Land of blue gold

In a region fraught with mutual distrust, anxieties over water supply are raising tensions between I

Almost anything the Dalai Lama does can trigger protests from Beijing. But his November 2009 visit to the disputed territory of Tawang, in the remote north-east Indian state of Arun­a­chal Pradesh, was felt with particular resonance in China's capital. Relations between India and China have been bad-tempered for months, with nationalists on both sides urging their respective governments to act tough.

The Dalai Lama's presence in Tawang - which China sees as southern Tibet, and which was the birthplace of his eccentric but talented predecessor, the sixth Dalai Lama - reminds Beijing that this was once Tibetan territory. The current Dalai Lama first came through these parts in 1959, as a young refugee fleeing Chinese rule. He never returned to Lhasa. India's open-hearted hospitality to exiled Tibet­ans has annoyed Beijing ever since.

Arunachal Pradesh, nearly 33,000 square miles of lightly populated mountain and valley, is claimed by both India and China. Its people, largely Buddhist and ethnically Monpa, speak a language similar to Tibetan and have suffered long years of neglect by both states: a condition they no doubt prefer to being fought over. During the Indo-Chinese border war of 1962, Chinese troops occupied Tawang for more than a month. Now, China is reasserting its claim. India, in turn, is claiming more than 14,700 square miles of Chinese-controlled Aksai Chin, near the Kashmir border. Talks between the two countries have been held repeatedly over the past four years without resolution.

Today, the line of actual control is heavily patrolled by both nations: on the Indian side by troops housed in ramshackle, temporary huts, and on the Chinese by soldiers in concrete barracks marching along well-paved roads. The contrast has not escaped the notice of local people and is taken as a signal of intent.

The Dalai Lama's presence in Arunachal Pradesh and the warm welcome he received from his devout Monpa following are symbolic of the antagonism. But Beijing also issued a strong protest when the Indian prime minister, Manmohan Singh, visited Arunachal Pradesh last October during an election campaign.

Historically, China is Pakistan's ally and many in India believe that China maintains pressure along the 2,500-mile border that the two countries share to keep Indian forces tied down. There have been alarming reports in the Indian press of repeated incursions across the line of control by Chinese troops. The Indian government plays these incidents down, pointing out that the boundary is not only disputed but also ill-defined, and that these incursions need not be taken as provocation.

Behind the immediate stresses, there is jockeying for regional and international influence by two large, utterly developing economies, built on radically different political philosophies and lying in a region with both live and frozen conflicts. After 1962, relations were hostile for decades: China and Pakistan became ­allies, and India turned for support to China's enemy, the USSR.

The end of the cold war brought new conflicts based on ethnicity and religion, in a region with four nuclear powers. Recently, India has been alarmed by China's increasing presence in Sri Lanka and Nepal, historically Indian spheres of influence. Now, there is another factor to complicate relations - the impact of climate change on states divided by political boundaries but united in their dependence on the rapidly melting Himalayan glaciers for water, essential both for security and life itself.

Just a few miles across the line that divides Arunachal Pradesh from Tibet, the powerful torrent of what becomes the Brahmaputra River enters one of the most dramatic passages of its 2,000-mile journey to the Bay of Bengal. Rising on the slopes of the holy mountain of Kailash in western Tibet, it flows east, along the northern flank of the Himalayas, then enters one of the deepest gorges in the world, executing a hairpin bend before roaring south into Arunachal Pradesh.

To the engineers dominating the upper echelons of Chinese politics, who have the twin concerns of meeting China's ever-growing demand for energy and its need for water, the great bend of the Brahmaputra seems to offer an irresistible temptation.

Dammed if they do

Damming the great bend of the Brahmaputra is an idea with a long pedigree. It was first suggested as one of a series of global "megaprojects" by the Japanese in the 1970s. More recently, the Chinese government has made occasional reference to the plan. Though it remains a drawing-board idea, India suspects it is moving up the Chinese list of priorities.

Anxieties about China's intentions were inflamed in 2005 by the publication of the provocatively titled Tibet's Water Will Save China. Though it was not an official statement of policy, it was written by a former officer of the Chinese People's Liberation Army, Li Ling, and its wide circulation gave it sufficient stature in Indian eyes to merit careful scrutiny. Ling's enthusiasm for diverting Tibet's rivers, including the Brahmaputra, to northern China to alleviate the acute water crisis there fitted enough of the facts to set alarm bells ringing.

In many ways, it is an implausible project, but China's engineering record and its demonstrated love of ambitious dam projects are troubling to its neighbours, so much so, that many in India's security establishment have said that if China were to dam the Brahmaputra, it would be tantamount to a declaration of war. Doubts about the feasibility of the project, including those expressed by the more sober Indian civil engineers, have not dampened wider fears. For India, concern about China's ambitions for the Himalayan region rivals - and is linked to - its long-standing enmity with Pakistan. In the heated atmosphere of mutual suspicion, water has taken its place as a critical national security concern.

At a meeting between the Indian and Chinese foreign ministers in Bangalore in October, India sought, and reportedly received, reassurances over the Brahmaputra. China, Indian officials were told, is a responsible country that would not harm the interests of its neighbours. But reports that remote sensing has detected the beginnings of construction on the river at Zangmu, Tibet, continue to circulate.

Both India and China suffer long-term anxieties over water, now rendered more acute by the rapid melting of the glaciers of the Himalayas (from which all of the great rivers of Asia derive to some degree). In a region fraught with mutual suspicion and reciprocal bad faith, there are no source-to-sink, trans-boundary water management agreements in place and, currently, little prospect of any being negotiated to manage the sharing of what threatens to be a rapidly diminishing supply.

The dispute works both ways. While India protests about Chinese infrastructure investments in Pakistan-controlled Kashmir, which include roads and a £7.8bn dam, India has its own plans to dam the Brahmaputra in Aruna­chal Pradesh, which China opposes. India has drawn up plans for 42 dams in Arunachal Pradesh, which have the potential to produce nearly 28,000 megawatts of hydropower, equivalent to the entire hydro capacity built by India in the past 60 years.

The dispute over the dams went international in June when China attempted to block an Asian Development Bank loan that included £37m for projects in Arunachal Pra­desh. The bank should not invest, China said, as the state was disputed territory. India responded by saying that it would finance the projects itself and stepped up its military presence in the region, deploying another 60,000 troops to the neighbouring state of Assam in addition to the 40,000 already stationed there. The shadow war games rapidly spread across the Himalayas, as China initiated military exercises. In September, India responded by stepping up the state of alert on the line of control in Kashmir.

The status of India's legal claim to Arunachal Pradesh is complicated and rests on the unresolved argument about the historic status of Tibet. It centres initially on an exchange of notes during the negotiation of the Simla Accord in 1914, under Henry McMahon, the then foreign secretary of British India. China, Tibet and Britain negotiated the accord, which resulted in the contentious McMahon Line that, for the British at least, defined the border between India and Tibet. The Tibetans conceded the territory that became Arunachal Pradesh to British India in return for a British promise, never honoured, to recognise Tibetan autonomy.

Chinese water torture

China rejected the Simla Accord and insists that Tibet did not have the status to sign any international agreement. If India were to rest its case on the accord, it would imply that Delhi recognised Tibet's authority to negotiate and conclude international agreements: a step that Beijing would take as severe provocation. The British, at the time, insisted on a distinction ­between China's acknowledged "suzerainty" over Tibet and full sovereignty, but the picture was further complicated last year when the Foreign Office abandoned the distinction, for current policy at least, as "anachronistic".

After Simla, neither side paid much attention to the disputed territory, and the Tawang monastery continued to pay taxes to Tibet until the 1950s. Shifting regional geopolitics have made this, and other Himalayan regions, the focus of potentially dangerous rivalries.

For the Tibetans in exile, these developments carry their own threat. Rising tension between their Indian hosts and Beijing is not good news. India has been a generous host to some 150,000 Tibetans who now live there, to the Dalai Lama and his government in exile, and to refugees who continue to arrive.

Yet there are voices in India which argue that, in the face of China's growing assertiveness, the cost to India of this spiritual and material solidarity is getting higher. It is not hard to find Indian analysts who believe that both India and China need a comprehensive agreement on the main points of contention between them - the border and the disputed territories, the fair management of declining water supplies, and the scientific and technical co-operation that such agreements would demand.

The question that many ask, but nobody has yet answered, is whether the price of a comprehensive agreement will be the special status and security that India's Tibetan exiles have enjoyed for more than half a century. Such a bargain would certainly please Beijing. For India, it is still a long way from official policy, but some argue it would be a price worth paying.

 

Isabel Hilton is editor of chinadialogue.net

 

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This article first appeared in the 18 January 2010 issue of the New Statesman, Palin Power

MILES COLE
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The new Brexit economics

George Osborne’s austerity plan – now abandoned by the Tories – was the most costly macroeconomic policy mistake since the 1930s.

George Osborne is no longer chancellor, sacked by the post-Brexit Prime Minister, Theresa May. Philip Hammond, the new Chancellor, has yet to announce detailed plans but he has indicated that the real economy rather than the deficit is his priority. The senior Conservatives Sajid Javid and Stephen Crabb have advocated substantial increases in public-sector infrastructure investment, noting how cheap it is for the government to borrow. The argument that Osborne and the Conservatives had been making since 2010 – that the priority for macroeconomic policy had to be to reduce the government’s budget deficit – seems to have been brushed aside.

Is there a good economic reason why Brexit in particular should require abandoning austerity economics? I would argue that the Tory obsession with the budget deficit has had very little to do with economics for the past four or five years. Instead, it has been a political ruse with two intentions: to help win elections and to reduce the size of the state. That Britain’s macroeconomic policy was dictated by politics rather than economics was a precursor for the Brexit vote. However, austerity had already begun to reach its political sell-by date, and Brexit marks its end.

To understand why austerity today is opposed by nearly all economists, and to grasp the partial nature of any Conservative rethink, it is important to know why it began and how it evolved. By 2010 the biggest recession since the Second World War had led to rapid increases in government budget deficits around the world. It is inevitable that deficits (the difference between government spending and tax receipts) increase in a recession, because taxes fall as incomes fall, but government spending rises further because benefit payments increase with rising unemployment. We experienced record deficits in 2010 simply because the recession was unusually severe.

In 2009 governments had raised spending and cut taxes in an effort to moderate the recession. This was done because the macroeconomic stabilisation tool of choice, nominal short-term interest rates, had become impotent once these rates hit their lower bound near zero. Keynes described the same situation in the 1930s as a liquidity trap, but most economists today use a more straightforward description: the problem of the zero lower bound (ZLB). Cutting rates below this lower bound might not stimulate demand because people could avoid them by holding cash. The textbook response to the problem is to use fiscal policy to stimulate the economy, which involves raising spending and cutting taxes. Most studies suggest that the recession would have been even worse without this expansionary fiscal policy in 2009.

Fiscal stimulus changed to fiscal contraction, more popularly known as austerity, in most of the major economies in 2010, but the reasons for this change varied from country to country. George Osborne used three different arguments to justify substantial spending cuts and tax increases before and after the coalition government was formed. The first was that unconventional monetary policy (quantitative easing, or QE) could replace the role of lower interest rates in stimulating the economy. As QE was completely untested, this was wishful thinking: the Bank of England was bound to act cautiously, because it had no idea what impact QE would have. The second was that a fiscal policy contraction would in fact expand the economy because it would inspire consumer and business confidence. This idea, disputed by most economists at the time, has now lost all credibility.

***

The third reason for trying to cut the deficit was that the financial markets would not buy government debt without it. At first, this rationale seemed to be confirmed by events as the eurozone crisis developed, and so it became the main justification for the policy. However, by 2012 it was becoming clear to many economists that the debt crisis in Ireland, Portugal and Spain was peculiar to the eurozone, and in particular to the failure of the European Central Bank (ECB) to act as a lender of last resort, buying government debt when the market failed to.

In September 2012 the ECB changed its policy and the eurozone crisis beyond Greece came to an end. This was the main reason why renewed problems in Greece last year did not lead to any contagion in the markets. Yet it is not something that the ECB will admit, because it places responsibility for the crisis at its door.

By 2012 two other things had also become clear to economists. First, governments outside the eurozone were having no problems selling their debt, as interest rates on this reached record lows. There was an obvious reason why this should be so: with central banks buying large quantities of government debt as a result of QE, there was absolutely no chance that governments would default. Nor have I ever seen any evidence that there was any likelihood of a UK debt funding crisis in 2010, beyond the irrelevant warnings of those “close to the markets”. Second, the austerity policy had done considerable harm. In macroeconomic terms the recovery from recession had been derailed. With the help of analysis from the Office for Budget Responsibility, I calculated that the GDP lost as a result of austerity implied an average cost for each UK household of at least £4,000.

Following these events, the number of academic economists who supported austerity became very small (they had always been a minority). How much of the UK deficit was cyclical or structural was irrelevant: at the ZLB, fiscal policy should stimulate, and the deficit should be dealt with once the recession was over.

Yet you would not know this from the public debate. Osborne continued to insist that deficit reduction be a priority, and his belief seemed to have become hard-wired into nearly all media discussion. So perverse was this for standard macroeconomics that I christened it “mediamacro”: the reduction of macroeconomics to the logic of household finance. Even parts of the Labour Party seemed to be succumbing to a mediamacro view, until the fiscal credibility rule introduced in March by the shadow chancellor, John McDonnell. (This included an explicit knockout from the deficit target if interest rates hit the ZLB, allowing fiscal policy to focus on recovering from recession.)

It is obvious why a focus on the deficit was politically attractive for Osborne. After 2010 the coalition government adopted the mantra that the deficit had been caused by the previous Labour government’s profligacy, even though it was almost entirely a consequence of the recession. The Tories were “clearing up the mess Labour left”, and so austerity could be blamed on their predecessors. Labour foolishly decided not to challenge this myth, and so it became what could be termed a “politicised truth”. It allowed the media to say that Osborne was more competent at running the economy than his predecessors. Much of the public, hearing only mediamacro, agreed.

An obsession with cutting the deficit was attractive to the Tories, as it helped them to appear competent. It also enabled them to achieve their ideological goal of shrinking the state. I have described this elsewhere as “deficit deceit”: using manufactured fear about the deficit to achieve otherwise unpopular reductions in public spending.

The UK recovery from the 2008/2009 recession was the weakest on record. Although employment showed strong growth from 2013, this may have owed much to an unprecedented decline in real wages and stagnant productivity growth. By the main metrics by which economists judge the success of an economy, the period of the coalition government looked very poor. Many economists tried to point this out during the 2015 election but they were largely ignored. When a survey of macroeconomists showed that most thought austerity had been harmful, the broadcast media found letters from business leaders supporting the Conservative position more newsworthy.

***

In my view, mediamacro and its focus on the deficit played an important role in winning the Conservatives the 2015 general election. I believe Osborne thought so, too, and so he ­decided to try to repeat his success. Although the level of government debt was close to being stabilised, he decided to embark on a further period of fiscal consolidation so that he could achieve a budget surplus.

Osborne’s austerity plans after 2015 were different from what happened in 2010 for a number of reasons. First, while 2010 austerity also occurred in the US and the eurozone, 2015 austerity was largely a UK affair. Second, by 2015 the Bank of England had decided that interest rates could go lower than their current level if need be. We are therefore no longer at the ZLB and, in theory, the impact of fiscal consolidation on demand could be offset by reducing interest rates, as long as no adverse shocks hit the economy. The argument against fiscal consolidation was rather that it increased the vulnerability of the economy if a negative shock occurred. As we have seen, Brexit is just this kind of shock.

In this respect, abandoning Osborne’s surplus target makes sense. However, there were many other strong arguments against going for surplus. The strongest of these was the case for additional public-sector investment at a time when interest rates were extremely low. Osborne loved appearing in the media wearing a hard hat and talked the talk on investment, but in reality his fiscal plans involved a steadily decreasing share of public investment in GDP. Labour’s fiscal rules, like those of the coalition government, have targeted the deficit excluding public investment, precisely so that investment could increase when the circumstances were right. In 2015 the circumstances were as right as they can be. The Organisation for Economic Co-operation and Development, the International Monetary Fund and pretty well every economist agreed.

Brexit only reinforces this argument. Yet Brexit will also almost certainly worsen the deficit. This is why the recent acceptance by the Tories that public-sector investment should rise is significant. They may have ­decided that they have got all they could hope to achieve from deficit deceit, and that now is the time to focus on the real needs of the economy, given the short- and medium-term drag on growth caused by Brexit.

It is also worth noting that although the Conservatives have, in effect, disowned Osborne’s 2015 austerity, they still insist their 2010 policy was correct. This partial change of heart is little comfort to those of us who have been arguing against austerity for the past six years. In 2015 the Conservatives persuaded voters that electing Ed Miliband as prime minister and Ed Balls as chancellor was taking a big risk with the economy. What it would have meant, in fact, is that we would already be getting the public investment the Conservatives are now calling for, and we would have avoided both the uncertainty before the EU referendum and Brexit itself.

Many economists before the 2015 election said the same thing, but they made no impact on mediamacro. The number of economists who supported Osborne’s new fiscal charter was vanishingly small but it seemed to matter not one bit. This suggests that if a leading political party wants to ignore mainstream economics and academic economists in favour of simplistic ideas, it can get away with doing so.

As I wrote in March, the failure of debate made me very concerned about the outcome of the EU referendum. Economists were as united as they ever are that Brexit would involve significant economic costs, and the scale of these costs is probably greater than the average loss due to austerity, simply because they are repeated year after year. Yet our warnings were easily deflected with the slogan “Project Fear”, borrowed from the SNP’s nickname for the No campaign in the 2014 Scottish referendum.

It remains unclear whether economists’ warnings were ignored because they were never heard fully or because they were not trusted, but in either case economics as a profession needs to think seriously about what it can do to make itself more relevant. We do not want economics in the UK to change from being called the dismal science to becoming the “I told you so” science.

Some things will not change following the Brexit vote. Mediamacro will go on obsessing about the deficit, and the Conservatives will go on wanting to cut many parts of government expenditure so that they can cut taxes. But the signs are that deficit deceit, creating an imperative that budget deficits must be cut as a pretext for reducing the size of the state, has come to an end in the UK. It will go down in history as probably the most costly macroeconomic policy mistake since the 1930s, causing a great deal of misery to many people’s lives.

Simon Wren-Lewis is a professor of economic policy at the Blavatnik School of Government, University of Oxford. He blogs at: mainlymacro.blogspot.com

 Simon Wren-Lewis is is Professor of Economic Policy in the Blavatnik School of Government at Oxford University, and a fellow of Merton College. He blogs at mainlymacro.

This article first appeared in the 21 July 2016 issue of the New Statesman, The English Revolt