Central Asia Policy Forum

Central Asia Policy Forum No. 2, June 2012 In 2011 State Secretary Hillary Clinton launched a New Silk Road strategy, presented as one of the United States major contributions to the post-2014 period in Afghanistan and designed to direct international investment to favor regional trade linking South Asia and Central Asia. Is the Silk Road initiative more than a positive spin on the military exit from Afghanistan? What are its main underlying geostrategic logics and economic mechanisms? How are the trade drivers of the Silk Road assessed? Featuring: Geoffrey PYATT, Principal Deputy Assistant Secretary of State for South and Central Asia Michaela PROKOP, political economist focusing on regional economic cooperation issues Gael RABALLAND, PhD in economics, Associate Researcher at the Choiseul Institute, Paris Gulshan SACHDEVA, Associate Professor, School of International Studies, Jawaharlal Nehru University, New Delhi Discussing the 'New Silk Road' Strategy in Central Asia Is the concept of Silk Road as it exists today a strategy in the fullest sense or merely a mindset? What does it need to become more efficient? The essence of the New Silk Road vision is the idea that if Afghanistan is firmly embedded in the economic life of the region, it will be better able to attract new investment, benefit from the regions resource potential, and provide increasing economic opportunity and hope for its people. This increased economic activity will benefit not only Afghanistan, but advance stability throughout the greater region as well through the creation of trade incentives, job opportunities, and people-to-people connections. The New Silk Road is a regional vision consisting of both hardware (infrastructure) and software (trade, private sector, capacity-building, etc.) linkages, and it is already taking shape, driven by the region. For instance, electricity from Uzbekistan and Turkmenistan is powering small businesses and government buildings in Afghanistan; rail connections are being built between Kazakhstan, Turkmenistan and Afghanistan, and a new rail line from the Uzbek border to Mazar e-sharif has been completed; Turkmen, Afghan, Pakistani, and Indian (TAPI) officials continue to make progress on the economic questions surrounding the proposed TAPI gas pipeline, and countries in the region are making steady progress on increasing trade: the Afghanistan-Pakistan Transit Trade Agreement (APPTA) and the Kyrgyzstan- Tajikistan-Afghanistan Cross-Border Transit Agreement are two such examples. India and Pakistan are also taking incremental, yet unprece-

dented, positive steps to facilitate the flow of goods across their border, recognizing the significant benefits for both sides. It is not just the United States that is working to facilitate and expand these economic linkages between South and Central Asia. Multiple initiatives such as the Transport Corridor of Europe, the Caucasus and Asia (TRACECA), the Central Asia Regional Economic Cooperation (CAREC) Program, and the ADB s Regional Improvement of Border Services (RIBS) project have been underway for some time and are intended to advance the idea of more trade through reduced non-tariff trade barriers and increased economic cooperation and integration. There are many weaknesses and missing links in the New Silk Road concept as it is currently being promoted. It is more a vision or wishful thinking than a clear and realistic strategy. The initiative has become a key component of the US strategy to promote stability in the region beyond 2014. It is based on the assumption that current military efforts will remain futile if Afghanistan, which as a landlocked country depends on developing its trade and transit network, does not become an economically viable state. The problem at the heart of the initiative is that Afghanistan the Asian roundabout is also its weakest link. The vision of a network of roads, rails and energy links connecting Central Asia via Afghanistan and providing the fuel for the subcontinent s economic growth grossly underestimates the legacy of conflict, the security and governance challenges in the country and the region as a whole, and the complex nexus between the Afghan insurgency and the political economy of the drug trade. There are also many other missing links in the New Silk Road. Iran, one of Afghanistan s most important trading partners and a central pillar on the ancient Silk Road, has been excluded. Its transit corridors could represent a more viable alternative to the riskier routes via Afghanistan and Pakistan or the costlier routes through the 2 Northern Distribution Network. An important part of a comprehensive strategy is also its sustainability and financing. After the withdrawal of most of its troops and its increasing domestic budgetary pressures it is not clear how the US would be able to continue subsidizing these currently economically unviable transit routes. Western diplomats and representatives of various international organizations have discussed the New Silk Road Strategy for several years. It is worth noting that it is regaining momentum thanks to some statements made by American diplomats in 2011. This strategy is being emphasized as a development tool for Afghanistan in the coming years. The declared objective of the Silk Road strategy is to remove the bureaucratic barriers and other impediments to the free flow of goods and people. However, in the last two decades the practice has focused mainly on road investments, since it is much easier to invest in roads than reducing border-crossing time and corruption at borders. It is also forgotten that land transport, in any part of the world, is more expensive than maritime transport mainly because of transit bottlenecks, the time and costs for crossing border, as well as transshipment costs. Economic activities are concentrated along coasts in the world precisely because maritime transport is cheaper than continental transport and economies of scale are higher in coastal regions. In the case of Central Asia, the decline of caravan trade dates back from the seventeenth century and led to a gradual economic marginalization of the region. The concept of the Silk Road has evolved over centuries and more recently in the last two decades. One single country, or a group of countries, can never monopolize it, because the Silk Road is a synthesis of cultures and civilizations as well as networks of trade, transit and infrastructure corridors. Every partner of the project has its own concept and understanding of the Silk Road and will continue to pursue its own objectives

through specific economic and/or cultural projects. Success of many of these projects will depend on economic viability as well as prevailing political and security conditions. It is difficult to imagine that all major partners ranging from Russia, China and Central Asian republics to India, Iran and Pakistan will agree on a single strategy. Already the European Commission s TRACECA project, as well as the US Silk Road Strategy Act, introduced enough geopolitics into the Silk Road concept. The Chinese Eurasian Land Bridge concept linking China and Russia to Europe via Kazakhstan and the International North South Transport corridor project initiated by India, Iran, and Russia are at different stages of implementation. Afghanistan (and some of its international partners) due to its geographical, strategic and security situation, would like to see the emergence of a Silk Road Strategy. However, the best thing would be to leave it to market forces and the best judgment of individual countries. The moment the strategy is associated with a particular country, it will unnecessarily generate resentment by some other players. Already a lot of trade, transit, energy and infrastructure projects and proposals are underway which will ultimately realize same goals as any well spelled out Silk Road Strategy. The best support the US could provide to the idea of Silk Road would be to identify some of the key projects, which will make a big difference in the region, and put its economic and diplomatic weight behind these proposals. Is the focus on trade relevant to addressing security challenges and political issues? As Secretary Clinton said, people need a realistic hope for a better life, a job and a chance to provide for their family that is a lesson we have learned time and again all over the world. The Silk Road vision is about building a more prosperous future for all of South and Central Asia. 3 Economic opportunity changes lives for the better and provides a positive alternative to insurgency. One of the best ways to increase economic opportunity is by growing a country s trade relationships. Trade with neighbors makes good economic sense as it can help raise the standard of living, provide jobs, and encourage social stability. Increased trade and investment links also give Afghanistan s neighbors more of a stake in their neighbor s future, and thus more incentive to make a positive contribution to Afghanistan s development. Indeed, all of Afghanistan s neighbors and nearneighbors stand to benefit from an end to the insurgency and a broad-based political solution. We are already seeing organic movement towards trade-friendly regulatory reform, regional capacity building, and increased cooperation on border management starting to take root within and between regional governments. From our perspective, trade, transit, energy, and people-topeople exchanges are some of the best mechanisms available for fostering economic growth and regional cooperation. The hope is that boosting trade would lead to an improvement in the economic prosperity of the region and create links, which in turn would build trust and provide incentives for peace and reconciliation. However, the security challenges and political tensions also represent some of the main obstacles to trade and to improving economic relations. This applies to relations among the Central Asian republics as well as to relations between Iran and the United States or between Afghanistan, Pakistan and India. The greatest progress in regional economic cooperation to date seems to be in the regional electricity trade with its clear benefits for all partners involved. The incentives for cooperation in other areas are less clear and often conflict with vested interests. The mostly poor implementation record of numerous bilateral and regional trade and transit agreements and regional cooperation initiatives amply demonstrates that improving trade relations will require parallel or preceding efforts to improve the multiple security and governance challenges. This also includes addressing the flourishing drug trade.

The benefits of trade may not represent sufficient incentives for all power holders in the region. Many of the region's countries are still ruled by a small, authoritarian elite with vested interests in the status quo. Some of these elites are more concerned with their own, short-term rent seeking and regime security than with free and open trade. The massive flow of opiates from Afghanistan represents another serious obstacle to licit trade. Drug money distorts the political economy of the countries, particularly the border areas. The corruption and collusion of local elites with the drug trade heavily impinges the free movement of people and licit goods. Opium cultivation flourishes where rule of law remains weakly enforced, local power holders often derive significant income from smuggling related activities and are therefore less likely to be inclined to support border management reforms and stabilization efforts. Trade can contribute to security since trade activities (formal or informal) are the only means of income for a large part of the population in countries like Kyrgyzstan and to a lesser extent in Tajikistan. Trade therefore, through its influence on poverty reduction, could have a positive impact on security. Trade is also a tool to develop economic cooperation and mutual interdependence in a context of tense relationships. That has been a core instrument in the case of European integration. However, we should not overestimate the political impact of trade since it depends on a global conducive environment. When borders are closed and governments do not wish to develop economic and political cooperation, trade is unlikely to prosper (except for smuggling). In this context, addressing trade obstacles is useful especially for local trade but political/security issues are probably more critical. Although there are still huge security and political challenges, particularly between India and Pakistan as well as between Afghanistan and Pakistan, focus on trade and economic issues can provide important inputs in improving bilateral 4 ties. Improvement in economic ties could also create new vocal constituencies advocating improvement in overall relations. Booming trading ties between India and China has to some extent forced policymakers on both sides to view relationships in more holistic manner. There is no guarantee that improvement in economic ties will automatically lead to better political relations. Still, a visible opening of India-Pakistan trade as well as Indian trade with Central Asia and Afghanistan through Pakistan could be a game changer for regional peace and stability. Despite serious political problems, there are already some positive trends. These include signing of Afghanistan-Pakistan Trade and Transit Agreement as well as positive developments on India- Pakistan trade matters. How do you understand the position of the US Silk Road initiative towards Russia and China, as well as the role of these two countries in post-soviet Central Asia? Though I am neither a China expert, nor a Russia expert, we see a growing consensus within the international community that greater economic opportunity leads to growth, and that growth leads to greater stability. China and Russia were participants at the Istanbul and Bonn Conferences, and were signatories of the positive declarations that emerged from those conferences. At Istanbul, China and Russia, along with the rest of the region, agreed on concrete and implementable economic confidence building measures, and on the importance of establishing realistic benchmarks to measure progress. These confidence-building measures include steps supporting Afghanistan s transition to a sustainable economy and implementing the New Silk Road/Historical Trade Routes vision of integrated regional economic growth that the international community welcomed and built upon at the Bonn Conference. Both China and Russia have a strong interest in seeing a more stable and prosperous Afghanistan. Because this vision absolutely contributes to these goals, both Russia and China have been supportive of the concept.

But ultimately, it is the countries of the immediate region that will turn this vision to reality. For much of the last few decades both Russia and China seem to have conceived of Central Asia and Afghanistan primarily through a security lens, fearing the spillover of Islamic fundamentalism and the impact of the drug trade. While security concerns remain a top priority, longer-term political and economic interests have gained in importance. This is particularly the case for China, which has invested heavily in the region s infrastructure and in Afghanistan's mining industry. Critics of the New Silk Road point to an underlying geo-economic strategic intent. There is also a lot of zero-sum thinking amongst the region's policy makers. Connecting Central Asia with South Asia would weaken Russia s monopoly over Central Asian trade and transit and also facilitate India entering the game. Beyond 2014 the prospects for the American version of the Silk Road, however, may be slim and China, Russia, and India are more likely to compete for their own trade and transit networks as well as their own economic interests in the region. The first major initiative in this field, the TRACE- CA program, which has been called The Silk Road of the 21st century, had been de facto presented as an alternative to the Russian route. The situation is different for China since this country is seen as the departure point for any silk road. In China s case, it is worth noting that the bulk of trade comes from Eastern China and goes through maritime transport to the United States, East Asia and Europe. Chinese flows transported overland are marginal. However, conceptually, China has an important role to play whereas Russia is an alternative and is in competition with Silk Road initiatives. From an economic history perspective, Russia was the main trading partner for Central Asia for several centuries. Therefore, it could take some time to see trade redirected toward trade flows between Central Asia and South Asia. Immediately after the breakup of the USSR, most Indian analysts felt that the real competition in Central Asia was between Russia and the United States. Many also believed that Russia would continue to have a decisive role in Central Asia because of its advantage of history and geography. Although many in India still believe in the reemergence of strong Russia, a sober assessment has also made a scenario in which over time China would become a dominant player in Central Asia, while being friendly with Russia. As China increased its engagement in the region and created a huge profile for itself through trade, energy deals, military agreements and the Shanghai Cooperation Organization (SCO), India will be watching carefully. It is also becoming clear that China would also play a more significant role in post-2014 Afghanistan, mainly through the SCO and through its close linkages with Pakistan. Both China and Russia have been quite suspicious of the Silk Road concept promoted by the US administration. Russians believe that post-soviet Central Asia is their sphere of influence and China feels the US Silk Road concept has deliberately ignored the importance of China in this economic strategy. At a very basic level, both of them feel that it is an attempt by the US to shift the Central Asian region from the Chinese and Russian orbit and bring it closer to South Asian countries. Trade between Central Asia and South Asia is still very limited. Do you think the Silk Road trade-based assessment is realistic? Do you identify any biases in calculating forthcoming economic trends? Trade between Central and South Asia remains limited. For all the progress, Central and South Asia remain two of the least integrated areas of the world. Indeed, a recent investment bank report found that intra-regional trade in South Asia is the lowest in the world, accounting for 1.5% of GDP. By virtue of geography, the region historically served as a hub of interlinking trade routes through which ideas, goods, and people passed 5

from one continent to another. Today, Afghanistan s neighbors and near-neighbors once again include some of the fastest-growing emerging economies in the world. This broader region of South and Central Asia is home to over one-fifth of the world s population. That market can fuel continued regional economic growth, but it will take vision and political direction to make that happen. We see the New Silk Road vision as a way to strengthen regional economic integration and promote economic opportunity between South and Central Asia through two primary mechanisms. The first is trade liberalization, which includes the reduction of non-tariff trade barriers, improved regulatory regimes, transparent border clearance procedures, and coordinated policies to accelerate the flow of goods, services, private investment, and people throughout the region. The second is energy and infrastructure, which includes roads, bridges, electrical transmission grids, railways and pipelines to connect goods, services, and people. These activities are for the countries of the region to pursue and carry out, and we have seen them taking steps to improve trade and economic cooperation. Increased trade throughout the region is not only realistic; it is already starting to happen. We see these developing trade relationships as win-win situations, and we are working hard to support them. Ultimately, we believe greater regional trade ties will unlock economic potential, and make countries wealthier and more secure by opening-up opportunities for all citizens. Particularly earlier projections of the economic benefits of increased regional economic cooperation have been grossly overestimated. For instance, a report by the Asian Development Bank one of the biggest promoters of regional economic cooperation estimated in 2005 that Afghanistan exports would increase to US$1,019 without significant improvements in intra-regional trade by 2010. With the road corridors and intraregional trade this number would increase to US$1,612 by 2010, i.e. an additional of US$592 million. However, according to the International Monetary Fund, Afghan exports amounted to a total value of only US$492 million in 2010. This is just one of the many unrealistic projections. The optimistic scenarios of the 'New Silk Road' with flourishing regional and intra-regional trade seem to ignore that in a region with a long legacy of conflict, authoritarian rule and characterized by mutual distrust, effective regional cooperation and trade will take time to evolve. Projections have become more cautious but still seem to ignore current trade patterns, transport costs and export potentials. For instance, Afghanistan s official trade remains heavily skewed towards imports linked to the presence of the international community and reconstruction efforts. Transit trade via Afghanistan is marginal. While traffic along the Northern Distribution Network has increased, the cost of transport along this route is significantly more expensive than the southern routes. Bilateral trade, particularly exports from Afghanistan, is limited due to the country s limited resources and export potential. In the medium to long term its vast mineral reserves are its greatest potential. However, resource-based growth and dependence is fraught with dangers and can, as other countries emerging from conflict have experienced, become a new source of competition and conflict in the region. Based on numerous empirical studies in the world, it is well known that the extent of bilateral trade depends mainly on the size of the economies, bilateral distance, respective level of development, the number of borders, and their economic complementarity and history. Applied to Central Asian flows from/to South Asia, it does not appear to be a large surprise to see limited trade flows due to the relative small size of the Central Asian economies and a lack of complementarity. It is therefore unlikely that flows will boom in the short and medium-term. South Asia is usually more perceived by Central Asian countries as an alternative transit route for exports/imports. But even in this case, it requires smooth border-crossings, efficient ports and trucking industries, and a more secure environment globally. 6

It is true that at the moment trade between these two regions is limited. Currently, the official twoway annual trade between India and Central Asia (including Afghanistan) is above US$1 billion (with about US$700 million exports). Apart from Afghanistan and Kazakhstan, economic relations with other countries are minimal. This trade is also restricted mainly to traditional items. Similarly, Pakistan trade figures show that in the last couple of years, its exports to Central Asia are between US$10 to 15 million per year. However, it has significant exports to Afghanistan. Although South Asian trade with Central Asian region looks quite insignificant, its importance should not be seen only within this limited context. With appropriate framework and foresighted policies, this region has the potential to alter the nature and character of South Asian continental trade. So far the majority of Indian trade is conducted by sea. Border trade with China was stopped after India-China war in 1962. A limited opening has been made with China recently through the Nathula Pass. Looking beyond Central Asia, it is clear that India trades a great deal with other CIS countries, Iran, and of course with the European continent. In 2010-11, India s total trade with these countries amounted to about US$147 billion. My own calculations on the basis of past trends show that that India s trade with Europe, CIS countries plus Iran, Afghanistan and Pakistan would be in the range of about US$500 billion in 2014-15. If political economy in the region improves and even if about 20 per cent of this trade is conducted through road, we are talking about US$100 billion of Indian trade passing through this region by 2015. South Asian regions will keep pushing policy makers to work for integration strategies. As a big fast growing economy, India will continue to be an attractive market for both the regions. Regional integration is also important for sustainability of Afghanistan as ultimately it has to play its traditional role of facilitating trade and commerce through its territories. So despite serious political and security concerns, economic integration between Central and South Asia will continue to be high on the agenda in the next few years. A non-partisan initiative, the Central Asia Program at George Washington University aims to develop academic and policyoriented research on contemporary Central Asia by providing a space for discussion connecting the policy, academic, diplomatic, and business communities. Its research activities focus on four main axes: security, development, state-building, and regional environment. It calls for a multidisciplinary approach combining political science, sociology, anthropology, economics, history, globalization studies, and security studies. The CAP aims to get US, European, Russian, Asian, and Central Asian counterparts working together, by promoting various forms of interaction and joint projects. More on www.centralasiaprogram.org Central Asia Program 2012 With the possibility of this trade passing through Central Asia and Afghanistan, most of the infrastructural projects in the region will become economically viable. Creation of this infrastructure will create further incentives for regional and sub-regional cooperation. With major infrastructural development and movement of goods and services, both India and Pakistan could be important economic players in Central Asia. Moreover, high economic growth in both Central and 7