Mancur Olson once argued that Germany and Japan grew rapidly after World War II largely because the war had removed much of the bureaucratic deadwood, allowing these defeated countries to rebuild with a more streamlined and efficient economic system. A David Brooks column discusses this theory:
In 1982, economist Mancur Olson attempted to explain a paradox. West Germany and Japan suffered widespread destruction during World War II, but both countries experienced prodigious economic growth in the years after the war. Britain, on the other hand, emerged victorious from the war, with its institutions still intact, and yet it immediately entered a period of slow economic growth, which left it lagging behind other European democracies. What happened?
In his book ‘The Rise and Decline of Nations’, Olson concluded that Germany and Japan actually experienced explosive growth because their old arrangements had been disrupted. The destruction itself and the forces of American occupation and reconstruction drove out the interest groups that had held back innovation. The old patterns that hindered experimentation were swept away. The disruption opened up space for something new.
There is always the danger that these kinds of explanations are just “just stories”; intriguing ideas, but ultimately untestable.
The Economist has an article entitled: “Why India should create dozens of new states“, which discusses the 2014 creation of a new Indian state called Telangana. Initially people were pessimistic:
It was the poorer part of the state from which it was carved out. Unlike other prosperous Southern states, it is landlocked. There is still only one airport. With the exception of Hyderabad, there are no major cities. Many foresaw economic difficulties, even unrest.
The new government has been working hard to make Telangana an attractive destination for investments by cutting red tape:
Another advantage of new states is that they have more room to experiment. Upon its inception, Telangana immediately started making itself attractive to investors. Many Indian states, keen to move up the rankings of ease of doing business in terms of ease of doing business, are promising to give companies ‘single-window clearance’ to deal with the bureaucracy. But the process is still a painful mess, with multiple departments using their own timelines. Telangana’s innovation was to do away with many requirements and promise approvals within 15 days. Such ideas were “only possible because we were a new state and there was no legacy to bring you down,” said Jayesh Ranjan, a senior bureaucrat involved in drafting the policy. “Everything was a clean slate.”
The sentence clean slate Reminded me of the Mancur Olson hypothesis about the recovery of Germany and Japan. How are things going in Telangana? Was the outcome as disappointing as experts expected? Here’s The Economist:
Ten years ago, the Union of India welcomed its newest member: the state of Telangana. Of the then 29 states of India, it ranked 12th in population, 11th in area and 10th in income per person. One of those rankings has changed dramatically since then. Last year, Telangana had skyrocketed to have the highest per-person income of any state, behind only tiny Sikkim and Goa.
This landlocked state is now richer than coastal states with major business hubs like Mumbai, Bengaluru, Chennai and Ahmedabad.
The Economist suggests that several other new Indian states also did slightly better after independence, but not nearly as well as Telangana. A clean state may be a necessary condition for radical reforms, but it is not a sufficient condition successful reform.
P.S. If you’re my age, you might remember these Indian cities by their previous names:
Mumbai (Bombay), Bengaluru (Bangalore), Chennai (Madras)
Here is a photo of Telangana’s largest city: Hyderabad: