China's Silk Road: A new vision for economic co-operation

2017-04-20, by Mario Pezzini, from OECD Development Centre

Some question the value of economic integration and, more broadly, regional and international co-operation. Others do not. They believe closer economic ties present opportunities to improve lives.

Many important initiatives are test cases for this issue. Amongst them, China’s efforts to forge a modern and inclusive Silk Road from Asia to Europe encompassing some 4 billon people are particularly insightful. Such efforts towards what China calls its Belt and Road Initiative will be the topic of discussion as some 60 countries and international organisations gather in Beijing this May. They will look at how best to overcome the challenges to optimise existing and potential complementarities along the Silk Road, a region encompassing Europe, with its scientific, technological and industrial base, the Gulf countries, the Middle East, North Africa, Central Asia, which is strong in natural resources, and Southeast and South Asia with its dense regional manufacturing supply chain.

Indeed, co-operation along the 21st century Silk Road offers opportunities in such areas as trade, investments, talent mobility, and infrastructure and logistics. Each area deserves special attention for its potential to affect lives for the better.

Trade for better lives

Intensifying regional supply networks as well as lowering tariff and non-tariff barriers to trade often are better for consumers, providing more product choice and availability. Such actions also benefit firms by increasing the size of their available market, lowering the cost of importing inputs, favouring participation in value chains, and promoting further specialisation and productivity. In East Asia and the Pacific, for example, outward-oriented development strategies boosted both trade and GDP growth. Consequently, this led to impressive reductions in poverty. Some 93% of the population in the region lived on income of less than USD 2 per day in 1981; this figure had fallen to 38% by 2005.[1]

Yet, there are opportunities for greater integration between countries at different levels of development that have not been completely explored. That’s why targeted policy measures across various levels of governments to address the lagging competitiveness of local businesses, unemployment and inequalities may help fully unlock the potential.

Investments for better lives

Investment flows along the Silk Road offer job opportunities as existing value chains are strengthened and new ones are built. Chinese companies investing abroad are creating jobs in the Asia Pacific region and Europe, with 35% and 24% of total FDI outflows.[2] North America and Latin America and the Caribbean are not far, receiving 15% and 14% of the investment, respectively. China is investing in Africa too, which receives 11% of total Chinese world FDI outflows. Southeast Asia and South Asia already strongly benefit from intra-Silk Road investments. In these two regions, more than half of jobs created by FDI come from inflows from countries in the Silk Road area (56% and 51%, respectively). Intra-Silk Road investments also are strongly relevant for China and Central Asia, where they account for 46% and 42% respectively of total jobs created by FDI.

Now, attracting investors in the short-term is one challenge. A bigger challenge will be to anchor investors and build linkages to the local economy. An effective investment retention strategy is often needed. Chile’s strategy to expand renewable energy in the Atacama Desert depicts how Chinese investments were used to upgrade and diversify domestic industries. With the participation of one of China’s largest solar manufacturers, a USD 900 million project helped to diversify Chile’s energy sources, while developing energy solutions for other industries with local providers. This entails creating links with local firms, building the necessary hard and soft infrastructure, enabling the growth of small- and medium-sized enterprises through a favourable business environment, and incentivising technology and knowledge transfer.

Mobilising talents for better lives

The Silk Road encompasses a talent-rich area. China leads in the number of total graduates and of graduates in science, technology, engineering and mathematics (STEM). This amounted to more than 9 million graduates in 2013, 48% of which were in STEM. By 2030, China will count nearly 200 million professionals with tertiary education. Europe follows, with more than 4 million in 2013, but with only 28% in STEM.[3] The mobility of talents, both amongst students and entrepreneurs, between and within the areas of the Silk Road, can play an instrumental role in knowledge transfer, trust building and mutual learning with important development outcomes.

It is not enough, however, to just connect regions along the Silk Road to facilitate talent mobility. Mobility will require putting a system in place that recognises foreign credentials and other qualifications. It will also require adapting skills to local needs through professional training.  

Effective infrastructure and logistics for better lives

Harnessing the trade, investment and skills of the countries of the Belt and Road Initiative needs increased connectivity through dependable information and communications technology, physical infrastructure and an enhanced business environment. Current Silk Road routes include rail lines that travel through Kazakhstan, including the already operational Chongqing-Duisburg rail line, and work is being done to upgrade highway linkages.

However, further efforts will probably be needed. In South Asia, for example, despite progress over the last 10 years, it still takes an average of 3.8 days to export from the region in comparison to 2.1 days from the European Union.[4] Although huge disparities within the region (Afghanistan at 86 days and India at 17 days) skew the number, even for export-oriented countries such as Bangladesh and India, nearly two-thirds of the shipping time is spent on paperwork and other institutional processes. Ultimately, policies need to promote operational efficiency, harmonise transportation coordination mechanisms and improve technical standards. Also, sustainable infrastructure financing in countries of the Belt and Road Initiative might need to look at sovereign wealth funds, pension funds and private investors.

Looking ahead

These above examples highlight the opportunities for improving the lives of people through beneficial co-operation among the countries along the Belt and Road Initiative. While some of the outlined challenges in trade, investments, talent mobility, and infrastructure and logistics remain to be addressed, the Silk Road of the 21st century has the potential to bridge regions and reshape global ties for more prosperity and mutual understanding. The OECD Development Centre stands ready to support these efforts. By strengthening ties between different countries and regions, facilitating research and analysis, and promoting knowledge-sharing and a dialogue of peers, we can deliver concrete policies for action and impact to change lives for the better along the Silk Road and beyond.

Mario Pezzini is the Director of the Development Centre at the Organisation for Economic Co-operation and Development (OECD) and Special Advisor to the OECD Secretary-General on Development. 


 

[1] According to World Bank data

[2] As measured by jobs created between 2012 and 2014 according to calculations based on the Financial Times data

[3] According to our calculations based on the World Development Indicators and China’s National Bureau of Statistics

[4] According to the World Bank’s Logistics Performance Index 2016