Environmental pollution as engine of industrialization

The article analyzes the dynamics of a small open economy with two sectors (a farming sector and an industrial one), heterogeneous agents (workers and entrepreneurs) and free inter-sectoral labor mobility. Labor productivity in the first sector is negatively affected by environmental pollution generated by both sectors, whereas in the second sector is positively affected by physical capital accumulated by entrepreneurs. Through a global analysis of the non-linear three-dimensional dynamic system of the model, we derive the conditions under which the accumulation of pollution is such that the expansion of the industrial sector generates a decrease in workers' revenues.