If Stakes Have Failed

25 september 2016

Central Asia Choosing Between Globalization and Regionalization

Ivan Safranchuk is an associate professor at the Department of Global Political Processes of the Moscow State Institute of International Relations (MGIMO). He holds a Doctorate in Political Science.

Resume: Central Asian countries will have to adjust their old stakes, which have failed, and make new ones. They will largely depend on the positions external partners will take. But countries in the region want economic cooperation without a geopolitical “burden.”

In the mid-2010s, Central Asia was faced with a choice among three projects: Russian-Kazakh (regional development center); American (connection to non-Russian transport corridors); and Chinese (transformation of the region into an area of safe land transit for Chinese goods towards Europe and the Middle East).

When the Central Asian governments realized that these projects were the main alternatives, the Ukrainian crisis was already raging. It greatly distorted the perception of any initiative by local elites. Their ideas of a geopolitical balance had changed over the previous decade, and now they preferred geopolitical neutrality and were very wary of everything with a shadow of geopolitics. They had long sensed this shadow in the Russian and U.S. proposals, and were therefore more disposed towards the Chinese one. Nevertheless, they were well aware of all the pitfalls and had no intention to end up on the sidelines of the Chinese economy.

A Mosaic of Variants

By late 2014-early 2015, it had become clear that Central Asian countries could not, or rather did not want to, make the final choice (even after joining the Eurasian Economic Union (EEU), in the case of Kazakhstan and Kyrgyzstan). The United States was the first to detect this sentiment. In the fall of 2014, U.S. diplomats invited their Chinese counterparts to discuss a possibility of coordination between the New Silk Road (NSR) initiative and the Silk Road Economic Belt (SREB) project. In March 2015, senior U.S. diplomats openly declared (although this position had unofficially existed since the end of 2013) that they were positive about SREB (but negative about the EEU) and confident that SREB and NSR were fully complementary.

In the spring of 2015, Russia, too, made a proposal to China to integrate SREB and the EEU, and on May 8 Xi Jinping signed a declaration in Moscow on the integration of the two projects. A few days later, a U.S. delegation led by Richard Hoagland, Deputy Assistant Secretary of State for South and Central Asian Affairs, arrived in Beijing. The delegation was received at a low (perhaps even intentionally so) level. The Americans proposed coordinating NSR and SREB. So now China can choose between integrating its SREB with Russia’s EEU or America’s NSR. The level of Sino-Russian negotiations on this issue is obviously higher, but the pace of coordination is slow in both cases.

Which of the three projects can easier be integrated with each other? Or rather, which of the two, Russian or American, projects can better be integrated with SREB? (None of the parties has an issue of an NSR-EEU integration on its agenda.)

Interestingly, for all the difference between the U.S. Greater Central Asia/New Silk Road initiatives and China’s SREB, they have something in common. Some U.S. analysts even write that China plans to do exactly what the United States wanted but never did. Both the Americans and the Chinese rely, although for different reasons, on the idea of globalization. The U.S. wanted to give Central Asia access to the global market (and it still speaks about it, albeit without former enthusiasm). China wants to retain its integration in the global economy and maintain its former model for as long as possible. It needs access to Europe and the Middle East via Central Asia.

Russia’s integration project has a different priority—the creation of a coherent regional economic group. This goal requires establishing an economic association without internal barriers to the movement of goods, services, capital, and labor. But this is only possible to the extent to which such an association’s common external borders are strengthened.

Meanwhile, the similar motives underlying the U.S. and Chinese Silk Road projects may prove to be a factor against their integration. Why should China need a U.S. analogue, if it wants to do almost the same? The U.S. believes that the Chinese can create physical infrastructure (“hardware”), while the Americans can offer “software,” as they have extensive experience in establishing trade regimes. However, China may take this situation as Washington’s proposal to jointly manage the infrastructure built with Chinese money, which Beijing will hardly accept, unless it has to do this due to additional circumstances (for example, those related to regional security).

In contrast, the integration of the Russian and Chinese projects may make sense for both China and Russia. There are great prospects not in uniting the two projects but in their coordinated and parallel implementation. The Eurasian Economic Union will offer China reliable and safe transit in the directions it needs, while Beijing will participate in developing the EEU space not as a periphery of its economic system but as an independent development center in Eurasia. This approach will meet the interests of the Central Asian countries too.

Central Asian elites have an interest in both a regional and a global vision of their region. Local states do not want to end up isolated in the depths of Eurasia, far from the main trade routes. But they do not need complete openness, either. In absolute figures, the region’s contribution to the global economic system is very small. If all barriers are lifted, Central Asian countries may lose their economic sovereignty and become a space for land transit and large infrastructure and energy projects, which will serve the economic interests of elites but will do little for the bulk of the population.

To maintain its long-term social stability, the region needs extensive economic development with re-industrialization to create jobs. Objectively, this can be achieved through both globalization and regionalization, and it is important to find a safe balance between them. Theoretically, China and Russia have the best chances to help find and maintain this balance. Efforts to resolve this practical problem will be made in parallel with scientific discussions on the relationship between globalization and regionalization trends in the contemporary world.

The World is not for Central Asia

Representatives of different schools describe global changes taking place in the areas of information and technology in different ways: Third Industrial Revolution (Jeremy Rifkin), new technological order (Sergei Glazyev) or even “new reality.” But all of them mean almost the same. Breakthrough technologies are replacing traditional production methods. The extrapolation of ongoing processes to the future brings scientists and entrepreneurs to the conclusion that many sectors of the economy will soon undergo transformation and that the geography and methods of production will change, along with value-added distribution among manufacturers. These changes will upset the balance between developed and developing countries.

It is expected that production will become less power-consuming as it will need less oil and gas, less resource-demanding as the demand for industrial metals will decrease, and less labor-intensive as less cheap labor will be used. All these factors may boost the emerging tendency to relocate production from developing countries back to the developed world. The role of countries occupying industrial and resource niches will diminish, while that of countries in the technological niche will grow.

The question of how new technologies will change international politics and the world order remains open. Perhaps, the globalization tendency will prevail, as the role of national governments will decrease and developed regions in various parts of the world will become actors of globalization. At the dawn of globalization, Jacques Attali in his book Millennium: Winners and Losers in the Coming Order described a world of the future where development centers (megacities) are integrated into a global system, and where world elites lead a nomadic life, moving freely between development centers. Megacities are divided by vast spaces controlled by new barbarians, who are denied access to the new modernity and have to live outside civilization. Now, at a new stage of technological development, which holds promise for change, this line of thought is gaining momentum again. The terms are somewhat different but the essence is the same. Some scholars predict the emergence of “valleys” (territories leading in the production and use of new technologies), surrounded by “belts”—“a green belt” (less developed than “valleys” but friendly and living in symbiosis with them), “a yellow belt” (still less developed and living in a kind of symbiosis with the “green belt”), and “a red belt” (undeveloped and unstable). (See: Yevgeny Kuznetsov. “Russia in a World of Technological Diktat. Three Scenarios of the Future” Russia in Global Affairs, No.2, 2016.)

Many questions remain unanswered. Will there be a rivalry between “valleys?” What forms can it take and what means will be used in it? Why should the less developed “belts” put up with their status and not try to attack “valleys?” How will the entire system be governed, if boundaries between “valleys” and “belts” do not coincide with the present national borders?

In the longer term, attempts may be made to build a “new world” based on other technologies (and concomitant value and worldview paradigms), but in the foreseeable future, the role of governments (acting individually or in coalition) will remain high. Actors of the “new reality” will cooperate with the governments of developed countries, which have well established elites, rather than isolate themselves in their “valleys” and start building a parallel world, at least for the time being.

In conditions of growing instability, the role of governments that provide safe environment for business will increase rather than decrease. Moreover, they can even play a bigger part in controlling the spread of advanced technologies and preventing, in cooperation with businesses, industrial espionage. This rivalry will cause the emergence of several competing centers. These and some other factors may contribute to the regionalization tendency.

The world economy’s model of recent decades was based on global value chains (GVC), when the production of end products was spread across the world and when developing countries attracted production from developed countries, which stimulated economic globalization. In the “new reality,” at least in the early stages, globalization is not very necessary. Production is concentrated in countries and regions with a highly qualified workforce, which is consistently reproduced precisely in developed countries (education, applied and theoretical schools of thought, and the manufacturing sector). New “evolutionary spirals” will develop, where progress or demand in one segment will boost development in another. Only a few states have “evolutionary spiral” systems, and only they can create new technological areas of regional (especially at first) scale.

The purchasing power and capacity of markets will also contribute to regionalization in the “new reality.” Since only developed countries can create technological and educational bases for the “new reality,” they will also provide markets as their populations have the required purchasing power level. According to the Boston Consulting Group, “one implication is that global manufacturing could become increasingly regional. Because relatively low-cost manufacturing centers exist in all regions of the world, more goods consumed in Asia, Europe, and the Americas will be made closer to home.” The process of relocating production and technologies, earlier moved to developing countries, back to the developed world has already begun.

Initially, in the process of regionalization, developed high-tech centers focus primarily on technology-intensive and expensive production. But experts say that, as technologies become cheaper, the manufacturing of cheap consumer goods will also concentrate in these centers and will employ industrial robots, thereby reducing the cost of end products. If both segments—expensive high-tech and cheap mass-produced goods—are concentrated in developed technological centers, this will be a severe blow to developing countries.

Therefore, there is a grim prospect in store for latecomers who missed the distribution of globalization dividends. They will be gradually cut off from intellectual resources, investment, capital and technologies. This, in turn, will reduce their chances for building their own technological areas and increase the threat of internal instability and outflow of specialists due to a lack of jobs.

Whom to Choose?

The probability of creating Central Asian technological areas in the framework of the “new reality” is zero. In spite of the vast reserves of raw materials and high GDP growth rates, declared every year, the region’s share in absolute terms is negligible by world standards. Economies of such size are unable to finance the creation of their own technological and scientific bases. As for cheap manufacturing segments, including those that are now moved from China, Central Asia can hardly compete with countries such as Vietnam, Laos, Cambodia or Indonesia. They have already harnessed this process and have the advantage of proximity to international maritime trade routes.

Central Asia does not have technological capabilities to become an independent regional development center. Sooner or later, Central Asian countries will have to join some of the emerging global development centers and one of technological areas in order to continue to be involved in global processes. The choice is limited, and so is the number of development centers in the “new reality.” By and large, this may be the “Greater West” (the United States, the European Union, Japan, and South Korea), China or Russia. The competition among all centers is growing, especially for advantages from the transition to a new wave of innovation.

The United States and its technologically advanced allies are in the forefront. At the same time, the U.S. does not gain from globalization in its present form, as it gives a clear advantage to China. The chances that Central Asia will join the U.S. technological area are not high. For economic reasons, the Americans do not need Central Asia as part of the “new reality”—as a source of raw materials or a regional industrial base. However, the U.S. interest in the region will continue not because Washington needs it but because other countries may need it. In other words, the U.S. wants to have more influence on processes in Eurasia than other development centers located in various parts of the continent.

Washington usually considers issues of geopolitics and economics as interdependent. It was the geopolitical loyalty of Japan and Germany (after World War II) and South Korea and Taiwan that gave them access to U.S. technologies, financial aid and markets. China is an exception to this rule. However, Washington’s policy towards Beijing is not only that of economic cooperation but also of geopolitical containment.

In the “new reality,” the geopolitical factor, which is determined by competition with other development centers, may become even more important in the U.S. regional policy (unless, of course, isolationist sentiment prevails in Washington). Therefore, geopolitical issues will be, as a minimum, a mandatory addition to a U.S. economic program for Central Asia (if there is one). More likely, such an economic program will be a sort of compensation for readiness to play a certain geopolitical role in Eurasia. But even in this capacity, Central Asia is well behind Europe and the Asia-Pacific region in the American system of priorities. These regions and the Transatlantic and Trans-Pacific Partnership projects, created for them, are more important to the United States.

Central Asia’s entering the realm of China’s technological influence would be a more realistic option, but with some reservations. The Chinese economy has drawn maximum benefit from globalization and become the world’s second largest (and first in terms of purchasing power parity). Beijing would like the model of the world economy, in which it steadily gained strength, to continue functioning. Nevertheless, China is aware of the new tendencies and its own inability to play against global trends in the long term, and seeks to keep up with them. If viewed in absolute terms, China may seem to be creating a high-tech economy and a technological area of its own as actively as the “Greater West” does. But in relative terms, the picture is not so optimistic. Beijing is having difficulty moving its economic system into the “new reality.”

In theory, China can help Central Asia create a production area, based on Chinese technologies. But in reality, it would be more beneficial and practical for China to invest in the development of such a center not in Central Asia but in its own western provinces bordering Kazakhstan, Kyrgyzstan, and Tajikistan. This does not completely rule out the possibility that some production facilities may also be created in neighboring countries. The most that Central Asia can hope for is the creation of individual production facilities serving only the Chinese technological area (sub-area in the Xinjiang Uyghur Autonomous Region), with its own standards. In other respects, Beijing will focus mainly on its western provinces and seek to move its economy into the “new reality,” which may take decades.

Central Asian states continue to maintain close economic ties with the Russian Federation. Russia is behind the United States, its allies and China in creating a technological area. For a long time, like other post-Soviet countries, it sought to catch up with globalization processes. However, high energy prices enabled it to accumulate substantial financial reserves and improve the welfare of citizens, turning them into active consumers and consequently propelling its strategic ambitions. Moscow adopted a more active industrial policy, including reindustrialization and modernization.

At present, the industrial and modernization projects in Russia rely on domestic resources, but not in an isolationist way. The corporations Rostec, Rosatom and Rosnano and the Skolkovo Innovation Center are engaged in industrial and technological projects that employ specialists and technologies available on the open international market.

It is too early to say whether Russia will succeed in creating a technological area of its own that would be a center of attraction for neighboring regions. But in any case, Moscow demonstrates its readiness to be an independent global player, which requires it to back its ambitions not only with political will, military power and a certain scale of economy but also with an ability to manufacture advanced technologies and achieve their commercialization. Therefore, Russia will most likely make great efforts to create technological and industrial areas of its own.

However, prospects of Central Asian countries’ joining one or another technological area should not be viewed only in terms of which area they would like to join or to which area they will be admitted (the two variants will not necessarily be the same). There is a gap between desires and reality, but this is not the point but a common dilemma, which Central Asian countries have faced in different ways since regaining independence. The point is how to choose: what technological area one would like to join? The desire to be among the most developed nations seems quite natural and makes one decide in favor of the more advanced niche and then think whether it will be admitted or not, on what terms and how these terms can be improved.

The U.S. and some of its allies are undisputed leaders in creating breakthrough technologies and building the “new reality” on their basis. China and, especially, Russia are lagging behind. Paradoxically, however, laggards may prove to be more promising (not just more accessible but precisely more promising) partners for Central Asian countries than leaders for the following reasons.

After they had gained independence, Central Asian states tried to become more prominent regional/global players in the energy sector (Turkmenistan and Kazakhstan with hydrocarbons resources, and Tajikistan and Kyrgyzstan with hydropower), in industry (Kazakhstan and Uzbekistan) or in transit and transportation services (Kazakhstan and Kyrgyzstan). If these niches become less important and profitable with a large-scale introduction of new technologies, as expected by many experts, Central Asian countries will face serious problems.

It is hard to imagine what economic role Central Asia can play in the “new reality” and what program this region may have for economic cooperation with the Western development center if it dramatically reduces the West’s dependence on fossil raw materials, industrial metals and cheap labor. Central Asia may become a deep periphery, although important in some geopolitical configurations.

It will take China and Russia much longer to introduce breakthrough technologies. But they are likely to remain interested in a considerable part of the “old economy” to provide jobs and an acceptable level of social stability. This “old economy” needs protectionist measures to survive and function. This is why, along with major changes in the world economy, regional processes aimed at extending the life cycle of the “old economy” will also retain their importance in Eurasia during the lifetime of at least one more generation of politicians. Arguments that those who fall behind from the very beginning will be behind forever are not always true: formerly, when a new technological paradigm was taking shape, there were also countries falling behind which after initial lagging took a worthy place in the new system.

Cooperation with Russia and China allows Central Asia to buy time in order to find acceptable options for entering the “new reality.” This does not mean that aspiring countries starting from the ground up can achieve success. A country must have some breakthrough technologies and part of the economy based on them, but the transformation of the entire economy takes a long time. In other words, some time will inevitably be needed when the “new” and “old” economies will coexist in parallel, because a long-term future is impossible without the former, while the latter is vital for achieving basic social and political stability, given the current demographic trends. Central Asia will need partners who are in a similar situation and who will help the region become part of the “new economy” and also keep the “old economy” to the extent necessary for the transitional period.

If Russia builds a technological base of its own, it will be able to attract other countries into its economic and technological space as equal partners on a greater scale. But if Russia falls far behind the leaders, the choice of Central Asian countries will be reduced to two main options: 1) a periphery for the Chinese economy and, at the same time, a transit space for China’s land communication with the Middle East and Europe; 2) Eurasian “mercenaries” that may find themselves involved in large-scale competition among development centers in Eurasia, impeding the policies of some of them on orders from others.

New Stakes

Ever since they became independent, Central Asian countries have sought to integrate into the world system. But they did it separately, rather than as a single region. These countries sought different niches in the world economy. Turkmenistan put its stakes on the energy sector both strategically and tactically. Kazakhstan and Uzbekistan initially focused on raw materials, hoping to move into the industrial sector later. Kyrgyzstan and Tajikistan strategically relied on the water and energy sector, but in the short and medium term they tried to make money from transit and transportation projects. All Central Asian countries wanted to be important players of global, not regional, scale in their niches.

Perhaps, 2002-2007 were the years of the greatest opportunities for Central Asian countries, when they could play their stakes. The geopolitical interest of the United States and its allies in the region gave Central Asia a chance to negotiate better terms for integration into the world system than those offered to dozens of developing countries, which joined in globalization and occupied niches at the end of the world’s “food chains.” Due to historical circumstances, Central Asian countries failed to make a real breakthrough in development at that time. It was then that elites in the region personally entered into the global World of Big Money.

Two of Central Asia’s stakes—globalization and geopolitics—failed. Two events in 2008—a geopolitical crisis in the Caucasus and the global financial and economic crisis—were seen through the prism of existing and emerging doubts about globalization and the realization of risks involved in geopolitical games. Under these circumstances, the regionalization concept could be of interest. In social and economic terms, regionalization in theory gives a new chance for development to countries that are on the fringes of globalization or occupy the most peripheral niches in the world economic system.

It turned out, however, that the regionalization process changed political rules so much that geopolitical elements emerged within it too. At first, there were fears that regional leaders (in particular, Russia in the case of post-Soviet Eurasia) would infringe on the national sovereignty of other members of regional associations. The fears came true only partially. There were other, more important and more unattractive, effects of regionalization for Central Asia, namely, the problem of borders between regions.

Central Asia’s location at the juncture of regions seemed to be an advantage in the framework of the globalization trend. All Central Asian countries dreamed of becoming a “bridge” between the North and the South, the East and the West. The regionalization process turned the “advantage” into a serious challenge. The Ukrainian crisis of 2013, when local elites divided over the choice of a partner for deep cooperation, Russia or the EU, came as a frightening illustration. Central Asian elites have never resolved conflicts between global and regional trends, which emerged in the late 2000s-early 2010s. Old conflicts and political games played over them continue. But the fast development of new technologies presents new challenges in addition to the old ones.

Countries in the region have not taken the desired place in the “old” world economy and continue struggling for it. But now they need to think of a place in the “new economy” where there may be even fewer chances for them but where opportunities may open up for individual members of Central Asian societies and elites.

So, local elites need to find a balance in several aspects: between their interest in globalization and regionalization; between their interest in projects that yield profits for elites (transit, major infrastructure projects, etc.) and projects that would offer economic opportunities for the entire population (reindustrialization); and between efforts to retain niches for themselves in the “old” world economy and efforts to find niches in the “new” one.

This challenge will be a test for elites’ competence. Under certain circumstances, it may even be a test for their commitment to the interests of their own countries and societies, and for their readiness to sacrifice their benefits for regional development and the satisfaction of the basic needs of their fellow citizens. It is not ruled out that some part of regional elites will fail this test, thus giving a boost to the process of renewal, which will take place to a greater or lesser degree anyway.

Central Asian countries will have to adjust their old stakes, which have failed, and make new ones. They will largely depend on the positions external partners will take. But countries in the region want economic cooperation without a geopolitical “burden.”

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