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Economic Cooperation in the Indian Ocean Region and the One Belt One Road Initiative: A Threat or an Opportunity?

Viewpoint by Dr Palitha Kohona

The writer is former Permanent Representative of Sri Lanka to the United Nations and former Foreign Secretary. – The Editor

COLOMBO (IDN) – The Indian Ocean region is experiencing a fondly anticipated luxury. Almost every one of the economies of the region is expanding at a rate that gives hope to the entire region, especially to its poor and marginalised. The promise of prosperity enthusiastically proclaimed at independence from colonial rule, so many decades ago, may at last become a reality. India is powering ahead with an anticipated growth rate of 7.3% and now is ahead of China.

Still the South Asian region continues to be confronted by an inexcusably massive burden of poverty, literacy deficits, malnutrition and deprivation. South Asia has the dubious distinction of being home to the largest concentration of the poor in the world. Inadequate policy frameworks, corruption, military rivalries and internal conflicts, among others, drain resources which could be devoted to economic advancement. Some internal conflicts are funded from the outside.

Encouragingly, the countries of the region have been attempting to collaborate with each other on economic matters, although ever so slowly and in fits and starts, having recognised that there is much to be gained through cooperation with each other than through rivalry. There is still much more mutually beneficial progress that can be achieved through cooperative efforts. India itself has expanded its vision with a slogan, “Look East Act East”.

The SAARC countries have concluded the agreement on the South Asian Free Trade Area (SAFTA) covering over 1.5 billion people and the South Asian Agreement on Trade in Services which tends to follow the Gats model. For a variety of reasons, including political tensions, religious rivalries, internal conflicts, age old suspicions, externally generated unease, colonial hang ups, etc, these agreements have not realised their intended potential.

Intra SAARC trade accounts for only 5% of the trade of its members. (In the NAFTA intra member trade accounts for 51% of their trade, in the EU, 65% and in the ASEAN, 25%). Sadly political rivalries have held back SAARC and many feel that the organisation created in 1987 could have achieved more in its 30 years of existence. There is even a suggestion that the SAARC should be left to die a natural death. A sad thought indeed.

The Bay of Bengal countries are part of the Bay of Bengal Initiative for Multisectoral Technical and Economic Cooperation (BIMSTEC). This agreement too, could generate better results, if methodically implemented. The region has too much in common that can be easily marshalled for mutual benefit. History, culture, religion, shared values, etc, all scream for collaboration, but little heed has been given to this incessent call. Centuries of cooperation and trade beckon us to respond.

Sri Lanka has concluded free trade agreements (FTA) with India and Pakistan and is in the process of negotiating an Economic and Trade Cooperation Agreement (ETCA) with India. Following the FTA, exports from India to Sri Lanka have boomed, reaching an impressive 4.5 billion Dollars. While Sri Lanka’s exports to India have grown but not at the same dizzying pace and hover around .5 billion Dollars. This disparity has given rise to suspicions and opposition to the conclusion of the proposed ETCA. Serious perceptional  and practical issues remain to be addressed with regard to the bilateral free trade agreement.

The South Asia region, as a unity, is still to secure international acceptability. Its leaders and policy makers need to be more flexible, imaginative and ambitious. While we struggle with such issues, a new factor has entered the equation. 

One Belt One Road initiative

Chinese President Xi Jinping’s One Belt One Road (OBOR) initiative, also known as the Belt and Road, unveiled in 2013, has provided the countries of the wider region with a new challenge as well as an unique opportunity to fast track their economies along the path to development. An investment bonanza is being dangled under the OBOR initiative, especially attractive to the countries on the Maritime Silk Road. Carefully managed and sensitively implemented, it could revive the glory days of the ancient Silk Route. Sri Lanka, sitting at the hub of the Silk Route, has embraced this concept.

It has been said that China’s OBOR investment ambitions, focused mainly on cooperative infrastructure and connectivity enhancement, has the potential to make a greater impact than the post World War U.S. Marshall Plan. The Marshall Plan provided financial assistance to the war devastated economic giants of Europe and was a major factor in their quick recovery. But the funds available under the OBOR make the Marshall Plan pale in to insignificance. The Marshall plan provided over $140 billion, at 2017 dollar values to assist Western European economies.

The Belt and Road initiative expects to make available a stunning USD 4 – 8 trillion, albeit to a much wider region. While the Marshall Plan achieved much, the OBOR funds are expected to realize substantially much more by creating an extended region of shared prosperity, the clear beneficiaries being a large number of developing countries.

The Marshall Plan allowed the United States to export its currency. The U.S. dollar was used to provide the subsidies, while European countries purchased U.S. goods with their own currencies. Over time, the U.S. dollar became a tool for stability; funds provided by the plan created the basis for future frequent easing of trade restrictions. 

Adding strength to the OBOR initiative, the Chinese Yuan has now been recognised as a reserve currency by the IMF and China appears to be increasingly moving towards international payments in Yuan.  The IMF elevated the Yuan, also known as the renminbi, or “people’s money”, on the same day that the Communist Party celebrated the founding of the People’s Republic of China in 1949.

The Yuan joins the U.S. Dollar, the Euro, the Yen and British Pound in the IMF’s special drawing rights (SDR) basket, which determines currencies that countries can receive as part of IMF loans. This would be the first time that a new currency has been added since the Euro was launched in 1999. It is an impressive achievement as the Yuan had very little or no credibility as recently as thirty years ago.

Today, China is the world’s largest economy by purchasing power parity. This is a massive leap from less than USD 200 per capita GDP in 1970. Sri Lanka’s per capita GDP is around USD 3800. (USD 270 in 1980).

The outward looking Belt and Road initiative, is designed to have a massively transformative impact on the economies of the vast Asian and African regions encompassing 68 countries with over 65% of the world’s population. It will be a closely related factor as Sri Lanka seeks to realise its own Vision 2025. Vision 2025 provides the development blueprint for the country for the next seven years

The OBOR goal, backed by China’s substantial economic clout, including through the Asian Infrastructure Investment Bank (AIIB) which has 61 state members at present, possesses the potential to create significant opportunities for the entire region. India has joined the AIIB.

SEIC 2017

It is against this background that the successful SEIC 2017 was organized in Colombo, Sri Lanka, in November 2017. The objective was to highlight Sri Lanka as a trading centre and an investment destination. A significant number of the participants at SEIC 2017 came from overseas, especially from China. Others came from Wall Street, London, Geneva, Dubai, India, Hong Kong, Singapore and Amsterdam.

Historically, traders and casual visitors recognised Sri Lanka’s potential both as a destination to visit and a trading hub. Ibn Batuta, the Moor from Tangiers, who visited the island in the 14th century, was not wrong by much when he observed that this was the most beautiful island on earth and was only 40 leagues from paradise. That paradise must be preserved despite the race to modernize, and achieve a higher level of sustainable prosperity for the people of the country as they seek to climb up the development ladder.

The copious writings of the fifth century scholar monk Fa Xian from China who spent a number of years in the ancient capital, Anuradhapura, after a long sojourn in northern India, tell a tale of bygone prosperity and complex international diplomatic and trading relations. Fa Xian carried a ship load of religious texts from Sri Lanka to China. Sri Lanka, like other countries of South Asia, had developed important relations, religious, trading and social, with the Middle Kingdom from early days.

The Belt and Road initiative invokes memories of the multitude of traders who visited us in the past and contributed to our prosperity. Already the Chinese largess is impacting on a swath of countries and regions. Pakistan has been promised USD 54 billion in investments in infrastructure. The Bangladesh-India-China-Myanmar corridor will link China with the Bay of Bengal.

Africa reaping the benefits of China’s investments

Africa is reaping the benefits of China’s investments and many African economies are prospering for the first time in many years. By 2014, Chinese investments in Africa had risen more than 20-fold to $220bn according to the China Africa Research Initiative at Johns Hopkins School of Advanced International Studies in Washington. Certain reservations concerning Chinese investments have also emerged. It is likely that this trend will accelerate as China also learns from experience and responds more to the intrinsic aspirations of the people of the continent. 

Since 2000, Ethiopia where the African Union is headquartered, has been a major recipient of Chinese loans to Africa, with financing for dams, roads, railways and manufacturing plants worth more than $12.3 billion, more than twice the amount loaned to oil-rich Sudan and mineral-rich Congo. 

The OBOR concept while raising some concerns, especially among the former colonial powers who ruthlessly ravaged Africa and Asia when they had the opportunity, can be used by countries of the Indian Ocean region and beyond to enhance their mutual prosperity without being constrained by the fears and suspicions inculcated by the colonial past. More importantly, without territorial occupation, racial discrimination and forced impact on cultures.

Further East, Australia received AUD 15.4 billion in Chinese investments involving 103 deals. Australia has been a major destination for Chinese investments after the US and Europe and investors have grabbed hotel assets, real estate, agri businesses, vineyards, health care, infrastructure, etc, giving rise to a latent xenophobic anti-Asian and anti-Chinese sentiment. The port of Melbourne is now controlled by a Hong Kong-Chinese concern. 

Europe and USA too receive Chinese investments

A significant share of Chinese investments has also headed to Europe. The EU whose second largest trading partner is China, received Euro 35 billion in Chinese investments in 2016 alone. Iconic facilities such as the Toulouse Blagnac airport where the Airbus 380 is assembled (sold to the Shandong Hi-Speed Group and a Hong Kong investment firm while Emanuel Macron was the Finance Minister), Volvo (to Geely), the AC Milan football club, the Piraeus harbour (owned 70% by COSCO), German robot manufacturer Kuka (now owned by a Chinese company). Not to mention a number of historic vineyards and buildings are in Chinese hands. Chinese companies are building the rail link between the Piraeus harbour and Serbia and Hungary.

Trains carrying East Asian products now travel through the Euro-Asian land mass, the modern Silk Route, to European capitals, including London, and also link up with Tehran. The Asian Railways Network sponsored by ESCAP provides South Asia also the opportunity to link up with the European network through Central Asia. Tremendous trade opportunities could open up with a high speed railway linking South Asia with Europe. Natural gas from Central Asia flows along four pipelines to China.

The U.S. has received USD 90 billion in investments since 2007. In New York, the Waldorf Astoria has been acquired by Chinese interests. However, China has also tightened overseas investments, especially in real estate, hotels, film and entertainment and sports clubs, to reduce excessive capital outflows and foreign exchange risks. Those countries seeking to benefit from the Chinese gravy train should be conscious of this development.

The expansion of China’s economic and political reach has caused more than a few nervous reactions in certain international circles, especially among powers which had been used to dominating the world stage. France, Germany and Italy are leading an initiative to require the EU to scrutinise Chinese investments in Europe more carefully.

Recently, it has been said that America’s focus on terrorism as the main threat has now shifted to Russia and China. According to a new Pentagon strategy released recently by Defense Secretary Jim Mattis, the United States must build up its military to prepare for the possibility of a conflict with Russia and China. The U.S. continues to view the world in terms of hostile competitors. 

China and the U.S. closely intertwined

Given that China and the U.S. are closely intertwined in a complex economic embrace, the use of such terminology is curious. The U.S. is China’s major trading partner. The bilateral trade in 2016 was worth USD 579 billion while the U.S. trade deficit was over USD 379 billion. And China is the main lender to the U.S. and also holds over 1.2 trillion Dollars in U.S. securities.

China is the biggest market for many U.S. agricultural products and millions of Chinese tourists visit the U.S. annually, not to mention the thousands of students who study there. Any conflict between the two countries, including a trade war, would do irreparable damage to both, not to mention the rest of the world.

The two countries have a unique opportunity in history to get away from historical power based competition to cooperate for the common good. Cooperation cannot be managed in a hurry but the opportunity is there. Many aspects of East Asian culture, including food, eating habits, traditional health care, yoga, Zen meditation and mindfulness, martial arts, dress, philosophy have been seeping in to Western and American life over the years.

The U.S. has been an inspiration in liberal ideas, democracy, transparency, legal propriety, management style, sports, music, film, etc. These ideas will not be adopted by the East overnight. Nor will the Eastern style of living, religion or doing business be adopted by the West lock stock and barrel any time soon. It will take time for a deeper understanding and appreciation of each other.

There are clear opportunities for teaching the two to each other. Instead of breast thumping and posturing, it will serve humanity’s interests better in the long run if the giants of the world, both Eastern and Western, could cooperate for mutual betterment.

Similarly a major concern is India’s sensitivities regarding China’s outreach. The fact that the two countries fought a border war in 1962 and have occasionally skirmished along a disputed colonial border have not been forgotten. But India’s natural concerns and sensitivities have impacted on the thinking of the smaller countries of the Indian Ocean region. India’s growing relationship with the U.S. has clear military implications.

The U.S. has recently agreed to sell Guardion drones to India for maritime surveillance. India, while strengthening its naval capabilities in the Andaman and Nicobar Islands, has also quietly developed strategic relations with Australia and Japan, participating in regular joint naval exercises. 

India, China and Sri Lanka

India maintains a base in the Seychelles and has just concluded an agreement to build an airstrip and a sophisticated “monitoring station” at a cost of US$45million. India has also signed a Bilateral Agreement for Navy Cooperation with Singapore that provides Indian Navy ships temporary deployment facilities and logistics support at Singapore’s Changi naval base, which is near the disputed South China Sea. Indian military strength in Indian Ocean region is formidable.

It seems unlikely that China, even if it wished, would be rash enough to challenge nuclear-armed India in the Indian Ocean for decades to come. India enjoys overwhelming military superiority in the Indian Ocean. Furthermore, the U.S. maintains a mammoth base on Diego Garcia to the south of Sri Lanka. It is highly improbable that Chinese policy makers would consider challenging the existing power arrangements in the Indian Ocean any time soon, if ever. They have not done so since Admiral Zheng He’s flotilla entered the Indian Ocean in 1405 and paid a few visits till 1433. To over extend in order to meet a possible challenge from China would result in expending scarce resources for a confrontation that is unlikely to happen.

Sri Lanka, as a small neighbour eager to ascend the development ladder in the shortest possible time is caught between the sensitivities of our closest neighbour and the need to develop stronger and pragmatic economic relations with another. There is little doubt that as a long time friend and a country that has provided much of Sri Lanka’s religious, especially Buddhism, and cultural inspiration, Sri Lanka must create and maintain an environment that makes India comfortable.

Sri Lanka’s diplomatic comfort level with India has always been cherished. India has been a major source of investments and tourists. The big neighbour must feel the reassurance that the small island to the south will not pose a strategic threat, and will not collude with any other country. It should never become someone else’s large aircraft carrier! Sri Lanka’s own interests will be served well with a reliable relationship with India.

This does not mean subservience or a one-way approach dominated by hectoring and gratuitous advice. The relationship, if it is to be comfortable and sustainable, must be one between two proud sovereign nations. India has a positive role to play as the bigger and stronger neighbour to the north. India’s burgeoning economy could provide a ready outlet for Sri Lankan businesses to expand but over-zealous and rash opening up of our economic doors with no comparable reciprocity would certainly create unease.

Sri Lanka must seek its own development path and that might mean seeking to collaborate with whomever we like, including China. Sri Lanka has maintained excellent relations, particularly economic, with Japan, Korea, Malaysia, Singapore, Thailand, etc. China, coincidentally, is India’s major trading partner. Japan has been a consistent source of development funds and political support for Sri Lanka.

Both the Chinese and Indian leaders have made explicit overtures to each other with repeated references to historical religious, cultural and trading links, both recognizing the opportunities presented by cooperation than by confrontation. China’s Buddhist links with India go back a long time. Recent efforts to recalibrate the bilateral relationship will be welcomed by all. 

A prosperous and stable Sri Lanka will be an asset to India not an unhappy and resentful neighbour to the south. Sri Lanka’s prosperity including through the Belt and Road initiative will be to India’s advantage as well. India could also benefit extensively from a proactive engagement with the OBOR initiative. [IDN-InDepthNews – 19 March 2018]

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IDN is flagship agency of the International Press Syndicate. –

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