Trade, Transport, and Territorial Development

The spatial distribution of economic activity is known to depend on trade costs, bothinternational and domestic. This paper examines the interplay between these external and internal trade costsusing a model of trade and production that is tested with the organized manufacturing sector data for India from 1989to 2009. The analysis establishes that the trade liberalization episode of the early 1990s helped spreadmanufacturing away from the primary region (districts closest to ports) to the secondary region between 1994 and2000. Such dispersion of activity away from the primary to the secondary region was driven by high internal trade coststhat insulated manufacturers from import competition. This trend reversed post-2000, a period of massive decline ininternal trade costs, attributed to the Golden Quadrilateral highway upgrades. During this period, the districts alongthe highway network in the secondary region gained market access and manufacturing activity, while those off thenetwork lost. Irrespective of the period, or the nature of trade costs, manufacturing activity in the interior region(districts farthest from ports) remained depressed, thereby emphasizing the importance of complementary conditions indriving territorial development.