policy

No. 2015-2 (May)

brief
Global Value Chains
along the New Silk Road
Paul Vandenberg, Senior Economist, ADBI
Khan Kikkawa, Associate, ADBI

Key points Central Asia is opening up rapidly with the completion of new transport corridors.
• The New Silk Road Providing a passageway for goods between east and west, however, cannot
provides a land bridge be its main goal. It needs to attract investment to diversify its economies from
linking East Asia and petroleum and other natural resources. Other parts of Asia have developed by
Europe. linking with global value chains. This may be an option for Central Asia, but it must
• The benefits for
Central Asia of being overcome some serious barriers to make that a reality.
merely a goods conduit
will be limited. Opening up Central Asia
• Participation in global
value chains (GVCs) In late 2014, a cargo train departed from Yiwu, a city located south of Shanghai,
has helped to speed
industrialization in and traveled west for 3 weeks across the Asian-European landmass before arriving
Southeast Asia and in Madrid. Covering a distance of over 10,000 kilometers, it passed from the
other subregions. People’s Republic of China (PRC) through Kazakhstan, the Russian Federation,
• National economic and other countries before finally reaching Spain. After offloading its goods for
strategy in Central Asia the Christmas market, it was reloaded with Spanish products and returned to
can include efforts to
attract investments in complete the maiden round-trip journey on the Yiwu–Xinjiang–Europe cargo line.
GVCs.
• For greater GVC This line and other routes are opening up trade between east and west via a
investment, policy continental land bridge through Central Asia that is referred to as the New Silk
makers can improve Road (or Route). The 3-week train trip from the PRC to Europe is much quicker than
trade facilitation,
create a supportive the 8-week journey by ship and much cheaper than airfreight. While beneficial
business environment, to the economies at either end of the route, a key concern is what benefits it will
develop small and bring to the economies of Central Asia. They will benefit from transshipment,
medium-sized servicing, and refueling activity and from better access to markets for their natural
enterprises, and skill resources and agricultural products. But can the opening of the route spawn
the workforce.
deeper and more diversified manufacturing and service sector development
within Central Asia?

This was a central question discussed at the workshop “Central Asia’s Economic
Opportunities: Economic Corridors and Global Value Chains” in Urumqi, PRC. The
event was the inaugural training workshop of the CAREC Institute whose physical
base was officially opened just prior to the workshop. Government officials from
the 10 member countries of the Central Asia Regional Economic Cooperation
(CAREC) participated in the workshop, which was co-organized with the Asian
Development Bank Institute and the Asian Development Bank.
© 2015 Asian Development
Bank Institute Central Asia’s Economic Opportunities: Economic Corridors and Global Value
ISSN 2411-6734 Chains
2–3 March 2015
Urumqi, People’s Republic of China
This work is licensed under a The workshop was co-organized by the CAREC Institute, the Asian Development Bank
Creative Commons Attribution- Institute, and the Asian Development Bank. Presentation materials are available at
NonCommercial-ShareAlike 4.0 http://www.adbi.org/event/6611.central.asia.economic.opportunities/
International License.
 Linking to global value
chains
One strategic approach to developing
their economies and maximizing
benefits from the New Silk Road would
be to link up with global value chains
(GVCs), also known as global production
networks. Production and exports from
Central Asia currently are concentrated
in petroleum, minerals, and agricultural
products, although there is considerable
diversity among the countries (Table 1).
Central Asian governments would
need to attract investment from global
companies that would be interested
in locating parts of their value chains
in these economies. This may not be
easy, however, given that many of the
countries are landlocked.
Singapore, Taipei,China, and Hong
Kong, China) and the West (United
States and Europe). This process of
expanding global production networks
and the increased geographical
fragmentation of production has been
part of a key change in the way that
low- and middle-income economies
have industrialized and developed over
the past 3 decades. This process, led by
multinational corporations, means that
multi-component goods are designed
in one country, have parts produced
in many others, and are assembled
at a final location. The output is then
sold globally—both to countries that
contributed to the production and to
those that did not. Corporations employ
these production strategies to benefit
from local production advantages.

The PRC and countries in Southeast The changing patterns of production

Asia have been able to grow and
industrialize by attracting investment
linked to GVCs. They have benefited
from the production strategies of firms
from high-income economies in both
the East (Japan, Republic of Korea,
are evident in global trade statistics.
The share of global value-added trade
accounted for by developing countries
increased from 20% to over 40% in
1990–2013, although poorer developing
countries still struggle to gain a role

Table 1 Central Asian economies: income, economic growth, and exports

Country GDP per Average Main exports
capita, annual GDP
2013 ($) growth (%)
Kazakhstan 13,610 6.92 Crude petroleum (55.0%), refined petroleum (4.9%), refined copper
(4.3%), ferroalloys (4.3%)
Turkmenistan 7,987 10.61 Petroleum gas (81.0%), refined petroleum (10.0%), non-retail pure
cotton yarn (2.3%)
Azerbaijan 7,812 12.92 Crude petroleum (88.0%), refined petroleum (4.3%), petroleum gas
(1.1%)
Mongolia 4,056 9.23 Coal briquettes (37.0%), copper ore (23.0%), iron ore (13.0%), crude
petroleum (9.4%), gold (4.3%)
Uzbekistan 1,878 8.16 Raw cotton (15.0%), cars (15.0%), refined copper (9.3%), non-retail pure
cotton yarn (6.6%)
Pakistan 1,275 4.29 House linens (10.0%), non-retail pure cotton yarn (9.2%), rice (7.9%),
non-knit men's suits (4.3%)
Kyrgyz Republic 1,263 4.57 Gold (34.0%), refined petroleum (6.9%), delivery trucks (4.6%), non-knit
women's suits (3.4%)
Tajikistan 1,037 7.23 Raw aluminum (59.0%), raw cotton (12.0%), lead ore (3.8%), other ores
(3.7%), dried fruits (3.6%)
Afghanistan 665 8.71 Raw cotton (150%), coal briquettes (11.0%), grapes (9.7%), scrap iron
(9.2%), insect resins (7.2%)
GDP = gross domestic product.
Source: World Bank Databank (2015).

ADBI Policy Brief No. 2015-2 (May) 2

 beyond exporting natural resources.
The GVC strategy has spread value
added and employment opportunities
to more locations and provides support
to developing countries to “catch up” to
high-income countries. Domestic value
created from GVC trade contributes
nearly 30% of gross domestic product
on average (Zhan et al. 2013). GVCs
have also significantly altered
international trade with 60% of global
trade, amounting to over $20 trillion,
consisting of intermediate goods and
services (Yeung 2014).
Central Asia’s integration
in global value chains
Central Asia has been able to attract
an increased flow of foreign direct
investment (FDI) over the past decade,
although much of this has gone into
countries with a large petroleum
sector (Fig. 1) with less investment in
manufacturing (Fig. 2). This investment
pattern has shaped export patterns with
some countries largely dependent on
petroleum exports (Fig. 3). There have
been investments in GVC manufacturing
as well, although this is still at the initial
or nascent stage. The key GVC sectors
globally are in multicomponent goods
such as automobiles and electronics.
Automobile production is established
in several Central Asian countries as
Fig. 1 Foreign direct investment, selected years, 1995–2013
35
30
Uzbekistan
25 Turkmenistan
Current $ billion
20
Tajikistan
Pakistan
15 Mongolia
10 Kyrgyz Republic
Kazakhstan
5 processing of these products can help
Afghanistan
0 Azerbaijan
1995 2000 2005 2008 2010 2013
Year
Source: World Bank Databank (2015).
Global Value Chains along the New Silk Road
joint ventures with foreign producers.
The most notable is General Motors
Uzbekistan, which is a venture with
UzAvtosanoat to produce GM cars from
knock-down kits. Production began in
2008 and in 2011 the companies formed
another joint venture, GM Powertrain
Uzbekistan, to make engines for use in
GM cars assembled in the country and
for export. Similarly, Toyota entered into
a partnership with Saryaka AvtoProm in
2014 to assemble knock-down kits of
the Fortuner, an SUV, in Kazakhstan. It is
the first production operation of Toyota
in the five core Central Asian republics.
Less complex goods are also produced
through value chains. Textiles and
garments, the most basic manufactured
products, are made in several Central
Asian countries. In some cases, they
are produced largely from domestic
inputs, such as in Pakistan where
cotton is grown and turned into
fabric. Elsewhere, production is part
of a regional value chain. In the Kyrgyz
Republic, for example, synthetic fabric
is imported mainly from the PRC and
made into clothing that is exported
and sold in Kazakhstan and the Russian
Federation. Garment exports grew
rapidly from $15 million to $155 million
in 2003–2012 and the sector employs
more than 100,000 workers in the
Kyrgyz Republic (Jenish 2014). Many of
the producers are domestic firms and
thus the sector does not rely on foreign
investment.
Central Asia is also competitive in the
production of processed agricultural
products. Food can form an important
part of export-based manufacturing
as shown by New Zealand (e.g.,
dairy), Thailand, and other countries
(Vandenberg and Kikkawa 2015). The
to expand manufactured output and
diversify the production and export
structure. The majority of Kazakhstan’s
exports to other Eurasian Customs
3
 Fig. 2 Foreign direct investment, inflow Infrastructure: To overcome the
Kazakhstan (2012)
Kazakhstan (2012) constraintsPakistan (2012)
of geography, it is
imperative that Central AsiaPetroleum build
4% 1% modern
18% transportation infrastructure.
5% Business activities Finance

5% Petroleum Producers in GVCs need to shipChemicals

parts, and chemical

35% Transport, storage, and components, supplies, and finished products

6% Motor vehicles and other
communications
Finance goods quickly and cheaply38%
4% bothtransport
within equipment
Electricity, gas, and water
Wholesale and retail trade 2%the region and to other regions. Most
10%
Mining and quarrying
3%of the GVC production hubs in the PRC
Construction

(eastern coastal cities) and Southeast

4% Non-metallic mineral
Metal and metal products
Asia (e.g., Bangkok, Ho Chi Min City,
products
Construction 5% Business activities
11% Manila, and Singapore) have access to
Other services
12% ocean
6% shipping which allows for Other
low
11% Food, beverages, and 6% 14%
tobacco
transport costs. Central Asia does not
Transport, storage, and
communications
have such access (Yang 2015). Eight
hstan (2012) Pakistan
Pakistan (2012)
(2012) Central Asian countries are landlocked,
Petroleum constituting about one-fifth of the
Business activities
18%
Finance 44 landlocked countries in the world.
Petroleum Chemicals and chemical Indeed, Uzbekistan is one of only two
35% Transport, storage, and
products
Motor vehicles and other
doubly-landlocked countries, meaning
38%
communications
Finance 4% transport equipment that all of its neighbors are also
Electricity, gas, and water
Wholesale and retail trade 2% landlocked.1 To overcome this problem,
Mining and quarrying
3% Construction
the region needs to rely on building
Metal and metal products
4% Non-metallic mineral good quality road and rail infrastructure,
products
Construction 5% Business activities as well as efficient air transport.
Other services 6% Other
Intraregional transport networks also
12%
Food, beverages, and 6% 14% need to connect through countries
Transport, storage, and
tobacco
communications to ocean ports. The development of
Source: International Trade Centre, www.intracen.org/ (accessed 27 April 2015). land transport corridors through the
PRC, as mentioned at the beginning
Union countries are foodstuffs, such of this brief, and through Pakistan can
as milk products, livestock, and fruits provide the vital link to ocean shipping.
and vegetables ( Tynaliev 2015). The China–Pakistan Economic Corridor
However, these products are not will link Kashgar in northwest PRC to
necessarily part of global value chains Gwadar Port about 3,000 kilometers to
but are based on domestic resources the south on the Arabian Sea.
and are produced almost entirely from
domestic inputs, even if they might be Trade facilitation: As a result of
sold abroad. political and ethnic tensions, Central
Asian economies have sometimes built
Policies for global value walls at borders, prohibited vehicles
registered in one country from crossing
chain investment to another, and required goods to
To ensure that Central Asia is not be unloaded and checked at border
only a transportation corridor crossings (Jekic 2015). These issues
but also a region for goods and need to be addressed through bilateral
services production, countries discussions and concerted policy
can seek to attract investment in action.
GVCs. Governments can support
such investment with policies and Furthermore, trade in GVCs requires
investments in several key areas. efficient soft infrastructure at the

ADBI Policy Brief No. 2015-2 (May) 4

 borders so that goods can pass
efficiently. Low tariff rates and
simplified and efficient border
procedures are required. A number
of countries have recently joined the
World Trade Organization (WTO),
which provides a commitment to low
tariffs and offers access to the other
160+ WTO members. While securing
WTO membership is important, there
are many subsequent commitment
actions that need to be put in place.
Tajikistan, which acceded in 2013, has
been proactive in trying to fulfill these
commitments. Other countries are in
the process of seeking accession.
The WTO arrangements are
complicated by the development
of regional trading blocs, notably
the Eurasian Economic Union that
includes the Russian Federation,
Belarus, Kazakhstan, Armenia, and the
Kyrgyz Republic. The bloc includes
a customs union, which proposes
a higher common external tariff on
some goods. WTO members in the bloc
will need to provide compensating
measures (low tariffs on other goods)
to remain compliant with the WTO.
Fig. 3 Export composition, 2014 (%)
100
90
80
70
60
50
40
30
20
10
0
Kyrgyz Republic
Pakistan
Mongolia
Tajikistan
Azerbaijan
Afghanistan
Kazakhstan
Turkmenistan
Note: Data for Afghanistan and the Kyrgyz Republic from 2013; data for Tajikistan and Turkmenistan
from 2000.
Source: UN COMTRADE, http://comtrade.un.org/db/default.aspx (accessed 27 April 2015).
Global Value Chains along the New Silk Road
Business environment: Countries
need to provide a conducive business
and regulatory environment to attract
foreign investment in GVCs. This can
be a challenge due to instability within
the legislative system that plagues
some countries, as well as differential
rights for foreign investors in regard
to private property, administrative
regulations, and tax regimes, which
together can create disincentives for
investors in Central Asia. In addition,
the development of industrial parks
or zones with clear and streamlined
investment procedures have been
employed successfully in the PRC and
many parts of Southeast Asia to attract
foreign investment.
Supporting businesses, notably SMEs:
Foreign GVC production plants require a
range of supporting services and input
manufacturers. They are often provided
by domestic small and medium-sized
enterprises (SMEs) but also foreign
SMEs from the country of the main
GVC investor. Domestic firms also act
as joint venture partners. Government
policy support to the development
of a vibrant SME sector can therefore
help attract investment and ensure
that the value chain establishes deep
domestic roots. Specific policies and
programs include facilitating access to
credit and identifying and securing key
technologies.
Capital goods
Wage rates and skilled labor: A key
Consumption goods
motivating factor for global firms to
Intermediate goods: food diversify investment locations is to
Other intermediate goods reduce costs, notably wages. Thus,
Petroleum and other fuels governments need to manage a
competitive wage environment. Many
countries in Central Asia do have low
wages, although in some cases the
reservation wage is pushed up by
wages available to migrants in other
countries. The two large labor-sending
countries, Tajikistan and the Kyrgyz
Republic, send many workers to the
Russian Federation. The skill level of
5
 the labor force is also important for
attracting GVC investment, notably
in higher value products. Government
policy can provide a solid foundation
of basic education and a system of
vocational training that equips workers
with skills relevant to the job market.
Conclusion
The emergence of the New Silk
Road is streamlining trade between
the major economic hubs of Asia
and Europe, including the Russian
Federation. Central Asia is developing
the connections to make the new
road viable, but it should also seek
to encourage productive investment
along the road. Participating in GVCs
can help in this regard and will ensure
a transition from being a supplier of
natural resources and raw materials
to becoming a manufacturer of goods
and services.

Note
1. Liechtenstein is the other doubly-landlocked country and is a micro state of 35,000 people.

References
Jekic, J. 2015. Necessary Trade and Investment Policies to Support Greater Value Chain
Investment in Central Asia. Presentation at workshop on Central Asia’s Economic
Opportunities: Economic Corridors and Global Value Chains, Urumqi, PRC, 2–3 March.
Jenish, N. 2014. Export-Driven SME Development in Kyrgyzstan: The Garment Manufacturing
Sector. Working Paper No. 26. Institute of Public Policy and Administration, University
of Central Asia. Bishkek.
Tynaliev, B. 2015. Investment Policy of the Kyrgyz Republic in the Framework of the
Integration Process. Presentation at workshop on Central Asia’s Economic
Opportunities: Economic Corridors and Global Value Chains, Urumqi, PRC, 2–3 March.
Vandenberg, P., and K. Kikkawa. 2015. New Zealand: A Farming and Services Growth Model
for Asia. Asia Pathways, blog of the Asian Development Bank Institute. 16 January.
Yang, C. 2015. Linking with GVCs – Manufacturing Investment from Hong Kong, China and
Taipei,China to the Pearl River Delta, PRC: Lessons for Central Asia. Presentation at
workshop on Central Asia’s Economic Opportunities: Economic Corridors and Global
Value Chains, Urumqi, PRC, 2–3 March.
Yeung, H. 2014. Global Value Chains and Global Production Networks: Organizing the World
Economy. Presentation at Regional Conference on Trade in Value-Added, Global
Value Chains and Development Strategy, Singapore, 6–8 May.
Zhan, J. et al. 2013. World Investment Report 2013: Global Value Chains: Investment and Trade
for Development. United Nations Conference on Trade and Development. Geneva,
Switzerland: United Nations Publications.

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ADBI Policy Brief No. 2015-2 (May) 6