Regional Trade Openness Index and Income Disparity - A New Methodology and the Indian Experiment

Abstract

This study tries to look at how 'open' Indian states are with respect to international trade and then try to characterise the relationship between regional disparity and 'openness'. The major purpose of this work is to develop an openness index at the regional or state level. It is well recognised that international trade data are not easily available at the sub-national level. This is particularly a problem for countries that are large in size and have diverse heterogeneous regions. The methodology developed here is not only applicable to the Indian case but also for many such countries where state level trade data are not available. We try to devise a proxy, which allows us to rank states over time in terms of their exposure to trade. This index changes over time on a year-to-year basis and therefore is amenable to time series analytics. It is observed that the relative income of a region is closely related to the extent of openness and that such relationship gets stronger over time. We have evidence that openness is strongly correlated with rising income disparity across regions.

Keywords: Trade, Regional Openness Index, Income disparity

JEL Classification: F14, R12