Structural Transformation and Spillovers from Industrial Areas

Abstract

Industrial areas (IAs) are sites established by the government for the promotion of industrial production, in which land-use laws are relaxed to enable non-agricultural economic activity. IAs also provide necessary infrastructure and basic amenities, but do not give subsidies, tax incentives, or other pecuniary benefits. To better understand the potential of such low-powered interventions by the state to promote economic development, we study the effects of newly created IAs in the Indian state of Karnataka on a variety of economic outcomes between the years 1990-2013. We quantify the effect of Industrial Areas on economic activity in the locations where they are established, as well as the spillovers to villages further away. Using a detailed dataset on the geographic locations and date of establishment of these IAs, together with village-level demographic and economic census data spanning more than 20 years, we show that the IAs led to a large increase in the number of firms, and employment. Furthermore, IAs lead to a classic “structural of the economy, with workers leaving agricultural for non-agricultural employment, and households previously engaged in subsistence agriculture shifting to commercial farming. The transformation occurs at distances up to 4-5 kilometers from the IA, and is accompanied by an increase in night-time luminosity and asset accumulation.