The Silk Road Investment Destination: New Business Frontiers
Mike Pfister, Associate Expert at the United Nations Conference on Trade and Development (UNCTAD) in the Division on Investment, Technology and Enterprise Development
The Silk Road Map Towards Prosperity…
The Silk Road was the historic term for the transcontinental trade route between Europe and Asia that in 200 B.C. linked two great empires – the Roman Empire in the West and the Court of China in the East. The main route of the Silk Road connected Chang’an, modern day Xi’an, with Constantinople and endured for several centuries. Today, the Silk Road Initiative aims at stimulating trade and investment in Central Asia under the leadership of the governments of China, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan, thereby helping the region that was once sidelined by the march of history reclaim its prosperity.
Since their independence from the Soviet Union in 1991, the Central Asian countries have witnessed a strong wave of privatisation and market-oriented reforms. The Silk Road region has emerged as one of the most dynamic regions in terms of growth with a strong potential for investment. To reap the wide range of opportunities, a regional approach and commitment by the respective governments and the private sector through close partnerships is called for.
It is not a matter of bridging East and West, as this can now be done in milliseconds on the internet or in hours by plane, rather it is about grasping the opportunities in pivotal part of the globe to service new consumer demands which have developed through the globalization of manufacturing and services over the last three decades. The regional investment concept framing the Silk Road is based on the overall economic setting of the region, its attractiveness for foreign direct investment (FDI), its growth prospects, the regional cooperation opportunities, as well as branding and marketing activities. The Silk Road Initiative taps these in an integrated approach.
The Economic Setting…
With the exception of China, the Silk Road comprises landlocked economies, with Uzbekistan being one of the two countries in the world being double land-locked, with none of its neighbors having access to the sea either. Yet, these have all portrayed impressive growth figures. The region’s gross domestic product (GDP) rose to an impressive 10% per year in 2002-2004 from a 6% figure in 1997-2001. This becomes even more remarkable when these are benchmarked against the 5.2% growth of all transition economies in 2002-2004.1
1. Asian Development Bank, "Central Asia in 2015", CAREC Policy Brief no. 1, 2005, p.2
Growth in the region goes hand in hand with the economic ascent in Russia, China, South Asia, and the positive signs in Afghanistan. The growth in the oil & gas exporting economies (Kazakhstan, Uzbekistan) has been fuelled by high oil prices, increased FDI, investment projects in infrastructure and sound macroeconomic management.2 The non-oil exporters have benefited greatly from the high gold and cotton prices and textile exports. These have been coupled by a flourishing manufacturing sector and a rise in manufactured exports. Not only did the heavy industry sectors, like in Kazakhstan, boom, but also the labor-intensive commodities in textiles and garments witnessed upsurges.3
2. ADB, "Regional Cooperation Strategy and Program for Central Asia Regional Economic Cooperation (CAREC) Member Countries (Azerbaijan, Kazakhstan, Kyrgyz Republic, Mongolia. People's Republic of China, Tajikistan, Uzbekistan) 2005-2007", p. i
3. ADB, "Central Asia in 2015", p.2
Table 1 displays some stylized facts for the Silk Road. The region consisted of 71 million people in 2003, generated a value of GDP of around $65 billion (in 2000 $) and grew by average with 6.8 per cent per year between 1999 and 2003. Thus, the Silk Road represents a large and growing market that is similar in population to Turkey, with about 10 million people more than the UK and France and around 10 million people less than Germany.
FDI Trends and the Silk Road…
On account of a strong increase in FDI flows to developing countries, 2004 saw a rebound in global FDI after three years of declining flows. At $648 billion, world FDI inflows were 2% higher in 2004 than in 2003. More impressively, inflows to developing countries surged by 40%. As a result, the share of developing countries in world FDI inflows was 36%, the highest level since 1997. The United States retained its position as the number one recipient of FDI, followed by the UK and China.4
4. World Investment Report 2005 (UNCTAD), p.xix
Despite the surging FDI inflows in China, inflows are rather limited in the Silk Road region as whole (Figure 1). For instance, with around $260 million of FDI in Xinjiang in 2004 the province accounted only for a fraction of China’s $50 billion FDI inflows. Besides, only Kazakhstan was able to attract large amounts of FDI, up to $3.5 billion in 2004. From 1999 to 2003 FDI reached 9.3 per cent of GDP on average and contributed to just over 40 per cent of total gross fixed capital formation in the latter.
The major target sectors for FDI in the region are oil, energy, export-oriented manufacturing, agriculture and services, especially tourism. It is important to note that China plays an increasing role for the other Silk Road countries with their large market as an FDI origin. Also, the FDI potential indices for the Silk Road countries portray positive improvements for China, Kazakhstan, and Kyrgyzstan, thereby adding to the Silk Road’s FDI attractiveness (Table 2).
Prospects for Growth and Regional Opportunities…
According to the Asian Development Bank (ADB), economic growth in Central Asia will remain in the range of 9% per year for the next three years, backed by the high projections for the oil, gas and non-oil export commodities prices, global energy demand, and an expansion of the respective service sectors. In addition, China is expected to continue on a solid economic path of 8% growth over the next decade.5
5. ADB, "Central Asia in 2015", p.7
More specifically, if one assumes that the Silk Road countries remain committed to implementing policy reforms, elaborating market and business friendly strategies and especially take advantage of the regional cooperation initiatives, such as the Silk Road initiative, the following scenario can be considered realistic.6
6. Note: This scenario is based on ADB, "Central Asia in 2015" p.9-11
Economic policy reforms initiated to date will be accelerated in the region and a market-economy will become more apparent. The trade regime, inter-regional as well as with the rest of the world, will remain liberalized and there will be visible progress in large-scale privatization, financial sector liberalization and corporate governance. Export promotion strategies will be sharpened in the non-oil economies, along with the creation of relevant incentives and institutions. Furthermore, genuine efforts on interest rate liberalization, reform of state-owned banks, and institutional development of capital markets will be expected. As privatization progresses and business procedures are modernized and streamlined, a vibrant private sector will emerge.
A number of regional cooperation initiatives, such as the Silk Road Initiative and ADB’s CAREC programme, will contribute to a coherent and cohesive development of the Silk Road as a region including in the areas of transport, trade, and energy. Concrete projects could include an integrated rail and road network system, harmonized customs codes, rationalized border procedures and the adoption of best practices information and inspection systems. Institutional improvements will lead to a reduction of non-tariff barriers to regional trade and an efficient regional energy market will surface through tariff reforms and investments in regional energy infrastructure. Of course, increased transparency and more rational pricing reflecting market conditions should complement all of the above.
Regional economic diversification will be fed through a clear industrial competitiveness strategy. Predominantly, such a strategy would entail investment promotion and targeting, linkages between Silk Road enterprises with global transnational corporations, industry tailor-made investments in human capital and restructuring of R&D and technology institutions. An important element of such a strategy is the partnership between government and private sector in order to develop and implement concrete and realistic competitiveness strategies and policies.
In a nutshell, this scenario will lead to the Silk Road oil exporters benefiting from the regional cooperation initiatives and a regulatory environment that will translate into integrated transportation networks and increased efficiency from price and tariff reforms. The non-oil exporting countries will benefit from industrial development as well as from enhanced regional cooperation. Based on these assumptions, the ADB predicts an average upwards movement in growth of about 20% until 2015 sourcing from greater regional cooperation, a strengthened policy framework, and endeavors towards a more competitive private sector environment. These would convert poverty rates to lower figures, especially among the non-oil exporters, due to a greater trickle down effect to the poorer segments of society supported by the implementation of adequate policy reforms. Currently, the Silk Road Initiative is preparing an investor's guide, which will provide deeper insights in regional business opportunities, as well as a more sector-specific approach.
Avenues to Overcome the Hurdles…
Of course, some warning signs do remain. With the exception of China, all the Silk Road countries are facing typical challenges of transition economies and emerging markets. Trade has yet to be used as a driving force for the region’s economic development and is stifled by the imposition of complex tariff and non-tariff barriers as alluded to earlier.7
7. Hübner, Wojciech, UNDP Silk Road Initiative, Annual Progress Report, p.2
Investment flows from abroad, with a notable exception of China and oil-rich Kazakhstan, have been weaker than expected. In addition, insufficient physical infrastructure, inadequate institutional capacity, and poor implementation of regional agreements, are all factors which hinder cooperative efforts.
The Silk Road countries are all very unique and are very diverse in socio-economic and political terms. One of the main challenges therefore is to help create capacity and mechanisms of efficient cooperation and integration in this region with shared historical ties, including a strong branding and marketing effort.
...Towards a Single FDI Destination…
The regional initiatives should aim at presenting the Silk Road region as one investment destination allowing concrete branding. To reconcile the interests of potential investors with the region's strong macroeconomic fundamentals, the involved parties need to harmonize their legislation towards foreign investment and their investment promotion efforts. To speed-up the current process a medium-term objective towards the establishment of a common FDI legislation should be considered. Additionally, such a unified move would provide the opportunity to implement measures to stimulate intra-regional FDI flows to establish closer trade ties.
There are concrete steps in that direction, such as the envisaged free trade area under the auspices of the Shanghai Cooperation Organization (SCO). As the process towards a free trade zone requires substantial legal harmonization, the issue of convergence of the FDI framework could be incorporated in such negotiations.
...Promoting Transparency and the Enforcement of Laws…
Region-wide efforts have to be made to tackle the problem of intransparency in the investment process. To spread the harmonization of existing laws across the region special emphasise has to be geared towards the harmonization of practices to enforce those laws. Additionally, region-wide efforts should aim at chocking rent-seeking behaviours.
For instance, the publication of regional best-practices combined with best-practices awards could help to ensure success. Transparency issues should be included into the negotiation framework of any forum created for the Silk Road.
...Target Sectors for FDI…
Each of the countries should clearly define its target sectors for FDI and make this information publicly available. Based on these national targets the countries should formulate there regional targets, thereby facilitating the regional branding as one investment destination. This common regional strategy has to be carefully coordinated to minimize competition in the attraction of FDI within the region.
Based on the FDI trends presented earlier, three areas of focus could be envisaged. First, the mining, oil and gas; petrochemical; and power and energy sectors are interlinked. This provides an excellent platform for a vision based on the region’s competitive advantage.
Second, the transportation sector is deemed to be a promising element of the regional FDI strategy if one considers the Silk Road as one network from East Asia to Western Europe. Once this network is revived on a large scale, the Silk Road has the prospect to prosper from increasing transit transportation, as the old Oasis towns did some 2000 years ago.
Third, in area of services, the tourism sector presents golden opportunities. With an abundant cultural heritage and sites along the ancient Silk Road, the prospect to brand the region as one single tourist destination is promising. Within the context of the Silk Road Initiative, the World Tourism Organization (UNWTO) has jumpstarted a number of initiatives.8
8. UNWTO, "Tourism Pearls of the Silk Road", Madrid, 2005
A persistent infrastructure deficit within the region is a serious impediment to intra- and inter-regional trade. International organisations, such as the ADB, UNESCAP, and Worldbank have addressed this problem by initiating multi-million dollar impulses with increasing momentum since the early 1990s. These programmes contribute significantly towards improving a pre-condition for FDI attraction. However, recent studies show that the infrastructure is still relatively poor, which poses a major impediment for trade and economic growth.
To address the lack of infrastructure certain considerations are important: First, a bundling of existing infrastructure projects of international organisations and others could help pinpoint areas of immediate concern from a master plan perspective. In the long-term, the master plan could more effectively channel funds to the most promising region-wide projects. Second, to highlight a vision with promising future returns for potential investors, the Silk Road should follow the legacy of the ancient Silk Road as a transport network connecting the prospering regions of Eastern China and Europe. Third, to attract FDI directly into transport infrastructure projects promising Public-Private Partnership initiatives have to be created, such as toll roads and airport developments.
Branding and Marketing the Silk Road…
The branding strategy for the Silk Road should be based on concrete opportunities and realism, framed on five pillars. Positioning, cohesiveness, momentum, opportunities and partnership are the focal points of approach. The Silk Road Investment Forum to be held in X’ian, China, in June 2006 will encompass these themes and is the first of a series of annual fora, which will allow concrete benchmarking of the various private and public sector commitments and policy efforts.
The Silk Road will have to be placed within a wider regional context, thereby calling for regional solutions over national solutions. This offers mechanisms for the region’s stakeholders to overcome some of the bottlenecks presented above, while at the same time providing investors with a wide range of opportunities in terms of products and end-users.
Mechanisms such as the Silk Road Investment Forum create a platform for joint strategy development, political mobilization and commitment by all participating authorities. This feature of cohesiveness is a key to success given the transnational nature of the region.
As described above, the Silk Road is a region on the move, and this has to be tapped. Investors are attracted to such areas, and the region should aim at reinventing itself in a new forward looking context built on tradition.
The brand strength of the Silk Road is rooted in the diversity rather than uniformity of opportunities. The region covers four countries and four Chinese western provinces of Xinjiang, Gansu, Ningxia and Shanxi, thereby obviously presenting a wide array of investment opportunities. Close partnership between investors, host communities and the Silk Road governments themselves will seal the commitment to making the Silk Road an attractive investment destination, creating new business frontiers.
The Road Ahead…
The Silk Road is an investment destination strategically placed to service the new, partly untapped mass consumer markets of tomorrow in China, Central and Western Russia, India and the Middle East. The Silk Road Initiative lays the foundation for capacity building through a framework of both inter and intraregional cooperation among the five countries which will develop local markets, increase levels of FDI, stimulate cross-border trade and will contribute to more equitable and balanced economic growth.
With the growing world demand for oil and gas driving the domestic industrial base of the region and the positive economic developments foreshadowed earlier, the Silk Road can definitely outreach its growth potential. In addition, the Silk Road Initiative presented here has a long-term expansion potential to include neighboring nations such as Afghanistan, Pakistan, South Korea, Japan and Mongolia, which would eventually create a powerful trading bloc with considerable clout.
The Silk Road Initiative (SRI) is a regional UNDP programme that aims to enhance cooperation and development among China, Kazakhstan, Uzbekistan, Kyrgyzstan and Tajikistan. It focuses on facilitating public private partnerships in three main areas: investment, trade and tourism.
The Initiative is launching sustainable capacity building mechanisms, using the concept of 'seed money'. Through the establishment of regional mayors' and investment forums, a Silk Road city award, and the organization of study tours for business communities, it supports the Silk Road countries in reaping the rewards from regional cooperation, and to further develop and prosper.
Goals of the SRI: Improve policy and legal conditions for trade; Initiate and attract investment; Promote and attract tourism.
Major Partners of the SRI: UN Conference on Trade and Development (UNCTAD), World Tourism Organization (UNWTO), Shanghai Cooperation Organization (SCO), BOAO Forum for Asia.
For more information, please visit: www.silkroad.undp.org.cn
Development of Human Potential in Kazakhstan:Will We Manage to Join the World's Top 50 Most Competitive Countries? Yury Shokamanov
Lifelong Construction Vladimir Kananyhin
What Investors Should Know about Construction in Almaty Stanislaw Glazkov
Distinguishing Features of the LogyCom Production Process Pavel Raspopin
Oil and Gas Producers Sum up the Results Elvira Djantureyeva
Oil of Mangistau: What Does the Current Year Have in Store? Natalya Butyrina
Development of the Caspian Shelf Requires Package Approach Anatoly Zolotukhin
Associated Gas: One Problem, Different Approaches Gulzhan Nurakhmet