Mukul Sandaal, IDSA
South Asia is the least integrated region in the world, and that is not in line with global trends. This is a major reason constraining India’s economic potential and its re-emergence as a global power. With China now a USD 10 trillion economy, compared to India’s economy of USD two trillion, India is at a defining movement on how the Asian Century will be shaped. The strategic question is whether Asia will have two poles, as it has had throughout history, or will India remain at Asia’s periphery as a regional power? Does connectivity, rather than institutions and rules, now enable integration and economic growth? The related question is whether economic development is the best way of reducing the role of the military in polity.
The One-Road-One-Belt (OROB) initiative for connectivity, with clear strategic advantages for China, contrasts sharply with existing treaty-based integration concepts where the geographical scope, partner countries, strategy, principles and rules are clearly defined at the outset. 34 countries have already signed cooperation agreements with China.
With Asia increasingly the world’s political and economic centre of gravity, the 27th Workshop of China’s Political Bureau, held on October 12, 2015, focused on ‘Global Governance’ seeking a new identity, vision and strategy. The motivation was to re-define the international perception of China as a large developing country, with one-Party rule, split with Taiwan and a regional power. China accounts for 40 per cent of world GDP growth, with the United States contributing only 10 per cent and India 20 per cent. China’s middle class has increased from five million in 2000 to 225 million today. Its outbound direct investment has reached USD 123 billion.
China is now seeking to establish its identity as a world class power; the organization of the Olympics had that aim. It has a vision of major power relations wherein it is an equal of the United States; the China-United States Climate Agreement and Ratification, contributing to global public goods, were announced in China. China’s strategy is to be a major player in global governance; the Asian Infrastructure Investment Bank is being developed as a multilateral, rather than a Chinese, entity. And, the OROB is consciously not adopting the development-cooperation model based on aid. Instead, it relies on a state strategy implemented by corporate investments and catalysed by the USD 40 billion Silk Road Fund, planned to be increased to 100 billion, to leverage a proposed investment of 1.4 trillion.
China’s ‘grand strategy’ looks both to the West and to the East. The OROB Initiative, seen more as a policy indicator than a set of projects, will link three continents – Asia, Europe and Africa. China is also looking at a free-trade area in the Asia-Pacific, possibly linking up with the United States. In addition, China is going in for tri-lateral agreements with the United States and European Union in Africa and Latin America, where its interests are not directly involved but giving it a global reach and influence beyond its immediate borders – the hallmark of a global power.
The OROB Initiative was accelerated as a strategic response to the military ‘re-balancing’ of the United States to Asia. The drivers are economic – the ‘exceptionalism’ of China’s growth story, which, it believes, serves as a model for others. Capital has been the key driver of China’s growth over the last three decades, with investment in infrastructure peaking at 54 per cent of GDP in 2013. In the period 2001-2007, China’s current account surplus reached 10 per cent of GDP because of booming exports. Foreign exchange reserves increased from USD 300 million to 3.5 trillion during the period 2000-2011. China has cash and deposits in Renminbi equivalent to USD 21 trillion, or two times its GDP, and expects that the massive overseas investment in the OROB will speed-up the internationalization of the Renminbi.
Energy security is another important factor, with pipelines already linking China with the rich gas and oil reserves in Central Asia. Western China also has a restive Uighur minority population, and the most important threat is from the East Turkestan Islamic Movement (ETIM), which has taken sanctuary in the Pakistan-Afghanistan border areas. Lastly, China expects to bridge the socio-economic divide – Western China suffers a 15-fold gap in per capita income with Shanghai.
A regional transport network has begun to be put in place. For some origins and destinations, the door-to-door costs for the rail option is already similar to the ocean option. The logistics rationale is clear; Kashgar is closer to Gwadar than to Shanghai, just as Yunnan, another minority province, is closer to Chittagong than to Shanghai. In 2015, 815 freight trains reached Europe. Iran is excited about being a transit point for a route to Europe via Turkey. A train has just reached Mazar-i-Sharif in Afghanistan.
A new concept of “International Capacity Cooperation” is also being implemented by relocating some manufacturing capacity to OBOR countries. In 2015, China signed memorandums with seventeen OBOR countries for capacity cooperation. This is very different to the current development-cooperation model of capacity building, which is institutional capacity supported by aid rather than local economic activity.
China is determined to push the OBOR initiative as it sees connectivity rather than global rules leading to increased trade, and continuing growth. China plans to have free-trade agreements with 65 countries in the six ‘economic belts’ of the OBOR, accounting for two-thirds of the world population and 30 per cent of GDP and consumption. The areas of cooperation include fibre optics, telecommunication, trade facilitation, monetary policy coordination and arrangements to manage financial risk. Bringing together policy areas that are currently split between the United Nations and Bretton Woods Institutions is a long-standing demand of developing countries.
China recognizes that India had these ideas earlier but did not have the resources to execute them. The principal Indian idea was that of an International North-South Transit Corridor (INSTC), initiated in September 2000, to bring together India, Iran and Russia in an effort to create multi-modal links (ship-rail-road) from India to Europe, via the Gulf, Central Asia and Russia. Another multi-modal transport agreement, the Ashkhabad Agreement, which brings together India, Oman, Iran and the Central Asian republics was initiated in April 2011, and linked closely to the INSTC projects. Only one Indian connectivity project, the trade and transit corridor from Chabahar in Iran to Afghanistan is off the ground; but the Indian investment of USD 500 million for port development is miniscule compared to the OROB.
In three years, China has achieved considerable success with OROB. The lending of the China Development Bank (CDB) and the Export-Import Bank of China (Cexim) has become closely aligned with its OBOR strategy, in the fields of industry, infrastructure, energy, trade finance and financial services. Some of the largest recent Chinese lending include: a USD three billion loan to the governments of Cambodia, Myanmar, Thailand and Laos, to be used for infrastructure projects and trade finance purposes; a 2.2 billion Cexim facility extended to the Kenya Railways Corporation for a new rail link between the Indian Ocean port of Mombasa and the Kenyan capital of Nairobi; and two facilities to companies in Indonesia for power plants, one totalling 1.5 billion and another worth 1.2 billion.
An interesting development with regard to OBOR is that projects have attracted overseas capital. For example, in October 2014, Oman’s State General Reserve Fund signed an agreement to take an equity stake in a port being constructed in Tanzania by the China Merchant Group (CMG) as well as the railway network leading to it. The agreement specified that USD 500 million would be designated for port financing for 2013 (via Cexim), for interest-free or low-interest loans to get the project started.
China is aware that it is investing in a risky environment and that the OROB initiative may not be commercially rewarding. China has a three-fold solution to these problems. First, it invites governments to organize summits to identify issues and seek common understandings, cooperation memorandum and people-to–people contact as the basis for regional cooperation.
Second, China is also organizing technical workshops of the concerned countries to facilitate investments and is partnering with multilateral institutions in this effort to give greater legitimacy. It is entering into areas the United Nations and bilaterals have ignored but have been considered important by developing countries. For example, a workshop to harmonize intellectual property rights legislation was organized in Beijing in July, jointly with the World Intellectual Property Organization.
Third, China is using money to resolve security issues, like paying Pakistan for an army division dedicated to the protection of Gwadar and is actively considering setting up a private security agency, borrowing ideas from something the United States has done for decades, but paid for by the companies rather than the government. Currently, China has no intention of directly improving the military capacity of these countries or getting involved in regional disputes, as its military strategy is focused on Taiwan and the Pacific.
The OROB initiative has moved beyond the discussion stage to being politically and economically accepted widely. In April 2016, an agreement was signed with the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), treating implementation of the OROB initiative as promoting regional cooperation. This is in part an answer to India’s concerns that connectivity should be built through consultative processes and not unilateral decisions.
Perceptions of what OBOR is really about – and how far it is feasible – diverge widely like the fable of the blind men and the elephant. Europe is assessing whether it will be a financial bonanza, the United States has been caught slow footed with its focus on seeking support for security from China, and India remains ambivalent.
India’s concerns centre on the China-Pakistan Economic Corridor (CPEC), finalized in April 2015 on the basis of 51 agreements, for a series of highway, railway and energy projects linked to the newly developed port of Gwadar on the Arabian Sea, all of which taken together will be valued at USD 46 billion. These projects will generate 700,000 jobs in Pakistan and, when completed, add 2 to 2.5 per cent to the country’s GDP. By focusing on the strategic implications, India is ignoring China’s supplementary interest – that such investments in the backward regions of Pakistan also address China’s, and India’s, concerns relating to security problems whose roots are in Pakistan.
During Premier Li Keqiang’s visit to India in May 2013, China and India jointly proposed the building of the Bangladesh-China-India-Myanmar Economic Corridor (BCIM) at a total cost of USD 22 billion, and agreed to do a joint study – this is a part of OROB. At the BRICS Summit, to be held in Goa in October 2016, India has invited the seven-member BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation) group, comprising Bhutan, Bangladesh, India, Nepal and Sri Lanka from South Asia and Myanmar and Thailand from ASEAN. It dates back to 1997, with a study on infrastructure as an important activity, and the discussion will inevitably turn to connectivity. Linking BIMSTEC and BCIM will be a strategic response to a strategic issue.
President Xi Jinping has staked so much personal and political capital on OROB that it has become a key test of his leadership, and will be made to succeed. China is keen to have India on board and both recognize that working together is necessary for achieving the ‘Asian Century’. India should seek to ‘redefine’ OROB to add a strong component for a ‘Digital Asia’, as that is where our comparative advantage lies, and for Asian connectivity to have two nodes, in China and in India, as has been the case throughout history.
It is rumoured that the OROB was a purely political initiative that did not emerge from the foreign policy establishment. It is now up to Prime Minister Modi to make a similar strategic leap with respect to Kashmir; the road to Islamabad is now through Beijing and not Washington.