Thursday, December 31, 2009

The New Silk Road

An old history of trade that dates back to more than 3,000 years ago is revitalized today by a new stream of goods, commodities and money invested in energy, infrastructure and manufacturing projects.

While the first person who used the term "Seidenstra├če", literally "Silk Road", was the German geographer Ferdinand von Richthofen in 1877, the Silk Road (or Roads, as it appears that we are actually talking about a whole network of routes and not just one road) dates back to the 5th century BC. These routes, extending more than 4,000 miles, have represented important paths, through which ideas and inventions, as well as goods and also diseases , spread from China to India & South East Asia, the Middle East and the larger Mediterranean.

Furthermore, while their relative importance is cause of debate, all scholars agree that the exchange of ideas, traditions and goods moving across the Silk Roads fast tracked the flourishing of the complex civilizations of China, Persia, India, Egypt, Arabia and Rome and, in several ways, helped lay the foundations of the modern world.

Over the centuries, the roads evolved, and new routes were added, especially when naval travel became more and more important.

Map information

This map indicates trading routes, used around the 1st century CE, centred on the Silk Road. These routes are largely valid for the period 500 BCE to 500 CE. [i]

The importance of the Silk Roads became less and less relevant as the world’s economic centre shifted westward, with the rising importance of the Americas, especially North America.

However, a new revival of commerce and investment has been in progress for the past 15 years and accelerating its pace tremendously since the beginning of the new century.

A few variables have contributed to the renewed importance of the New Silk Road: the growing importance of China as the heart of global manufacturing, the tragic September 11 2001 events, the rise of Indian economy, the uncontrolled expansion of credit in the Western societies, the available liquidity among GCC countries, and last but not least the long term demographic trends in the so called G7++ countries. [ii]

The current economic uncertainties haven’t been able to reverse well settled trends. Commerce between Asia and Middle East has been growing at a staggering rate of 30% a year. Since 2006, Asia has been the largest trading partner of the Gulf Cooperation Council, and as of 2007, Asia accounted for 55% of the total $758 billion in trade. [iii]

Further examples of how countries have become interconnected can be seen in the desire of GCC countries to play a permanent role in the development of the natural trading partners surrounding them. Khalid Al-Muhairy left his post, as fund manager at Abu Dhabi Investment Authority, to set up his own asset management fund, Evolvence, solely focused on India. The fund, which is now worth $400 million, has successfully funded Indian businesses in construction (Chennai), high tech pharmaceuticals in Hyderabad, and a private cancer-treatment centre run by US trained doctors in Bangalore.

Smaller Moroccan and Algerian companies have manufacturing facilities in China for shoes, toys, garments and more. The wholesale market of Yiwu in South-eastern China has become the centre of commerce for many Middle Eastern traders to the extent that city administration has built Mosques to accommodate the needs of Muslim travellers and residents, and road signs have been posted in Arabic as well as Chinese and English.

As Western economies tend to present less and less appeal, the large GCC sovereign funds are evaluating investment opportunities in Asia. ADIA (Abu Dhabi Investment Authority) aims to have 8% to 12% of its total fund value invested in Asia.

Conversely, to witness the fact that the ties developed are mutual, Asian companies are building more and more of a presence in the Middle East as well. China has invested billions of dollars in the oil sector in Africa, especially in Algeria and Sudan and state-owned and private Chinese construction companies are now executing infrastructure work (roads, bridges, etc.) across the entire GCC and Africa.

China’s exports to Egypt have quadrupled since 2003, roughly 18 times the value of Egyptian exports to China. The Egyptian government is trying hard to make Egypt the destination of Chinese investment to compensate for the balance. The aspiration is to have Egypt as an export hub for Chinese companies. North East of Cairo, TEDA, a development agency based off the port of Tianjin is building a manufacturing zone. The objective is to attract large Chinese companies to be able to employ 10,000 Egyptians and 1,000 Chinese employees.

HSBC has recently decided to move its principal office from London to Hong Kong, a move that underlines the importance of Hong Kong as a key global financial centre. More recently Abdualla Al Awar, CEO of the DIFC Authority, has declared to .Commerce publication: “…we’ve seen the investment flows have shifted recently. In the past three years there’s been a west to east flow of investments, but maybe that position is changing now. We’ve seen more interest coming from the East Asian market and from within the region. If, for example, someone wants to access Africa, they will use Dubai. The flows are more East to East now – east to the Middle East, and the reverse.”[iv]

More and more examples can be found in newspapers, consulting papers, and so forth. The evidence of a New and powerful Silk Road is everywhere.

The camels of the old paths carrying precious stones and carpets have been substituted by oil tankers, large Airbuses landing in billion dollar airport hubs, and wire transfers. As the West grapples with fixing structural problems, the New Silk Road can prove to be the fertile ground for a new economic revival.

New economies, rich in resources, are going to play a role as well: Kazakhstan, Uzbekistan, and Tajikistan are all looking at opportunities to develop new ties and relationships within the region.

Furthermore, as common interests grow and countries become more and more interdependent we will be able to avert the risk of political destabilization.

It is within the parameters of this quickly evolving environment, that agents of economic development, such as free zones, become more and more relevant, as they provide the perfect vehicle for companies to expand their reach and take full advantage of the New Silk Road which has emerged.

Image: courtesy of Business Week Online

[i] Wood, Francis (2002). The Silk Road: Two Thousand Years in the Heart of Asia. Berkeley, CA: University of California Press. pp. 9, 13–23. ISBN 978-0-520-24340-8.

[ii] Geographical labels for regions are adapted from the Geography of Ptolemy (c. 150 CE), some trading centre names date from later (c. 400 CE). Relying on Ptolemy's names is wrong but neutral. The following contemporary trading centres (or possible trading centres) are not marked: Red Sea - Myos Hormos, Berenica, Ptolemais Theron, Adulis, Muza, Ocalis, Aualites, Malao. Arabia - [South] Saue, Sana, Saphar, Eudaemon Arabia, Cane, Mosyllon, Moscha. Persian Gulf - Asabon, Charax, Gerra, Ommana, Apologos. Persia - Persepolis, Alexandria Areion, Kandahar. Africa - [East Africa/Kush/Axum] Coloe, Axum, Akhmim, Panopolis, Aromaton Emporion, Opone, Sarapion, Dongola. [Mediterranean] Cyrene, Leptis Magna, Carthage, Caesarea, [Beyond map] [East Africa] Juba, Maji, Sennar, [Trans-Saharan] Sijilmassa, Tamanrasset, Murzuk, Tingis. Europe - Gades (Cadiz), Augusta Treverorum (Trier), Aquileia, Ostia, Athens. India - [Arabian Sea] Horaia, Barbaricum, Barake, Astakapra, Suppara, Kalliena, Semylla, Mandagora, Palaepatmae, Melizeigara, Erannoboas, Byzantion, Naura, Tymdis, [Central] Paethana, Tagara, [South] Muziris, Nelcynda, Bacare, Balita, Colchi, Palaesimundu, [East] Argaru, Poduca, Sopatma. Silk Road - Ecbatana, Yarkand, Jiaohei, Kitai, Kaifeng. (Note - both summer and winter routes around the Takla Makan are shown). China - Chengdu, Kunming, Cattgara. South East Asia - Trang, Thaton. The routes between most of these unindicated sites are not marked, notably the extensive European/Roman routes and the other routes in Persia beyond the Silk Road. Another route not indicated is the Scythian route running from China to the Black Sea. The large number not marked on India are the minor sites listed in the Periplus of the Erythraean Sea.
[iii] See previous article for additional relevant information.
[v] .Commerce Middle East Business Analysis, Issue 35,  November 2009. Pp. 25.

Sunday, December 27, 2009

Emerging markets, by choice or mandatory evolution?

As I am immersed in my daily work at the Free Zone I come face to face with more and more European entrepreneurs that are relocating their business in the United Arab Emirates as a vehicle to take advantage of the emerging markets promise.

Over the last couple of years, and especially after the latest financial turmoil, the motivation behind their desire to relocate have changed considerably. While originally the motivation was a desire to explore and diversify their investment portfolios it has now become a matter of survival.

European business owners have to face two serious questions to which they need to find suitable solutions:
  1. How do I protect the assets that I have acquired during these years? In some cases the assets have been accumulated in a matter of generations as is the case with many family owned businesses in Italy, the country where I am originally from.
  2. How do I position my business in such way that it can thrive in the future? and therefore: how do I take advantage of the growth in the emerging markets?
Question (1) is purely a matter of asset protection dictated by the fact that all G7++ governments are to collect as much taxes as possible to sustain the spending spree that governments have been undertaking recently to face the economic downturn. The trend is to be sustained long term as the same governments are facing mounting costs from the welfare systems in place all the while the population grows on average older an older. Nevertheless answers to question (1) vary in the level of sophistication and opportunities, new tax free jurisdiction become more appetizing versus others are under pressure from the OECD. I will leave analysis of this matter to another posting as the topic deserves additional exemplifications.

Question (2) is more business driven and that is where I am going to spend a little bit more time.
As the world becomes more and more connected it has become easier for individuals and small organizations to pack their bags and relocate. The new generation is better equipped with language skills and therefore when opportunities arise elsewhere the barriers preventing shifting have become lower and lower.
This substitution effect seems to be ignored completely by the European press, and much of the academic world, which instead tends to build long term development projections banking on a "closed" system. A system whereby businesses and individuals are static.

I recently came across notes from a convention held in Bucharest last Oct 2007: Work Session on demographic projections. Some papers were really interesting and fundamentally pointed out what was obvious already 30 years ago: Europe (& the world in general) was going to enter a period leading to a DECREASING population, starting with the Western countries and then reaching the entire world.

The element that I propose is that most of the assumptions are too optimistic because they don't take in consideration the substitution effect, therefore the ability of many Europeans to transfer their activities elsewhere, or the ability for many immigrants to go back "home" in fact accelerating the decline of relevance of European countries to the global GDP.

Following are some relevant observations from the paper of David S. Reher, Universidad Complutense de Madrid, “Towards long-term population decline: a discussion of relevant issues,” European Journal of Population 23 (2007): 189-207

"Not only is this period of growth ending, there are also real perspectives for prolonged population decline in many of the world’s regions during the twenty-first century. There can be little doubt that this process has started in Europe and in other developed nations. It may just be getting under way in many of the lesser developed countries of the world as well."

"Extremely low fertility has been around for too long for it to portend anything other than major long-term social change. It gives every indication of having become a structural aspect of the developed world."

"The trend towards population decline has been building for many years now. In some areas where this process is further advanced population will decline by as much as 20 percent in the next 50 years. Should present trends in fertility continue, decline by the end of the century will be much greater. Since this upcoming period of decline will hinge on low fertility, populations will tend to be loaded with elderly persons, and children and working age populations will be shrinking."

"As for the society of the future, expectations are not nearly so optimistic. Severely skewed age structures, an unavoidable by-product of the process underway, will have important consequences for all aspects of social welfare that depend on the redistribution of resources."

"Economists are well-acquainted with the issue of aging and grapple with potential solutions ranging from later retirement to increasing women’s labor force participation, large-scale immigration, or reducing pensions and dismantling what is left of the welfare state. While certain doubts exist as to the economic expediency of many of these mechanisms or whether or not they will bring with them unwanted side effects, especially in the case of international migration, it is unquestionable that they represent a safety valve for rapidly aging societies. If current trends persist, however, over the long run none of them may prove to be more than partial remedies. (emphasis added by the author of this blog)
International migration itself, the focus of much current attention and concern, is unlikely to represent more than a temporary and rather inadequate solution for skewed age structures and population decline." (emphasis added by the author of this blog)

In the face of these irreversible trends I consider the choice of few SMEs to explore emerging markets more of a matter of survival than anything else. The next challenge for emerging markets economies is to create the appropriate environment to facilitate this transition and create the necessary framework to welcome foreign direct investment from the old Europe.

Full notes from the Eurostat Work Session available at:

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Thursday, December 17, 2009

Geopolitical & economic shift eastbound: underlying trends fueling long term growth in an economy

Since joining the Ras al Khaimah free zone in the UAE I have been delivering presentations in which I illustrate the benefits, services and features of the free zone. But it was only recently that I started introducing some slides about key macroeconomic variables that, in my opinion, are behind the free trade zones’ existence in the first place.

Over the course of my professional career, I have been lucky enough to have the opportunity to operate in a wide variety of locations internationally, from the fast paced Silicon Valley to New York City and Toronto, passing through Europe on a variety of assignments, to finally settle here in the UAE, where I have taken on international projects connecting the Middle East, Indian subcontinent and Asia.

Such an array of countries and realities has allowed me to experience, firsthand, the global changes that I am about to briefly touch upon in this article.
The process, whereby emerging markets have gained weight in the global economy, started a long time ago, but a few unrelated events contributed to the considerable acceleration of this process:
- September 11, 2001
- Peak of the latest commodity cycle
- The rise of China as an economic power

The first created a world where the USA, all of a sudden, became a less accessible country; the second one generated a windfall of liquidity across the oil producing countries, who – for the first time – decided to invest in building their own infrastructures instead of in foreign financial instruments; and the last one shifted the global supply side balance, by providing goods at competitive prices in almost all economic sectors.
Out of this combination of events and long term trends, new alliances have been forged, ties have been formed, and a new Silk Road has arisen.
The new order is settling in, but not without trauma, as every change of this magnitude requires a number of shocks to define a new workable equilibrium among the parties at play; and the latest financial crisis is, in fact, one of these traumas.
Nevertheless, these trends are here to stay, because at the core, economies are sustained by people.

People are the nucleus of the economic system; this is a fact that is often overlooked by politicians and analysts too focused on the near term election or the latest crisis to look at the horizon. Demographic trends are, therefore, an essential element driving the long term development of a country. People spend, invest, consume and save. The rate at which we all do these things changes our ability to sustain a pattern of economic growth or economic regression.

With this in mind, we need to recognize the following:
Demographic trends point to a slow but irreversible decline in all the economies that have led the world during the past 100 years: UK, Germany, Italy, Spain, France and also the US & Canada, with the difference among them being that these last two countries seem to have a better prospect in the long run due to their relatively better ability to absorb immigration and turn immigrants into tax payers.
Europe instead, will be the first and most deeply affected by a set of negative trends: the combination of adverse demographics and an expensive welfare system will short-circuit European economies and lead to long term economic and political decline.

In the USA, the baby boomers starting to retire in the middle of the worst financial crisis in history doesn’t spell sustainable consumer spending, as the following generations just don’t have the sheer numbers to sustain the economy at the same pace as previous generations.
The only hope for countries, like the USA and Canada, which traditionally have been immigration friendly, is to – as fast as possible – integrate new immigrants, who will contribute to renewing “the American dream” and, more importantly, pay taxes. In Europe so far, the integration of new workforce in combination with a rigid and overregulated economic system has failed to produce a new generation of tax payers in high enough numbers to counteract the depletion of the workforce currently in place.

If we fast forward time to 2050, we will see a very different world from that of today. The geopolitical and economic balance of the world is shifting eastward, where a new Silk Road has formed – one that extends from China, across Southeast Asia and India and reaches the continents of Europe & North America but looks more and more to West Africa as a new land of opportunity.
Of particular interest in this context, is the role that India is going to take over the next 2-3 decades. In fact, long term demographic projections (beyond 2040) show trends even more favorable than China, of which we have become accustomed to say: “it will become old before becoming rich”. India shows great fundamentals with a consistently developing internal market.
It is with these irreversible trends in mind that I tour across Europe, the Indian subcontinent and Asia and place the free trade zone as their natural outcome.

The free trade zone (or Special Economic Zones as they are sometimes called), therefore, becomes the answer to two powerful needs:
- The UAE’s need to diversify its economy, in light of the new policy of developing sustainable infrastructure;
- The natural global need for an investor friendly hub that is able to bridge multiple continents: Far East, Middle East/North Africa, Europe.
Investors of all origins cannot ignore the opportunities presented, regardless of their motivations.
Some will be motivated by the need to protect their hard earned assets from their countries’ irreversible need for more taxes and additional fiscal pressure to fund the failing welfare systems.
Some will want to take advantage of the new world order to set up a strategic presence in a global hub.
As I said, regardless of the motivation, the years ahead are bearing the challenges and uncertainties of a paradigm shift. For many, new opportunities will arise, and for others, it will be a different destiny. For us here in the UAE, it is clear: we have embraced the challenge. RAK FTZ is here to move ahead and represent the facilitator and partner needed to sail past the uncertainties and seize the opportunities arising from this newly forming global order.Additional note: By design, my analysis doesn’t touch upon the distribution of wealth among the citizens of each country and doesn’t touch upon quality of life variables, which influence the desirability to live in one country or another; rather, it focuses on the absolute economic relevance of a country within the global landscape.

Additional bibliography:

Purpose of this blog

Dear All,
the posts on this blog are going to relate to the following topics:
  • emerging market economies with a particular focus to the GCC countries and Indian subcontinent;
  • the trade and political relationships between industrialized countries, the so called G7++, and emerging market economies;
  • the rise of a new Silk Road
  • the overall shifting of the global economic and political balance from a North Atlantic exis to an Indo-Chinese one.

Looking forward to use this Blot as a vehicle to exchange idea with other professional operating in this field.

Luca Gorlero