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Development on Silk Road

By Dr Hashim Iqbal Malik
Kashmir Watch
October 13, 2008

As it happened that silk became a precious commodity highly sought by other countries at a very early time, and it is believed that the silk trade was actually started before the Silk Road was officially opened in the second century BC. An Egyptian female mummy with silk has been discovered in the village of Deir el Medina near Thebes and the Valley of the Kings, dated 1070 BC, which is probably the earliest evidence of the silk trade. During the second century BC, the Chinese emperor, Han Wu Di's ambassadors traveled as far west as Persia and Mesopotamia, bearing gifts including silks. A Han embassy reached Baghdad in AD 97, and important finds of Han silks have been made along the Silk Road. One of the most dramatic finds of Tang silks along the Silk Road was made in 1907 by Aurel Stein. Some time around 1015, Buddhist monks, possibly alarmed by the threat of invasion by a Tibetan people, the Tanguts, sealed more than ten thousand manuscripts and silk paintings, silk banners, and textiles into a room at the Caves of the Thousand Buddhas near Dunhuang, a station on the Silk Road in north-west Gansu.

From about the fourth century BC, the Greeks and Romans began talking of Seres, the Kingdom of Silk. Some historians believe the first Romans to set eyes upon the fabulous fabric were the legions of Marcus Licinius Crassus, Governor of Syria. At the fateful battle of Carrhae near the Euphrates River in 53 BC, the soldiers were so startled by the bright silken banners of the Parthian troops that they fled in panic. Within decades Chinese silks became widely worn by the rich and noble families of Rome. The Roman Emperor Heliogabalus (AD 218 - 222) wore nothing but silk. By 380 AD, Marcellinus Ammianus reported, "The use of silk which was once confined to the nobility has now spread to all classes without distinction, even to the lowest." The craving of silk continued to increase over the centuries. The price of silk was very hight in Rome. The best Chinese bark ( a particular kind of silk) cost as much as 300 denarii (a Roman soldier's salary for an entire year!). Many sources quote that Roman citizens' demand for imported silks was so great as to be damaging to the Roman economy.

Silk was even beginning to have a civilizing effect on the barbarians. In 408 AD when Alaric, a Goth, besieged Rome, his price for sparing the city included 5000 pounds of gold, 3000 pounds of pepper, 30,000 pounds of silver and 4000 tunics of silk.

The description of Silk Route to the west as the `Silk Road' is somewhat misleading. Firstly, no single route was taken; crossing Central Asia several different branches developed, passing through different oasis settlements. The routes all started from the capital in Changan, headed up the Gansu corridor, and reached Dunhuang on the edge of the Taklimakan. The northern route then passed through Yumen Guan (Jade Gate Pass) and crossed the neck of the Gobi desert to Hami (Kumul), before following the Tianshan mountains round the northern fringes of the Taklimakan. It passed through the major oases of Turfan and Kuqa before arriving at Kashgar, at the foot of the Pamirs. The southern route branched off at Dunhuang, passing through the Yang Guan and skirting the southern edges of the desert, via Miran, Hetian (Khotan) and Shache (Yarkand), finally turning north again to meet the other route at Kashgar. Numerous other routes were also used to a lesser extent; one branched off from the southern route and headed through the Eastern end of the Taklimakan to the city of Loulan, before joining the Northern route at Korla. Kashgar became the new crossroads of Asia; from here the routes again divided, heading across the Pamirs to Samarkand and to the south of the Caspian Sea, or to the South, over the Karakorum into India; a further route split from the northern route after Kuqa and headed across the Tianshan range to eventually reach the shores of the Caspian Sea, via Tashkent.

Secondly, the Silk Road was not a trade route that existed solely for the purpose of trading in silk; many other commodities were also traded, from gold and ivory to exotic animals and plants. Of all the precious goods crossing this area, silk was perhaps the most remarkable for the people of the West. It is often thought that the Romans had first encountered silk in one of their campaigns against the Parthians in 53 B.C, and realised that it could not have been produced by this relatively unsophisticated people. They reputedly learnt from Parthian prisoners that it came from a mysterious tribe in the east, who they came to refer to as the silk people, `Seres'. In practice, it is likely that silk and other goods were beginning to filter into Europe before this time, though only in very small quantities. The Romans obtained samples of this new material, and it quickly became very popular in Rome, for its soft texture and attractiveness. The Parthians quickly realised that there was money to be made from trading the material, and sent trade missions towards the east. The Romans also sent their own agents out to explore the route, and to try to obtain silk at a lower price than that set by the Parthians. For this reason, the trade route to the East was seen by the Romans as a route for silk rather than the other goods that were traded. The name `Silk Road' itself does not originate from the Romans, however, but is a nineteenth century term, coined by the German scholar, von Richthofen.

In addition to silk, the route carried many other precious commodities. Caravans heading towards China carried gold and other precious metals, ivory, precious stones, and glass, which was not manufactured in China until the fifth century. In the opposite direction furs, ceramics, jade, bronze objects, lacquer and iron were carried. Many of these goods were bartered for others along the way, and objects often changed hands several times. There are no records of Roman traders being seen in Changan, nor Chinese merchants in Rome, though their goods were appreciated in both places. This would obviously have been in the interests of the Parthians and other middlemen, who took as large a profit from the change of hands as they could. However, this route declined in 18th century after hostile environment in the region and mainly due to Anglo Sino rivalry.

Now in the the 21st century, the great East-West trading route has regained major prominence. The New Silk Road -- the revival of trade and investment between the Gulf and Asia -- features large movements of capital as well as goods.

China is a major part of this metaphorical roadway. Trade between the Middle East and China totaled 69 billion U.S. dollars in 2007.

I spoke of revitalising the Silk Road; but perhaps it would be better to speak of re-energising the Silk Road. After all, one of the big global issues today is energy security of supply and security of demand. The question is whether energy security will increase interdependence and cooperation, as it should, or serve as a bone of contention and even lead to zero-sum competition.

Objectively speaking, energy should unite us. Indeed, in the twenty-first century, Realpolitik means seeking mutual benefit. But this presupposes that we all resist the age-old human temptation to focus on short-term relative gains at the expense of others, and instead strive for mutual benefit.

Most recently European Commission published a Green Paper on Energy for the European Union, formulating a Europe-wide energy policy. It consists of three main pillars: 1) enhancing security of supply; 2) promoting free market principles inside and outside the European Union; and 3) promoting sustainability.

From a European perspective, Kazakhstan, like Russia and other countries, has become a key energy partner. The Green Paper says the 'Caspian and Mediterranean countries are important gas suppliers and transit routes'. Kazakhstan possesses significant amounts of oil and gas, and is blessed with a strategic location. Given sufficient investment, Kazakhstan could develop within ten years into one of the world's top eight oil producers.

Exploration and production are not the only key problems, however. Transport from producers to consumers is another. Consumers want security of supply; producers want security of demand. This requires long-term cooperation and mutual trust. At the same time, all need to diversify. Regardless of whether a country finds itself on the supply side or the demand side, all need to reduce the risk that crises or disruption in one part of the world will have a big impact on another part of the world. That is why building more pipelines is crucial. For Eurasia, gas and oil pipelines are the Silk Road of the twenty-first century. While creating networks of mutual dependence, one can at the same time spread our collective risks.

There is also an environmental aspect to building a more extensive pipeline network in Eurasia. As oil and gas have to be transported over steadily greater distances in steadily greater quantities, the environmental risks also rise.

One example drawn from the link between your region and the European Union is the vulnerable shores of the Bosporus, where many ships with dangerous cargoes pass through the heart of Istanbul. New pipelines offer a good alternative.

We will be able to discuss these issues this coming November at a ministerial energy conference between the European Union and the Black Sea / Caspian Sea region.

Over the last two years U.S. policy makers have been promoting a new vision for Central and South Asia. This vision advocates the creation of a new Silk Road. The idea behind the vision is to restore links between Afghanistan, the Central Asia Republics, and their neighbors. Realization of the vision can only occur if barriers to cooperation and integration are significantly reduced. Conceptually, these barriers can be understood by viewing them as transaction costs: the higher the transaction costs, the harder it will be to create a new Silk Road. High transaction costs are created by geography, dependence on other countries' transit routes and a variety of political, social, and economic factors. The most significant factors contributing to high transaction costs are poor governance, underdeveloped infrastructure, and insecurity. Finding ways to lower transaction costs is the critical task for the United States and its partners. For the United States and its eastern partners to succeed in their nation building efforts in Afghanistan, they need to find ways to improve economic conditions in the country. According to American policy makers, the best way to accomplish this is to expand economic links between Central and South Asian nations. They believe Afghanistan has the potential to once again become the "land bridge connecting the vast Kazakh steppes and beyond with the great ports of the Indian Ocean and greater Asia." The essence of the American vision for both regions is the creation of a new Silk Road. Its creation could conceivably open up new markets and economic opportunities for the landlocked countries of Central Asia and Afghanistan. Integrating commerce regionally could spur economic growth, create new jobs, and bring in foreign investment which could help reduce poverty, increase regional stability, and potentially set the stage for the emergence of democratic governance in the region.

Former Soviet Union (FSU) legacies, geography, a lack of transportation infrastructure, and geopolitics are just a few of the barriers that hamper regional cooperation and economic integration. Each of these affects transaction costs which reduce the economic potential of a new Silk Road. Overcoming high transaction costs requires cooperation between regional nation-states, regional and international organizations, international financial institutions, and major powers like the United States, China, Pakistan, India, and Russia. Without this cooperation, the vision of creating a new Silk Road will not likely be realized. Finding ways to manage transaction costs therefore becomes the critical task for the responsible nations. American policy makers generally saw Central and South Asia as distinctly different regions. U.S. relations and solutions to problems were often pursued on a bilateral basis. Geographically Afghanistan was grouped by the U.S. State Department (DOS) with the rest of South Asia. Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan, the five Central Asian Republics (CARs), were grouped with Russia. The U.S. Department of Defense (DoD) grouped the CARs, Afghanistan, and Pakistan with the Middle East in the Central Command area of responsibility (AOR) and placed India and the rest of South Asia in the Pacific Command AOR. It was not until Secretary of State Condoleezza Rice's visit to Central and South Asia in October 2005, that the United States started viewing Afghanistan, the CARs, India, Pakistan, and the rest of South Asia as part of a greater South Asia. The DOS formally aligned its policy organization with this view in early 2006 with the movement of the CARs from DOS's European and Eurasia Bureau to its South Asia Bureau. Since Secretary Rice's visit, U.S. policy makers have been promoting a new vision designed to increase economic prosperity and cooperation between Central and South Asia. Central to this vision is the broad idea of a "revival of the fundamental basis for the Silk Road. Such a revival, they believe, will restore historic ties between the regions and create new links in the areas of trade, transport, energy, democracy, and communications. These linkages are expected to preserve and extend existing relationships (Europe, Turkey, NATO, Organization for Security and Cooperation in Europe (OSCE), and Japan) and expand relationships between Central and South Asia.

However, the landlocked nature of Afghanistan and the CARs means they must depend on neighboring countries' transit infrastructure. Therefore, the quality of their neighbors' infrastructure is just as critical as their own. The quality of infrastructure in Afghanistan and the CARs, like other landlocked countries, is generally underdeveloped and not in good condition. According to one estimate, only 25 percent of the roads in Kyrgyzstan and 20 percent of the roads in Tajikistan are in good condition. A lack of funding for repairs, low quality maintenance, and numerous other factors has contributed to poor quality roads. In addition to roads, the region's railways, logistics systems, and multimodal transport infrastructure are also in poor condition and underdeveloped. None of the CARs have modern logistics centers capable of consolidating freight for international markets. This deficiency combined with the limited availability of multimodal transport has created conditions which have made the costs of international transport services for small cargo very high. Cross-border movement of trains is inhibited by a lack of locomotives and train paths which causes substantial delays at border crossings. Rail links from the CARs heading south through Afghanistan are underdeveloped and transit connections to Pakistan do not exist.

Many infrastructure deficiencies are a direct result of the legacy of the infrastructure development policies of the FSU. The infrastructures the CARs inherited from the FSU were designed to transport raw materials from the CARs to Russia and Ukraine. This resulted in a transportation network in which all major roads, rail links, and pipelines pointed north, crossing through multiple CARs on the way to Soviet markets. The network's northward orientation ensured that transit corridors to the east, west, and south were either very limited or nonexistent. Since 1991, transport corridors to the east and west have been gradually developing in response to growing trade with China, Iran, and

Turkey. Routes to the south have been much slower to develop; however, since the ousting of the Taliban regime in Afghanistan this has started to change (the CARs' exports to India are less than one percent of their total exports). The major investment in the South has been the rebuilding of Afghanistan's Ring Road. The Ring Road is one of the largest and best funded projects in the region. So far, over US$1.45 billion has been spent on the construction of the Ring Road and roads linking itto neighbors' border posts. Numerous other transport projects, intended to integrate the CARs with their neighbors, are ongoing but progress continues to be slow due to deteriorated legacy transit corridors, poor coordination of national transportation projects, and limited financial resources.

The condition of the transit infrastructure in Afghanistan's southern neighbors, while in better condition and better developed, is also inefficient, suffers from long wait and travel times, and of low reliability. Poor performance in Pakistan's transport sector is estimated to cost Pakistan 4-6 percent of GDP annually. Pakistan railways take from 21- 28 days to travel 1800 km from the northern end of the country to its southern ports, which is 4-7 times slower than in China and the United States. Road freight takes 3-4 days to travel the same distance (twice as long as in Europe and East Asia). Iran's transport sector is in better condition but has similar problems. Its problems include underdeveloped seaports, railways and road networks, inefficiencies resulting from state ownership of its railways, and poor quality transportation services. Like Pakistan, most of Iran's land freight is carried by trucks. The imbalance between the road and train sectors, in both countries, is not just a function of underdeveloped railways, but also a function of government policy which introduces markets distortions which make rail transport less competitive. Both countries' major seaports suffer from a lack of capacity. Specifically, the Pakistani seaports of Karachi and Port Qasim are inefficient, Gwadar, Pakistan and Chabahar, Iran are undeveloped, and Bandar e-Abbas, Iran needs to be upgraded. Overall, the transport networks in South Asia are more developed than those to the North, but they still generate significant transaction costs.

Another issue is the ability to access neighboring countries' transit corridors is more than a matter of having the right infrastructure connections. Access requires good cross-border political relations with neighbors. For landlocked counties like Afghanistan and the CARs, bad relations with a neighbor can limit or deny access which has serious economic and political consequences. The causes of poor political relations in the region include the inability of governments to demarcate national borders, a failure to implement effective water management mechanisms, political vagaries of neighbors, criminal and insurgent activities in border areas, fears of Uzbek hegemony, and a general distrust of neighbors. One of the driving forces of poor political relations in the CARs is Uzbekistan's policies and actions. Uzbekistan is important because it shares a border with Afghanistan and the other CARs and controls important trade routes critical to Tajikistan and Kyrgyzstan. It also has the largest population and most powerful military in Central Asia. Uzbekistan sees itself as the dominate power in the region and often uses its position and power to pressure its neighbors. A recent example of this activity involves Uzbekistan's refusal to allow Kyrgyz electricity to pass across its borders on the way to Tajikistan in October 2006. Uzbek authorities claimed the local power grid could not support the extra load. Tajik officials disagreed and believe this action was an effort to force Tajikistan to buy the more costly Uzbek electricity. Experts also believe this may be part of a larger effort to inhibit Tajik development which could potentially threaten Uzbekistan's leadership role in the region.

Uzbekistan's poor handling of border issues has also strained political relations and restricted access to transit corridors. The 1999-2000 mining of borders with landmines and unilateral demarcation of disputed borders with Kazakhstan, Tajikistan, and Kyrgyzstan resulted in higher cross border tensions. The fallout from these actions and the resulting landmine removal operations continues to cause minor conflicts along Uzbekistan's borders and sour relations with its neighbors. Demarcation disputes are also prevalent between Tajikistan and Kyrgyzstan, especially in the Ferghana Valley. The Ferghana Valley, home to nine million people, has some of the most contentious border disputes in the region. The combination of porous borders and presence of multiple ethnic enclaves (one Kyrgyz enclave in Uzbekistan, four Tajik enclaves in Kyrgyzstan, and two Uzbek enclaves in Kyrgyzstan) make border control and demarcation very difficult. Border tensions over the years have resulted in numerous incidents and riots at border stations. The most recent incident occurred on September 19, 2006 when Tajik border guards captured an Uzbek soldier and contract worker for illegally crossing into Tajik territory near Kurak. Water is another significant source of political tension in Central Asia. Most of the region's water originates in Tajikistan and Kyrgyzstan, states not well endowed in energy resources. In the winter, Tajikistan and Kyrgyzstan release water from their dams to create electricity which leaves less water available for the summer uses of downstream neighbors. Downstream users, Kazakhstan and Uzbekistan, which are well endowed in natural gas and oil resources, are the CARs biggest consumers of water. They use water in the summer to grow cotton and other crops. As the economies in upstream users grow, their demand for energy will increase, especially in high energy consumption industries like Tajikistan's aluminum industry (over 40 percent of Tajikistan's exports). Uzbekistan's plan to increase the price of natural gas it sells Kyrgyzstan this winter could result in increased releases of water to generate more electricity to offset gas prices. These factors create a situation which makes water usage a strategic resource and a source of tension between the CARs. Turkmenistan severely limits foreign contact with its citizens and access to the country. It generally enjoys good trading relations only with states (Iran and Russia) which enable it to transport its main resources, oil and natural gas, to foreign markets. Relations with other states like Uzbekistan tend to be poor. Turkmenistan's isolationist policies severely limit opportunities for cooperation and its potential as a transit corridor. Cross-border political friction is not limited to the CARs. South Asian states suffer from the same disease.

Therefore, States undergoing civil wars, major political unrest, combating insurgencies or suffering from high levels of criminal activity develop conditions which cause states to close or severely restrict access across borders. Over the last decade the Central and South Asian regions have experienced all these problems. The largest source of instability has been Afghanistan. Concerns over the infiltration of terrorist groups and other extremists along with the expansion of the drug trade and its associated criminal activity have caused Afghanistan's neighbors to restrict border access. Instability in other states has also been a source of border closures and restrictions. Kazakhstan and Uzbekistan closed their borders with Kyrgyzstan in March 2005 during the Kyrgyz Tulip Revolution. Kazakhstan also closed its border with Kyrgyzstan on November 29, 2005 until after the December 4, 2005 presidential elections.36 The Uzbek- Kyrgyz border was closed after the May 2005 unrest in Andijan. This incident was not the first time the Uzbek border was closed. Uzbekistan has a history of closing or restricting access to its borders. The Uzbek government's primary rationale for tighter border controls has largely been based on security concerns related to the activities of radical Islamic groups. Incidents like the March 2004 attacks in Bukhara and Tashkenthave intensified the regime's fears of radical Islamist group infiltration. Uzbekistan also closed its borders over economic issues in January 2003. During this period, Uzbekistan blew up a bridge at the border crossing near the Kyrgyz town of Kara Su and accused its neighbors of "economic aggression."

The CARs and their neighbors have significantly different national transportation regulations and procedures. Border procedures and tariffs are also governed by a complex regional regulatory framework which is based on numerous bilateral, multilateral, and international agreements. This mosaic of agreements creates a situation which has resulted in little harmonization of transport procedures and increased the costs of crossborder and transit traffic among the CARs and their neighbors. The way this situation increases transaction costs can best be demonstrated by examining tariffs, customs regimes, and visa procedures. Customs regimes, while they vary widely from country to country, can generally be characterized as inefficient, uncoordinated, time consuming, and costly. Typically, at each border checkpoint or port of entry, each state has multiple inspection and enforcement agencies. Each agency has its own paperwork requirements and fees. Custom clearance can take anywhere from 3 to 97 days depending on the country. The number of documents and signatures required to import into the region are: 18 and 32 for Uzbekistan, 10 and 57 for Afghanistan, 18 and 27 for Kyrgyzstan, 18 and 17 for Kazakhstan, and 12 and 15 for Pakistan. In Tajikistan more than 60 administrative steps are typically required to import a product. A similar number of administrative requirements and delays exist for exports. The fees associated with clearing customs can be considerable. For a truck to transit from the Talas Oblast in East Kyrgyzstan to the Termez, Afghanistan border crossing, it would have to make four border crossings (Kyrgyzstan-Uzbekistan, Uzbekistan-Tajikistan, Tajikistan-Uzbekistan,

and Uzbekistan-Afghanistan). Tariffs also lack harmonization and are a significant barrier to trade in Central and South Asia. The tariff rates and schedules employed by the CARs differ considerably. Turkmenistan (10 to 100 percent on 94 commodities), Kazakhstan (7.9 percent average with some as high as 100 percent), and Uzbekistan have relatively high tariff rates and the latter two countries employ a very complex tariff schedule. Kazakhstan, Tajikistan, and Uzbekistan frequently and unpredictably change their tariff schedules. Railway tariffs have also been a source of tension between Uzbekistan and Tajikistan. Implicit tariffs in the form of taxes are also levied by Kazakhstan and Uzbekistan on selected imported goods in order to protect domestically produced goods. Burdensome customs procedures and paperwork, complicated border crossing procedures, a lack of harmonization in tariff policy, and other administrative practices of the CARs has created an environment that imposes several barriers to cross-border and regional trade and cooperation. All of these barriers are a matter of policy. Unlike physical barriers, like poor geography, which impose transaction costs that are largely fixed, administrative practices are barriers which create transaction costs that can be lowered through better policy. Unfortunately, creating and carrying out better policy can be very difficult where powerful vested interests benefit from the status quo.

In addition to being landlocked and the costs arising from dependency, several other conditions produce transaction costs which can potentially inhibit a new Silk Road. These conditions are based on a wide variety of political, economic, and social factors. The most significant factors include border effects, informal barriers, a lack of economic diversity and inadequate markets of scale, the "spaghetti bowl" problem, business and social network effects, and the actions of major powers. All create barriers that will need to be considered and addressed. The first factor policy makers should consider is what economists refer to as the "border effect." The mere presence of a border inhibits integration and impedes trade. Borders create a strong "home-bias" in the pattern of trade. Different legal systems, regulatory schemes, currencies, languages, and cultural practices all contribute to this effect. Many of the differences have become more pronounced in the CARs since the breakup of the Soviet Union. Each of the CARs has strove to create their own national identities which have resulted in similar, but different forms of governance. The legal systems and governmental institutions of each state have contributed to more jurisdictional and institutional differences within the region. Different jurisdictions and institutions are barriers that generate transaction costs. Local languages like Turkmen, Kazakh, Northern Uzbek, Tajiki, and Kirghiz are replacing Russian as the language of choice. South Asian states also speak a wide variety of different languages (Urdu and Sindhi in Pakistan; Farsi, Pashto, Southern Uzbek, and Turkmen in Afghanistan; Hindi and English are the dominate languages in India). The numerous currencies in use in the two regions include the Uzbekistani Soum, Indian Rupee, Pakistani Rupee, Afghani, Somoni, Turkmen Manat, and the Tenge. These and other factors present in Central and South Asia create a strong disincentive to integrateInformal barriers to trade and cooperation arising from internal factors are the second factor which creates higher costs. They include poor governance, corruption, criminal activity, and poor economic conditions. All these factors feed on each other. Poor governance creates opportunities for corruption and criminal activity and vice versa.

Criminal activities contribute to corruption and poor governance. Poor economic conditions frequently result of poor governance and bad economic policy in states like Uzbekistan and Turkmenistan. In states, like Kyrgyzstan, with reasonably good economic policies, corruption and criminal activity undermine governance. None of the Central or South Asian states rank low on corruption indexes. Many informal barriers arise directly from the administrative and policy actions already discussed. Multiple control points along transit routes, bureaucratic red tape, high taxes, import-export restrictions, and cumbersome border crossing procedures create conditions and opportunities for corruption and rent seeking activities. These activities come in many forms and include bribes and unofficial payments, under invoicing, and smuggling. In the transportation sector, unofficial payments often exceed official payments. Truck drivers on the Dushanbe-Moscow Road reportedly pay US$842 in official fees and Kazakhstan. Informal payments at internal checkpoints in Tajikistan may amount to as much as one percent of GDP annually. Kyrgyz trucks traveling routes toward Western Europe and Turkey report making unofficial payments to police and customs officials as high as 12 percent of the value of the cargo carried. Labor immigrants traveling by train from Tajikistan to Moscow report making similar unofficial payments to border guards, custom officials, and transport police. These unofficial costs do not include the costs and impacts associated with illegal trade. These same administrative and policy actions create incentives for local populations to engage in illegal trade which further perpetuate corruption and poor governance. Poorly paid border guards, customs and other government officials often demand bribes from local traders. To make a living, these same traders often have to engage in smuggling and under-invoicing in order to get around trade restrictions and taxes. This creates a shadow economy in which illegal activity is the norm. Money earned in a shadow economy is often concealed and not deposited in banks to avoid discovery by government officials. Currency black marketers in Uzbekistan claim most of their customers are traders engaged in smuggling and police and other officials who receive large sums of money in the form of bribes. In such an environment corruption and rent seeking thrive which allows patron-client networks to become firmly entrenched and further erode governance. Capital created from the shadow economy allows criminal actors to influence local economic and political activities. In some cases, these actors are able to move into the political domain and become elected officials. All of this creates a poor business environment which raises transaction costs.

In addition to economic factors related to corruption and shadow markets, a lack of economic diversity and inadequate markets of scale create barriers that are the third factor which contribute to higher transaction costs. All of the CARs and Afghanistan have very small, undiversified markets, and depend on a narrow range of products. Small market size restricts their ability to diversify their exports and makes it very difficult for them to create economies of scale in transportation and exploit market specialization. The only way for the CARs and smaller South Asian states to benefit from economics of scale and specialization would be to maintain high export levels and have well functioning internal markets. Neither of these conditions exists. Social, ethnic, and business network effects are the fourth factor which creates barriers to cooperation and increases transaction costs. National politics and economic activity within Afghanistan and the CARs are driven by a social structure of power brokers generally divided along three lines: kinship systems, regional networks, and magnates who control major resources and industries. The interaction of the power brokers determines the limits and scope of cooperation within and between countries. Economic and political activity generally conforms to these three groupings. The effects produced as these groups jockey for political and economic power can in some cases turn violent, but usually results in the "in group" controlling key resources and the major instruments of state power. The "spaghetti bowl" problem is the fifth factor which has the potential to create higher transaction costs. It is a result of Central and South Asian states' entry into numerous bilateral and multilateral regional trade agreements (RTAs). The most notable multilateral RTAs include the Single Economic Space (SES), Commonwealth of Independent States (CIS), Eurasia Economic Community (EAEC), and Economic Cooperation Organization. The discriminatory nature of many RTAs can create inconsistencies and situations which greater complicate customs policies and tariff schedules. This can in turn divert existing trade, worsen social welfare, and hinder integration into the international trading system. Full implementation of the EAEC has potential to createall of these effects and increase external tariffs in Kyrgyzstan and Tajikistan.

The actions of regional powers like Russia and China will continue to have a significant influence on events in Central and South Asia over the near-to-medium term. Politically and economically, Russia is still the most influential power in Central Asia although Chinese influence in the region has increased significantly over the past decade. Both countries have significant economic and security interests in the region. Since 2001, due to geopolitics and security concerns, there has been considerable convergence between Russian and Chinese Central Asian interests. This convergence has resulted in increased security and economic cooperation with the CARs. The rising importance of the SCO and increased Russian engagement with other regional organizations (Collective Security Treaty Organization (CSTO) and Eurasian Economic Commonwealth (EEC)) are manifestations of this trend. Other major powers (India and Japan) have also increased their engagements activities with the CARs, especially in the energy sector. Russian and Chinese influence in Afghanistan is considerably less. Chinese influence in South Asia is

much greater than Russia's and has been on the rise especially in Pakistan. Iran, Pakistan, and India are the more significant regional powers in Afghanistan. Each has significant interests in Afghanistan based on numerous cultural, historical, and economic factors. Iran and Pakistan, which share long borders with Afghanistan, have a history of meddling in Afghanistan's internal affairs. India, while it does not share a border with Afghanistan, has strong business and cultural ties with Afghanistan and has been an increasingly active player in Afghanistan's economic and security sectors. Pakistan has not welcomed this development and tends to view Indian actions with considerable suspicion. As Indian influence in Afghanistan increases, Pakistan's fear of encirclement by India will likely drive it to find ways to counter Indian influence. While, all three countries have an interest in seeing the security situation and economic conditions improve in Afghanistan; geopolitics and other national interests may drive them to pursue their interests in a manner that may preclude cooperation amongst themselves and with other powers such as the United States. The actions and policies regional powers pursue to advance their own national interests may not naturally converge with the U.S. vision of a Greater Central and South Asia. Individually or in partnership, China, Russia, India, Iran, and Pakistan have the potential to act as spoilers and derail any U.S. effort to build a new Silk Road. In the near future, the majority of U.S. focus and resources will likely remain on Afghanistan. The current security situation and high political stakes make it difficult to devote more resources towards the CARs. The more likely prospect is fewer resources will be directed toward the CARs. As U.S. assistance has already decreased to less than half of the 2005 level. It is also quite possible that programs such as Central Asian Infrastructure Integration Initiative may push more of U.S. assistance in the direction of energy infrastructure improvement. Connecting the energy infrastructure of the CARs, especially Tajikistan and Kyrgyzstan's, with South Asia should create positive economic benefits for each country and is consistent with the U.S. vision of creating more options. It will not necessarily do much to reduce many other existing transaction costs. Conclusion The fundamental idea behind the new U.S. vision for Central and South Asia is sound. Landlocked countries like Afghanistan and the CARs have the economic and social development deck stacked against them. Their integration into a regional trading network and connection to their southern neighbors has the potential to significantly improve their

economic development. For this to happen, major investments need to be made in better governance, security, and transport infrastructure. Investments should be made based on the following criteria: does the investment lower transaction costs? The United States and the donor community have committed significant resources towards improving regional infrastructure which will aid in transaction cost reduction resulting from physical factors. Costs resulting from non-physical factors will be much more difficult to reduce. The policy choices regional leaders make will greatly impact future transaction costs. The current baseline of transaction costs will likely prevent the creation of a new Silk Road over the short-to-medium term. A new Silk Road is a long term project which cannot be accomplishes on the cheap. It will require significant resources, regional cooperation, and focus by policy makers.

(The Author is Research Officer in National Institute of Administrative Research, LBS National Academy of Administration,

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