Lee Kuan Yew's India rethink
By Kaushik Basu
Professor of economics, Cornell University
BBC NEWS WORLD EDITION
APRIL 25, 2005

When it comes to crafting national economic policy, few political leaders in the world have had the perspicacity of Lee Kuan Yew.

Not only did he steer Singapore from the Third World to the First in three decades, he has written and commented on the economic problems of different nations with remarkable prescience.

Concerning India, during his term as prime minister of Singapore, he routinely expressed pessimism.

"It was sad to see the gradual rundown of the country," he once wrote.

Coming of age

It therefore caused a stir when, earlier this month on the occasion of the founding of the Lee Kuan Yew School of Public Policy in Singapore, he predicted that India would be propelled into the "front ranks".

The question I want to investigate here is whether this optimism, which seems to be widely shared - from Martin Wolf in the Financial Times to Roger Cohen in the International Herald Tribune - is founded in facts.

The short answer is yes. While India has been doing well for more than a decade now, there have been changes over the past three years that are significant. I shall dwell on four of these changes.

First, Indian companies have come of age.

This was noted by Mr Lee. When he spoke about what India had to offer China, he mentioned India's "near world-class companies", good corporate governance and capital market transparency.

This began with software companies like Infosys, Wipro and Tata Consultancy Services, which set new standards in corporate culture, and spread to other sectors.

And, aided by the sharp rise in foreign exchange reserves, Indian companies have, over the past three years, begun making global acquisitions.

In 2003 they bought up 35 companies abroad. Buying even one would have been unthinkable a few years earlier.

Back-tracked

Second, there has been a windfall in India's outsourcing business, related to the US presidential race.

Readers will recall that losing Democrat candidate John Kerry had criticised US companies that outsourced back-office work to developing countries.

He later back-tracked on this, realising that this was not good economics for the US and also that it was not commendable ethics to propagate protectionism vis-a-vis poor nations.

But once this topic made its appearance, it refused to go away.

A host of writers and commentators on television, such as Lou Dobbs, went out of their way to vilify American companies that, for greed of profit, outsourced jobs.

A lot of small American companies that had the greed of profit but did not know of this great opportunity suddenly woke up to it.

Firms that may have had four or five secretaries decided to keep some of them and shipped the remaining jobs to English-speaking poor nations.

For the Third World this was an unexpected boon, since advertising on US television is so expensive.

A large number of countries have gained and India, which already had the organisational infrastructure for back-office work, did especially well.

Optimism

Third, with China joining the World Trade Organisation, India having removed quantity controls on imports, and the advance of the IT industry, there has been an unprecedented rise in Indo-Chinese trade.

The trade between these two nations was $5bn in 2002, $7.6bn in 2003 and $13.6bn in 2004.

Moreover, what is interesting is that it is India that is running a trade surplus.

In general, there seems to be a boost in India's trade with the rest of Asia.

Finally, these strong economic developments come with a fortuitous political change, no matter what moral position one takes on this.

With the rise of global terrorism, US political interests have come into alignment with India's.

As Thomas Simons, ex-US ambassador to Pakistan, has noted, the Soviets left Afghanistan in February 1989 and insurgency in Kashmir rose from the summer of that year.

The fundamentalist forces that were engaging the Soviets began settling into a new job, providing a common problem for the US and India.

And combined with the fact that India and the US share similar political systems - democracy, free press and a constitutional commitment to secularism - this makes India a natural strategic partner for the US.

India should nurture these new economic and political advantages.

This will involve a pragmatic assessment of its self-interest but also, I like to believe, a commitment to certain values.

It will entail cooperation with China and the US, but also the strength to retain moral independence in global politics.

And there would be reason to take the new optimism seriously.

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