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Do small states really make better ones?

Do small states really make better ones?
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First Published: Sun, Dec 13 2009. 11 56 PM IST

Updated: Sun, Dec 13 2009. 11 56 PM IST
It is assumed ex ante, without any causal evidence, by several political leaders that smaller states make for better governance and superior economic performance. But does a Telangana being carved out of Andhra Pradesh (AP) automatically mean lesser transmission and distribution losses, and therefore, better electricity availability? Would a smaller state automatically improve attendance of school teachers and doctors in the villages? Would it automatically rein in the burgeoning fiscal deficit of state governments? We often tend to confuse a smaller state with greater local participation and thus greater accountability in the delivery of services, which may or may not be the case.
Also, a smaller state does not always mean a smaller government. In fact, at least in the short and medium term, the cost of administration will increase, for one would be duplicating a lot of the existing systems and resources in the new state. Thus, instead of “administrative convenience”, what one should be looking at is “administrative necessity”. What is the smallest and most effective size of government to deliver growth and development? Interestingly, there is no evidence in economic literature which consistently proves that government failure is costlier than market failure to the economic performance of a state. As such, it is facile to conclude a priori that a smaller or a bigger government is necessarily superior or inferior to the market, or vice versa. What has been seen to consistently matter is the quality of government intervention, and it is debatable whether this improves with the size of government or with the quality of leadership, as such evidence is still nascent and mixed.
What does the economic evidence and the data point to? The five poorer states of Bihar, Orissa, Uttar Pradesh (UP), Madhya Pradesh (MP) and Rajasthan, with 40% of India’s population, produce only 25% of the national output, while India’s five richest states of Gujarat, Haryana, Maharashtra, Punjab and Tamil Nadu, with around 25% of the population, produce 40% of the national output. International Monetary Fund research indicates that the richest states (such as Punjab) grew three-four times faster than the poorest states (such as Bihar) between 1970 and 2005. Interestingly, the Gini coefficient of per capita consumption is also the highest for Tamil Nadu and Maharashtra (between 0.35 and 0.4%), indicating extreme variations intrastate even in the richest states. The southern parts of Bihar, Orissa and UP account for at least 55% of poverty levels, demonstrating that even within the poorer states, there are deep pre-existing variations.
Looking at governance per se, credible indicators are hard to obtain. Anecdotally, Chhattisgarh seems to be doing better than MP and Uttarakhand than UP, but we must remember that a Madhu Koda showed up in a new “small state” of Jharkhand and, by all accounts, is in the midst of enormous unaccounted wealth in the shortest possible period of time.
Outstanding research by Bibek Debroy and Laveesh Bhandari has shown the performance of 78 regions of India. Contrary to the exponents of a separate state, their research demonstrates that all regions except coastal Andhra have grown dramatically, and in relative terms, that of Telangana has been “most dynamic”. If this is correct, then it would negate the theory that Telangana has lagged behind in India’s post-reform period, and demonstrate that the richer coastal Andhra has been relatively growing the slowest.
The other aside, given the rapid deterioration of India in the Transparency International rankings, is whether the demand for smaller states is a guise for grabbing a larger share of a smaller kitty (as against a smaller share of a larger kitty) when it comes to rapacious rent-seeking by politicians—justified in the name of the “sentiments” of the people. There can be no end to primordial passions and one can justify on the ground of sentiment carving out of ever smaller states till such time that it becomes completely meaningless. All those giving the example of the US’ number of states should not forget that the states which are the economic dynamo of America are the larger ones such as California, New York, Texas, Illinois, and not Montana or Wyoming. Stellar research by Michael Porter at Harvard Business School indicates that within each country there are clusters—the US has at least 400—which are the engines propelling growth, and these are spread all across the US, not correlated to a big or small state.
Time and again, evidence suggests that the necessary sine qua non for rapid economic growth are sound policies which don’t hamper the market but work to support it—pre-existing conditions, a strong institutional framework, private investment across sectors, and sound human development indicators. The sufficient condition is perhaps the quality of leadership and other intangibles that we have not yet learnt how to measure accurately. I don’t know if the time is ripe to demand statehood for myself and my family, but going the way we are, that day doesn’t seem far away when I will be—along with a few others—demanding a separate state for Vadama Tamil Iyer Brahmins from North Arcot, which can be the surest recipe for economic regression for me!
Srivatsa Krishna is a Harvard MBA and an Indian Administrative Service officer. He writes weekly on business, government, infrastructure and entrepreneurship. The views expressed here are his own. Respond to this column at offtherecord@livemint.com
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First Published: Sun, Dec 13 2009. 11 56 PM IST