policy
brief
No. 2015-2 (May)
Global Value Chains
along the New Silk Road
Paul Vandenberg, Senior Economist, ADBI
Khan Kikkawa, Associate, ADBI
Key points
•
•
•
•
•
The New Silk Road
provides a land bridge
linking East Asia and
Europe.
The benefits for
Central Asia of being
merely a goods conduit
will be limited.
Participation in global
value chains (GVCs)
has helped to speed
industrialization in
Southeast Asia and
other subregions.
National economic
strategy in Central Asia
can include efforts to
attract investments in
GVCs.
For greater GVC
investment, policy
makers can improve
trade facilitation,
create a supportive
business environment,
develop small and
medium-sized
enterprises, and skill
the workforce.
Central Asia is opening up rapidly with the completion of new transport corridors.
Providing a passageway for goods between east and west, however, cannot
be its main goal. It needs to attract investment to diversify its economies from
petroleum and other natural resources. Other parts of Asia have developed by
linking with global value chains. This may be an option for Central Asia, but it must
overcome some serious barriers to make that a reality.
Opening up Central Asia
In late 2014, a cargo train departed from Yiwu, a city located south of Shanghai,
and traveled west for 3 weeks across the Asian-European landmass before arriving
in Madrid. Covering a distance of over 10,000 kilometers, it passed from the
People’s Republic of China (PRC) through Kazakhstan, the Russian Federation,
and other countries before finally reaching Spain. After offloading its goods for
the Christmas market, it was reloaded with Spanish products and returned to
complete the maiden round-trip journey on the Yiwu–Xinjiang–Europe cargo line.
This line and other routes are opening up trade between east and west via a
continental land bridge through Central Asia that is referred to as the New Silk
Road (or Route). The 3-week train trip from the PRC to Europe is much quicker than
the 8-week journey by ship and much cheaper than airfreight. While beneficial
to the economies at either end of the route, a key concern is what benefits it will
bring to the economies of Central Asia. They will benefit from transshipment,
servicing, and refueling activity and from better access to markets for their natural
resources and agricultural products. But can the opening of the route spawn
deeper and more diversified manufacturing and service sector development
within Central Asia?
This was a central question discussed at the workshop “Central Asia’s Economic
Opportunities: Economic Corridors and Global Value Chains” in Urumqi, PRC. The
event was the inaugural training workshop of the CAREC Institute whose physical
base was officially opened just prior to the workshop. Government officials from
the 10 member countries of the Central Asia Regional Economic Cooperation
(CAREC) participated in the workshop, which was co-organized with the Asian
Development Bank Institute and the Asian Development Bank.
© 2015 Asian Development
Bank Institute
ISSN 2411-6734
This work is licensed under a
Creative Commons AttributionNonCommercial-ShareAlike 4.0
International License.
Central Asia’s Economic Opportunities: Economic Corridors and Global Value
Chains
2–3 March 2015
Urumqi, People’s Republic of China
The workshop was co-organized by the CAREC Institute, the Asian Development Bank
Institute, and the Asian Development Bank. Presentation materials are available at
http://www.adbi.org/event/6611.central.asia.economic.opportunities/
Linking to global value
chains
One strategic approach to developing
their economies and maximizing
benefits from the New Silk Road would
be to link up with global value chains
(GVCs), also known as global production
networks. Production and exports from
Central Asia currently are concentrated
in petroleum, minerals, and agricultural
products, although there is considerable
diversity among the countries (Table 1).
Central Asian governments would
need to attract investment from global
companies that would be interested
in locating parts of their value chains
in these economies. This may not be
easy, however, given that many of the
countries are landlocked.
Singapore, Taipei,China, and Hong
Kong, China) and the West (United
States and Europe). This process of
expanding global production networks
and the increased geographical
fragmentation of production has been
part of a key change in the way that
low- and middle-income economies
have industrialized and developed over
the past 3 decades. This process, led by
multinational corporations, means that
multi-component goods are designed
in one country, have parts produced
in many others, and are assembled
at a final location. The output is then
sold globally—both to countries that
contributed to the production and to
those that did not. Corporations employ
these production strategies to benefit
from local production advantages.
The PRC and countries in Southeast
Asia have been able to grow and
industrialize by attracting investment
linked to GVCs. They have benefited
from the production strategies of firms
from high-income economies in both
the East (Japan, Republic of Korea,
The changing patterns of production
are evident in global trade statistics.
The share of global value-added trade
accounted for by developing countries
increased from 20% to over 40% in
1990–2013, although poorer developing
countries still struggle to gain a role
Table 1 Central Asian economies: income, economic growth, and exports
Country
Kazakhstan
GDP per
capita,
2013 ($)
Average
annual GDP
growth (%)
Main exports
13,610
6.92
Crude petroleum (55.0%), refined petroleum (4.9%), refined copper
(4.3%), ferroalloys (4.3%)
Turkmenistan
7,987
10.61
Petroleum gas (81.0%), refined petroleum (10.0%), non-retail pure
cotton yarn (2.3%)
Azerbaijan
7,812
12.92
Crude petroleum (88.0%), refined petroleum (4.3%), petroleum gas
(1.1%)
Mongolia
4,056
9.23
Coal briquettes (37.0%), copper ore (23.0%), iron ore (13.0%), crude
petroleum (9.4%), gold (4.3%)
Uzbekistan
1,878
8.16
Raw cotton (15.0%), cars (15.0%), refined copper (9.3%), non-retail pure
cotton yarn (6.6%)
Pakistan
1,275
4.29
House linens (10.0%), non-retail pure cotton yarn (9.2%), rice (7.9%),
non-knit men's suits (4.3%)
Kyrgyz Republic
1,263
4.57
Gold (34.0%), refined petroleum (6.9%), delivery trucks (4.6%), non-knit
women's suits (3.4%)
Tajikistan
1,037
7.23
Raw aluminum (59.0%), raw cotton (12.0%), lead ore (3.8%), other ores
(3.7%), dried fruits (3.6%)
665
8.71
Raw cotton (150%), coal briquettes (11.0%), grapes (9.7%), scrap iron
(9.2%), insect resins (7.2%)
Afghanistan
GDP = gross domestic product.
Source: World Bank Databank (2015).
ADBI Policy Brief No. 2015-2 (May)
2
beyond exporting natural resources.
The GVC strategy has spread value
added and employment opportunities
to more locations and provides support
to developing countries to “catch up” to
high-income countries. Domestic value
created from GVC trade contributes
nearly 30% of gross domestic product
on average (Zhan et al. 2013). GVCs
have also significantly altered
international trade with 60% of global
trade, amounting to over $20 trillion,
consisting of intermediate goods and
services (Yeung 2014).
Central Asia’s integration
in global value chains
Central Asia has been able to attract
an increased flow of foreign direct
investment (FDI) over the past decade,
although much of this has gone into
countries with a large petroleum
sector (Fig. 1) with less investment in
manufacturing (Fig. 2). This investment
pattern has shaped export patterns with
some countries largely dependent on
petroleum exports (Fig. 3). There have
been investments in GVC manufacturing
as well, although this is still at the initial
or nascent stage. The key GVC sectors
globally are in multicomponent goods
such as automobiles and electronics.
Automobile production is established
in several Central Asian countries as
Fig. 1 Foreign direct investment, selected years, 1995–2013
35
Current $ billion
30
Uzbekistan
25
Turkmenistan
Tajikistan
20
Pakistan
15
Mongolia
10
Kyrgyz Republic
Kazakhstan
5
Afghanistan
0
1995
2000
2005
2008
Year
Source: World Bank Databank (2015).
Global Value Chains along the New Silk Road
2010
2013
Azerbaijan
joint ventures with foreign producers.
The most notable is General Motors
Uzbekistan, which is a venture with
UzAvtosanoat to produce GM cars from
knock-down kits. Production began in
2008 and in 2011 the companies formed
another joint venture, GM Powertrain
Uzbekistan, to make engines for use in
GM cars assembled in the country and
for export. Similarly, Toyota entered into
a partnership with Saryaka AvtoProm in
2014 to assemble knock-down kits of
the Fortuner, an SUV, in Kazakhstan. It is
the first production operation of Toyota
in the five core Central Asian republics.
Less complex goods are also produced
through value chains. Textiles and
garments, the most basic manufactured
products, are made in several Central
Asian countries. In some cases, they
are produced largely from domestic
inputs, such as in Pakistan where
cotton is grown and turned into
fabric. Elsewhere, production is part
of a regional value chain. In the Kyrgyz
Republic, for example, synthetic fabric
is imported mainly from the PRC and
made into clothing that is exported
and sold in Kazakhstan and the Russian
Federation. Garment exports grew
rapidly from $15 million to $155 million
in 2003–2012 and the sector employs
more than 100,000 workers in the
Kyrgyz Republic (Jenish 2014). Many of
the producers are domestic firms and
thus the sector does not rely on foreign
investment.
Central Asia is also competitive in the
production of processed agricultural
products. Food can form an important
part of export-based manufacturing
as shown by New Zealand (e.g.,
dairy), Thailand, and other countries
(Vandenberg and Kikkawa 2015). The
processing of these products can help
to expand manufactured output and
diversify the production and export
structure. The majority of Kazakhstan’s
exports to other Eurasian Customs
3
Fig. 2 Foreign direct investment, inflow
Kazakhstan
(2012)
Kazakhstan (2012)
5%
4% 1%
Business activities
5%
Petroleum
35%
6%
Transport, storage, and
communications
Finance
Wholesale and retail trade
10%
Mining and quarrying
Metal and metal products
Construction
11%
11%
Other services
12%
Food, beverages, and
tobacco
Pakistan
(2012)
Pakistan
(2012)
hstan (2012)
Petroleum
Business activities
Finance
18%
Petroleum
35%
Transport, storage, and
communications
Finance
Wholesale and retail trade
Mining and quarrying
Metal and metal products
Construction
4%
Non-metallic mineral
products
Business activities
5%
Construction
12%
38%
4%
2%
3%
Other services
Other
6%
Food, beverages, and
tobacco
Chemicals and chemical
products
Motor vehicles and other
transport equipment
Electricity, gas, and water
6%
14%
Transport, storage, and
communications
Source: International Trade Centre, www.intracen.org/ (accessed 27 April 2015).
Union countries are foodstuffs, such
as milk products, livestock, and fruits
and vegetables ( Tynaliev 2015).
However, these products are not
necessarily part of global value chains
but are based on domestic resources
and are produced almost entirely from
domestic inputs, even if they might be
sold abroad.
Policies for global value
chain investment
To ensure that Central Asia is not
only a transportation corridor
but also a region for goods and
services
production,
countries
can seek to attract investment in
GVCs. Governments can support
such investment with policies and
investments in several key areas.
ADBI Policy Brief No. 2015-2 (May)
Infrastructure: To overcome the
Pakistan
(2012)
constraints
of geography,
it is
imperative that Central AsiaPetroleum
build
Finance
modern
18% transportation infrastructure.
Producers in GVCs need to shipChemicals
parts,
and chemical
products
components, supplies, and finished
Motor vehicles and other
equipment
goods quickly and cheaply38%
bothtransport
within
4%
Electricity, gas, and water
the region and to other regions. Most
2%
Construction
of the GVC production hubs in the
PRC
3%
(eastern coastal cities) and Southeast
Non-metallic mineral
4%
products
Asia (e.g., Bangkok, Ho Chi Min
City,
Business activities
5%
Manila, and Singapore) have access to
Other
6% shipping which allows for
ocean
low
14%
6%
Transport,
storage, and
transport costs. Central Asia does
not
communications
have such access (Yang 2015). Eight
Central Asian countries are landlocked,
constituting about one-fifth of the
44 landlocked countries in the world.
Indeed, Uzbekistan is one of only two
doubly-landlocked countries, meaning
that all of its neighbors are also
landlocked.1 To overcome this problem,
the region needs to rely on building
good quality road and rail infrastructure,
as well as efficient air transport.
Intraregional transport networks also
need to connect through countries
to ocean ports. The development of
land transport corridors through the
PRC, as mentioned at the beginning
of this brief, and through Pakistan can
provide the vital link to ocean shipping.
The China–Pakistan Economic Corridor
will link Kashgar in northwest PRC to
Gwadar Port about 3,000 kilometers to
the south on the Arabian Sea.
Trade facilitation: As a result of
political and ethnic tensions, Central
Asian economies have sometimes built
walls at borders, prohibited vehicles
registered in one country from crossing
to another, and required goods to
be unloaded and checked at border
crossings (Jekic 2015). These issues
need to be addressed through bilateral
discussions and concerted policy
action.
Furthermore, trade in GVCs requires
efficient soft infrastructure at the
4
borders so that goods can pass
efficiently. Low tariff rates and
simplified and efficient border
procedures are required. A number
of countries have recently joined the
World Trade Organization (WTO),
which provides a commitment to low
tariffs and offers access to the other
160+ WTO members. While securing
WTO membership is important, there
are many subsequent commitment
actions that need to be put in place.
Tajikistan, which acceded in 2013, has
been proactive in trying to fulfill these
commitments. Other countries are in
the process of seeking accession.
The
WTO
arrangements
are
complicated by the development
of regional trading blocs, notably
the Eurasian Economic Union that
includes the Russian Federation,
Belarus, Kazakhstan, Armenia, and the
Kyrgyz Republic. The bloc includes
a customs union, which proposes
a higher common external tariff on
some goods. WTO members in the bloc
will need to provide compensating
measures (low tariffs on other goods)
to remain compliant with the WTO.
Fig. 3 Export composition, 2014 (%)
100
90
80
70
Capital goods
60
Consumption goods
50
Intermediate goods: food
40
Other intermediate goods
30
Petroleum and other fuels
20
10
Pakistan
Kyrgyz Republic
Tajikistan
Mongolia
Afghanistan
Turkmenistan
Kazakhstan
Azerbaijan
0
Note: Data for Afghanistan and the Kyrgyz Republic from 2013; data for Tajikistan and Turkmenistan
from 2000.
Source: UN COMTRADE, http://comtrade.un.org/db/default.aspx (accessed 27 April 2015).
Global Value Chains along the New Silk Road
Business environment: Countries
need to provide a conducive business
and regulatory environment to attract
foreign investment in GVCs. This can
be a challenge due to instability within
the legislative system that plagues
some countries, as well as differential
rights for foreign investors in regard
to private property, administrative
regulations, and tax regimes, which
together can create disincentives for
investors in Central Asia. In addition,
the development of industrial parks
or zones with clear and streamlined
investment procedures have been
employed successfully in the PRC and
many parts of Southeast Asia to attract
foreign investment.
Supporting businesses, notably SMEs:
Foreign GVC production plants require a
range of supporting services and input
manufacturers. They are often provided
by domestic small and medium-sized
enterprises (SMEs) but also foreign
SMEs from the country of the main
GVC investor. Domestic firms also act
as joint venture partners. Government
policy support to the development
of a vibrant SME sector can therefore
help attract investment and ensure
that the value chain establishes deep
domestic roots. Specific policies and
programs include facilitating access to
credit and identifying and securing key
technologies.
Wage rates and skilled labor: A key
motivating factor for global firms to
diversify investment locations is to
reduce costs, notably wages. Thus,
governments need to manage a
competitive wage environment. Many
countries in Central Asia do have low
wages, although in some cases the
reservation wage is pushed up by
wages available to migrants in other
countries. The two large labor-sending
countries, Tajikistan and the Kyrgyz
Republic, send many workers to the
Russian Federation. The skill level of
5
the labor force is also important for
attracting GVC investment, notably
in higher value products. Government
policy can provide a solid foundation
of basic education and a system of
vocational training that equips workers
with skills relevant to the job market.
Conclusion
The emergence of the New Silk
Road is streamlining trade between
the major economic hubs of Asia
and Europe, including the Russian
Federation. Central Asia is developing
the connections to make the new
road viable, but it should also seek
to encourage productive investment
along the road. Participating in GVCs
can help in this regard and will ensure
a transition from being a supplier of
natural resources and raw materials
to becoming a manufacturer of goods
and services.
Note
1.
Liechtenstein is the other doubly-landlocked country and is a micro state of 35,000 people.
References
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Investment in Central Asia. Presentation at workshop on Central Asia’s Economic
Opportunities: Economic Corridors and Global Value Chains, Urumqi, PRC, 2–3 March.
Jenish, N. 2014. Export-Driven SME Development in Kyrgyzstan: The Garment Manufacturing
Sector. Working Paper No. 26. Institute of Public Policy and Administration, University
of Central Asia. Bishkek.
Tynaliev, B. 2015. Investment Policy of the Kyrgyz Republic in the Framework of the
Integration Process. Presentation at workshop on Central Asia’s Economic
Opportunities: Economic Corridors and Global Value Chains, Urumqi, PRC, 2–3 March.
Vandenberg, P., and K. Kikkawa. 2015. New Zealand: A Farming and Services Growth Model
for Asia. Asia Pathways, blog of the Asian Development Bank Institute. 16 January.
Yang, C. 2015. Linking with GVCs – Manufacturing Investment from Hong Kong, China and
Taipei,China to the Pearl River Delta, PRC: Lessons for Central Asia. Presentation at
workshop on Central Asia’s Economic Opportunities: Economic Corridors and Global
Value Chains, Urumqi, PRC, 2–3 March.
Yeung, H. 2014. Global Value Chains and Global Production Networks: Organizing the World
Economy. Presentation at Regional Conference on Trade in Value-Added, Global
Value Chains and Development Strategy, Singapore, 6–8 May.
Zhan, J. et al. 2013. World Investment Report 2013: Global Value Chains: Investment and Trade
for Development. United Nations Conference on Trade and Development. Geneva,
Switzerland: United Nations Publications.
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ADBI Policy Brief No. 2015-2 (May)
6