Germany, Japan, and Telangana

Mancur Olson once argued that Germany and Japan grew rapidly after WWII largely because a great deal of bureaucratic deadwood was removed by the war—allowing these defeated nations to rebuild with a more streamlined and efficient economic system.   A David Brooks column discusses this theory:

In 1982, the economist Mancur Olson set out to explain a paradox. West Germany and Japan endured widespread devastation during World War II, yet in the years after the war both countries experienced miraculous economic growth. Britain, on the other hand, emerged victorious from the war, with its institutions more intact, and yet it immediately entered a period of slow economic growth that left it lagging other European democracies. What happened?

In his book “The Rise and Decline of Nations,” Olson concluded that Germany and Japan enjoyed explosive growth precisely because their old arrangements had been disrupted. The devastation itself, and the forces of American occupation and reconstruction, dislodged the interest groups that had held back innovation. The old patterns that stifled experimentation were swept away. The disruption opened space for something new.

There’s always a danger that these sorts of explanations are merely “just so stories”; intriguing ideas, but ultimately untestable.

The Economist has an article entitled: “Why India should create dozens of new states“, which discusses the creation in 2014 of a new Indian state named 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. It still has only one airport. With the exception of Hyderabad, it lacks any cities of size. Many foresaw economic difficulties, even unrest.

The new government worked hard to make Telangana an attractive destination for investment by cutting red tape:

Another advantage of new states is that they may have greater leeway to experiment. Upon creation, Telangana immediately set about making itself attractive to investors. Many Indian states eager to rise up ease-of-doing-business rankings promise “single-window clearance” for businesses to deal with the bureaucracy. But the process is still a painful mess, with multiple departments working to 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 pull you down”, says Jayesh Ranjan, a senior bureaucrat who was involved in drafting the policies. “Everything was a clean slate.”

The phrase clean slate reminded me of the Mancur Olson hypothesis about the recovery of Germany and Japan.  So how have things been going in Telangana?  Was the outcome as disappointing as pundits expected?  Here’s The Economist:

A decade ago the Union of India welcomed into the fold its newest member: the state of Telangana. Of India’s then 29 states, it ranked 12th by population, 11th by area and 10th by per-person income. One of those rankings has since changed dramatically. By last year Telangana had shot up to boast the highest per-person income of any decent-size state, behind only tiny Sikkim and Goa.

This landlocked state is now richer than coastal states that contain important business hubs such as Mumbai, Bengaluru, Chennai and Ahmedabad.

The Economist suggests that several other new Indian states also did a bit better after independence, but nowhere near as well as Telangana.  A clean state may be a necessary condition for radical reform, but it’s not a sufficient condition for successful reform.

PS.  If you are as old as I am, you might recall these Indian cities by their previous names:

Mumbai (Bombay), Bengaluru (Bangalore), Chennai (Madras)

Here’s a picture of Telangana’s largest city—Hyderabad: