DEVELOPMENT POLICIES,URBAN UNEMPLOYMENT AND DEFORESTATION: THE ROLE OF INFRASTRUCTURE AND TAX POLICY IN A TWO-SECTOR MODEL*

ABSTRACT. We model an economy of a developing country that produces an exportable manufactured good in an urban sector and a nontradable rural good. Manufacturing faces a fixed wage, which encourages urban unemployment. Changes in cultivated area in the rural sector involve deforestation or reforestation at frontiers. Government taxes to pay for urban infrastructure that assists the manufacturing sector. Increases in urban infrastructure may relieve or exacerbate frontier deforestation but expands manufacturing employment and reduces urban unemployment. Rural transportation improvements exacerbate frontier deforestation but expand employment in the urban manufacturing sector. A larger population, ceteris paribus, widens the rural-urban wage gap and exacerbates deforestation, but may cause manufacturing employment to expand or contract.