Short- and Long-Run Effects of Environmental Degradation: A Structuralist Approach

The model presented in this paper distinguishes an industrial and an agricultural sector within a developing economy, which interact predominantly through the goods market. Investment determines saving through the Keynesian mechanism of effective demand. Environmental degradation results from the overexploitation of a renewable resource due to a common pool externality, which causes agricultural productivity to decline. The analysis shows that environmental degradation can reduce growth in the short run but increases growth (measured by the stock of industrial capital per capita) in the long run. Simulations reveal that the period of decline can be as long as 40 years. This suggests that the short-term effects in this model may be more relevant for policy than the long-run equilibria. Copyright Blackwell Publishing Ltd 2003.