Economic Diversification and the Environment in a Small Economy
RANSFORD W. PALMER
Economic diversification is the recommended path for those developing economies whose dependence on one or two traditional export commodities makes them vulnerable to fluctuations in international commodity prices. This usually means that these countries should develop comparative advantage in the production of nontraditional exports.
Often, developing countries try to attract new industries with their abundance of cheap labor and an array of tax incentives. For some firms, however, cheap labor and tax incentives may be necessary but not sufficient inducements to relocate. The cost of pollution control may be a deciding factor. Instead of making costly investment in pollution control in its home country, a firm may move offshore where the government, anxious to attract foreign investment, may impose no such requirement.
The purpose of this chapter is to develop an analytical framework that will guide policy makers in a small Caribbean-type economy in their choice of new industries that will expand foreign exchange earnings with a minimum amount of environmental cost and a maximum amount of employment.
We begin with a hypothetical economy in which tourism is the only industry. Because of rising import bills and rapid population growth, the government has taken the decision to diversify its economy to increase foreign exchange earnings and to create jobs.
We argue that the tourist industry is completely dependent upon the natural environment of this country and that any damage to this environment by any new industry will have a negative impact on the