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Don't Rushdie to Conclusions

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Salman Rushdie, writing in today’s Washington Post [2], offers part of an explanation for the surprise outcome of the recent election in India:

It’s no accident that the ruling alliance lost heavily in Andhra Pradesh and in Tamil Nadu, precisely the states that wooed information technology giants such as Microsoft to set up shop, turning sleepy “second cities” such as Madras, Bangalore and Hyderabad into new-tech boom towns. That’s because while the rich got richer, the fortunes of the poor, such as the farmers of Andhra, declined year by year. The gulf between India’s rich and poor has never looked wider than it does today, and the government has fallen into that chasm.

Rushdie’s assessment of the political situation likely is correct. But care is required when drawing inferences about economic progress from his claim that the rich are getting richer while the poor endure worse suffering.

If Madras, Bangalore, and Hyderabad truly were “sleepy” cities prior to their recent and significant growth powered by the information-technology industry, then many of the residents of these cities who are prospering today probably were not rich back in the “sleepy” days. Also, a good bet (although I don’t know for sure) is that, as these cities boomed, many people from rural regions moved to these cities and now take part in the new prosperity. Almost surely, many Indians who were poor before the recent surge in economic growth are today much more prosperous than they were just a few years ago – some, perhaps, are even rich.

Of course, economic progress does not benefit everyone equally, and in the short-run, it can even make some people worse off. Perhaps – perhaps – the tech-boom in these Indian cities is responsible for a decline in the well-being many people working in agriculture.

I use the weasel-word “perhaps” just above because I don’t know enough about the details of India’s economy and its recent history. Rushdie assumes that the decline in the material welfare of Indian farmers is caused by the tech-boom in the cities. Why would this be? Wouldn’t greater prosperity in the cities raise the demand for agricultural outputs and thereby increase the prosperity of at least some agricultural regions? Recognizing that wealth is created and not a fixed-in-size stock of stuff, the mere assumption that greater wealth at location X means less wealth at location Y is unacceptable.