International Trade

American Economic Journal: Applied Economics 2 (October 2010): 1–41

http://www.aeaweb.org/articles.php?doi=10.1257/app.2.4.1

Factor Immobility and Regional Impacts of Trade

Liberalization: Evidence on Poverty from India†

By Petia Topalova*

This paper uses the 1991 Indian trade liberalization to measure the

impact of trade liberalization on poverty, and to examine the mechanisms underpinning this impact. Variation in sectoral composition

across districts and liberalization intensity across production sectors

allows a difference-in-difference approach. Rural districts, in which

production sectors more exposed to liberalization were concentrated, experienced slower decline in poverty and lower consumption

growth. The impact of liberalization was most pronounced among

the least geographically mobile at the bottom of the income distribution, and in Indian states where inflexible labor laws impeded factor

reallocation across sectors. (JEL F13, I32, O15, O18, O19, O24)

T

he second half of the twentieth century witnessed one of the greatest increases

in trade openness in the history of the world. Significant declines in tariffs and

transportation costs have caused international trade to affect the economy of nearly

every country. Yet, while theory and cross-country studies suggest that trade liberalization increases overall welfare, credible evidence on how trade liberalization

affects the distribution of income within a country is relatively scant, providing

inconsistent results (see Pinelopi Koujianou Goldberg and Nina Pavcnik (2007a)

for a literature review). Even less is known about the mechanisms through which

trade effects work. These questions are particularly important in light of recent criticism of globalization from both developed and developing countries, and particularly relevant for developing countries with large vulnerable populations, inflexible

industrial structure, and inadequate social safety nets, where the long-run benefits...