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Keynote Remarks: Asian Regional Economic Integration


Remarks
Robert D. Hormats
Under Secretary for Economic Growth, Energy, and the Environment 
The Asia Society
New York City, NY
December 12, 2012

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As Delivered

It is a great pleasure for me to be able to participate today with all of you, and also to have a chance to listen to a very distinguished group of panelists following my remarks.

I have to say this is a terrific report by Alexander Evans, and I agree with you that this is the kind of visionary, thoughtful, look-ahead type of report that’s needed as we try to craft policies for the next decade and beyond. I really commend you for the hard work that you’ve done and the very eclectic effort you’ve made to get a whole lot of people’s views on this, because there are many different views on this complicated subject, but it is nonetheless very important. I’m also pleased to be here with some old friends.  Frank Wisner and Nick and Sheila Platt have been the stalwarts in thinking about these issues for a very long time now.  We’ve had a chance to work together for many years, and I hope to continue to do so.

One of themes of this report is that this region has been the least economically integrated region in the world.  I think this is saying a lot, because there are a lot of regions of the world that we’re working with, like North Africa, Egypt, Tunisia, and elsewhere, that are somewhat disconnected from one other economically. While the fact that this region is the least economically integrated is a problem, this problem actually provides us with an opportunity.  If there were to be greater connectivity and greater integration, this could give an enormous boost to economic growth.

The New Silk Road concept is really about regional integration, and it was picked because it creates a vision of the way this area used to be when there was a huge amount of interaction, both trade and financial.  For centuries, this area was a very prosperous part of the world, largely due to interconnectivity. The interconnectivity went from Europe, Venice and the Mediterranean through many parts of China.  And this interconnectivity was not just a road.  It was marine transportation as well. Also, if you Google the Silk Road, Wikipedia it, or look at serious books about it, they show that there were really a lot of silk roads.  It was a web of interconnections, and that was really the idea behind it.  Thus, the vision is not to have just one road, but, in fact, that this can again be a highly interconnected region.

I’d like to focus in particular on Afghanistan because, as Suzanne [DiMaggio, Vice President, Global Policy Programs, Asia Society] has pointed out, this change that’s going to occur in Afghanistan between now and the end of 2014 is very important.  Crucial transitions are going to occur with respect to such things as security, governance, and the economy.  And the success of these transitions is going to depend largely on the ability of Afghanistan and its neighbors to increase prosperity in the region. That will come largely through increasing integration between Afghanistan and its neighbors, particularly the north-south corridors connecting Central and South Asia through Afghanistan, but also connectivity further south.

President Karzai speaks of Afghanistan as the Asian Roundabout at the Heart of Asia.  There are very elaborate charts and plans to make it a roundabout.  Some of these were presented a couple of years ago here in New York by a number of Afghan Ministers to the finance community in the hopes of obtaining financing. There’s a map here, which I hope all of you will look at.  And what’s really interesting is that it’s not these large projects which at the moment are driving the process.  It’s actually a lot of practical things like roads between Turkmenistan, Uzbekistan, and Tajikistan, all of which if you look at a map are developing their own interconnections between themselves and their commercial centers and Afghanistan. Also important, as I will discuss in a moment, is increasing Afghanistan’s economic connections to Pakistan, and through Pakistan to India. The success of the transitions that are under way in Afghanistan now depend largely on these kinds of interconnections, trying to fulfill—perhaps not all at once but over a period of the time—this vision of increased connectivity.  

Secretary Clinton has called this emerging network of interconnections a “New Silk Road,” and it was largely to get people to buy into this concept as a vision for the future. While it’s understood that not all of this could be accomplished right away, it was a way of suggesting that interconnectivity would lead to greater prosperity, stability and security for Afghanistan. Study after study—and I am sure you’ve read many of them, and certainly many of them have been incorporated in your study—have shown enormous potential for increased private investment, which would be useful to drive economic development through a regionally connected economy to overcome the regional disconnects that have emerged really over the last hundred years or so.

Afghanistan’s neighbors and near-neighbors include some of the fastest-growing economies in the world.  The region really is home—if you look at it in its entirety—to about a fifth of the world’s population, and this is becoming, or has the potential to become, a regional economic mega-market. The markets, particularly to the south, but other parts of the region as well, can help fuel regional growth and private sector investment.  Because what’s happening, and what tends to happen in the United States as well, is that if you can build interconnections—roads, railways, and other types of interconnections—all along those interconnections or roads, little towns and little businesses sprout up. This is certainly what happened in the United States with the Transcontinental Railway, but happens virtually everywhere, increased connections and infrastructure spawn new services and investment, so stores and factories build there because they can move their goods more efficiently.  

The United States is playing an active role in this regional interconnection process.  Within Afghanistan alone, the United States has supported some 200 hundred road projects, which included building new roads and rehabilitating existing roads—totaling more than 3,000 kilometers.  And the rehabilitation part is very important because in many parts of the country, there are roads, but they’re just not very good roads.  Rehabilitation has been an important part of our programs both through USAID and the American military. And between 2010 and 2014, we estimate that outlays in support of energy infrastructure, which is another important type of connectivity, will lead to projects of about $2 billion.  A number of these projects are already under way, and a lot of them are on the books, because expanding the connectivity of the energy grid is very important to demonstrate that the government is providing the services that the people want.  

U.S. assistance to small- and medium-sized enterprise development and agricultural production is also important.  U.S. assistance with water management is very critical to certain parts of the country.  In addition, U.S. support for mineral extraction is essential because there are lot of minerals in Afghanistan ripe for export.  As you know, these minerals are highly touted; The New York Times has run large articles about mineral wealth in this area. U.S. assistance with vocational training is also very important because a lot of people are not trained in the kinds of jobs that can be very helpful to the future growth of Afghanistan.  We’ve also tried to encourage the expansion of  Afghanistan’s economic ties with Central and South Asia, and we’re in the process of engaging and doing more.

But I think it’s important to point out that Afghanistan, while central to this idea that President Karzai has talked about as a sort of regional roundabout, is not the only country that’s going to benefit from the kind of economic cooperation that I’m talking about.  The entire region is going to see benefits as well; and I think it’s important that we incorporate any strategy we have with Afghanistan into a broader regional strategy.  If it’s just Afghanistan alone, or it’s just connectivity between Afghanistan and others alone, it really does not sell the whole thing.

Ambassador Haqqani [former Pakistani Ambassador to the United States] made a very good point in talking with me about this earlier—about the need for a much greater effort to explain this, to sell this, to make sure that everyone else buys into this—and I think he is exactly right.  This is something we’re trying to do, but we should probably do more comprehensively with a lot of the countries in the region. If this kind of vision works, or even if part of it works—even if we do some of it—if we do it well, we foresee tremendous economic opportunities for trade in a whole range of products.  We’ve identified areas where we think the possibility for substantially increased trade exists in a fairly short term way, such as wheat, cotton, various kinds of energy, and a variety of finished products as well. And the economies of Central Asia and the Indian sub-continent, through liberalization and through increased investment across borders, can further benefit through increased rail transportation, increased road transportation, and better communications infrastructures.

First of all, these kinds of interconnections can create jobs.  When roads or railways are built or improved, or communications or electric grids are built out, there are construction jobs at the outset, but the amount of business that will take place once they are completed will even be greater than the initial benefits from the projects themselves.  There’s also another dimension here which I think is important, which is beginning to get attention, and about which we’re certainly trying to do more.  And that is the changes that are underway now in Burma which provide an interesting set of new opportunities.

What’s happening in Burma—the expansion or improvement in relations generally with India and Bangladesh, and the greater connectivity of Burma to the rest of Southeast Asia—is very important because the vision here is not just a vision of a New Silk Road surrounding Afghanistan.  There’s also an idea that if you can do it—and it’s beginning to happen already organically—is a greater degree of cooperation between South Asia and Southeast Asia, or what we are calling the Indo-Pacific Corridor.  If you look at connections between India across Bangladesh to Burma and Southeast Asia—if you look at the possibilities, such as maritime trade across the Bay of Bengal—you’ll also see interesting opportunities there as well.

So the idea behind this whole notion of Silk Road interconnectivity, the Indo-South Asia or Indo-South Pacific Corridor, is a simple one.  The idea is that if you increase cross-border cooperation and collaboration in trade, Central, South, and Southeast Asia can once again be a hub for, or a transit area for, global commerce between themselves and for Europe through Central Asia. While trade among the countries of South Asia and Southeast Asia remains far below its potential—last year, this trade accounted for only 1.5 percent of the region’s GDP—the countries of the region are making progress toward a more integrated regional market.  I think this is important to note.  While it is perhaps not as dramatic as some might like it to be, real progress has been made—certainly compared to what existed five years ago.

One such example is transit agreements.  The Afghanistan-Pakistan Transit Trade Agreement is very important and took a lot of time to negotiate.  It has been important not just in quantitative terms—which is certainly important—but also as a political breakthrough as well.  And regional bids for World Trade Organization accession are already creating a more robust, transparent, and predicable trade environment, or at least the potential for such an environment.  So there are opportunities here, and we think that there are more opportunities to come if these areas of progress can be developed further. As you know, a strong foundation for this regional vision already exists through what is known as the Istanbul Process.  This is a framework that involves a great many countries in the region, where agreed-upon confidence-building measures point to a concrete way forward.  We think this is something that has potential.
 
There have been meetings already.  There have been several follow-up meetings, some at the ministerial level, some at  lower than ministerial level.  The idea is to figure out ways in which these countries can cooperate, and it is not just the countries I have mentioned.  You have other countries which are part of the process as well.  In fact, some countries that are not immediately evident as major parts of this effort have an interest in it as well, such as Russia and China.  I will talk a little about both of those in a moment.

In addition to the very useful Istanbul Process, the Fifth Regional Economic Cooperation Conference on Afghanistan, RECCA-V as it is called, recently met in Dushanbe, and made significant contributions to regional economic integration—specifically through the introduction of 17 regional Integration Projects and the establishment of Policy Priorities for Afghanistan and the wider region.  So there are actually real projects that are on the books that have been developed here.

In October, the five Central Asian governments plus Afghanistan also took part in the Central Asia Trade and Investment Framework Agreement (TIFA) Council meetings in Almaty. This is part of the effort of weaving these countries together in ways that enhance trade opportunities.  Many of the Governments that are discussed in this report, and are represented here today, were present at a meeting I chaired in Tokyo on the margins of the World Bank/IMF meeting—which included Finance Ministers and Central Bank Governors of the New Silk Road countries that are engaged in this process.  We had the Finance Ministers from virtually the entire region—the Deputy President of Kazakhstan, the Finance Minister of Pakistan, the Central Bank Governor of Afghanistan and many others.  The idea was to talk about the New Silk Road project and to figure out how we can work more closely together on the financial side.  

Two of the very valuable contributors are, of course, the World Bank and the Asian Development Bank (ADB), as well as Japan.  The Asia Development Bank has done a great deal of work on this and has already put together a very thoughtful plan which incorporates a lot of the opportunities I have been talking about.

At my meeting, we explored more ideas for effectively promoting regional investments in Afghanistan and its neighbors, including the establishment of a regional seed fund for smaller projects, mechanisms to mitigate investment risk—and there are a lot of investment risks in the area particularly in these newer projects—and also to figure out how to more effectively deal with currency and currency related issues.

A lynchpin in regional integration efforts has been the ADB-facilitated Central Asian Regional Economic Cooperation (CAREC) program,  which has implemented already over 100 projects worth in the area of $17 billion in transportation, trade facilitation, broader trade policy, customs issues, trade expediting measures, and energy.  And the eleventh CAREC ministerial in Wuhan, China, laid out a comprehensive plan for an additional $24 billion in investments over the next 10 years.  So there are actually projects that are either underway or about to be underway or will be financed in this process.

I want to just touch on China for a moment, because It is important to have buy-in from China.  If you look at the region, there are two really major players, and one of them is China and the other, of course, is India.  But there are a number of others that are required to make this work.  

We see enormous opportunities for connectivity between India and Afghanistan, but that obviously involves a lot of cooperation from Pakistan, which is the transit point in this process.  So working these out politically, as well as commercially, is a very important objective.  And there have been several very good meetings between the Indian Commerce Minister and his counterpart in Pakistan.  

And I think there has been progress on that— which has been relatively highly publicized— such as Pakistan’s commitment to grant India Most Favorable Nation status by the end of 2012, and India’s pledge to reduce the number of items on its sensitive list by 30 percent.

But what is interesting and what has not gotten as much publicity—but is also important—is the fact that the Chinese are playing an interesting role.  If you look at the original silk road, the destination on the East was for the most part China.  

The Chinese see this as a great opportunity for moving goods and people and raw materials between China and other parts of the region—Chinese manufactured goods to the West and raw materials and energy to the East, to China.  So we see China as playing an important role.  The fact that they hosted the CAREC meeting in Wuhan demonstrates their keen interest in pursuing this.

The ADB, the World Bank, and other multilateral and bilateral actors are really indispensible partners in pulling all of this together and with coming up with a viable plan, because you need to have some cohesiveness to this process for it to be effective.

Central Asia, sitting on some of the world’s largest energy and mineral reserves, has the potential to supply energy-hungry markets in a lot of places, such as India, Pakistan and certainly China, where new energy resources are desperately needed to power economic growth and development.  So there are a lot of potential areas where this could work, but it will not work without some degree of planning and some degree of cohesion.

The fact that Afghanistan is at the center of this “Roundabout” gives them opportunities to benefit from it.  But the capacity of the Afghanistan plan has to be coupled with plans that dovetail with those of other countries in the region.

We also find this is not just a government sponsored series of actions.  What is very interesting here is that the private sector itself has taken the lead in a number of areas.  We have seen significant private sector investment going on in Pakistan—from the Stans to the North of Pakistan where there is investment in services, trucking, roads, small manufacturing, etc.  We think if this continues that Afghan trade— just as a result of private sector initiatives—could double to $1 billion by 2013.  

Already India, as a result of the developments that have occurred that I mentioned, accounts for one quarter of Afghanistan’s exports.   This is up substantially from what it would have been several years ago.  As India has shifted its engagement outward, this has opened new possibilities for commerce and connectivity with its neighbors, particularly Pakistan and increasingly with Bangladesh.  There is a lot of pressure from the business communities in the region to encourage governments to take a more proactive role.  The commercial opening between India and Bangladesh is important for a variety of reasons, because this can provide important opportunities for a whole range of companies to play an active role.  

So these are the kinds of things we see in the region and the kinds of opportunities we are trying to push.  It really depends not so much on the United States itself playing a leadership role.  The role the U.S. can play is encouraging openings and trying to facilitate progress on connectivity.

One of the things that we’re also trying to do is to enhance the role of women in the area.  We have chaired a number of groups that have brought women together and hosted a regional South Asia Women’s Entrepreneurship Symposium in Dhaka.

Secretary Clinton has spoken out on this issue frequently, and I think we all stand to gain from encouraging the role of women in this entrepreneurial environment, because they can play a major role in many cases.  They have not been allowed to play the role that they potentially can play to further stimulate economic activity in the region.

So let me just offer a few closing thoughts.

One is that I think the whole region stands to gain from enhanced regional cooperation, and the United States is ready to lend support, both financially and in terms of its convening power, but also in terms of its support for the work of the Asian Development Bank, the World Bank, and other institutions.  And the United States is beginning to sell this vision in a more comprehensive way.

There seems to be I think—when I talk to people in the region and at the conference I chair, and in the conversations I’ve had and a lot of my colleagues have had—a greater sense of support and optimism around the idea of a greater degree of connectivity between the countries of Central Asia, and also between Central Asia and South Asia and Southeast Asia.  Although the latter is not quite as far along as some of the others, it’s one on which we can make some progress.  So this whole notion of connectivity for greater trade, greater infrastructure, and greater integration, I think, provides us with opportunities for both government-led and government-supported projects, but also encouraging a greater degree of private sector involvement in this process.  

I want to underscore that this challenge is really a challenge for all of us to try to build a greater understanding of how countries in the region can benefit from one another, along with the kinds of measures that these countries need to take to make this work.  And it’s going to take financing.  The smaller projects are financeable by countries in the region.  The larger projects are going to involve the Asian Development Bank and the World Bank, so one of the things we need to do is to make sure there is some sort of coherent plan or integrated idea for how these connections will work, but we also need to ensure that at least a few of these big projects get funded.  

You don’t need all of them to be funded all at once.  Some of these plans are very ambitious, but if you pick the right ones, you’ll be successful.  It would be particularly helpful if you identify a few of these plans in the energy area that are needed in order to get the manufacturing sector going.  If you get a reliable source of energy and support connectivity of villages, the villages can then get supplies of energy.  So if you identify a few plans and get them going, along with what the private sector is doing already, there is an opportunity for progress—to make this transformation, which is not a short-term one, but a long-term one.

We have to be prepared for frustrations.  Things don’t always work as quickly in the region as we would like.  But I think having this vision and having this sense of practical cooperation is useful.  So, this is the vision that we’re trying to pursue, and I’ve given a quick review of some of the programs and some of the organizational efforts we’re undertaking to encourage this.

In the end, as Afghanistan is trying to make its transition, these projects and programs will be very helpful in giving it at least a chance to move toward greater stability and greater prosperity than it would have without them.  And these projects and programs also provide major benefits for a region that has not been very well connected or integrated for many, many years.  This historic lack of interconnection brings new opportunities for the entire region, but this vision has to be looked at in a comprehensive way.  This vision is not only good for Afghanistan, but also provides opportunities for trade, development, and job growth in a region that can benefit enormously from the stimulus of greater interconnectivity.

Thank you very much.
 



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