Mancur Olson once argued that Germany and Japan grew rapidly after WWII mainly because most of the bureaucratic wood was removed by the war—allowing these defeated nations to rebuild with a simple and efficient economic system. A David Brooks The column discusses this idea:
In 1982, economist Mancur Olson first described the paradox. West Germany and Japan endured great destruction during World War II, but in the post-war years both countries experienced remarkable economic growth. Britain, on the other hand, came out victorious in the war, its institutions strong, but it quickly entered a period of slow economic growth that left a challenge to other countries that ruled by the will of the people of Europe. What’s going on?
In his book “The Rise and Decline of Nations,” Olson concluded that Germany and Japan enjoyed precisely the strongest expansion. because their old arrangements had been disturbed. The destruction itself, and the ability to stay and rebuild America, drove away the interest groups that held the innovation. Old patterns that hindered exploration were swept away. Disruption made room for something new.
There is always the danger that these kinds of explanations are just “just stories”; attractive ideas, but ultimately unproven.
The Economist has the title: “Why should India create a lot of new states“, discussing the creation in 2014 of a new Indian state called Telangana. At first, people were pessimistic:
It was a poor part of the country in which it was recorded. Unlike other prosperous southern states, it is closed. It still has only one airport. Apart from Hyderabad, it has no major cities. Many foresee economic problems, even chaos.
The new government has worked hard to make Telangana an attractive investment destination by cutting red tape:
Another advantage of the new states is that they may have more freedom to explore. Upon creation, Telangana soon began to make itself attractive to investors. Many states in India eager to increase the ease of doing business are promising “single window clearance” for businesses to deal with the authorities. But the process is still a painful mess, with many departments working on their own timelines. Telangana’s innovation was to do away with many requirements and promise approval within 15 days. Such ideas “were only possible because we were a new country, and there was no legacy to dismantle,” said Jayesh Ranjan, a senior official involved in policy-making. “Everything was going well.”
It’s an expression a clean slate reminded me of Mancur Olson’s view on the recovery of Germany and Japan. So how were things going in Telangana? Was the result as sad as the professors expected? Here is the Economist:
Ten years ago the Union of India welcomed into the fold its newest member: the state of Telangana. Out of India’s 29 states at the time, it ranked 12th in population, 11th in area and 10th in per capita income. One of those levels has changed dramatically. Last year Telangana had come out boasting the highest per capita income of any respectable state, behind only Sikkim and tiny Goa.
This landlocked region is now richer than the coastal regions that contain important business centers like Mumbai, Bengaluru, Chennai and Ahmedabad.
The Economist suggests that many of India’s other new states have also done better after independence, but nowhere near Telangana. A clean state may be a necessary condition for radical change, but it is not a sufficient condition effectively change.
PS. If you’re old like me, you might remember these Indian cities by their previous names:
Mumbai (Bombay), Bengaluru (Bangalore), Chennai (Madras)
Here is a picture of the main city of Telangana—Hyderabad:
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