Globalization, North-South Industrial Location and Environmental Competition

Relying on a North-South model of economic geography, our paper attempts to discuss the management of global pollution issues such as greenhouse gas emissions. As firms are increasingly mobile, they become sensitive to differences in environmental standards across countries and subject the regulatory power of a country to the rule of competition. In this context, we first evaluate the consequences of a passive ecological dumping from the South. We find that the Northern region undergoes a phenomenon of industrial relocation with a fall in its real income. In addition, the outcomes on global pollution abatement appear ambiguous. Globalization of the world economy, by changing the location decisions of firms, can make global pollution even worse. This calls for international cooperation between the North and the South. We then turn to investigate the outcomes of a harmonization of environmental policies. Although better from an ecological point of view, this second scenario harms the South both in terms of industrial relocation and real income.