False Dichotomy

False Dichotomy

Bangalore vs Karnataka

The Indian Express

Bangalore November 3: Given the gigantic churning of human lives in India, it would seem silly to think that the non-emotive, dehumanised models and empirical exercises in modern economics can teach us much. Yet, in the recent debate between Mr. Deve Gowda and the IT industry over the resource allocation for Bangalore’s infrastructure, economics has many insights to provide. Mr. Gowda has rallied discontent and promises to play a modern Tughluq to the IT industry. He has positioned his diatribes as the voice of the underrepresented (read rural) in a banquet supposedly overflowing with riches to the other side (read urban). This is a false and puerile dichotomy, at best.


Yet, Mr. Gowda has done us all a favour by acting more like a satrap of a minor principality rather than as an ex-Prime Minister of India, by reigniting the decades old rural-urban question. Mahatma Gandhi might indeed have said that “India lives in its villages”. But, it is criminal to celebrate this idea while witnessing relatively abysmal growth rate, deteriorating quality of life, fluctuating indicators of women’s welfare etc in much of rural India. Bangalore’ s issue is not that there aren’t funds for construction of roads etc; but that the city can’t accommodate the rising influx of rural and urban migrants who cause the local infrastructure to burst at its seams. It is almost an heresy to suggest, that rural India imposes on urban India, especially amongst the quasi-socialist elite liberals and the professional activist class of urban India. In fact, what they ought to ask is why do millions of Indians leave their villages and stream into cities.

A reasonably superficial answer is that cities have all the capital, investment and jobs. The operative (and politically expedient) word in the previous sentence is ‘have’; as if the cities in India were originally endowed with all that we see. This is lazy reasoning at best. The questions, ought to be asked: why indeed do (most) cities manage to grow despite seeming infrastructural breakdowns (think Mumbai after the rains)? What drives the incentives at a microeconomic level for individuals to flow in rather than leave (think Malayalis in Chennai)? Are cities just a by product of random endowments that leads to intrinsic competitive advantages (think Calcutta on the Hubli during the British Raj)? Are jobs created by specialisation induced within-sector growth (think background sound-editors in Bollywood)? Or does diversity induced intra-sectoral growth create jobs (think highway mechanics complementing Maruti-Suzuki)? These are no easy questions to answer, but they might replicate the successes of Bangalore rather than forcing, as Mr. Gowda proposes, IT companies to setup shop in, say, Dharwad or Udupi.

Modern industrial (and city) planning in India, since the Nehruvian days, has sought to exploit Marshallian externalities. An externality is the non-quantifiable by-product of an action. For example, if a road is build for primarily transporting wheat-products, an externality is that it also enables two communities to connect faster. In India, a Marshallian externality argument emphasises that industries (and cities, villages etc) ought to specialise locally in a specified commodity. The knowledge arising from this, and the associated externalities, will lead to growth. Thus, we saw emergence of minor cities like Bhilai, Cuddappah, Jamshedpur, Tirupur etc. There is no doubt a certain force of logic to this reasoning; but surely this is invitation to suffer the cyclicality of demand. It is barely a recipe for persistent growth and job creation. There are two distinct phases in the lifecycle of any product. The first is the conceiving end of it, i.e., the creative aspects etc. The second is the actual production end of things. In the Marshallian setup, blessed often by governmental regulations, both these practices occur within certain geographical confines. Proponents often cite gains from labour market exchanges, linkages between suppliers and knowledge based externalities. However, with technology and loosening of governmental restrictions etc., these two aspects of production have increasingly de-coupled, and it is imperative to understand why this is so.


In communities with diverse industries, search quality of partners for trade improves. Most matches that happen have an higher probability of being an efficient match - i.e., resources are not wasted, as opposed to being inefficient matches. The learning algorithms for individuals and organisations improve, and diversity of human capital talent leads to creative and incremental changes that leads to high quality products in the long run. In short, it pays to have different types of firms and industries in your village, city, surroundings, etc.

This is often called the Jacobs externality: the unwitting benefits from human capital diversity.

Where does all this leave Mr. Gowda’s desire to make the rest of Karnataka as vibrant as Bangalore? At the heart lies the need to acknowledge five key points: The first is the least tangible. Individuals leave villages for cities because cities function, no doubt, as lotteries for employment prospects - one may win, and if one wins then the economic structure allows you to keep your earnings. So, foster a respect for private property. The second is that the institutional structures of Indian villages are still mired in rent seeking behaviour that encroach up one’s right to earn from own innovation: often in name of caste and religious distortions. Thus most individuals rationally pursue a low risk and low rewards occupation: agriculture. The third is an obvious, but hardly acknowledged, idea that Karnataka can only spend more money on their schools and food programs if the IT industry contributes more tax revenues. Governments have budget constraints too. Styming IT’s growth by failing to provide infrastructure is self-defeating to achieve Mr. Gowda’s stated dreams. The fourth is that IT (and other) companies must be allowed to make more efficient global hires that introduces diversity into the local labor pool. The fifth is that governmental effort must ensure that Indian villages and small towns are not a one-industry localised cluster.

Forgetting to ask basic, but hard questions, is largely an invitation to let policy be guided by half-truths, prejudices and false dichotomies that affects not only our economic fortunes. Unfortunately, it seems, Mr. Gowda and his underlings will never let Reason get in the way of scoring a political point.