It's Still 'The Economy, Stupid' by Fareed Zakaria

April 3, 2000, U.S. Edition

It's Still 'The Economy, Stupid'
Clinton talked mostly to the Indians about Kashmir and nukes. That was a big mistake. The more pressing issue is building their future prosperity.
By Fareed Zakaria

That great philosopher Mel Brooks once noted profoundly, "It's good to be the king." Anyone watching Bill Clinton's tour of the Subcontinent last week would have to admit, it may be even better to be president of the United States. Clinton swept through India in the style of a Roman emperor. But for all the fanfare, the president missed a great opportunity. He talked mostly about two issues, Kashmir and nuclear weapons. Neither will define India's future. Of all people, Clinton should have remembered, "It's the economy, stupid."

Both Kashmir and nukes are important but not really subject to a solution after a few days of meetings. The conflict in Kashmir won't be solved until there is a marked evolution of attitudes within India and Pakistan, something unlikely to happen any time soon. On nuclear weapons, the Clinton administration is still in denial that India is a nuclear power and will remain one as long as its neighbors have such weapons. Moreover, Clinton has little moral authority on the issue since he presides over the largest arsenal of nuclear weapons in the world.

But Clinton has enormous credibility when speaking about economic issues. Around the world he is given credit--sometimes undue credit--for putting America's fiscal house in order and being on watch while the U.S. economy has performed at warp speed. The president can talk economics with interest, expertise and passion. He should have tossed aside the State Department's briefing papers on interim accords and confidence-building measures and spoken from his heart about the future Indians can build for themselves, if only they have the courage.

This would have been a good time to talk about the Indian economy. Reforms have stalled. The New Delhi government has not delivered on even its modest proposals. The economy, growing at 5 to 6 percent, is doing well only because of a string of good harvests--much of the Indian economy is agricultural. To lift its people out of poverty, India needs to grow much faster, around 8 percent. Most East Asian countries grew at these rates for decades (and did not have exploding populations) and only then raised living standards.

When Clinton did talk economics, he lavished praise on India's new high-tech economy. He's hardly alone in his exuberance. Many observers, both in India and on Wall Street, look at this sector and declare India the next Asian tiger. The facts are impressive. India's software industry, which barely existed 10 years ago, generates $5 billion a year--an amount projected to rise to more than $80 billion in a decade.

But while the software industry is impressive, it accounts for only 1 percent of GDP. And while the Indian middle class is large--at perhaps 200 million--300 million Indians live below the poverty level. No less than 80 percent of Indians work on farms and in factories; in America, 80 percent of the economy is in the service sector. You cannot have a new economy without first having an old economy. Indians have often thought that technology--it used to be dams, now it's computers--will be their salvation.

Clinton knows that building a modern economy requires much more than technology. And it's not something that business can do by itself. You need an effective and disciplined state. India's government spends a staggering 14 percent of GDP on subsidies. The annual fiscal deficit is close to 9 percent of GDP. Instead of wasting money on corporate and farm welfare, the government should invest in human capital--health and education, which are utterly neglected. India also needs hundreds of billions of dollars for infrastructure (ports, telephones, electrical plants, roads), yet foreign investment is hampered by dozens of pointless rules.

Most important, Clinton could tell Indians how to modernize their state and economy and yet maintain the support of the least fortunate in society. It is a balancing act he's remarkably good at--and it's what India desperately needs.

If India's ruling class had the courage to move boldly and integrate their country into the world, many old, seemingly intractable problems--like Kashmir--might even yield to solutions. After all, it is surely not a coincidence that Ireland came closer to resolving its troubles after moving forthrightly into the European Union and experiencing the heady economic growth that came with it. And were Europe to accept Turkey into its fold, that country might handle its Kurdish minority with tolerance and tact. In other words, Clinton might even have helped the causes he talked about if only he had stayed with his strengths. Instead, he made the usual points about the usual subjects. Still, it wasn't a total waste. The Taj is a stunning sight.