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The New Silk Road

How has the tradition of the ancient Silk Road been revived by capital flow?

November 30, 2006

How has the tradition of the ancient Silk Road been revived by capital flow?

The Silk Road as a trading route can be traced back about 2000 years. It was named by the German scholar Baron Ferdinand von Richtofen in 1859 — many centuries after this caravan network had faded into obscurity.

Originally, Chinese silk was the main commodity traded from the old imperial capital at Chang'an (Xi'an) west via central Asia, south of the Caspian Sea and on to the Middle East — then to Turkey and Europe.

By the 6th century, merchants, traders and armies were also developing trade in spices from India and the East Indies, gold from Persia and pottery and grains from Europe.

The trading of goods was supplemented by exchanges of technologies — glass and paper-making, for example. As such, the trade routes served as an important conduit for the spread eastwards and westwards of art and, inevitably, religion. The Silk Road was in fact a main collection of tracks with connecting routes north through Russia to the Black Sea and south to India and the Arabian Sea.

By 900, at the end of the Tang Dynasty, China had started to fragment, the Islamic empire in central Asia began to splinter and the peoples of central Asia were moving west and east.

Although the Silk Road remained active for another 300 years, political instability and upheavals in Asia and the Middle East consigned the Silk Road to disuse. Between the 14th and 16th centuries, the trade route was abandoned.

Much later, during the era of the British Empire, the regional connections were apparent in that, for example, the Gulf states were administered out of India — not London — and the economy of the Gulf region was linked mainly with India.

Oil production on a major scale changed everything. With it and then later the Cold War, the economic and political orientation of the Gulf shifted towards the United States and the West.

In any event, the economic significance of Asia until the 1970s at the earliest was not especially noteworthy, certainly not as an outlet for energy or capital. However, from the 1950s onwards, China aligned itself with anti-colonial movements all over the world, including in the Middle East.

Since 1993, when China first became a net oil importer, the intensity of political and economic ties has grown. Of course, the cementing of deeper relationships was facilitated by the collapse of the Soviet empire after 1989-90. The route has been further encouraged by some mutual interests and concerns resulting from the behaviour of the American empire, not least in the Middle East itself and in central Asia.

A multi-polar Asia and Middle East, incorporating China, Russia, India, Japan, Korea, Iran and Saudi Arabia, could hardly have remained passive as the significance and price of hydrocarbons increased and as the economies of Asia continued to grow absolutely and in importance.

A new strategic tapestry is in the process of being formed, its threads being hydrocarbons, petrodollars, consumer products and technologies, military ties, labor migration — even religion.

The hydrocarbon part of this is self explanatory, and a shift in the Middle East to prioritise shipments towards Asia is evident in both crude oil and natural gas as Asian demand rises and as it switches steadily away from coal.

The other economic linkages are rather newer and warrant attention, not least because Middle Eastern countries may now be much more sensitive to Asian business cycles. Further, Asia is becoming more sensitive to Middle Eastern energy developments.

For 30 years, East and South Asian investors have been significant investors in the Middle East, competing for management and investment contracts while capital has gone in the other direction.

But these flows of expertise and capital have gathered considerable momentum in very recent years and, of course, the increase in interest in Islamic finance and banking has provided new links between not only the Middle East and South East Asia, but also with China, India and Pakistan.

Indeed, the emphasis on infrastructure and project finance in the Gulf and in Asia is ideal for Islamic finance, especially bonds (sukuk), the outstandings of which have soared since 2002 when pioneered by Malaysia to reach over $40 billion currently.

It is still fair to point out that the institutional structures underpinning Asian and Middle Eastern ties are relatively weak or embryonic. Bilateral relationships are most common, but the wider institutional structures necessary for deeper and broader interactions are starting to change.

The Organisation of Islamic Conferences, founded in 1969 and comprising 57 countries, is the only major body with complete coverage of the GCC states and certain Asian countries, including Pakistan, Bangladesh, Malaysia and India. Russia has observer status in this organisation.

However, the Shanghai Cooperation Organisation, founded in 2001 by Russia, China, Kazakhstan, Tajikistan and Uzbekistan to deal with disputes, terrorism and separatist threats now has a new raison d'etre.

The function of the OIC is, essentially, to foster energy and economic cooperation and to deter or contain U.S. presence and influence in central Asia (which is seen as destabilizing for a variety of reasons). In 2005, it admitted Iran as an observer, along with India, Pakistan and Mongolia.

As a group, it now represents about half the world's population. Moreover, since June 2005, several structures have evolved to further the networks of economic and political interactions.

These networks include the Asia-Middle East Dialogue, the China-OPEC Energy Dialogue, the Asia Cooperation Dialogue, the China-Arab Cooperation Forum, the Indo-Gulf Summit, the Arab-Asian Financial Forum, the UAE-Asia Investment Forum and, at the end of this year, the India-Arab World CEO Summit.

The relationship between Asia and the Middle East, however, has been asymmetric so far in that Asia is far more dependent on energy imports than the Gulf states are on Asian consumer and capital goods and its companies.

Nonetheless, significant changes are starting to occur in both directions, highlighting for both regions an external dependence on the other. In other words, the relationship between the Gulf and Asia can be seen partly as a simple comparative advantage play with hydrocarbons and petrodollars going to Asia and manufactured goods coming back the other way.

But this simplified explanation should not belittle the significance of the relationship between Asia and the Middle East. Labor movements and capital flows should be expected to flow in the manner dictated by factor returns.

Thus, Indian workers have long been active in the Gulf energy and construction markets, but now they are being joined by Chinese workers following their firms' investments across North Africa and the Gulf, from Algeria to Iran.

Furthermore, politics are also playing an important role now. The way countries in Asia and the Gulf perceive geopolitical change, mutual economic and cultural interests and strategic allegiances all seem to be playing a role in not only the movement of migrant labor, but more importantly that of capital.