Quantifying the Caucasus’ gains from BRI trade

Quantifying the Caucasus’ gains from BRI trade
Georgia’s infrastructure budget would be best spent upgrading its railroad networks, according to new research from the ADB Institute.
By Eurasianet September 28, 2021

Bottlenecks at major ports and other shocks to global shipping are casting fresh attention on alternate routes for moving Chinese wares to European markets.

The Trans-Caspian International Transport Route, known as the Middle Corridor, had been in development as part of Beijing’s Belt and Road Initiative (BRI) for several years before the coronavirus tied supply chains in knots. The 6,500-kilometre network of roads, railroads and ports spanning Kazakhstan, the Caspian Sea, Azerbaijan and Georgia, then into Turkey and/or the Black Sea is intended to reduce shipping times from 60 days by ocean to a fortnight. It is backed by billions of dollars in loans and grants from the Chinese government.

Middle Corridor

(International Association "Trans-Caspian International Transport Route")

A recent economic impact assessment by the ADB Institute, the development bank's think tank, looks at what the countries along the route stand to gain – or not.

Using historical trade and tariff data, researchers Xinmeng Li, Kailai Wang, and Zhenhua Chen calculate the potential effect the Middle Corridor would have on real GDP growth (growth after accounting for inflation) in transit countries.

They start with the assumption that investments will reduce the cost of trade. Then they simulate five scenarios describing different volumes of investment amid varying subsidies in a post-COVID world, different investment targets (sea, rail, road, airports), types of trade (export and import), and levels of investor confidence.

Trade has winners and losers, so reducing barriers comes with costs. An agricultural country like Georgia, for example, stands to lose local customers as cheaper foodstuffs from abroad compete for market share (assuming tariffs remain unchanged); at the same time, Georgian farmers will benefit from new markets in Europe.

Overall, in their middle-of-the-road scenario, Li, Wang and Chen calculate that Georgia stands to gain 0.68% to GDP per year by easing trade.

By disaggregating types of infrastructure investment, the authors then show that Georgia’s economy would be best served by upgrading its railroad networks, followed by seaports (which makes the tussle over the stalled Anaklia port project all the more painful a setback), at 0.242% and 0.209% growth, respectively. Road upgrades would contribute 0.107%.

These figures sound small, but compounded over many years could significantly boost output.

For Azerbaijan and Kazakhstan the figures are far lower, however. Both would be best served by investments in air transport, which, in that middle scenario, only add 0.028% and 0.069% to GDP, respectively. Overall, across all the Middle Corridor nations, investments in airports and railroads “have larger positive impacts on GDP growth than investments in seaport and roadway infrastructure.”

Li, Wang and Chen stress that infrastructure investment is necessary whether part of the BRI or not. Not only will growth suffer without modernisation, but regional trade – between Kazakhstan and Georgia, say – is a worthy goal in and of itself, possibly doing more to stimulate local economies than searching for distant markets in Europe and Asia.

The paper does not discuss debt or Chinese financing, but it offers Middle Corridor countries a way to measure the benefits of new infrastructure against expected future growth. It is important that countries like Georgia and Azerbaijan conduct their own economic analyses, the authors say, because, when Chinese project developers come calling, they “appear to overestimate the positive externalities and underestimate the negative ones.”

“Countries should carefully consider the costs and benefits since the results suggest that [these investments] may not be effective in some countries.”

From China’s perspective, an argument for the Middle Corridor is diversification, to avoid dependence on the more direct route to Europe across Russia, write Tristan Kenderdine and Peter Bucsky in another ADB Institute paper published earlier this year.

Efforts to sell the project as a way to encourage exports from the region do not add up, they find. Chinese subsidies “alone will not facilitate intraregional trade between the Middle Corridor countries or extraregional trade from the region to the PRC or Europe.”

“The statistics do not justify the PRC’s hype,” they write. The Middle Corridor crosses too many borders and bodies of water to be commercially viable.

For countries like Georgia and Azerbaijan, borrowing for giant infrastructure is a gamble. Kenderdine and Bucsky argue that they would be better served by liberalising and integrating their economies locally with, for example, a regional trade zone, perhaps connecting the Caucasus and Central Asia.

Until then, they write, “there remains a mismatch between expectation and reality.”

This article originally appeared on Eurasianet here.              

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