The Future Is Asian

by Parag Khanna

  Central Asia: The Crossroads of the New Silk Roads

  The Central Asian republics’ transformation from former Soviet castaways to Chinese-financed Silk Road passageways has been a generation in the making, starting in the 1990s with the first pipelines across Kazakhstan from the Caspian Sea to China and the founding of the Shanghai Cooperation Organisation (SCO). By 2005, China and Kazakhstan had declared a “strategic partnership.” A decade later, the Belt and Road Initiative was under way across numerous Central Asian states. Although China is the key instigator of Central Asia’s new arteries, the outcome of the BRI process will be not Chinese hegemony but a new crossroads for Eurasia. Contrary to the US view that China’s infrastructure projects constitute a neocolonial intrusion, Central Asian nations are eager to host these new east–west corridors. Khorgas, a logistics hub on the Sino-Kazakh border, has become a much-visited visa-free transit zone for migrant laborers and businesspeople participating in the region’s modernization. As in the ancient past, large numbers of Iranians, Turkic peoples, South Asians, and Chinese are visible in the marketplaces of Central Asian states. Almaty, Kazakhstan’s commercial hub located near the borders of Uzbekistan, Kyrgyzstan, and China, has become a melting pot for regional merchants and traders. This is a reminder that many Asians welcome China’s infrastructural forays in Asia because they provide cover to pursue their own commercial agendas—not China’s.

  Were China not taking the risk to kick-start a new modernization phase for the former Soviet republics, commentators would lament that those countries are risky backwaters no sane investor should dare enter. But now China is the biggest investor in Kazakhstan’s railways and pipelines, Uzbekistan’s energy and transport infrastructure, Turkmenistan’s gas fields, Kyrgyzstan’s mineral sector, and Tajikistan’s hydropower plants. Chinese capital has done more than just perpetuate local corruption; it has provided a kick of bootstrapping discipline in states known more for the brutality of their regimes. Now that most of the region’s Soviet-era leaders have passed away, how will these fragile nations build a meaningful future? If it were not for Chinese investment in landlocked Uzbekistan’s cross-border infrastructure, its new government would not have declared the goal of doubling its GDP through regional integration—nor would it be one of the world’s two fastest-growing economies year over year.

  China’s annual steel output of more than 1 billion tons per year matches that of the rest of the world put together, with 200 million tons to spare annually for export to its BRI partners. With fifty-six special economic zones functioning in BRI countries, there will be plenty of demand. Chinese policy banks and the Asian Infrastructure Investment Bank (AIIB) will together finance many of the $150 billion in annual projects, providing a jump start and incentives for private investors to come in.

  Some have criticized the AIIB as a rival of the World Bank, but the AIIB became necessary because the World Bank turned away from financing major infrastructure projects more than five decades ago. The AIIB has thus corrected for the massive market failure in providing regional infrastructure. The template of the AIIB is not the World Bank but the mainly Japanese-funded Asian Development Bank (ADB), headquartered in Manila. Founded in 1966, in the early 2000s the ADB began to implement transport and energy projects as far away as the Caucasus. Today its more than 170 projects, valued at more than $30 billion, financed by Asians and European funders such as the European Bank for Reconstruction and Development (EBRD) as well as multilateral bodies such as the World Bank’s International Finance Corporation (IFC). Importantly, ADB projects adhere to COP21 environmental objectives such as investing in renewable energy. No doubt these established development funders were skeptical about the AIIB, but its potential to catapult the volume of capital deployed for the region has inspired dozens of their senior officials to decamp to the AIIB, bringing with them the knowledge of project management standards that many feared the AIIB would lack. Recently, both the World Bank and ADB have committed to finance projects jointly with the AIIB. After all, the ADB itself estimates that Asia needs $26 trillion in infrastructure investment by 2030. Now more than eighty countries and most of the world’s development institutions have formed a network to ensure that that target is met. While suspicion will persist about many dealings related to BRI, the process embodies mostly what one Pakistani minister calls a spirit of “cohesive sincerity.”

  Though BRI is a multilateral initiative, it is one that is market-based, not driven by ideology. Though it may make loss-leading investments, it is a commercial initiative, not a charitable one. China’s state-owned enterprises and banks are learning to share the risks of project finance with new financial institutions that are more focused on quality governance and decent returns on investment. Though the main shareholders in the $40 billion Silk Road Fund are the People’s Bank of China, China Investment Corporation, China Development Bank, and Export-Import Bank of China, it operates much like the World Bank’s IFC with capital raised from a wide range of partners. It seeks efficient operations and meaningful profits. Renminbi-denominated funds that manage Belt and Road assets are launching IPOs and listing on exchanges, attracting investors from around the world.

  At its launch, Chinese president Xi Jinping claimed that the BRI “is not a soloist but a chorus.” He rightly gambled that even states that rival China would invest in the BRI vision, realizing that criticizing from the sidelines looks like little more than jealousy. India, for example, is not only the second largest shareholder in the AIIB but also its largest loan recipient. BRI has also teamed up with Japan to launch a parallel set of infrastructure projects. The United States, too, has recognized the inevitability of BRI, with wise voices counseling Washington officials, in the words of one former State Department official, to join the game of “ramp[ing] up trade, investment, and infrastructure building across Asia.”10 GE decided to partner with the Silk Road Fund to make joint investments in power grids across BRI member countries. In 2018, President Trump signed the Build Act, which established a new United States International Finance and Development Corporation (USIFDC) with a budget of $60 billion to support American commercial operations in Asia. While such US investments—should they materialize—may restore some US credibility, more fundamentally they will help Asians achieve their own goals. Taken together, all these funds will pay for the services of thousands of companies from all over the world—but especially Asia—that provide construction, manufacturing, technology, consulting, legal, and all manner of project-related needs. What is built in Asia stays in Asia and is first and foremost for Asians.

  Xi Jinping, in his speech to the 2017 Communist Party congress, stated that China’s approach to foreign policy “offers a new option for other countries and nations who want to speed up their development while preserving their independence.”11 Where so much new investment is made, however, a great deal of debt piles up as well. The only way for Central Asia to manage its rising debt is through radical economic restructuring—a challenging task in an era of low commodities prices. Kazakhstan is the first to try. The national welfare fund (Samruk-Kazyna) aims to reduce the government’s share in the economy from nearly 90 percent to under 20 percent, allowing investors to transform state bureaucracies in banking, real estate, and energy into modern enterprises. With no major financial hub between Moscow and Beijing, Kazakhstan’s fast-growing new capital city of Astana, the host of Astana Expo 2017, has launched a Dubai-style Astana International Financial Centre (AIFC), with the Shanghai Stock Exchange as an anchor investor, to serve as a regional headquarters for both foreign and local companies. Chinese banks and firms have agreed to list shares there so that Kazakhs can own a stake in the companies financing their future.

  Kazakhstan has taken the lead as the hinge nation between Europe and Asia. Sixty percent of the current volumes of China-to-Europe rail cargo cross its territory versus the 30 percent that begins in Russia and the 10 percent that begins in Mongolia. Kazakhstan and Mongolia, the world’s two largest landlocked c
ountries, are vast natural transit spaces. They are also giant power stations for the unfurling Silk Road corridors. Kazakhstan not only is an oil and natural gas power but is investing heavily in solar power, wind power, nuclear power, and biomass, all of which can feed into the planned ultra-high-voltage DC (UHVDC) electricity transmission system linking population centers in Central Asia. In Mongolia, Japan’s SoftBank is helping develop the country’s massive solar- and wind-power potential, which, together with the country’s hydropower resources, can reduce its costly imports of fuel from Russia and China, to which it exports almost all its coal and copper.

  With Asia’s two geographic giants as its neighbors, the eternal question for Mongolia is how to be more than a buffer between Russia and China or a venue for their maneuvering over mining concessions and railways. Russian soldiers built Mongolia’s railways a century ago, and their descendants still live there. Mongolia’s current president, Battulga Khaltmaa, with his soft spot for Russia, has kicked the country’s “third neighbor” campaign into high gear. The goal of attracting non-Chinese investors goes by the acronym ABC: “Anyone but China.” During the recent mining boom, however, only China came. Now that Mongolia has to find ways to modernize with less mineral revenue, it is reaching out much farther for development strategies. Like Australia and Bhutan, it is reemphasizing some of its premining industries, such as leather making and organic farming. Mongolia does, after all, have only 3 million people against 50 million horses, cows, camels, goats, and especially sheep, whose wool generates everything from fine cashmere sweaters to cozy, eco-friendly insulation for nomadic gers (tents). Asians aren’t moving to Mongolia, but Mongolia should be part of sustainable Asian homes.

  China has first-mover advantage in many of its neighboring countries, having invested in them when no one else would. But this does not pave a linear path to dominance. Instead, China’s robust entry into these markets elevates their profile in attracting other investors who can help them grow and pay down their debts to China, even substituting for Chinese loans and capital on less onerous terms. Small economies such as those of Kyrgyzstan, Laos, Mongolia, and Tajikistan owed the majority of their debt to China before BRI but now are gaining a sturdier platform for growth and recognition. Governments such as that of Kazakhstan have gained the confidence to declare strategic commodities and industries off limits to foreign investors, thus rejecting some of China’s debt-for-leverage plays. China’s neighbors will accept Chinese investment and trade for mutual benefit, but they won’t be coerced into strategic traps. They want to prosper in an Asian system, not a Chinese one.

  From Mountain to Sea: Asia’s Vertical Axes

  Pakistan is a young state in search of new meaning. Conceived as a home for South Asian Muslims, Pakistan nonetheless has only the same number of Muslims as its great rival, Hindu-majority India. In the seventy years since independence, only once has a democratically elected government completed a five-year term. Though it has become an established nuclear power, its internal sectarian violence is its greatest threat. After the September 11, 2001, terrorist attacks, Pakistan became the major conduit for NATO supplies into Afghanistan, making the country an indispensable front line in the US-led “war on terror,” but as the weapons, funds, and political support dry up,12 Pakistan needs a new strategic raison d’être.

  The answer—becoming Central Asia’s reliable conduit to the Arabian Sea—has been in the works for decades but has now taken pole position among the numerous competing visions for Pakistan’s future. After India and China’s early-1960s border disputes in the western Himalayas, China began to extend the high-altitude Karakoram Highway through Pakistan along the Indus River to Karachi. Though this north–south traversal has been useful for transportation within Pakistan, it has done little to heal the country’s east–west divide between the fertile Punjab and Sindh east of the Indus River and the barren, rugged Pashtun and Baluch regions on its west. The United States’ $20 billion in military assistance to Pakistan since 2001 has focused on counterterrorism, but has done little for long-term economic growth: only in 2014 did Pakistan’s textile exports to Europe surpass a mere $6 billion, less than a third of the country’s total exports. And as ever more Pakistanis have returned from construction labor in the Gulf region, bringing back conservative Wahhabi Islamic values, Pakistan’s government has faced a growing backlash against any deals with the United States.

  It was once a truism that to comprehend Pakistan you needed to grasp the roles of Allah, the army, and America. The first two still hold sway, but America has been decisively replaced as the third “A”—by Asia. Pakistan, like other Asian countries, has become fed up with being a supplicant to the United States. The former cricket star turned national political leader, Prime Minister Imran Khan, says what almost everyone in the country seems to feel, that Pakistan should stop being a “hired gun”13 for the United States and a “scapegoat for US failures in Afghanistan.”14 Furthermore, the more the United States threatens to withhold IMF funding to stave off Pakistan’s debt crisis, the more the country is pushed into the arms of China and its historical patron Saudi Arabia, which quickly provided a $6 billion bailout in 2018.

  Indeed, Pakistan is fully embracing its Asianization. In 2015, Pakistan signed an “all-weather strategic partnership” with China, and as soon as Trump reduced US military assistance in 2017, Pakistan and China declared that all their trade would be denominated in their own currencies rather than the dollar. Pakistan’s consulates in Shanghai and Chengdu have been working overtime to dole out visas to Chinese merchants heading over the Karakoram Mountains—or flying directly on new routes between Chengdu and Pakistani cities. The total value of the China-Pakistan Economic Corridor (CPEC) is set to exceed $60 billion in capital allocated to electricity generation, roads, railways, fiber-optic Internet, manufacturing, and agriculture projects. An estimated 3 million jobs in power plants, leather tanneries, and industrial parks making everything from medical devices to solar panels are attributable to CPEC. Eighty-two percent of Pakistanis have a favorable view of China, and TV commercials show recently arrived Chinese families welcomed into local homes to share fragrant meals. With more than 30,000 Chinese taking residency in Pakistan from 2014 to 2016 (and 71,000 short-term visas issued in 2016 alone), the Huashang Weekly has begun a Pakistan edition to inform Chinese of local affairs.

  China is not Pakistan’s main patron for charitable reasons; it wants unfettered access to the Arabian Sea and demands that Pakistan’s army and infighting ministries coordinate better and rein in corruption. When they don’t, China doesn’t hesitate to suspend funding for projects. These are not the environmental and social standards Western agencies demand, but it is conditionality nonetheless. The massive incentives China has put on the table are instilling Pakistan with a discipline it has lacked for decades. Never amid the largesse of the US-financed “war on terror” was national development so front and center in Pakistan’s national conversation. As a frequent visitor to Pakistan, I am amazed by the candid and focused number crunching being aired in public fora and media. Which new debts can Pakistan afford to take on? What growth rates need to be achieved to pay them off? How can labor productivity increase and the tax base be expanded? These are the questions Pakistan must ask—and correctly answer—to avoid CPEC becoming what its critics claim it stands for: Colonizing Pakistan for the Enrichment of China.

  Pakistan is yearning to graduate from a spasmic Islamist democracy to a reliable moderate partner within the Asian system. This bootstrapping attitude is why Asian investors have gotten excited about Pakistan. For decades, Saudi Arabia’s main export to Pakistan besides oil has been radical Islamist ideology. Now it has declared that Pakistan will become one of its top destinations for investment in mining, chemicals, and livestock. In 2018, China launched a pricey marketing campaign promoting the port of Gwadar as the “gateway to emerging Pakistan” with giant posters on the sides of London buses. At the same time, Pakistan is playing hardball and has c
anceled several significant Chinese projects, including a hydroelectric dam in Gilgit. It resists exporting cotton and marble to Chinese factories, preferring to focus on boosting its own textile and masonry industries and exports. Pakistan has no interest in reliving the British East India Company with China playing the role of England.

  China’s determined presence in Pakistan is a major driver of Asia’s eastern, western, northern, and southern subsystems coming together, benefiting both countries and a number of their neighbors. Iran is keen to join CPEC as a secure corridor for accessing China, while a rumored Chinese naval base on Pakistan’s Jiwani peninsula near the Iranian border would strengthen Iranian-Chinese cooperation in challenging the US Navy’s Persian Gulf–based Fifth Fleet. At the same time, Iran and India have launched the International North-South Transport Corridor (INSTC), which allows India to circumvent Pakistan and send goods via container ship to Iran’s Bandar-e-Abbas port and then via rail through Baku in Azerbaijan and Astrakhan in Russia and onward to Europe. Though some observers portray the CPEC and INSTC initiatives as rivals, in truth they represent Iran cleverly playing to China’s and India’s simultaneous interest in its energy supplies and geography, while increasing the burden on Pakistan to protect both Chinese and Iranian interests—especially as it pertains to keeping Afghanistan stable. Pakistan’s logic has long been to weaken Afghanistan to enhance its own “strategic depth.” But with CPEC projects under way, Pakistan has redeployed a full division of 15,000 soldiers away from its Afghan border toward its new functional spine to ensure security for Pakistani and Chinese workers. Since China has become Afghanistan’s largest investor and needs it as a gateway to Iran, Pakistan’s military adventurism and support for Taliban factions have been curtailed. In fact, Pakistan’s government now prioritizes completion of the Iran-Pakistan gas pipeline.