Effects of international trade and corruption on tropical deforestation

The first essay analyzes the impact of two positive international trade policies on tropical deforestation in Indonesia: (1) a special incentives treatment under the current European Union (EU) Generalized System of Preferences (GSP) for countries that meet the International Tropical Timber Organization\u27s (ITTO) criteria for sustainable forest management and (2) a proposed elimination of the ban on log exports. The introduction of a segmented labor market, where logging takes place in remote areas by indigenous forest people who otherwise live from subsistence agriculture without entering the organized labor market, reverses results of standard trade models: positive trade measures can reduce environmental damages associated with tropical deforestation. Both trade policies discussed in the paper result in a reduction in subsistence logging and an increase in log prices, which lead to fewer forest fires and less waste from logging operations. ^ The second essay examines the enforcement of sustainable forest management under the recent proposal by the EU. We present a multiple-stage dynamic game of incomplete information between the EU and tropical forest countries, which can be of two types: environmentally friendly and environmentally unfriendly. We show that full participation is not always a necessary condition for the optimal outcome. In fact, only if the disutility from tropical deforestation is relatively high and the share of environmentally friendly countries is sufficiently low, will the EU offer a tariff reduction and sustainable forest management criteria that will be accepted by all tropical countries. ^ The third essay of the dissertation investigates the effects of corruption on tropical deforestation. We argue that the relationship between corruption and environmental quality is far from being clearly understood. Using the forest sector as an example, we demonstrate how the effects of corruption on tropical deforestation depend on the nature of the corruption, which hinges on the ability of the private sector to influence government decisions. We derive two propositions, which we test in the empirical part of this paper using a cross-country analysis. Our findings suggest that greater corruption leads to more tropical deforestation in countries where the forest sector has a capacity to influence government decisions; and it leads to less deforestation in countries with a relatively weak forest sector.