Corridors for Competition or Cooperation? Perspectives from Southern Asia

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Vaqar Ahmed*

Yamna Arshad*

Sustainable Development Policy Institute

*Vaqar Ahmed (vaqar@sdpi.org) Yamna Arshad (yamna@sdpi.org) Sustainable Development Policy Institute (www.sdpi.org)

Economic Aid: Boon or Bane?

This paper tries to offer three key arguments in the light of recent geopolitical history of Southern Asia. First, plans by China, Russia and the US to support and extend regional connectivity and make alliances with partner countries in the region lack a shared vision, in turn, leading to competing programs and projects, particularly seen in the trade, transport and energy sectors. 1

Second, this lack of coherence across the mega infrastructure connectivity programmes, financed by China’s, Russia’s and the US’ own funding mechanisms has weakened the ability and willingness of partner economies in Southern Asia to pursue indigenously driven regional economic integration. Many have not even invested their own capital in these ventures. 2

Third, such an outcome will eventually increase the dependence of economies in Southern Asia on China, Russia and the US and, in turn, will also prevent the dependent economies to share the benefits of each other’s progress through already existing regional cooperation forums (as the client state would not be fully autonomous to pursue working relationships in the region). This defies the theoretical foundations of the current economic corridor building exercises which suggests to the stakeholders that ultimate benefit of seamless infrastructure connectivity in the region will come from offering ones (infrastructure) endowment to the neighbors and the region. 3

Recent political economy of corridor development

US plans for its presence in Southern Asia have been fast changing. However, one observes a declining physical footprint of the US in the region – compared to pre-2014, when the war in Afghanistan was mainly led by the US troops. The US Silk Road Strategy Act, announced well before China’s Belt and Road Initiative, lacked proper execution. It aimed at building projects that, in turn, would create regional interdependencies and, thereby, ensure stability in the region. 4 It was envisaged that such projects would strengthen the strategic influence of the United States in the region. This, however, could not culminate and today China and Russia stand as the key players in the region with the ability to also influence political, economic and security issues facing the region (Rumer 2016).

The exit of the US as the leading player in pursuit of regional economic integration in Southern Asia provided space for China and Russia to pursue their own plans for the region. These include, for example, the Russian-led Eurasian Economic Union (EAEU), Shanghai Cooperation Organization, and the Chinese-led belt and road initiative. The sustainability of these regional arrangements may have greater probability given the close cooperation between China and Russia on plans for Central and South Asia. In fact, at one point in the recent past, particularly around 2009 and 2010, Russian dependence on China’s support in energy and the economy in general was unprecedented (Kim and Indeo 2013).

A key regional initiative across Central Asia that has now mobilized support and financing from within the region, including Southern Asia, is the Central Asia Regional Economic Cooperation (CAREC) program. This brings together Afghanistan, Azerbaijan, China, Georgia, Kazakhstan, Kyrgyz Republic, Mongolia, Pakistan, Tajikistan, Turkmenistan, and Uzbekistan and is financially supported by six funding bodies. The program has been able to mobilize $29.4 billion for trade, transport, and energy sectors. The Asian Development Bank (ADB) share in this is $10.4 billion. The Corridor-5 of CAREC links Central and South Asia through Gwadar and Karachi ports in Pakistan. Similarly, Corridor-3 originates from Central Asia and connects with Kabul in Afghanistan. For Central Asia the progress on CAREC is impressive. For the two South Asian countries – Afghanistan and Pakistan – however, the dividends of CAREC will critically depend upon restoration of peace. 5

A key development in the region was the collapse of the South Asian Association for Regional Cooperation (SAARC). This is perhaps the only arrangement that brings together Afghanistan, Bangladesh, Bhutan, India, Nepal, the Maldives, Pakistan and Sri Lanka – comprising of almost a quarter of the global population. SAARC was crucial for keeping India-Pakistan dialogue process on track and for the promotion of deeper trade, investment and infrastructure cooperation between the eight member countries. On the insistence of India, three other SAARC member countries also pulled out of the planned Heads of States SAARC meeting in Islamabad in 2016. This development has temporarily shut any negotiations that could have resulted in an integrated Asian Highway Network (UNESCAP 2016).

The United States’ own calculus around trying to increase India’s profile in the region did not render promising results. The former had increased its civil and military support for India during 2015 and 2016. It thought that India might, overtime, balance the regional presence of China and Russia. This, of course, did not suit China, Russia and Pakistan. With the income of a quarter of India’s population being below USD 1.25 a day, India is a relatively smaller power in the region. It still, however, felt tempted to have regional expansion plans of its own and increased its investments towards pursuing, for example, the International North South Transport Corridor with Iran and Russia; Bangladesh, Bhutan, India and Nepal (BBIN) motor vehicle agreement; and the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) – some members of which are also part of the Trilateral Maritime Security Cooperation. The US-India alliance and India’s increased engagement in Afghanistan prompted China, Russia and Pakistan to closely cooperate in security and economic issues. The urgency to complete early harvest projects under China – Pakistan Economic Corridor (CPEC) is one example of this cooperation.

The close cooperation between China and Russia in energy and the economy in general has not been seen with a positive lens in India. Russia-Pakistan joint military exercises, the former’s intent to finance energy and port sector initiatives inside Pakistan (Khan and Ahmed 2015), and Pakistan’s intent to purchase S-35 warplanes from Russia has also been viewed suspiciously by New Delhi. Moscow now sees Islamabad as an indispensable counter-terrorism partner in Afghanistan. 6

Just as SAARC remained dormant due to the political issues between the member states, ECO – an inter-governmental regional organization comprising of Afghanistan, Azerbaijan, Iran, Kazakhstan, Kyrgyz Republic, Pakistan, Tajikistan, Turkey, Turkmenistan, and Uzbekistan – too could not establish itself as a strong economic bloc. The achievement has been slow and mixed. It is only recently that Iran, Pakistan and Turkey have shown intent to work closely on promoting transit trade ties.

Pakistan is proposing to open six transit trade routes with Iran and Turkey. 7 It will be some time before businesspersons in the region start to actively use these routes. Efforts have also been underway to reopen the already existing rail link between Iran, Pakistan and Turkey. This, among other reasons, is inspired by other efforts in the region to strengthen rail based linkages e.g. Azerbaijan, Georgia and Turkey have initiated work on the Baku-Tbilisi-Kars rail road. Pakistan and several countries in the region could not previously cooperate with Iran due to perceived push back from the US. With diminishing US presence and leverage in the region, things seem to be changing and there have been high-level meetings between Iran and its neighbours. 8

Case of weak cooperation in energy, water and food security

South Asia is home to around 25 percent of the global world population and almost 40 percent of Asia’s total population. Around 40% of the world’s poor (i.e. people having USD 1.25 per day) live in this region. The good news is that, according to the World Bank Group, South Asia is one of the fastest growing regions in the world. 9 This growth is fueled by a large domestic demand, remittances of workers’ abroad, running high fiscal deficits due to increased public investment, success in attracting investment from abroad, and low oil prices. The sustainability of some of these factors seems unlikely in the longer run.

Furthermore, as the economies of South Asia expand, it will be increasingly important to secure energy, water and natural resource requirements. The region faces uncertain oil and gas supplies in the future. Most of these countries are increasingly getting water stressed. This, in turn, also forebodes a food security crisis under the business-as-usual scenario (Rasul 2014).

Regional cooperation may be an answer to energy, water and food deficits in the region. For example, Ahmed (2014) and Singh et al. (2016) explain that the region can meet the fast increasing electricity demand through cross-border electricity trade. While there has been some progress on this, however, most countries have still not reformed domestic energy markets and addressed national-level inefficiencies, which are preventing a regional grid. Some countries face political mistrust and are not convinced that such initiatives can create economic interdependencies. In fact, the local narrative in these countries fuels speculation that the country with the upper hand (i.e. relatively more resource rich) may turn off the tap once political differences intensify.

The changing economic and political alliances in the region also prevent energy trade. The economic partnerships pursued by China, Russia and the United States with countries in the region play a key role in the decision of these economies on whether or not to cooperate among each other. This is a key reason why India is not interested, at least for now, in expediting work on the Turkmenistan–Afghanistan– Pakistan–India (TAPI) and Iran-Pakistan-India gas pipelines. 10 India has, in fact, formally exited form the latter arrangement.

Cooperation on water remains a far more daunting task. This largely is a result of asymmetric power relations among the states in Southern Asia. However other technical issues which allow water disputes among states to linger for a long time include: an absence of regional mechanism to share water as a resource, lack of framework agreements between SAARC member countries, and nationalistic sentiments seen in some states (Adhikari 2014).

South Asia being one of the regions worst hit by climate change has also seen changing cropping patterns. This, along with recurrent droughts, has led to food security challenges. SAARC member countries had embarked on prioritizing cooperation in agriculture. An Action Plan on Climate Change to use regional approaches to mitigation and adaptation was also put in place. In addition, SAARC Food Bank and SAARC Seed Bank were also endorsed but never pursued or expanded with a serious intent to counter recurrent food shortages in the region.

Supply may create its own demand

Despite the above, investment cooperation in connectivity related infrastructure has flourished. This is primarily due to the rise of new funding vehicles in the region. A mere fact that the region is no more dependent on the traditional multilateral funding bodies has encouraged national governments in the region and local private sector to come together and forge partnerships with institutions which carry less stringent conditionalities. Some examples of such funding sources include: Asian Infrastructure Investment Bank (AIIB), ECO Trade And Development Bank, New Development Bank (NDB) – formerly referred to as the BRICS Development Bank – and SAARC Development Fund. 11

There has also been some delinking of trade from regional political disputes. Intraregional trade in Southern Asia is gradually picking up. More land routes for merchandise trade are being opened in the region. Intra-regional investment in energy, textile and fast moving consumer goods sub-sectors has also been observed (Ahmed et al. 2014). During the regular meetings between central bankers from across the region, there seems agreement to further liberalize the banking channels to facilitate cross-border trade and investment linkages. Medical tourism and trade in health services are being encouraged on passionate grounds (Manzoor and Ahmed 2016). All this will hopefully lead to enterprise-level learning and rise of a (business) constituency for peace in the region. An interesting feature has been that despite closed borders during several phases of geopolitical history, trade through informal channels has continued. All regional economies can only gain by formalizing these inflows (Ahmed 2014b, Ahmed 2015).

It remains unfortunate that these episodes of success have not been adequate to forge stronger interdependencies. The larger economies in the region – including China and India – face a security dilemma that reinforces military competition. 12 This competition is forcing (economically) smaller countries in Southern Asia to choose between friends in the region and keep cooperation limited to their select partners. Before such military competition in the region further derails economic liberalization and cooperation, there are several measures still available to the leadership. It will be important for countries in South Asia to promote interaction at track 1.5 and track 2 levels. In this regard, restrictive visa regimes for neighbors has not done well to promote an understanding of each other’s perspective. Inland security priorities of these countries should not hurt business-to-business and people-to-people dialogue.

References

Ahmed, V. (2014). A case of energy diplomacy. The News on Sunday-International The News.

Ahmed, V., A. Q. Suleri, and M. Adnan (2014) FDI in India: Prospects for Pakistan. Editors Nisha Taneja and Sanjib Pohit: India-Pakistan Trade – Strengthening Economic Relations. Springer.

Ahmed, V. (2015) Strengthening South Asia Value Chain: Prospects and Challenges. South Asia Economic Journal. Vol 16, Issue 2_suppl, 2015.

Ahmed, V. (2017). South Asia: Cooperation to Achieve Development? International Conference on Human Capital, Food Security and Economic Development in South Asia.

Ahmed, V. (2017) Economic Corridors, Investment Diplomacy, and Transit Cooperation; Chapter 6 in the book: Pakistan’s Agenda for Economic Reforms, published by Oxford University Press, Pakistan.

Ahmed V., Suleri A.Q., Wahab M.A., Javed A. (2015) Informal Flow of Merchandise from India: The Case of Pakistan. In: Taneja N., Pohit S. (eds) India-Pakistan Trade. Springer, New Delhi

Adhikari, K. (2014). Conflict and Cooperation on South Asian Water Resources. IPRI Journal. 14(2), pp. 45-62.

Fallon, T. (2015). The New Silk Road: Xi Jinping’s Grand Strategy for Eurasia. American Foreign Policy Interests. 37(3), pp. 140-147

Jha, S. (2013). Trade, Institutions, and Ethnic Tolerance: Evidence from South Asia. American Political Science Review. 107(4), pp. 806-832.

Liff, A and Ikenberry, G. (2014). Racing toward Tragedy? China’s Rise, Military Competition in the Asia Pacific, and the Security Dilemma. The MIT Press Journals. 39(2), pp. 52-91.

Manzoor, R. and V. Ahmed (2016) Desired Reforms in Health Services Trade between India and Pakistan. Aditi Bulletin Issue 6, Center for Study of Science, Technology & Policy.

Mawdsley, E. (2015). Cooperation, competition and convergence between ‘North’ and ‘South’. SAGE JOURNALS. 41(1), pp. 108-117.

Kim, Y and Fabio, I. (2013). The new great game in Central Asia post 2014: The US “New Silk Road” strategy and Sino-Russian rivalry. Communist and Post-Communist Studies. 46(2), pp. 275-286.

Khan, H and Ahmed, V. (2015). Fund-raising for Energy Projects in Pakistan. Sustainable Development Policy Institute. Working Paper No. 149.

Rasul, G. (2014). Food, water, and energy security in South Asia: A nexus perspective from the Hindu Kush Himalayan region. Environmental Science & Policy. 39, pp. 35-48.

Rumer, E., Sokolsky, R., and Stronski, P. (2016). U.S. Policy Toward Central Asia 3.0. Carnegie Endowment for International Peace.

Rehman, A and Ahmed, V. (2016). CPEC and regional integration. The News on Sunday-International The News.

Singh, Anoop and Jamasb, Tooraj and Nepal, Rabindra and Toman, Michael, Cross-Border Electricity Cooperation in South Asia (June 23, 2015). World Bank Policy Research Working Paper No. 7328. Available at SSRN: https://ssrn.com/ abstract=2622314

Shabbir, S. and V. Ahmed (2016) Trade with Iran: Prospects for Pakistan. Criterion Quarterly, Vol 10 No 4.

UNESCAP. (2016). Intergovernmental Agreement on the Asian Highway Network. Economic and Social Commission For Asia And The Pacific.

World Bank. 2016. South Asia Economic Focus, Spring 2016: Fading Tailwinds. World Bank Group

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1- See Ahmed (2017).

2- Also see Mawdsley (2015).

3- See Rehman and Ahmed (2016).

4- For example, Turkmenistan, Afghanistan, Pakistan and India (TAPI) gas pipeline, rail links being constructed between Afghanistan, Turkmenistan and Kazakhstan, and rail link from the Uzbek border to Mazar-e-Sharif in Afghanistan.

5- See Rehman and Ahmed (2016) and Ahmed V. (2017b).

6- http://www.dw.com/en/china-and-russia-want-us-out-of- afghanistan/a-39250894

7- http://www.tehrantimes.com/news/398322/Pakistan-proposes-new-trade-routes-with-Iran

8- https://www.valuewalk.com/2017/09/china-russia-turkey-pakistan-vs-us/ . See also Shabbir and Ahmed (2016).

9- WBG (2012).

10- See also Jha (2013).

11- See also Fallon (2015).

12- See also Liff and Ikenberry (2014).