A vision of the future

China's multimillion-dollar port scheme in Baluchistan gives it a foothold in the Middle East that i

It is easy to miss the significance of the new port at Gwadar, which had its ceremonial opening in March. Five years ago this was just a fishing village on the Arabian Sea, a remote place on the edge of the desert and mountains of the Baluchistan region that spans Pakistan, Iran and Afghanistan. Camels and horse-drawn carts clogged the streets. Tribesmen wearing Baluch turbans and carrying AK-47s stood on the waterfront like epitaphs for the Great Game.

But five years is a long time in the politics of Asia, and the former outpost has changed almost beyond recognition. Today it lies, controversially, at the centre of General Pervez Musharraf's vision of the future for Pakistan. Built with Chinese money (how much is debatable, though it would be a safe bet to say at least $250m-plus in loans for the first phase), the multi billion-dollar scheme will inevitably aggravate the tense rivalry between nuclear-armed superpowers in this most volatile region of the world - if it has not already done so.

Musharraf flew in to Gwadar for the grand opening of the port on 20 March. "This is a major event in history," the khaki-clad president told a delegation from Beijing in a toast to the "all-weather" friendship between Pakistan and China. "The same Chinese friends will build a naval base here for us, and an energy hub for the Gulf and central Asian states," he added. China has also invested $200m in building a coastal highway that will connect the new port to Karachi.

In fact, the political weather looks choppy in Gwadar, just 250 miles from the Strait of Hormuz, through which nearly 40 per cent of world oil supplies flow. Several other countries in the region are not thrilled at the prospect of China gaining a foothold in the Middle East. They suspect Beijing will not only use the port to protect its oil supplies, but also want to flex its muscles in the Indian Ocean by spying on US military manoeuvres and threatening its enemies' trade routes.

As such, the new Chinese plans have rung alarm bells in India and Iran. The government in Delhi feels China is encroaching from three sides - Myanmar, Tibet and Pakistan. It is therefore helping the ayatollahs in Tehran to construct a port at Chabahar in Iranian Baluchistan, just over the border from Gwadar, in an effort to compete for the energy trade out of Afghanistan, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. Here, Iran may have the upper hand, building on better relations with central Asian states such as Afghanistan, under President Hamid Karzai, who remains cool towards Pakistan because of that neighbour's support for the Taliban.

But the fiercest opponents to the Gwadar scheme are the local Baluchis. The billions of dollars going into the project have served only to fuel bitter discontent or, at any rate, a suspicion that the benefits of the project will bypass them on the way to state coffers in Islamabad. Baluchis hate their government, which they refer to as "Pakistan", as if it were a foreign country.

Neither history nor geography has done them any favours. Life is harsh in the arid plains and bare mountains, with very little water, sparse vegetation and extremes of temperature. When the Baluchi tribesmen have not been fighting each other, or the heat or the land, they have fought Arabs, Turks, Tartars, Persians, Hindus and the British. Gwadar even belonged to Oman for 200 years. It was given to the Sultan of Oman by the Khan of Kalat in the 18th century and was sold back to Pakistan for about £3m only in 1958. Yet the Baluchis have never been fully conquered or subdued - not by the armies of Genghis Khan, nor by Lord Curzon, nor Musharraf.

The latest insurgency began in 2003 and targets Baluchistan's natural resources almost daily. Last year, according to official figures, there were 187 bomb blasts, 275 rocket attacks, eight attacks on gas pipelines, 36 attacks on electricity cables and 19 explosions on railway tracks. Militants also killed three Chinese engineers working at Gwadar in a repeat of an attack that claimed the lives of three Beijing contractors in 2004.

Eight out of ten families in Baluchistan lack safe drinking water; nine out of ten have no gas. This last statistic makes the Baluchi insurgents especially angry, given that their region produces most of Pakistan's gas - about a billion cubic feet per day, or roughly 45 per cent of total production - from the country's main gas field at Sui.

"Hub!" hissed Senator Sana Ullah Baloch of the National Party. "The world totally ignores Baluchistan. We need electricity, water, hospitals, roads and schools. We deserve no less because we have the resources, the strategic areas and the sea. We are Pakistan. Musharraf wouldn't last a day without us."

The Baluchi uprising undoubtedly poses a threat to Gwa dar's future as a major international port and Musharraf acknowledged as much in his speech at the opening ceremony. The insurgents should "surrender their weapons and stop creating hurdles in the progress of Baluchistan", he warned, or they would be "wiped out".

Musharraf's spokesman, Major General Shaukat Sultan, has accused Pakistan's neighbours of abetting the Baluchi militants. Two years ago, he claimed that India's external foreign intelligence agency, the Research and Analysis Wing, was "involved in terrorist activities in Baluchistan", just as Delhi has been protesting for decades about Pakistani-backed infiltration into Indian-run Kashmir. Several times the two nuclear-armed nations have gone to the brink of war, most recently in 2002. That occasion coincided with the go-ahead for a new port on the Arabian Sea. Soon afterwards the Pakistani police claimed to have arrested an Indian agent in Karachi for providing "strategic and sensitive information to India's spy agency, including maps of the Gwadar port".

I spoke to Pakistan's foreign minister, Khurshid Kasuri, about the future of Baluchistan. Kasuri is an immense, gar rulous man, and an expert on the region's politics. He told me that a Gwadar-style project had been the brainchild of the Soviet Union, which sought a port in hot waters. To meet that target, it invaded Afghanistan, though it was later forced to withdraw. China, as an emerging superpower, faces the same problem. It doesn't have a port that can be used all year round. Shanghai is approximately 3,000 miles away from the west of China. Gwadar is less than 2,000 miles from China and, with its warm waters, the port can stay open the whole year.

I asked Kasuri if Pakistan's neighbours were right to question Chinese motives in building a port that could be used to keep an eye on Indian missile tests or US naval patrols out of Diego Garcia in the Indian Ocean, but he dismissed talk of a hidden agenda. "As foreign minister, I'm supposed to know many things, but I'd be very surprised if there was nothing I didn't know," he said. "What I can tell you is that we now have a modern energy port where, five or six years ago, there was only sand and dust, and it will bring great benefits to Baluchistan, so I think the president's policy is bang right."

The Americans, on the other hand, are wary of a growing Chinese presence in the Gulf, so close to their own operations in Iraq and Afghanistan. For the moment, however, the White House seems to regard Gwadar not as a direct threat to US interests, but as an opportunity to restrict Iran. Others believe the project is a doomed venture on account of its proximity to the lawless tribal areas of northern Pakistan, where al-Qaeda is once again on the rise. Al-Qaeda's leaders have never forgiven Pakistan for co-operating in the "war on terror" after years of bankrolling the Taliban. In a nightmare scenario, the port at Gwadar would become an irresistible target, an unmissable opportunity for supporters of Osama bin Laden to wreak revenge. Sometimes it can be hard to forecast the weather in Baluchistan.

Hugh Barnes is a central Asia specialist. He is working on a translation of Hamid Ismailov's novel "Comrade Islam"

Pakistan by numbers

4 military dictators, including Pervez Musharraf, have ruled the country for 31 of its 60 years

3rd biggest recipient of US military aid after Israel and Egypt

64 years national average life expectancy

50% adult literacy rate

12m number of Pakistanis who have access to the internet

7th highest incidence of TB in the world

This article first appeared in the 30 April 2007 issue of the New Statesman, Pakistan: The Taliban takeover

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