Reaching out to Central Asia

Most analysts and commentators predict that post-2014 Afghanistan is going to face three major challenges – security, political and economic. The security and political aspects (including the transfer of responsibilities to the Afghan security forces, the process of electing a new President, and peace talks with the Taliban) are enormous difficulties that will have to be overcome. Foreign aid and the engagement of international organisations is set to decrease along with the number of foreign troops in the country, and while the Chicago and Tokyo conferences in 2012 earmarked USD 14 billion and 16 billion respectively for the ‘transformative decade’ of 2015-2024, it is clear that Afghanistan will soon have to rely on a home grown economy to drive meaningful and long-term reconstruction efforts.

According to the Afghan government, more than 70 nations have pledged about USD 120 billion for the reconstruction project since the fall of Taliban, the majority of which has come from the US. Recently however, amidst reports of aid money failing to reach its targets, corruption and the shoddiness of the final products, the patience of Congress and the American public is showing signs of wearing thin. Already, aid has been reduced significantly, and there is  now a ban on beginning new infrastructure projects in the country by the US military.

Foreign aid and its effectiveness in promoting growth and development have always been controversial. The issue has become even more acute in the context of Afghanistan, where aid is being used to build a state in the midst of an ongoing war. Despite this, significant gains have been made in education, health, infrastructure, communications and the empowerment of women. With a shortfall in the means to continue these programmes, however, their sustainability is under serious threat. Asian Development Bank Outlook 2014 shows that growth in GDP (excluding opium production) had already declined to 3.3 percent in 2013 (a far cry from  the 12 percent growth achieved in 2012) – leaving the Afghan government with even fewer resources to cover both security maintenance, and the rebuilding of an economy.

Afghanistan has two options open to make up this shortfall. The first is inviting in foreign investment to develop Afghanistan’s huge, and largely untapped, natural resources. Both the economic potential of the country as well as the security risks an unstable Afghanistan will pose for the immediate neighbourhood have grabbed the attention of New Delhi and Beijing. The Delhi Investment Summit on Afghanistan (2012) as well as the ‘Doing Business with Afghanistan’ meeting organized by the Federation of Indian Chambers of Commerce & Industry (FICCI) in November 2013 indicated that Indian businesses have already decided on big investments in the country. In a USD 10.3 billion deal finalised in 2011, the state-owned Steel Authority of India won the rights to mine iron ore in Hajigak province, home to an estimated 1.8 billion tonnes of iron ore. Largely untapped lithium, copper, gold, iron and earth deposit reserves could be worth a further USD 3 trillion according to the Afghan government.

Infrastructure and trade and transit agreements will be needed to facilitate the transportation of these raw materials and products out of Afghanistan, and this is where the country’s second option comes in. The expansion and utilisation of Afghanistan’s unique geo-strategic position and the revival of its role as a trade connector will undoubtedly bring economic benefits that will aid reconstruction efforts, particularly as interest in reviving the Silk Route grows among the international community.

Future trading
So far the majority of Indian external trade is conducted by sea. Overland trade with China was stopped after India-China war in 1962, and only recently have tentative steps been taken to resume this, through the Nathu La Pass in Sikkim, which was reopened for trade in 2006. New Delhi is looking firmly towards Afghanistan and Central Asia. A stable Afghanistan has the potential to transform India’s continental trade through Pakistan, Afghanistan and Central Asia, and increase opportunities for trade with Eurasia and the EU.

In Central Asia, India trades a great deal with the countries of the former USSR, Iran, and further beyond, with the European continent. Prior to the global economic crisis of 2008-09, India’s trade with this region was growing fast, particularly with Afghanistan, Pakistan and Iran, and in 2012-13, India’s total trade with these regions amounted to about USD 173 billion. Simple calculations on the basis of past trends show that India’s trade with Europe, the ex-USSR, Iran, Afghanistan and Pakistan would reach between USD 400-500 billion annually within the next few years.

Even if 20 percent of this trade is conducted by road, USD 80-100 billion of Indian trade would be passing through Afghanistan and Central Asia. Were India-Pakistan relations to significantly improve (or at least become more trade-friendly), an important portion of Indian trade – particularly from the landlocked northern states like Jammu & Kashmir – would transit through Pakistan and Afghanistan, giving economic viability to the planned infrastructural projects in the region. These linkages will also transform small and medium industries and agriculture in Central Asia and Afghanistan.

A major impediment to realising this potential is the existing India-Pakistan relationship and lack of trust between Islamabad and New Delhi. However, the economic dynamics of the region show clearly that both India and Pakistan will ultimately suffer economically if they fail to cooperate meaningfully in Afghanistan – with Indian continental trade moving through the region, the Pakistani economy would also benefit in a major way. Pakistan fears that increasing Indian exports to the five Central Asian republics will erode the markets for Pakistani products; however, figures from the country’s Trade Development Authority show that even without Indian competition, Pakistan’s exports to the five Central Asian republics are very limited – less than USD 20 million in 2011-12. Afghanistan, however, is another matter. In the same year it was the third most popular destination for Pakistani exports, and India will have to tread carefully in an area Pakistan firmly believes is its own backyard. With major infrastructural development and an accompanying increase in the movement of goods and services though, the possibilities of both India and Pakistan becoming important economic players in the economy of Central Asia will hopefully trump traditional antagonisms.

It is hoped that the 2011 Afghanistan-Pakistan Transit Trade Agreement will further encourage trade between the two countries and the transport of goods through their territories, as well as contribute towards achieving the target of a yearly trade of USD 5 billion by 2015, a figure set out by the Pakistan-Afghanistan Joint Economic Commission (JEC) in 2013.

There is work to be done to ensure the APTTA can fulfill everything it has set out to do, and meaningfully link the economies of India, Pakistan and Afghanistan with Central Asia and Europe. Indian goods are still forbidden from transiting by land through Pakistan on their way to Central Asia, while goods destined for India from Afghanistan must be loaded on to new trucks at the Wagah-Attari border. Turkmenistan, Uzbekistan and Iran must also be included, to give the framework teeth and ensure it can link up with the Eurasian Economic Union when it takes its full-fledged form in 2015.

On the economic front, there have recently been some encouraging steps taken in the India-Pakistan relationship. Both countries have expressed their intentions to set a maximum tariff rate of 5% on all goods outside sensitive lists for bilateral trade, and a new, liberalised visa regime was signed in 2012, allocating separate and streamlined visas for those wishing to do business. Commercial interests have been calling more forcefully for politicians both sides of the border to put aside their mistrust and create an environment conducive to cross-border trade, most recently at the 5^th SAARC Business Leaders Enclave in New Delhi in January of this year.

In the pipeline
Uncertainty concerning post-2014 Afghanistan has also added a new dimension to India’s relations with the Central Asian republics. The possible failure of the Afghanistan project poses common security challenges, but it should also be remembered that its success could open tremendous economic opportunities for both South and Central Asia. With this in mind, the strategic significance of the region has increased considerably for policy makers in South Block, reflected in the announcement of a new, twelve point ‘Connect Central Asia’ policy in July 2012, which set out plans for increased engagement with the Eurasian Economic Union, the reactivating of the North-South Transport Corridor and strengthening of cooperation with Afghanistan in terms of security and counterterrorism.

Within the broader context of increasing regional connectivity, India and Pakistan continue to support both the Regional Economic Cooperation Conference on Afghanistan (RECCA) as well as the Istanbul ‘Heart of Asia’ processes. Within the Istanbul process India is piloting the Trade, Commerce and Investment Opportunities Confidence Building Measure (TCI-CBM). So far, India’s foothold in Central Asia remains tenuous. Membership of the Shanghai Cooperation Organisation (SCO), which India is currently pursuing, would firm this up and provide easier access to markets in Central Asia and Eurasia.

Compared to the current modest trade between South and Central Asia, inter-continental trade may eventually show itself to be much more important for the Southasian region. More ambitious plans, such as the Central Asian Regional Economic Cooperation Program, the Northern Distribution Network (NDN) and the International North-South Transit Corridor (INSTC) are all different pieces of this larger picture, which hopes to ultimately see Southasian goods from India and Pakistan reaching Europe. Although many of these plans have been under discussions for some time, the success of the NDN has given new impetus to Southasia-Europe transportation dreams, proving that positive results can be achieved even when negotiations involve strategically competing nations.

Chinese engagement in Afghanistan will also increase, both to protect its USD 3 billion investment in copper mines as well as through the SCO. Central Asian and Russian engagement is likely to reflect concerns over religious fundamentalism, drug trafficking, cross-border crime and flow of refugees.

As the US and its allies step down their engagement in the country, Afghanistan’s neighbours are watching and waiting. Linking the economies of South and Central Asia constitutes a very real and productive long-term possibility for Afghanistan. After the relatively smooth first stages of the presidential election, the discourse on Afghanistan is already changing. The few months after July 2014 will be crucial. By that time, the political lie of the land, as well as the status of the Bilateral Security Agreement with the US will be clear. If, within this new environment, even a few of the host of projects currently envisioned for the region, like the proposed Turkmenistan-Afghanistan-Pakistan-India pipeline go ahead, economic integration could become a ‘game changer’, not just for Afghanistan, but for the geo-politics and economic integration of the entire region.

~Gulshan Sachdeva is Professor and Chairperson at the Centre for European Studies, School of International Studies, Jawaharlal Nehru University, New Delhi. As a regional cooperation advisor, he headed the ADB and The Asia Foundation projects at the Afghanistan Ministry of Foreign Affairs in Kabul (2006-2010).