (56) a = δ σ. 0 where δ & σ are two arameters and 0 = T /ω.e. t s the amount of labor used to nvent new technology that uses lower amount of land n the agrcultural sector. Usng ths extra assumton f we solve the model we fnd nterestng results. The results are summarzed n table 9. 4

25 Table 9 The Imact of Subsdy on the Cleared Land and the Utlty of the Northern and Southern Consumers Varables Amount of Subsdy T = 0.05 T = 0.08 T = 0. A U U The results above clearly show that under free trade, f a subsdy s rovded from the North to the South that mroves the land use effcency n the South, decreases the amount of land cleared n the South and n that way decreases the bodversty loss. It also ncreases the gross utlty of the Southern consumers. But the Northern consumer s gross utlty decreases slowly. 8. POLICY IMPLICATIONS AND CONCLUSION The aer exlans the current realty faced n the bodversty rch develong countres. Ths aer has shown theoretcally that the concern of ant-globalzaton actvsts that free trade deletes world s bodversty stock s true. On the other hand, t has shown that the concern of envronmental and resource economsts that even wthout trade, the unsustanable oulaton growth alone can delete bodversty resources s also true. Free trade added wth Southern rad oulaton growth and agrcultural extensons are the man reasons of bodversty loss. It s also true that the develong countres are short sghted. In the long run, as the terms of trade decreases for the South wth ncreased bodversty loss, the South eventually s worse off both wth resect to trade and resources. But the realty s that the develong countres do not have any other alternatve. They have to delete ther rch bodversty resource stock to feed the current oulaton though t may hurt the future generaton of these countres n artcular and the world at large. 5

26 There are very mortant olcy mlcatons of the results found n ths aer. Ths aer shows that demand sde mechansms lke dscountng of bodversty deletng roducts and suly sde mechansm lke eco-frendly agrcultural technologes can have a ostve mact to decrease bodversty loss. Above all, oulaton growth has to be controlled so that t can be sustanable wth resect to the bodversty stock. Poulaton should not exceed the ecologcal lmt of the earth. All these mechansms can only slow down the deleton of the bodversty stock, but can not sto t fully. So, besdes these mechansms, we should robably look for more roactve measures. We have to look for alternatve measures lke bo-rosectng or ecotoursm to create economc values from the conservaton efforts of the bodversty stock. Also the bodversty rch develong countres have to dversfy wth resect to domestc roducton and trade. They need to decrease ther deendence on exort of natural resource ntensve roducts and dversfy ther exort towards manufacturng roducts. Above all, gven the current realty of the develong countres, only green actvsm lke avodng consumton of bodversty deletng goods or ant-globalzaton actvsm lke blockng free trades or free market actvsm lke leavng everythng to the hand of market wll not work n the long run. If as a ctzen of the globe, we value bodversty as a global ublc good that has to be conserved, we have to act as global ctzens too. As roud natonal ctzens, we are already sendng our tax dollars to reserve the natonal hertages. Smlarly, we have to send our tax dollars for conservaton of the global hertages lke bodversty stock too. Lke at the natonal level, the rch eole ay more tax dollars and donatons for the conservaton effort, so should be the case at the world level. The rch North should ay more to conserve the world s bodversty stock. The efforts lke the global envronmental fund should be the rncle mechansm to conserve bodversty stock of the world. Also as the benefts of the conservaton of natonal hertages are enjoyed equally by all the ctzens of a country at resent and n future, sometmes wth a smaller fee, the benefts of the conservaton of the world s bodversty stock should be enjoyed equally by all the ctzens of the world n resent and n future. 6

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