5 things to know about the New Silk Road

With continued talk of economic doom and gloom – Goldman Sachs is predicting a third wave of the financial crisis and the IMF is warning of a slowdown in global growth – some pundits are finding solace in the new Silk Road conversation. But what do we really know about this initiative that’s being dubbed One Belt, One Road (OBOR)?

1. What’s the scope?

“The economic belt along the Silk Road is home to almost 3 billion people, and represents the biggest market in the world with unparalleled potential.” These were the most widely cited words of Chinese President Xi Jinping when he first introduced the initiative. China subsequently demonstrated that it was prepared to walk the walk when it backed and generously endowed several new institutions:

• $40 billion: Silk Road Infrastructure Fund, established in February 2014
• $100 billion: Asian Infrastructure Investment Bank, established in October 2014
• $100 billion: New Development Bank (also known as the BRICS Bank), established in July 2014

Those figures are marred by ambiguity and include funders other than China. Nevertheless, they clearly demonstrate the immense scale of OBOR.

Furthermore, as many as 60 nations have expressed interest in the initiative, which amounts to about 30% of all countries on the planet.

2. What’s it about?

From its conception, the New Silk Road was meant to reach far beyond improved logistics. When Georgia hosted the Tbilisi Silk Road Forum earlier this month, Prime Minister Irakli Garibashvili called the new Silk Road a corridor of global prosperity and cooperation. Indeed, right at the start of OBOR, President Xi said it had five pillars:

• Enhancing monetary circulation
• Improving road connectivity
• Promoting unimpeded trade
• Stepping up policy communication
• Increasing understanding between people and nations

Should the continent make progress in all these areas, we are bound to witness transformations far beyond the boost of transit capacity.

3. What is the perspective from China and other countries along the route?

Some posit that China is deploying its economic power in pursuit of geopolitical objectives. Others compare the OBOR to the Marshall Plan. But perhaps the simplest and most compelling explanation is purely economic: it is China’s way of solving its overcapacity problem. The transit corridor connecting western China with the country’s biggest trading partner – the EU – will be especially helpful for boosting that part of the country, and thus easing social tensions between the affluent coast and the still developing inland provinces.

When it comes to countries like Pakistan, where China has already pledged to invest tens of billions of dollars, or Kazakhstan, where the historic announcement was made by Xi Jinping, the focus is squarely on the promise of infrastructure development and the stimulating effect it will have on the wider economy. A more far-sighted strategy will have to balance pursuit of investment from the newly established financial institutions with a long-term view on how a country can leverage its own competitive edge to become an integral part of global value chains rather than simply a transit point.

4. How will it benefit Europe?

According to the World Bank, as fast as the Chinese economy has been growing in the past few decades, in absolute terms, it is still only roughly half the size of the EU’s ($18.5 trillion vs. $10.4 trillion). Europe’s genuine embrace of OBOR is therefore critical to the initiative’s ultimate success.

Indisputably, Europe and China are the two main economic poles on the Afro-Eurasia supercontinent, and trade between them dwarfs any other bilateral exchange in the region. The new Silk Road is sure to expand it further, and in the long term, all parties stand to gain, as postulated by basic economic theory. In the short term, however, some industries will be affected more than others, and it would be safe to assume that the long-term gains as well as short-term pains will be uneven among the EU’s 28 countries.

The diverging interests of EU member states, coupled with often unwieldy bureaucracy in Brussels and further amplified by recent geopolitical tensions, must have been contributing factors to Europe’s slow and half-hearted initial response to OBOR. How should Europe react? Which way will the trade imbalances tilt? And, perhaps the most sensitive issue, how will it affect European jobs?

Given the complexity of the questions, much more thought should be put into strategy formulation on the side of the EU, and some good scenario planning would go a long way. Critically, though, Europe needs to actively engage in this conversation to ensure all parties benefit.

The OECD forecasts that by 2030 Asia will represent 66% of the global middle-class population and 59% of middle-class consumption. The new Silk Road will not be built overnight, so the time to take a long-term view is now.

5. What path will it trace?

OBOR is notably and perhaps deliberately vague on details of who is in and who is out of the mega integration project of the century. And why shouldn’t it be? Competition among the countries in the region is clearly in China’s interest. When BMW or Intel is courted by governments to host the next manufacturing facility, the CEOs do not hesitate to leverage their negotiating position. And, ultimately, the companies benefit from the special arrangements that suitor-countries offer.

Several factors will determine what route the New Silk Road will take – everything from the state of a country’s existing infrastructure, to political and security risks, to geography and terrain. What’s almost certain, though, is that it will choose the path of least resistance. And if the inevitability of the transcontinental integration megatrend brings Europe to the table, and the competition for Chinese investment motivates political leaders in the region to pursue better policies, improve cooperation with their neighbours, and begin thinking beyond “infrastructure now” into the realm of global value chains integration, then the corridor of prosperity might just become a reality.

Author: Andrew Chakhoyan, Director, Government Relations, VimpelCom. Former Head of Eurasia, World Economic Forum.

Image: A shopper is seen through large lantern decorations at a shopping mall in Beijing February 20, 2013. REUTERS/Kim Kyung-Hoon