Tag: Regional Cooperation and Integration
E-Transaction Platforms Could Help Protect Asia’s Banks from Nonperforming Loans
Persistent, high levels of nonperforming loans could undermine bank lending and economic recovery in Asia’s developing countries.
The global economy is facing growing headwinds amid rising interest rates, heightened geopolitical tensions, and lingering pandemic effects. The economic slowdown and rising interest rates could lead to higher nonperforming loans as it becomes more challenging for borrowers to repay and service their debts. Persistent and high levels of nonperforming loans in turn could undermine bank lending and economic recovery.
Nonperforming loans held by banks in Asia totaled $794 billion at the end of 2021 (up from $766 billion in 2020 and $692 billion in 2019) according to official figures. During the pandemic, fiscal stimulus helped prevent corporate defaults, while easing regulations relieved pressure on banks to pursue repayment.
The phasing out of regulatory forbearance, global monetary tightening and challenging economic and financial conditions could pose a significant risk to banks’ asset quality, increasing nonperforming loans in the near future. To avoid rising nonperforming loan ratios, diminishing bank lending capacity and worsening economic performance, it is important to strengthen the way nonperforming loans are repaid or resolved.
Nonperforming loan resolution – the disposal of nonperforming loans from banks’ balance sheets – can be made more efficient through private nonperforming loan markets. At present, the level of nonperforming loan market development differs considerably across Asia.
For example, the Republic of Korea, Thailand, and the People’s Republic of China have active nonperforming loan markets, while differing in their characteristics, including the degree of international investor involvement. Many other countries in Asia and the Pacific are at an earlier stage of nonperforming loan market development, such as Viet Nam and Kazakhstan.
Impediments to nonperforming loan market development include a limited number of active investors, and scarce information around market prices and volumes. Furthermore, the institutional environment plays an important role, with poor legal framework legislation, weak collateral enforcement and insolvency proceedings adding to the market imperfections. As a result, there is often a considerable gap between the price an investor is willing to pay and the price a bank is willing to accept for a nonperforming loan.
E-transaction platforms for nonperforming loans can address some of these market impediments more efficiently. Such platforms would create an online marketplace, bringing together buyers and sellers in the digital space, and help information flows.
First, e-transaction platforms can reduce information asymmetry inherent in any financial transaction, as the seller would have more information on the value of an asset being sold than the buyer. This can be done by offering data review, validation, and also warehousing functions. Standardized nonperforming loan data templates can help in that regard, enhancing granularity, quality, transparency, and comparability of nonperforming loan-related information that are key to potential investors.
Second, e-transaction platforms can enhance efficiency of transactions and price discovery among market participants. As in any other online retail platform, market participants can be matched and exchange information online. This can lower transaction costs and operation efficiency. Anecdotal evidence suggests e-platform operators could offer much faster execution of transactions, with 55% to 90% time saved, compared to conventional offline processes.
Small investors could also find it easier to join this marketplace, helping broaden the investor base. Pricing mechanisms can also be facilitated through e-platforms, improving pricing efficiency. For example, e-platforms can facilitate a competitive online bidding process (much like eBay auctions) upon review of the specific asset information submitted by the sellers and the necessary due diligence.
Third, e-transaction platforms can attract foreign investors. There are also some e-trading platforms in the European Union that facilitate both domestic and cross-border trades of nonperforming loans. Currently, however, existing nonperforming loan markets in Asia tend to be dominated by domestic players. While this is also due to legal impediments, such as restrictions of foreign ownership, foreign investors could be attracted to this platform for greater transparency and lower cost. Especially for smaller markets and countries, a platform facilitating overseas investment could vitalize their nonperforming loan markets.
Nonperforming loan collection practices should be regulated to protect consumers and borrowers.
There are a few key considerations for the establishment of e-transaction platforms in the region.
The region’s financial markets have long been held back by fragmentation and the same is true for e-platforms. The People’s Republic of China has several active e-platforms for nonperforming loans, including through popular online retail platforms. However, these e-platforms are segmented without mechanisms for standardization and interoperability. Consolidating e-trading platforms will help reduce costs while offering multiple benefits of efficiency gains.
For nonperforming loan transaction platforms to function smoothly, including across borders, harmonization of regulatory and reporting requirements is crucial. For instance, the adoption of agreed international standards of nonperforming loan recognition and valuation is important. Minimum standards in the form of best practice guidelines could further incentivize active market participation. Adoption of nonperforming loan data templates, possibly mandatory, can further help.
An enabling legal framework and infrastructure are key to promoting nonperforming loan markets and thus also e-transaction platforms. For example, regulations need to offer clear guidelines and legal proceedings for effective workout and resolution of nonperforming loans while protecting borrowers’ rights. Multiple factors should be considered on balance.
Nonperforming loan collection practices should be regulated to protect consumers and borrowers, while practices should not restrict lenders’ ability to efficiently work out nonperforming loans. This needs to be accommodated through strong judicial capacity and infrastructure, including sufficient court capacity to swiftly resolve disputes.
A non-discriminatory level playing field would attract diverse investors, both in nonperforming loan markets in general and e-platforms in particular. That is, regulatory requirements should be applied equally to both foreign and domestic market participants, reducing possible entry barriers.
Finally, given that Asia’s nonperforming loan markets and ecosystems are at different stages of maturity and depth, exchange of knowledge and experience would be important.
Potential policy support could lead to the establishment of a nonperforming loan transaction platform in the region—or a network thereof—that features common standards. Setting regional standards to support cross-border transactions could maximize the reach of the nonperforming loan transaction platform and enhance its effectiveness.
This article is based on the findings of the ADB report ‘Road Map for Developing an Online Platform to Trade Nonperforming Loans in Asia and the Pacific.’
Authors
Cyn-Young Park
Director for Regional Cooperation and Integration, Economic Research and Regional Cooperation Department, ADB
Peter Rosenkranz
Financial Sector Specialist, East Asia Department, ADB
This blog is reproduced from Asian Development Blog.
Paving an Even Path in Asia’s Digital Economy: Role of Regional Cooperation in Inclusive Digital Transformation
Digitalization is a key driver of competitiveness and development. As the world takes the path to unprecedented digital advancement, Asia continues to be a powerhouse of digital transformations in a wide range of areas from microchip manufacturing to electric vehicles, from digital currency to e-commerce.
Coronavirus (COVID-19) pandemic has accelerated digital transformations, but not all countries have benefitted equally. For example, rural farmers in the People’s Republic of China (PRC) were able to take advantage of existing digital mobile network, digital payment, and logistic services to find alternative markets and sell their produce online. Many turned to established e-commerce platforms, such as, Pinduoduo, Taobao, and JD, and doing so innovatively via live-streaming.
In contrast, rural farmers in some other parts of Asia struggled to keep their livelihoods during the pandemic. Without access to face-to-face trades due to lockdowns, let alone selling online, many had to live with little or no income.
Businesses of micro, small, and medium-sized enterprises (MSMEs) in many parts of Asia also suffered during the pandemic. Even in ordinary circumstances, persistent barriers such as poor and costly infrastructure, poor digital literacy, and limited government support hinder the growth of MSMEs in many developing economies. Inevitably, during COVID, many MSMEs failed to capitalize on the pandemic-triggered digital transformation.
The above are some of the issues discussed in a dialogue organized by the ADB-PRC Regional Knowledge Sharing Initiatives (RKSI) and the Ministry of Finance, the PRC, on the topic of digital transformation and regional cooperation.
The forum acknowledged that despite the many opportunities presented by the digital economy in Asia, a great part of the region’s digital potential remains untapped, and key regulatory, infrastructural, financial, and capacity challenges remain. There is also a widening digital divide among countries that are under-connected and those that are digitalized.
Prevailing digital infrastructure and non-infrastructure gaps, specifically in e-commerce across Central Asia, are highlighted in a Central Asia Regional Economic Cooperation Program (CAREC) Institute study. The study shows that e-commerce development among CAREC countries is highly varied and key gaps remain. These gaps include those in basic digital infrastructure and regulatory policies resulting in a lack of economic opportunities, income inequality and weaknesses in the business environment.
A solution to bridge this gap and drive an inclusive digital growth is regional cooperation.
In 2021, ministers from Central Asia Regional Economic Cooperation (CAREC) member countries endorsed the Digital Strategy 2030, which identifies areas that can catalyze collaboration and digitalization in the region. Similarly, Greater Mekong Subregion (GMS) countries are considering a proposal to promote and enhance cooperation in the digital economy, leveraging on the GMS cross-border e-commerce cooperation platform.
Region-wide cooperation allows governments and stakeholders to coordinate policies, share costs of building and maintaining infrastructure, and expand markets to advance the digital economy. Regional cooperation mechanisms also help build trust and harmonization that are crucial for digital development among countries. In turn, digital advancement promotes regional cooperation in trade, finance, transport, energy, and other sectors.
To make inclusive digital transformation a reality, cooperation must extend beyond the public sector and encourage collaboration with partners from international organizations, private businesses, MSMEs, civil society, and other stakeholders.
Regional cooperation offers great potential to level the field and ensure that no one is left behind in the digital economy. Regional cooperation also means sharing and learning from country experiences across the region. There are rich lessons and inspirational stories from not just digital-focused firms, but also individuals with digital skills, who have transformed their lives and that of their families and communities waiting to be heard and shared.
Regional focused platforms such as CAREC, GMS, and RKSI, play a crucial role on this front in facilitating such cross-border knowledge exchanges and partnerships to ensure inclusive and sustainable development, and improve people’s wellbeing.
Authors
Hsiao Chink Tang
Senior Economist, East Asia Department, Asian Development Bank
Anne Cortez
RKSI Communication Specialist
Recalibrating Growth Dynamics for Inclusive and Sustainable Economies
The Central Asia Regional Economic Cooperation (CAREC) countries have encountered a myriad of challenges in 2022 and are most likely to continue facing them in 2023 as well. Economic growth is expected to lose steam, and factors such as climate change, geopolitical instability, as well as the Russian invasion of Ukraine will place further pressure on inflation, debt burdens, international trade, inclusive and sustainable growth, and progress on the sustainable development goals (SDGs).
Growth, inclusivity, and sustainability
Policymakers continue to face a major challenge on how to formulate economic policies that simultaneously promote economic growth, reduce inequality, and ensure environmental sustainability. The growth outcome has to poverty alleviation and nations in the CAREC region must consider this a top priority.
Hundreds of millions of poor have graduated from extreme poverty in the last three decades, mostly in emerging economies, including the CAREC countries. However, the pandemic, climate change and regional conflicts have threatened to push millions of people into extreme poverty.
Climate change is a complex global challenge. To mitigate the risks posed by climate change to sustainable economic development in the region, a broad spectrum of regional policy and technical responses on a regional scale is essential.
A multipronged approach is crucial for ensuring even growth
Against the above backdrop, the 6th CAREC Think Tank Development Forum was organized on 15–16 September 2022 in Baku, Azerbaijan. The forum gathered over 150 participants drawn from leading think tanks, academia, governments, development partners, the private sector, and the media to deliberate how much recalibrating is required in CAREC economies to achieve inclusive and sustainable growth.
The forum discussed how global recovery from the pandemic has been uneven in CAREC countries. In 2021, certain countries performed relatively better than others during the recovery. Georgia, Tajikistan, and Uzbekistan performed the best, while Azerbaijan’s, Kazakhstan’s, and Pakistan’s performance were average; and the Kyrgyz Republic and Mongolia were not expected to recover to pre-pandemic levels before 2024. The forum also noted that gender gaps in education and labor force participation are immense in some CAREC countries, but income inequality is moderate and emissions per capita is below the global average. Furthermore, the region is unlikely to achieve any of the targets of SDGs by 2030.
Massive investment and productivity push could minimize inequalities
There is growing evidence that excessive inequality hurts long-term growth prospects. For growth to be sustainable, it needs to be inclusive, but this requires massive investment, which is a challenge given the already limited fiscal space in many countries.
Mobilizing taxes for development is the way forward. Countries should broaden their tax base, strengthen tax administrations, increase progressivity, widen social safety nets, and limit untargeted subsidies.
Reducing gender gap requires deliberate efforts to support the hiring of women and facilitate career progression, as catching up with developed economies has slowed and a new productivity push is needed. The catching-up progress of the CAREC economies with developed economies had significant momentum until about 2013. Between 2013 and 2021, there was an increase of only 0.3 percentage points to 17.5%. Easy gains from basic economic reforms, favorable terms of trade, capital inflows, and technology transfer seem to have been exhausted.
Well-established implementation and financing mechanisms can facilitate SDGs progress
The CAREC region is lagging when it comes to progress on SDGs. While there is some progress with regard to the development of green energy, progress on other SDG indicators has been slow.
Most countries have a well-established SDG coordination mechanism, but success requires a large institutional architecture. Most of these SDG mechanisms are chaired by those at level of prime ministers, and many have supporting technical secretariats, or working groups of line ministries focused on SDGs.
Most SDGs mechanisms are supported by statistical agencies, analytical units, and financing units. However, the limitation is that the coordination at federal/central level is high, but at local level the coordination is very weak.
Many of the national development plans are not budgeted for, and many lack sufficient finance, adding to the fact that the total amount of financing gaps is not identified. The private sector needs to be engaged in alternative sources of financing to achieve SDGs and maintain them.
Focus on green energy can mitigate the risks posed by climate change
Climate change is real. The most recent, ugliest, of this manifestation in the region can be seen from the catastrophic floods in Pakistan. Energy security is multidimensional and a measure of a unique nexus encompassing a country’s or region’s economic, political, geopolitical, institutional, legal, and regulatory aspects. As such, it is essential to include all aspects of the energy environment to assess energy security. For example, Taghizadeh-Hesary et al. propose four perspectives: availability (scientific/resource aspect); applicability (engineering or technological aspect); acceptability (environmental and social aspect); affordability (economic aspect).
To diversify the energy basket, the region needs to adopt a comprehensive framework to identify its energy requirements, measure availability of energy resources, acquire cutting-edge technology to minimize environmental footprints, and find ways to ensure affordable provision of clean energy. As with the increasing share of industrialized agricultural production, it is necessary to diversify energy consumption from too much reliance on fossil fuels to an optimal combination of renewable and nonrenewable energy resources.
A conflict-free, stable business environment can help accelerate economic growth in the region
Major geopolitical conflicts, coronavirus (COVID-19), and climate change have added additional negative externalities to the region’s economic woes. The pandemic took a heavy toll on people and livelihoods. Regional economic growth plunged into recession in 2020. Years of progress toward SDG Goal 1 on poverty reduction experienced a major setback, with 85 million people estimated to have been pushed back into extreme poverty in Asia-Pacific by the end of 2021.1 The impacts caused by COVID-19, climate change, and geopolitical uncertainties resulted in the region’s output loss of US$2 trillion between 2020 and 2022.2 Countries with larger external debt stocks are also more exposed amid rising global interest rates. In essence, more exposed economies tend to face larger potential impacts of the Russian invasion of Ukraine.
Multi-stakeholder cooperation is the way forward
A partnership is a vehicle for strengthening international and national cooperation to collectively address multidimensional socioeconomic agendas. The framework of partnership is based on four core elements:
- Shared objectives: Countries in the region may not share all but do share some objectives that are critically important for their participation.
- Guiding principles: Certain guiding principles must be shared within the cooperation framework.
- Inclusive modalities: These address matters on how to create an environment in which smaller and bigger partners both benefit from the partnership.
- Accountable results: There must be an accountable, results-based mechanism in order to assess outcomes.
No partnership globally can be sustained without partnerships within countries because actors that are going to participate in the process must be brought in, whether it is the private sector, nongovernmental organizations, or local communities.
1 Malik, H.A. 2022. Crisis Upon Crisis: Understanding Main Implications and Policy Analysis. Presentation at the 6th CAREC Think Tank Development Forum, Baku, Azerbaijan. September 2022.
2 Ibid.
Author
Khalid Umar
Chief Strategic Planning Division, CAREC Institute
Related event: 6th CAREC Think Tanks Development Forum
The Sixth Think Tank Development Forum Report On Recalibrating Growth Dynamics for Inclusive and Sustainable Economies
The Impact of COVID-19 Mobility Restrictions on Trade Facilitation at Borders in the Central Asia Regional Economic Cooperation Region
Progress in Trade Facilitation in CAREC Countries: A 10-Year Corridor Performance Measurement and Monitoring Perspective
Dialogue on Regional Cooperation in Promoting Digital Economy: Challenges and Way Forward
Digital economy comprises a broad range of economic activities that use digitized information and knowledge as key factors of production. The internet, cloud computing, big data, fintech, and other new technologies are used to collect, store, analyze, and share information digitally and transform social interactions. Digitalization of the economy creates benefits and efficiencies as digital technologies drive innovation, productivity, and fuel job opportunities and economic growth. The digital economy also permeates all aspects of society, influencing the way people interact and bringing about broad sociological changes.
Coronavirus (COVID-19) pandemic, geopolitical tensions, and fragility of global values chains have accelerated the sharp expansion of the digital economy in Asia with rapid innovations and broad applications across all sectors. The recent phenomenal growth of e-commerce in Asia is a case in point, where many Asian countries have become important buyers and sellers of goods and services online. Digital connectivity also offers a lot of potential in reducing trade costs by using ICT to link up markets and enter global value chains. In the area of finance, digital technology promotes financial inclusion in many developing Asian countries. As a result, investment in financial technology in Asia has expanded in various sectors such as payments, mobile, data and analytics, and regulatory technology.
Despite the many opportunities offered by digital economy, Asia has yet to fully realize the potentials of harnessing digital technology for sustainable development. The lack of national regulations and policies to support cross-border commerce and finance, and imbalanced digital economic development including ICT infrastructure, trade facilitation and logistics, and skills development remain key challenges. Concerted regional-level actions—through cooperation—can accelerate the realization of benefits from national efforts, as countries build synergies and complement one another. Harmonizing regulations, aligning documents with international standards for interoperability, developing a regional broadband ecosystem, pooling of human and financial resources, and exchange of innovative ideas are but a few examples. The role of digital economy in the post-pandemic sustainable development is a priority of most countries and cooperation to promote is part of various regional initiatives. The Central Asia Regional Economic Cooperation (CAREC) Digital Strategy 2030, endorsed in 2021, aims to be a catalyst for regional cooperation on digital technologies among its member countries, to promote regional competitiveness and growth. The Greater Mekong Subregional program is considering a proposal for enhanced cooperation on digital economy, leveraging upon the GMS cross-border e-commerce cooperation platform.
This dialogue brings government officials, and experts from multilateral institutions, regional think tanks, and private enterprises to share challenges, insights, and experiences related to promoting the digital economy. It aims to facilitate discussions to build a resilient digital economy particularly in the Greater Mekong Subregion and the East and Central and West Asia regions, where all stakeholders can work together to achieve the long-term goal of more sustainable and inclusive economic growth.
Agenda:
Time | Program |
---|---|
Chairperson: Hao Zhang, Deputy Country Director and Office-In-Charge, ADB Resident Mission in the PRC | |
15:00 – 15:10 | Opening Remarks • M. Teresa Kho, Director General, East Asia Department, ADB • Lu Jin, Deputy Director General, Department of International Economic and Financial Cooperation, Ministry of Finance, the PRC |
15:10 – 15:40 | Keynote Presentation • Research on Digital Economic Cooperation under Regional Frameworks, Xiaoqing Ji and Chong Liu, Shanghai University of Finance and Economics • Building Digital Connectivity in GMS Sub-Region, Guanqi Zhou and Lei Zhang, Yunnan University • Digital Divide and Policy Reforms for Promoting E-commerce in the CAREC Region, Qaisar Abbas, Chief of Research Division, CAREC Institute |
15:40 – 16:55 | Panel Discussion on Regional Cooperation in Promoting Digital Economy Moderator: Marzia Mongiorgi-Lorenzo, Principal Economist, East Asia Department, ADB Subregional Programs • Saad Paracha, CAREC Secretariat • Yi Hong, Chief Expert, Yunnan Cross-border Digital Commerce Engineering Research Center Private Sector • Wei Liu, Senior Sustainability Scientist, Luohan Academy, Alibaba • Yutong Zhang, Research Director, Institute of JD Economy and Development, JD • Augustine Chiew, Global Senior Public Services Industry Expert, Huawei • Xiaogang Zha, Director, International Policy Center, Tencent Research Institute, Tencent • Jamie Ko, Director, Regional Public Affairs and Policy, Grab, Singapore |
16:55 – 17:00 | Closing Remarks Safdar Parvez, Advisor, East Asia Department, ADB |
Analyzing the Factors that Constrain Trade Efficiency in CAREC
This study examines the impediments and gaps that hinder the growth of regional trade and ways to reverse declining trade efficiency.
Overview
Despite having reached a certain level of consensus, Central Asian countries still face challenges in regional trade cooperation. Trade efficiency is generally low and even declined from 2001 to 2020.
Analyzing trade efficiency and influencing factors in the Central Asia Regional Economic Cooperation (CAREC) region using the stochastic frontier gravity model(link is external) showed that 56% of the 11 member countries have a trade efficiency score lower than 0.2. The study considered not only the countries’ economic scale, population size, and influencing factors, such as geographical distance and border condition, but also political barriers, differences in digitalization, and institutional distance.
Conducted under the CAREC Institute CTTN Research Grants Program 2021, the study found transportation costs and trade barriers among the major factors constraining the growth of regional trade, while interconnectivity serves as an important driver of trade. A widening gap in digitalization may also affect regional trade prospects.
Governments should reduce regulations and allow market forces to allocate resources more effectively. Policy makers should also give attention to differences in informatization—how much information and communication technologies contribute to national development—among CAREC members.
Analyzing Trade Efficiency
CAREC is a crucial organization promoting trade cooperation. It involves many of the countries situated at the border of the European and Asian continents. However, the study showed that despite some progress, the current level of actual trade is far from ideal, and trade resistance is high.
Results of the study showed that Afghanistan and Tajikistan—because of their low economic level in the world— are generally inefficient in export trade and have not formed close trade relations with other CAREC members.
The Kyrgyz Republic and Pakistan also posted low trade efficiency levels with other CAREC countries. Kazakhstan, even with its membership in the Eurasian Economic Union, showed low trade efficiency.
Mongolia and Uzbekistan both showed high trade efficiency with the People’s Republic of China, but their trade volume with other CAREC countries is far from ideal.
Kazakhstan and Turkmenistan have high trade efficiency with other CAREC countries.
Azerbaijan and Georgia were the most efficient. However, their main export destination countries are outside CAREC. Majority of Azerbaijan’s exports go to Italy and Turkey, while Georgia’s exports go to Turkey and Russia.
Key Findings
Regional trade efficiency is generally in decline. Most CAREC countries became independent after the collapse of the Soviet Union and focused initially on national stability and reconstruction.
Since the 21st century, some countries showed strong willingness to develop foreign trade. However, because of high trade costs, intra-regional trade development did not keep pace with the expansion of the trade boundary. From 2000 to 2020, the CAREC regional trade inefficiency factor resistance increased rather than decreased.
Trade integration can play a huge role. The low trade efficiency in the region shows that actual trade is far from the ideal level. Actively promoting trade integration is one of CAREC’s priorities. Other donors and multilateral agencies can also support this regional trade cooperation initiative.
Transportation cost is a main constraint factor. The impact of transportation cost is significantly higher than that of other control variables, indicating that regional trade is still limited by backward transportation infrastructure. The transport network inherited from the Soviet Union cannot meet the development requirements of globalization, and countries in the region encounter various problems in restarting their economies in the wake of the COVID-19 pandemic. There are not enough funds for infrastructure maintenance, let alone for the construction of a new transport network.
At present, major powers, multilateral institutions, and nongovernment organizations are actively involved in infrastructure construction in the region. The integration of transportation infrastructure in the region—which will effectively reduce transportation cost—can promote the development of export trade. Further efforts to promote regional connectivity in Central Asia remain an important focus in driving trade development in the region.
Trade barriers of exporting countries hinder efficiency. In the trade freedom index, a country’s restrictions and obstacles to import and export trade reflect the political barriers to trade. Political barriers of exporting countries have a significant effect on the efficiency of export trade in the region. These include export subsidies, voluntary export restrictions, sanitary and phytosanitary standards, and other nontariff trade barriers.
In order to release the region’s trade potential, CAREC countries should optimize their respective trade policies, reduce government regulation, and gradually transition to using market forces to achieve effective allocation of resources.
Differences in digitalization (informatization) have a negative impact on trade efficiency. Due to the COVID-19 pandemic, the gap in digitalization may further widen and become a new factor hindering trade development. Countries with weak digital infrastructure and insufficient digital development talent are more likely to slow down the application of digital new technologies because of the decrease in technology investment funds. The pandemic, however, has also indirectly promoted the spread of digital life and accelerated digital transformation in various fields, including international trade.
References
Y. Wang and B. Yan. 2021. Trade Efficiency and Influencing Factors in the CAREC Region: Based on the Stochastic Frontier Gravity Model. Central Asia Regional Economic Cooperation Institute. Xinjiang.
Author
Yue Wang
Canvard College, Beijing Technology and Business University
This blog is reproduced from Development Asia.
How Trade via Rail in Central Asia Can Mitigate the Energy and Climate Crises
Trade via rail in Central Asia has proven highly effective in recent years. It needs further support to take it to the next level.
In a world where 90% of global trade is moved by sea, the landlocked economies of Central Asia almost exclusively rely on rail and road transport for trade. Much of the long-distance cargo moves via existing rail networks, which have substantial potential to facilitate trade in the region and beyond, including between European, Middle Eastern and South/East Asian markets. Rail transport is also cheaper, safer, and less prone to border delays.
However, trade via rail faces structural obstacles. For example, the differences in railway gauges between the former Soviet states, the People’s Republic of China and Europe, Pakistan and India present a fundamental challenge. As a result, tracks are interrupted and need the transfer of freight at border crossing points – a time-consuming and labor-intensive task.
Long-distance trade in and across Central Asia was unappealing for years due to a lack of effective trade agreements and changing national trade laws that increased costs and unpredictability of rail transport, as well as weak service coordination, and cumbersome border crossings.
Despite these challenges, the number of express container trains traversing Central Asia has skyrocketed from 17 in 2011 to over 15,000 in 2021. This has been achieved on the back of political will, regional cooperation, and rail reform. Rail transport within the region has also thrived, facilitating trade flows between the People’s Republic of China and Central Asia while contributing to dialogue and transboundary cooperation.
This impressive growth can be attributed to simplified processes, including single window and single stops, reduced border inspections, improved platform companies, and competitive pricing. Central Asian governments have actively implemented ambitious reforms over the last years to facilitate trade. Uzbekistan’s Yallama border crossing is an example of this trend.
Most recently, rail transport benefitted from the COVID-19 pandemic as border closures and movement restrictions forced truck drivers to stay home. For example, Turkmenistan closed its border to foreign trucks, while Kazakhstan and Uzbekistan required foreign truck drivers to present negative COVID-19 test results and vaccination certificates. Mongolia faced such a severe supply chain disruption via road that food was temporarily unavailable, leading to increased prices.
Rail transport is cheaper, safer, and less prone to border delays.
As a result, truck operating costs surged, forcing some carriers to exit the industry, leading to a substantial drop in road transport capacity for both international and domestic shipments. Unsurprisingly, a significant percentage of cargo shipments quickly shifted from road to rail.
It became simpler to clear customs for one train driver operating a 40 container unit-train than 40 truck drivers operating 40 separate trucks. Rising fuel and energy prices, which impact the cost of road transport a lot more than rail where single trains move dozens of containers also explained the soaring rail business.
Moving forward, to maintain this shift, it is important that governments provide quality infrastructure for onward distribution, particularly to remote areas. Initiatives like Uzbekistan’s, which has actively supported an expansion of its road carriers’ truck fleets, are a good example of policy support for both rail and road to play to their own strengths.
The environment also matters in this shift. As it uses less energy per ton of goods moved, transport via rail is more climate-friendly. This is an important consideration for European Union (EU) members that are aligning their operations with the EU taxonomy and supply chain legislation, mandating greener and more sustainable ways of doing business.
Such measures can also be a blueprint for more sustainable short distance trade within the region. It will be up to the governments of Central Asia to create the right enabling environment to heave their transport and trade network into a more sustainable future. Subsidies to kickstart greener transport or pilot projects for alternative fuel options can go a long way to inspire change and ultimately policies, making the sector internationally more competitive.
The upward trend of rail transport will most likely continue over the coming decades as demand grows, fuel costs rise, and reducing the carbon footprint becomes a more important consideration for suppliers and end-consumers.
Future policy and regulatory challenges include fostering a commercial orientation for Central Asian railways, putting them on a solid footing for financial sustainability, improving the reliability and speed of service and filling in the missing links to enhance the performance of the rail network in supporting trade.
The recently announced China-Kyrgyzstan-Uzbekistan Railway, which will facilitate trade between the People’s Republic of China, Central Asia, Europe, Turkey, and the Middle East, will be an important addition to regional stability and cooperation on a global level. Importantly, peace and cooperation are natural effects of trade.
For land-locked countries or regions, rail transport infrastructure is the basis to stabilize economies and foster transboundary dialogue and cooperation.
Author
Zulfia Khamitovna Karimova
Principal Regional Cooperation Specialist, ADB
This blog is reproduced from Asian Development Blog.