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What would a Central Asian bloc mean for the Indo–Pacific?

Posted By on January 23, 2017 @ 11:00

Image courtesy of Flickr user Thomas Depenbusch.

Central Asia’s economy has functioned well since the global financial crisis of 2009. Kazakhstan’s credit rating is still at an investment grade. Uzbekistan has continued to grow at a rate of roughly 8% since the crisis and Tajikistan has maintained growth of 5–7% since 2009. That has been achieved during a tough time for the global economy with negative interest rates, sluggish growth and greater protectionism.

China has seen Central Asia’s potential and sought out economic opportunities for itself and the region. In 2015, it created the Asian Infrastructure Investment Bank (AIIB) with the intent of financing US$8 trillion worth of vital infrastructure, mainly in Central Asia. The AIIB attracted 57 members, including United States allies like Australia and Great Britain despite complaints from the US and Japan about the bank’s governance, relative to the rival US–Japanese Asian Development Bank. However, with the election of Donald Trump and the potential US withdrawal from Asia's financial architecture, the AIIB now seems to be a diplomatic master stroke from China.

China now needs to ensure that the bank actually contributes to Central Asia’s economic development. China’s way of doing this will be through the ‘one belt, one road’ (OBOR) initiative. The initiative has two objectives. Firstly, to revitalise the ‘Silk Road Economic Belt’ that runs through Central Asia. Secondly, to connect this belt with the new ‘Maritime Silk Road’ that runs through the Indian Ocean. If the AIIB is to finance the significant infrastructure deficit in Central Asia, China will lay the groundwork for achieving the first objective of the OBOR initiative.

Reestablishing the dormant Silk Road Economic Belt will be the greatest test for OBOR. The Indian Ocean is an established hub for international trade and fisheries that Australia helps protect. The Silk Road now only links China’s Xinjiang and Pakistan and converting that into a vibrant trade route will be hard. Even if the necessary infrastructure is built through AIIB investment, the Silk Road Economic Belt will still have to have to procure funding from more traditional bilateral sources and private investors. That’s a tough ask for an infrastructure project already planned to be ‘multiple times larger’ than the Marshall Plan.

However if the Silk Road Economic Belt does develop the required infrastructure, the economies of Central Asia will benefit significantly. Central Asia might again provide the lifeblood of the international economy and the region will have China’s OBOR to thank for it. China’s political objectives for OBOR are clearly to develop allies in Central Asia.

To understand China’s economic diplomacy in Central Asia, it’s worth looking at the Shanghai Cooperation Organization (SCO). The SCO was started by China and Russia in 2001 to create a multilateral security organisation akin to NATO between the two countries, as well as Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. The focus of the SCO has been mainly on security to combat the ‘three evils’ of terrorism, separatism and extremism, and its member states have started sharing intelligence and conducting joint military exercises.

While the SCO remains focussed on security, the bloc has recently become more comprehensive and its members have formed a strategy to harmonise the economies of Central Asia, mainly through the AIIB. China has pushed for a free trade agreement among members and Russia appears to be keen to integrate its Eurasian Economic Union with China’s OBOR initiative to bolster its struggling economy.

That has improved trust among the members. In June 2016, China’s state-owned Xinhua News Agency spoke of a regional identity, a ‘Shanghai Spirit’ defined by ‘mutual trust, mutual benefit, equality, consultation, respect for diverse civilizations and pursuit of shared development.’ It won’t be surprising if China tables a document like ‘ASEAN Vision 2020’ at the SCO soon to formalise a regional identity similar to that of the Southeast Asian regional bloc.

If China succeeds in prosecuting its diplomatic agenda, the four pillars for a regional bloc will have been built, namely: financial architecture (through the AIIB); significant regional trade (through the Silk Road Economic Belt and an SCO free trade agreement); security architecture (through intelligence sharing and joint military operations at the SCO); and a regional identity (through the Shanghai Spirit).

Such a bloc could become a serious competitor to the Indo–Pacific’s existing architecture. As East Asia’s economies struggle with deflation, ageing populations and asset bubbles, multilateral organisations like ASEAN and APEC might find a fast-growing economic competitor in the SCO. Another threat is that, unlike ASEAN and APEC, the SCO’s focus has always been on security. As such, a regional bloc in Central Asia might carry more strategic weight than the existing multilateral economic organisations in the Indo–Pacific.

While those threats might only be realised much further down the track, the SCO has the potential to weaken ASEAN and APEC. As a founding member of APEC and a longtime advocate for better integration in ASEAN through the East Asia Summit, Australia should appreciate how those developments will affect the regional architecture. That will be vital if Australia is to understand how best to advance its interests in an evolving Indo-Pacific.

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[1] Kazakhstan’s credit rating: https://www.moodys.com/research/Moodys-downgrades-Kazakhstans-rating-to-Baa3-with-negative-outlook-concluding--PR_347131

[2] 8% since the crisis: http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?end=2015&locations=UZ&start=1990

[3] 5–7% since 2009: http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?end=2015&locations=TJ&start=1990

[4] negative interest rates: http://www.smh.com.au/money/whats-the-deal-with-negative-interest-rates-20160321-gnnc49.html

[5] sluggish growth: http://www.imf.org/en/News/Articles/2016/10/04/AM16-TR100416-Transcript-of-October-2016-World-Economic-Outlook

[6] greater protectionism: http://www.wsj.com/articles/global-trade-rebound-threatened-by-protectionism-after-trump-victory-1480084737

[7] Asian Infrastructure Investment Bank: http://www.aiib.org/

[8] US$8 trillion worth of vital infrastructure: http://dfat.gov.au/international-relations/international-organisations/multilateral-development-banks/Pages/asian-infrastructure-investment-bank.aspx

[9] 57 members: http://www.aiib.org/html/aboutus/introduction/Membership/?show=0

[10] US and Japan: http://america.aljazeera.com/opinions/2015/10/should-japan-join-a-chinese-led-banking-body.html

[11] Asian Development Bank: https://www.adb.org/

[12] US withdrawal from Asia's financial architecture: https://www.aspistrategist.org.au/not-trans-not-pacific-not-partnership/

[13] one belt, one road: https://reconnectingasia.csis.org/database/initiatives/one-belt-one-road/fb5c5a09-2dba-48b9-9c2d-4434511893c8/

[14] established hub for international trade and fisheries that Australia helps protect: http://www.navy.gov.au/sites/default/files/documents/SPS3_Protecting_Trade_IndianOcean.pdf

[15] Xinjiang and Pakistan: https://www.britannica.com/topic/Silk-Road-trade-route

[16] traditional bilateral sources: https://www.ft.com/content/e83ced94-0bd8-11e6-9456-444ab5211a2f

[17] ‘multiple times larger’: https://www.bloomberg.com/news/articles/2016-08-07/china-s-marshall-plan

[18] China’s political objectives: https://www.weforum.org/agenda/2016/06/why-china-is-building-a-new-silk-road/

[19] Shanghai Cooperation Organization: http://www.sectsco.org/

[20] ‘three evils’: http://www.refworld.org/cgi-bin/texis/vtx/rwmain?page=publisher&publisher=ASIA&type=&coi=&docid=49f5d9f92&skip=0

[21] sharing intelligence: http://www.cfr.org/china/shanghai-cooperation-organization/p10883

[22] military exercises: http://tass.com/world/745617

[23] free trade agreement: http://thediplomat.com/2016/11/china-suggests-free-trade-zone-for-the-sco/

[24] to integrate: https://www.rt.com/business/256877-russia-china-deals-cooperation/

[25] ‘Shanghai Spirit’: http://news.xinhuanet.com/english/2016-06/22/c_135457073.htm

[26] ASEAN Vision 2020: http://asean.org/?static_post=asean-vision-2020

[27] deflation: https://www.ft.com/content/b64e9262-23a0-11e6-9d4d-c11776a5124d

[28] ageing populations: https://openknowledge.worldbank.org/bitstream/handle/10986/23133/9781464804694.pdf

[29] asset bubbles: http://www.wsj.com/articles/asset-bubbles-from-stocks-to-bonds-to-iron-ore-threaten-china-1477952654

[30] fast-growing economic competitor: http://www.worldbank.org/en/region/eca/brief/global-economic-prospects-europe-and-central-asia

[31] founding member of APEC: http://dfat.gov.au/international-relations/regional-architecture/apec/Pages/asia-pacific-economic-cooperation-apec.aspx

[32] better integration in ASEAN through the East Asia Summit: http://foreignminister.gov.au/releases/Pages/2011/kr_mr_110720a.aspx?ministerid=2