ATaleofTwoStates1 Amartya Lahiri Federal Reserve Bank of New York
[email protected] Kei-Mu Yi Federal Reserve Bank of Philadelphia
[email protected] First draft: August 2004 Version: December 2004 1We would like to thank Satyajit Chatterjee, Hal Cole, Narayana Kocherlakota, as well as par- ticipants at the 2004 Iowa Development conference, Iowa State University, and Indian Statistical Institute Delhi for detailed comments and discussions. Thanks also to Edith Ostapik, Matt Kon- dratowicz and Katya Vasilaky for excellent research assistance. The views expressed here do not necessarily reflect the views of the Federal Reserve Bank of New York, the Federal Reserve Bank of Philadelphia or the Federal Reserve System. Abstract In this paper we study the economic evolution between 1960 and 1995 of two states in India — Maharashtra and West Bengal. During this period West Bengal, which was one of the two richest states in India in 1960, has gone from a relative per capita income of about 100 percent of Maharashtra, to a relative income of around 60 percent. Our diagnostic analysis reveals that a large part of the blame for West Bengal’s development woes can be attributed to: (a) low aggregate productivity (b) poorly functioning labor markets and sectoral misallocations. We find that sectoral productivity and labor market allocation wedges were strongly correlated with political developments in West Bengal, namely the increasing vote share of the leftist parties. Keywords: Indian states, development JEL Classification:O11,O14 1Introduction When India gained independence from Britain in 1947 the two richest states in the country were Maharashtra and West Bengal.