Optimal Infrastructure after Trade Reform in India

Priyam Verma
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Priyam Verma: AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique

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Abstract: Lower tariffs typically raise productivity, production, and trade, increasing the benefits from building infrastructure. Infrastructure spending by governments should therefore increase after countries open up to trade. I test this hypothesis empirically using a trade reform in India and find that a 1 percentage point reduction in tariffs in- creased states' infrastructure spending by 0.5% between 1991 and 2001. To understand the mechanisms behind my empirical findings, I develop and calibrate a multi-region model of international trade, private capital accumulation, and infrastructure spending, in which each government chooses such spending to maximize their state's welfare. I find if governments choose infrastructure following the reform optimally, infrastructure would have increased by 60% on average. The actual increase, based on my empirical findings, was about 29%. Counterfactual exercises show that raising aggregate infras- tructure towards its optimal following the trade reform will result in state GDP to increase by 7% points on average.

Keywords: Infrastructures; Tariffs; Trade (search for similar items in EconPapers)
Date: 2024-01
Note: View the original document on HAL open archive server: https://hal.science/hal-04676412v1
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Published in Journal of Development Economics, 2024, 166, pp.103208. ⟨10.1016/j.jdeveco.2023.103208⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04676412

DOI: 10.1016/j.jdeveco.2023.103208

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