The ‘Silk Road’ or the ‘Silk Route’ that existed between 130 BC and 1453 BC was predominately a series of trade routes that intertwined their way through Europe, Central Asia, Persia to China to facilitate trade, commerce, cultural exchanges, and knowledge in the ancient world. The predominant goods traded then were Chinese silk and spices i. China was one among the dominant trading nations along the routes, and the Asian giant continues to dominate much of the world trade today.

Today, China is spearheading a mammoth initiative to revive the Silk Route again, through the ‘One Belt One Road’ (OBOR) initiative. The ‘New Silk Route’ initiative (as it is termed), that was announced in October 2013 (by the Chinese Government), seeks to encompass and incorporate many countries in Asia and Europe in its path to a more globally integrated world characterized by higher growth prospects and economic development for all.

An Introduction to OBOR

The OBOR project is an initiative to connect China and other countries across Asia, Southeast Asia, Middle East, and Europe, through a vast network of interconnecting land and maritime routes, in order to facilitate trade and commerce. There are two aspects to the initiative, as unveiled by China.

  1. The BELT or The Silk Road Economic Belt as it is called, involves building a network of road and rail routes, gas pipelines and other infrastructure projects that interconnect interior China to participating countries along the route in Central Asia , Middle East, and ultimately to parts of Europe.
  2. The ROAD or the Maritime 21st Century Silk Road is the maritime equivalent that involves building a network of ports, planned sea routes and maritime infrastructure projects along the Southeast Asia corridor, connecting coastal China to South Asia and Europe via the Indian Ocean and North Africa.

China has already set up the Silk Route fund and injected $40 billion worth of initial funds to support projects under this initiative, and in March 2017, private investors in China set up the Green Silk Road fund with an initial capital of 30 billion Yuan or $4.4 billion. Chinese state banks, including The Export-Import Bank of China and China Development Bank,  have become the major disbursers of investment funds, with funds being disbursed predominantly in the form of bilateral loans. Chinese construction companies are expected to undertake majority of projects in the Belt region. One of the major projects has already been initiated along the China Pakistan Economic Corridor (CPEC), where countries have tied up with each other to construct and upgrade various infrastructure projects. One such project is the Gwadar Port in Pakistan that will pave the way to connect China’s Xinjiang province to the Arabian Sea/Gulf of Oman and the Indian Ocean at large. China based multilateral institutions have also been involved in funding the initiative, namely- the Beijing based Asian Infrastructure Investment Bank (AIIB) and the Shanghai based New development Bank (respective capital bases of $100 billion and $50 billion). Total infrastructure investment as part of the OBOR initiative is estimated to exceed $1 trillion, and it is now confirmed that about 52 countries are interested in participating in OBOR in some form or the other.

Clearly, the scope and scale of the project is immense. If reached conclusion, the project would involve 65 countries accounting for about 40% of the world’s gross domestic product (GDP), with OBOR’s impact felt on close to 4.4 billion persons across the worldii .

OBOR is expected to yield several positive benefits for China as well as other participating nations, with the next section exploring some of these potential benefits.

OBOR and Associated Benefits to China

  • Revival of China’s faltering economic growth through higher volume of trade creation of jobs.
  • Opportunity for China to move up the value chain and become a leader in the export of high-end goods and technology, through the eventual knowledge transfer that will occur.
  •  Private firms within china will accrue enormous benefit, especially construction companies, as many of them will be undertaking key OBOR projects.
  • China will have access to trade with smaller markets that have been thus far difficult to penetrate into.
  • Increased energy security through faster transportation of gas and oil, via rail and road links.
  • Underdeveloped provinces such as Xinjiang will develop with increased access to markets outside of China.

OBOR and Associated Benefits to Other Participating Countries

  • Participating countries will get greater access to China as well as other interconnected markets along the proposed routes. Smaller and landlocked countries especially stand to gain from increased inclusiveness.
  • Smaller countries will see inland infrastructure improvement through increased investment by China and other partner countries.
  • Exchange of information, ideas, and technology among countries will bring about sustained economic development and spur innovation.
  • Lowering of costs of transporting goods to countries given economies of scale and availability of better infrastructure.

Risks Attached to OBOR

While the economic benefits accrued will be enormous to both China and countries in the accord, there are also some risks attached to the initiative:

  • China could use OBOR to export its surplus steel, cement and other materials, to smaller markets.
  • Many countries along the corridor are credit rated poor by top credit rating agencies and there is an associated lending risk therein.
  • Many Countries in BELT and ROAD region are characterized by internal strife, poor governance and so on, and any domestic instability will increase associated costs of transportation and labour.
  • Large financial investments relative to the small size of some economies, could result  in macroeconomic imbalances and high budget deficits.
  • There are also attached social and environmental risks  as infrastructure projects could displace communities and lead to  environmental pollution.

The larger question that remains, however, is the sustainability of the proposed model of development. There are for instance, far too many logistical complications for OBOR to sustain. Territorial and Maritime disputes have to be resolved in order for Maritime ROAD to work smoothly. There is also a gap between what the public sector can lend and what the private sector can augment with to finance OBOR in the end. Moreover, a sudden tense political situation between countries along the corridor can push back project timeline.

OBOR clearly has the potential to alter the trade and investment landscape of Eurasia, and bring about greater economic gains, and positive collaboration among participating states, thereby improving the economic prosperity of the region. The need of the hour, however, is for participating countries to work together to draft strong policy related objectives and feasible agreements, chart out clear rules and regulations in regards to areas such as the environment, human rights and so on, thereby ensuring OBOR’s success in the long run.

[i] Ancient History Encyclopedia Limited.

[ii] World Bank blog based on a presentation at the Silk Road Forum 2015.

About Frost & Sullivan

For six decades, Frost & Sullivan has been world-renowned for its role in helping investors, corporate leaders and governments navigate economic changes and identify disruptive technologies, Mega Trends, new business models and companies to action, resulting in a continuous flow of growth opportunities to drive future success.

Frost & Sullivan

For six decades, Frost & Sullivan has been world-renowned for its role in helping investors, corporate leaders and governments navigate economic changes and identify disruptive technologies, Mega Trends, new business models and companies to action, resulting in a continuous flow of growth opportunities to drive future success.

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