A Tale of Two States

Abstract

In this paper Lahiri and Yi study the decline of West Bengal relative to Maharashtra, historically two of the most important states of India. In 1960, West Bengal’s per capita income exceeded that of Maharashtra, the third richest state at the time. By 1993, it had fallen to just 69 percent of Maharashtra’s per capita income. They employ a "wedge" methodology based on the first order conditions of a multi-sector neoclassical growth model to ascertain the output and factor market sources of the divergent economic performances.

Their diagnostic analysis reveals that a large part of West Bengal’s development woes can be attributed to: (a) low sectoral productivity, especially in manufacturing and services; and (b) sectoral misallocation in labor markets between the manufacturing sector and the other sectors of the economy. They also present evidence on the labor market, the manufacturing sector, and public infrastructure that suggest a systematic worsening of the business environment in West Bengal during this period.

Lahiri A and K Yi (2008), " A Tale of Two States: Maharashtra and West Bengal", Federal Reserve Bank of Philadelphia, April.