Testing Spillover Effects of Economic Growth: The Case of India's Northeastern Region

By Debnath, Avijit; Roy, Niranjan | IUP Journal of Applied Economics, July 2012 | Go to article overview

Testing Spillover Effects of Economic Growth: The Case of India's Northeastern Region


Debnath, Avijit, Roy, Niranjan, IUP Journal of Applied Economics


The trickle down of growth from one region to another or spillover effect is implicit in the very idea of 'balanced regional development' which has always been one of the declared objectives of national policy in India. This paper is an attempt to analyze the performance of northeastern states in India in terms of their Net State Domestic Product (NSDP) growth and also to examine the growth spillover effects among the same for the period 1981-2007. The results of the study reveal that there is a considerable variation in the performance of individual states in terms of NSDP growth, with most states growing faster than the regional average. Also, a mixture of trickling down and polarization effects of economic growth is found within the northeastern region. Neither of the two opposite hypotheses holds in general. The present study contributes to the literature by exploring the dynamics of growth linkages among the northeastern states in India.

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Introduction

Balanced regional development has always been one of the declared objectives of national policy in India. But despite this, the pace of economic development of different states and regions in the country has not been uniform over the years. When we speak about 'balanced development', the trickle down of growth from one region to another or spillover effect is implicit (Bhide et al., 2005). The literature is replete with colorful terms to hypothesize spillover relationships among regions: spread-backwash, generative-parasitic, and trickling down-polarization (Gaile, 1980). While the terminology varies, the main idea is same and simple to illustrate. The hypothesis of spread and trickling down effects would hold if income and growth of a region cause income and growth of the other region with positive coefficients. The same kind of causality with negative coefficient would support the polarization and concentration hypothesis (Dholakia, 2009).

This paper is an attempt to empirically explore whether there are regional growth spillover effects among the states of northeast India. Besides answering this important question, we would also examine the performance of northeastern states in terms of Net State Domestic Product (NSDP) growth. Data used in this paper are annual figures covering the period 1980-81 to 2006-07 and variables are measured at constant 1999 prices. The data were obtained from Handbook of Statistics on Indian Economy (RBI, 2009). Seven states of the Northeastern Region (NER), viz., Assam, Arunachal Pradesh, Meghalaya, Nagaland, Manipur, Sikkim and Tripura have been selected for the study. Mizoram has been excluded from the study due to lack of database for the related variables.1 This paper is organized as follows: it provides a brief review of literature, followed by a discussion on the performance of NE states measured in terms of NSDP growth. Here, the paper attempts to quantify growth acceleration or deceleration during pre- and post-reform periods. Subsequently, the empirical results on the spillover effects of growth are presented, and finally, the conclusion is offered with implications.

Spillover Effects of Economic Growth: Review of Literature

The neoclassical growth model suggests that economic disparity among countries (or regions) is a temporary phenomenon. In the long run, all economies should converge to similar steady-state levels of per capita income (Martin and Sunley, 1996). In marked contrast to the various orthodox neoclassical models, there is a cumulative causation paradigm that originated in the works of Hirschman (1958) and Myrdal (1959), and was in part a response to the failure of the orthodox theory to provide answer to basic issues that arise from the economic history of growth and development, including the persistence of divergence. Higgins (1983) and Hansen (1990) in their studies maintained that the existence of spillover effects across regions may not be significant always. …

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