It reduces economic development! In my rough memory, the vanilla version of CivIV-BTS is different. Towns could grow on their own and provide gold to nearby cities, even if they weren't in the city radius.
No, this is a basic Civ4 mechanic. Cottages always needed to be worked to be able to grow. Cottages play a huge role for the economic development of your empire.
It reduces economic development! In my rough memory, the vanilla version of CivIV-BTS is different. Towns could grow on their own and provide gold to nearby cities, even if they weren't in the city radius.