| Even though the importance of globalization is widely acknowledged, the effect of openness of economies on unemployment and the environment is not clearly established yet. Standard economic theory predicts that employment as a whole is generally unaffected by trade. On the other hand, trade is also popularly believed to be the major driving force behind rising unemployment in various countries. The effect of globalization on the environment is even more controversial. The anti-trade point of view is based upon the idea that globalization promotes specialization of poor countries in the polluting industries, thus decreasing welfare. On the other hand, increased economic activity brought by trade could raise living standards, which would promote stricter environmental regulation.; In the first two chapters of my dissertation, I use a model of economic geography by Krugman and Venables (1995) to investigate the validity of both opinions. Unemployment is introduced by assuming efficiency wage behavior in manufacturing sector. Environmental concerns are incorporated by assuming pollution by the manufacturing sector, and addition of a government, which cares about environment, as well as real incomes of the population. I find that as transport costs fall, the manufacturing sector starts to concentrate in one economy, forming a “core-periphery” pattern. Increased profitability of firms in the “core” country allows them to relax no-shirking constraint and increase employment. On the other hand, concentration of the manufacturing sector in the “core” economy increases pollution and forces local government to hike pollution taxes and engage in higher cleanup efforts.; As a result, the “core” country gets lower unemployment and a cleaner environment. The opposite happens in the “periphery”. However, with further reduction of transport costs, higher wages and taxes in the “core” economy make it harder for firms to enjoy the benefits of concentration, so symmetric allocation of the manufacturing sector eventually re-emerges.; In the third chapter, I perform an empirical test of the Krugman and Venables (1995) model. I find evidence that, as transport costs fall, industries tend to concentrate. In addition to that, at a sufficiently low transport cost, further cost decreases tend to cause a decrease in concentration. |
