The New Silk Road Post-2014: Challenges and Opportunities

Nisha Desai Biswal
Assistant Secretary, Bureau of South and Central Asian Affairs
The Woodrow Wilson Center
Washington, DC
January 22, 2015

As Prepared

Thank you Michael for the gracious introduction.

It is an honor to speak at the Woodrow Wilson Center, an institution that serves an important and thoughtful role in shaping and advancing our national interest. For the last fifteen years, the Wilson Center has been led by two of America’s foremost global thinkers, public servants, and members of Congress, in Lee Hamilton and Jane Harman.

I am grateful for the chance to speak alongside an eminent panel of experts. No one is more conversant in the historical complexity, cultural richness, and geopolitical significance of Central Asia than Dr. Fred Starr. Few people match Mara Burr’s experience in promoting U.S. trade with South and Central Asia. And I look forward to the views of Jan Kalicki on energy security and trade, honed across a distinguished four-decade career in the public and private sectors.

It is wonderful to see many friends and colleagues from the diplomatic community here with us today. Thank you for being here. I would like to acknowledge Kazakhstan’s Ambassador to the United States Kairat Umarov – who I believe is with us today – for his partnership.

Back in the fall, we decided on the date for this important discussion. Of course, back then, we weren’t anticipating the Secretary of State and the President would be travelling to India in a span of three weeks. As you can imagine, it is a busy time.

Nonetheless, I didn’t want to miss this opportunity to discuss the remarkable prospects and enduring challenges facing South and Central Asia.

With more than 20% of the world’s population, and sitting astride key global trade routes, South and Central Asia can be a key driver of prosperity in the 21st century. This will bring sustainable security and economic development to billions of people across Asia – with positive ramifications felt across the globe.

A more stable and prosperous South and Central Asia is directly in the U.S. interest, and a more economically-connected region will ensure this stability and prosperity is widely shared and endures for generations to come.

The U.S. New Silk Road initiative is a reflection of the Obama Administration’s enduring commitment to the region, a recognition of the vital importance of economic and energy connectivity, and a representation of our belief that shared prosperity can lead to stability and security.

Working side-by-side with the countries in the region, other donors, and international financial institutions, the United States is pursuing a four-pronged strategy to bolster regional connectivity as part of the New Silk Road.

Specifically, we are focused on building a regional energy market, facilitating trade and transport, improving customs and border procedures, and linking businesses and people. The success of these efforts will be critical for securing Afghanistan’s economic ties with its neighbors and creating important ties between Central and South Asian economies.

For too long, Central Asia’s geography has defined its relationships with the rest of the world.

But, in the 21st century, economies can be powered by characteristics less beholden to the constraints of geography. The region is mineral- and gas-rich, at a time when the markets of greater Asia have put an enormous premium on a predictable flow of resources to power its emerging markets.

Central Asia has also played a vital role in support of Coalition efforts in Afghanistan over the last 14 years. Of course, our role in the region pre-dates the events of September 11th. Many in this room recall – and perhaps a few even helped bring about – the early decision by the United States to recognize the independence of the Central Asian states some 25 years ago. Our support continues today with our commitment to enhance bilateral ties from Ashgabat to Astana.

We understand the skepticism in the region when we speak of economic integration and regional connectivity, or the pace of our progress. The region’s political and ethnic diversity may make for complicated politics, but it also underscores its untapped potential. And what some perceive as an isolated economic zone, to others equals one of the last true frontier markets for development, investment, innovation, and growth.

Expanding our view beyond the region, this is clearly a moment of rapid change in the world, where the tectonic plates of global politics and economics are shifting considerably.

The menace of extremism – as seen in Ottawa, Peshawar, Sydney, and Paris – continues to pose a threat to the well-being of societies across the globe.

Concerns with slowing economic growth have forced many developing economies to reassess their key relationships and seek greater diversification. Falling oil prices have posed challenges to countries that rely heavily on energy exports, while import-dependent countries in South Asia benefit from lower manufacturing and consumer costs.

We also see a move to reduce dependency in fossil fuels as the impacts of pollution and climate change exact an ever-increasing toll.

All these global developments, whether they occur in Tashkent or Tokyo, Almaty or Ankara, will have a dramatic effect in this region.

Also, recent political developments – such as new governments taking the helm in India and Afghanistan – are also redefining how the region will co-exist and grow.

For instance, in India, Prime Minister Modi has promised to implement long-delayed economic and investment reforms. I will accompany President Obama to India tomorrow, where he will serve as the Prime Minister’s Chief Guest of India’s Republic Day ceremony. This marks the first time a sitting U.S. President has visited the subcontinent twice. Regional trade is likely to be near the top of the agenda.

The Modi government has put a premium on growing its economy and the markets of its neighbors, including in Central Asia – acknowledging a regional growth imperative that for too long has proved elusive.

India itself boasts the second largest population in the world, and expects 550 million people to occupy its middle class by 2025. According to the United Nations World Urbanization Prospects, in 2014, there were 28 mega-cities, 16 of them in Asia. By 2030, it is estimated the world will have 41 mega-cities, of which many will be fueling Asia’s growth.

It is clear that South Asia can offer Central Asia a predictable and vibrant market for the future in energy, raw materials, or other goods and services.

As we see here, Central Asia is one of the least integrated geographic regions in the world, with only about six percent of total trade occurring within the region.

Looking at the same measure of economic integration, 45 percent of total trade among ASEAN plus Japan, Korea, and China is intra-regional. Meanwhile, India itself is rapidly taking steps to expand trade with East and Southeast Asia.

If you consider foreign direct investment flows – which may best reflect broader integration trends – FDI from Japan, Korea, and China to the rest of Asia, particularly to ASEAN nations, has steadily been increasing.

Conversely, intra-regional FDI flows in Central Asia are paltry, at less than one percent. Also, as you can see from the slide, the region lags in the World Bank’s measurement of how much time it takes to export goods across national boundaries.

In short, this means Central Asia and Afghanistan are being left out of Asia’s economic growth, weakening the region’s resilience and making these countries even more vulnerable to internal and external shocks.

There are a couple reasons for this phenomenon.

China and Russia currently dominate trade patterns that mostly transit east to west. Trade to the rest of Asia through north to south routes is minimal, which means Central Asia and Afghanistan are largely cut off from the growth markets in the rest of South and Southeast Asia.

But, as Kazakhstan’s Foreign Minister Idrissov has said, while Central Asia might be land-locked, there’s no reason for it not to be land-linked.

In that vein, the United States strongly believes that with the right investments today, Central Asian countries and Afghanistan can position themselves to share in Asia’s rise.

Expanding trade ties within the region and points south – through Pakistan and to India – can be a game-changer. By connecting to new markets, trade ties can boost political stability within the region and create additional incentives for countries to work together on shared challenges. Having a diverse set of economic connections also reinforces independence and sovereignty.

President Ghani and his new government recognize that sustaining gains made in Afghanistan over the past decade will require robust growth and linkages with Afghanistan’s neighbors. Indeed, President Ghani was just in Turkmenistan this week, working with President Berdimuhammedov to expand trade and transit of gas, electricity, and expanded rail connectivity. This type of leadership is the key ingredient for any of this to work.

But, economic connectivity by itself is not enough to create enduring peace and prosperity. Countries in the region need to strengthen transparent and accountable governance, adopt environmentally-sustainable growth policies, and create inclusive political and economic systems that provide opportunity for all –especially for women and ethnic minority populations.

Now, let me state up front we are not naïve about the challenges. If this were easy, it would have been accomplished years ago. But we are bullish about the opportunities in front of us.

Let me offer specific examples that highlight progress in some of these areas.

On a regional energy market, tremendous progress has been achieved over the past year on the CASA-1000 electricity project, which will bring surplus summer hydropower from Central Asia to South Asia. This is an important proof of concept project for regional connectivity.

The four CASA countries – Tajikistan, Kyrgyzstan, Afghanistan, and Pakistan – reached an agreement on commercial pricing and are now taking steps to plug the remaining 23 percent funding gap, and sign major construction contracts to build and finish the lines by mid-2018.

The World Bank and Asian Development Bank are also working jointly to ensure complementarity between the CASA-1000 project and the ADB’s TUTAP project, which also brings surplus electricity from Central Asia to Afghanistan.

Uzbekistan is already lighting Kabul through the TUTAP lines, and a major transmission line from Turkmenistan to Afghanistan is in the works. We are working closely with both the World Bank and ADB to ensure a fully-integrated Central Asia-South Asia regional energy market in the future.

The region would benefit from development of the Turkmenistan-Afghanistan-Pakistan-India, or TAPI pipeline, which would diversify flows of Turkmen natural gas to new markets in South Asia. Bringing TAPI to fruition will require the expertise of an international oil company, and we hope progress is achieved this year.

Going forward, we will continue working with Central Asian countries to address their domestic energy needs, especially during winter months when they often face deficits. We will also support efforts within the region to address trans-boundary water management issues, which are increasingly important and have serious ramifications on energy and agriculture.

Turning to trade and transit issues, we are seeing some positive momentum towards breaking down barriers to trade. This is so critical since a 10 percent reduction in transport costs increases trade by 25 percent. As landlocked countries have some of the highest transportation costs, creating corridors that reduce the cost of transport, maximize efficiency, and can evolve to include transport, trade, logistics, and even supply chain corridors must be our collective goal.

In Islamabad recently, Afghanistan and Pakistan met to review APTTA – the historic Afghanistan-Pakistan Transit Trade Agreement. We were pleased to see Tajikistan join these discussions, which we hope provides additional momentum to support additional cross-border trade agreements in the region.

We are also seeing critical developments on rail connectivity. The rail line between Uzbekistan and Afghanistan, which the United States strongly supported, has played an important role in transporting goods in the region. With the right steps, even more can be achieved.

Turkmenistan, Afghanistan, and Tajikistan are also in discussions on a new rail line that could further connect these countries within the region and even provide an outlet one day to the Caspian Sea.

Let me also say a few words about our strong support for CAREC, or the ADB’s Central Asia Regional Economic Cooperation program. CAREC is developing six transport corridors linking Asia, Europe, and beyond through 7,800 kilometers of road and 3,800 kilometers of rail by 2020.

These transport links will build upon 3000 kilometers of roads in Afghanistan and 1000 kilometers of roads in Pakistan the United States has built or improved, including the five main trade routes into Afghanistan.

However, to turn these roads into highways of trade, we will need to see greater improvements in customs and borders. Bureaucratic, time consuming, and expensive customs and border procedures are perhaps the biggest impediments to regional trade.

We are working with other donors on supporting integrated border management and risk management systems. But again, political will to combat corruption, tackle narcotics, and support greater trade across borders will be the real driver that unlocks success.

On the private sector side, thanks to our partners at USAID, we have had tremendous success in sponsoring trade forums that in the past year alone have connected businesses across the region.

More broadly, by supporting trade liberalization through accession to the World Trade Organization, regulatory reform, improving the investment climate, and promoting free market principles, we are helping make these economies more attractive to investors and trading partners alike.

Before I conclude, let me turn briefly to the interest of other countries in greater regional cooperation and connectivity.

As you all know, China is developing what it is calling the Silk Road Economic Belt. Some paint our New Silk Road initiative as being in competition with China’s efforts, but in fact we welcome China’s constructive engagement and see a great deal of potential complementarity in our efforts.

We would only urge China, as it pursues economic cooperation projects, to utilize global standards and best practices in order to ensure sustainable economic growth for the people of Central Asia.

I also want to mention Russia, which of course has deep historical and economic ties to Central Asia. Russia will continue to be a major economic force in the region. At the same time, Central Asia states need the space to make their own decisions on how to further their economic development, preserve their political autonomy, and deepen their integration with global markets.

The expansion of the Eurasian Economic Union, for example, should not come at the expense of countries fulfilling their existing international commitments, including commitments to the World Trade Organization, nor restrict their ability to enter into other bilateral or multilateral trade relationships.

Thank you for your time. I’m eager to hear your views and take a few questions, and welcome your feedback on the opportunities and challenges this dynamic region presents.