One of the earliest instances of globalisation, the Silk Road, linked Asia with the Roman Empire in a flourishing trade that brought silks, spices and tea from the East and gold, silver and wine from the West. The route out of China was first opened by Commander Zhang Qian when he was ordered in 138BC by the Emperor Wu Di to form an alliance with the Yuezhi tribes (in present day Tajikistan) in order to fight the hostile Xiongnu tribes.
The network of routes comprising the Silk Road thrived for centuries as a conduit for trade, investment and culture, until the rise of maritime trade routes and the isolationism of the Ming Dynasty led to the winding down of their use in the 14th century. But as China and India re-assume their positions as global economic powers, the Silk Road is once again being developed, largely under Chinese leadership, as a hot spot for business.
As with its predecessors in the Han Dynasty, the incumbent Chinese government has a pressing political motivation for developing a new Silk Road. China’s western-most province, Xinjiang, has been wracked in recent years by instability and tensions between the native Uighur ethnic group and the Han ethnic majority. Separated from the rest of the country by distance and geographic obstacles, the government is seeking to bring stability to the area through economic integration and growth.
China would like to turn the region’s remote location to its advantage by restoring it as a gateway into Eurasia and an anchor for an emerging economic bloc, which would include its central and south Asian neighbours.
Trade and investment flows within central Asia are already on the rise. The size of the regional market is relatively large: the area including Pakistan, Afghanistan and Xinjiang has a total population of more than 310 million people. Many of the countries in the region hope to increase intra-regional trade as their infrastructure develops and buying power increases. China is driving most of the trade in this region. As of 2010, China was either the top import partner or export partner for each of the central Asian countries.
Much of the current trade and investment is based on the vast mineral and hydrocarbon resources in the region. Kazakhstan ranks 11th in the world for proven petroleum reserves, with 30 billion barrels. Turkmenistan, Kazakhstan and Uzbekistan are all major natural gas producers, with the 12th, 13th and 17th largest reserves in the world, respectively.
To export these resources out of central Asia, there are a number of strategically important pipelines traversing the region with endpoints in Russia, China and Iran. The most recent investments into these pipelines have been from China. In 2011, China concluded agreements with Uzbekistan and Kazakhstan in order to increase the capacity of a gas pipeline originating in Turkmenistan to 55 billion cubic metres by 2015.
Collectively, the central Asian states have large amounts of mineral deposits such as copper, gold and silver. Anglo-Australian mining firm Rio Tinto has made investments into copper exploration in Kazakhstan and Uzbekistan. While China’s largest gold company, Zijin Mining Group, recently acquired a majority share of Kyrgyzstan’s Altynken Company to mine 8.9 million tonnes of gold ore. Zijin also opened a new ore oxide processing facility in Tajikistan in August 2011, to support its existing mining operations. In 2011, China also inked new deals for uranium supply and investment in Kazakhstan and Uzbekistan.
As Afghanistan starts to develop its mineral resources, which have been estimated to be worth trillions of dollars, Chinese and Indian firms are at the forefront of investment in the country, as evidenced by the strength of their bids in recent tenders for iron and oil and gas projects.
Faster by land
Beyond resource-based investment, improvements in transportation infrastructure provide the potential for cost-effective transcontinental land links to turn old Silk Road market towns into hubs for economic activity again. A new cargo rail service cutting through Xinjiang and Kazakhstan opened in May 2011, providing a rail link between Chongqing in south-west China to the port of Antwerp in Belgium that can be completed in 13 days, which is half of the time required to ship by sea.
Other planned rail links criss-crossing the region and connecting the landlocked countries to ports on the Arabian Sea, Caspian Sea, Pacific Ocean and Atlantic Ocean will increase the region’s access to markets and make them more competitive with coastal economic centres.
There is strong institutional support for these plans, which is led by Central Asia Regional Economic Co-operation (Carec), a partnership of 10 central Asian countries and six multilateral donor organisations. Carec is administered by the Asian Development Bank and works in four priority areas: transport, trade, trade policy and energy. One of its major initiatives is the Carec transport and trade facilitation strategy that is planned to deploy $21bn in investments over 10 years to build a new network of six transport and trade corridors that will connect the regional economic centres and link the region with the rest of the world.
The Shanghai Co-operation Organisation (SCO) consists of China, Russia, Kazakhstan, Kyrgyzstan, Uzbekistan and Tajikistan, with India, Pakistan, Iran and Mongolia acting as observers. Although it is primarily focused on security concerns, SCO also deals with economic issues and has regular dialogues, which have resulted in closer co-operation in the region in areas such as finance, infrastructure and trade.
In the zone
China is actively promoting its Xinjiang province as the economic centre of the region and announced in October the policies for new special economic zones (SEZs) in Kashgar and Korgas. Kashgar was a major hub in the Silk Road and has proximity to the borders with Pakistan, Afghanistan, Kyrgyzstan and Tajikistan while Korgas is on the border with Kazakhstan and is the entry point for the gas pipeline from Turkmenistan.
The ultimate hope is that these SEZs can replicate the success of the Shenzhen SEZ by providing funds for infrastructure construction and tax holidays and financing for investors. The main challenge is that whereas Shenzhen benefited from its proximity to Hong Kong, the infrastructure and markets in the proximity of the new SEZs are very underdeveloped. Nevertheless, neighbouring countries such as Kazakhstan and Pakistan are welcoming the SEZs, and hoping that they too can benefit from the development of economic clusters.
While the resources are in place for central Asia to emerge as a powerful, interconnected economic bloc, serious obstacles remain. Violence and political instability is a major factor. After the 2010 revolution in Kyrgyzstan, instances of nationalisations compounded the uncertainty for potential investors. A joint mining exploration venture between South African mining company Gold Fields and the UK's Orsu Metals was suspended in October 2011, after an attack on its workers.
Even in relatively peaceful countries such as Tajikistan, there is a spillover of crime and violence from neighbouring Afghanistan. In Xinjiang, where the Chinese government maintains rigorous security measures, instability manifests itself in other ways, for instance, the internet was shut down across the entire province for 10 months following major rioting in 2009.
Corruption, lack of transparency and poor protection of investor rights are other major risks for investors. In Transparency International’s 2010 Global Corruption Perceptions Index rankings, Tajikistan, Kyrgyzstan, Turkmenistan, Uzbekistan and Afghanistan all found themselves in the bottom 15 places out of 178 countries.
Intra-regional tensions could also thwart efforts at integration. Competition between Russia and China has surfaced on issues regarding rail and pipeline links and continuing friction between the superpowers could slow down development. There is also a degree of mistrust relating to China among some of the country's other neighbours, with many fearing the consequences of too much dependency on the country.
Traders and manufacturers complain that the Chinese import low-quality goods into their countries at prices that crowd out locally manufactured products. Others worry that the Chinese are extracting their resources without leaving behind adequate compensation and benefits for locals. If such popular sentiments grow, policy barriers may be erected that slow investment.
The efforts required for building the physical and institutional infrastructure to overcome these many challenges will take decades to complete, although enthusiasm from Chinese and Indian investors, who are less risk averse and have more government backing than their Western counterparts, could shorten this time frame. As could the contribution of resources from the Chinese government, which could contribute to the development of infrastructure and the acquiring of more energy sources.
The original Silk Road operated for more than 1500 years but has been dormant for the past 500. The costs and returns involved in re-energising the region as a hub for commerce and culture needs to be viewed over a long-time horizon where those who are successful will be able to profit from the value created at the intersection of Europe and Asia.
James Ku is managing director of Indev Partners, an economic development advisory and project management firm based in Shanghai. He has recently advised governments and donor agencies on investment policy and infrastructure projects in China, Afghanistan and Pakistan.