New milestones on the Silk Road

By Dominic Barton
Financial Times

December 24, 2007

Baron Ferdinand von Richthofen, the German historian and geographer, coined the expression “Silk Road” 130 years ago to designate the well-worn path between China and the West via Damascus.

He chose silk as symbolic of the exotic and highly prized goods China allowed to flow from its centers to barbarian lands.

Today, no single commodity could claim exclusive naming rights. The “new Silk Road” — shorthand for the revitalized trade between the Middle East and China — carries steel, telecom equipment, oil, humans and financial capital, and more besides.

The trade flows both ways, driven by the Persian Gulf’s appetite for infrastructure, agriculture, education, healthcare and information technology, and China’s thirst for Middle Eastern oil and capital.

How wide is this metaphorical roadway?

Trade between the Middle East and China last year totaled $69 billion, up from $6 billion in 1995. In 2000, there were only seven direct flights a week from the six Arab states in the Gulf Cooperation Council to China. Now there are 50 flights.

Trade and investment between the two regions receive considerable coverage in newspaper columns: China’s Sinopec Corp. invests as much as $100 billion in Iran to help secure an energy supply; Dubai-based Damac Holding is building a $2.7-billion residential, office and leisure complex in Tianjin, China.

These are long-term strategic investments, not mere portfolio plays.

There is more to come. China is expected to have $1 trillion of infrastructure needs over the next five years. Saudi Arabia’s infrastructure needs over the next 10 years are forecast at $650 billion.

Whereas the old Silk Road traditionally ended at Damascus, its new namesake is beginning to break trail into North Africa and beyond, a trading region known as MENA, for Middle East and North Africa. Again, the growth of direct flights between the regions is a telltale sign. In 2000, there were 293 direct flights a week from the Middle East to Africa; now there are 554.

As global demand for commodities continues to rise, the world has awoken to Africa’s rich natural resources.

Private capital flows to sub-Saharan Africa are still dwarfed by those to regions such as Asia, but have trebled since 2003.

According to International Monetary Fund statistics, total gross private flows in 2006 were about $45 billion — almost 6% of Africa’s gross domestic product and up from about $9 billion in 2000.

Dubai, which was never part of the old Silk Road, is hard at work positioning itself as the key junction of the new version. The opening of the Jebel Ali freeport in 1979, which preceded the diversification of Dubai’s economy into tourism and telecom, has led many roads to Dubai.

The desire for a concrete overland route from Asia to Europe and Africa is very real. Overland options, such as the trans-Siberian railway, have existed for many years but still move only a tiny fraction of cargo.

A much-discussed “Iron Silk Road,” running from South Korea through North Korea to link up with the trans-Siberian, could arguably take good advantage of South Korea’s ports.

Meanwhile, China is constructing 12 highways to link its western Xinjiang province with Central Asia. These could one day link up with the United Nation’s Asian Highway Network, connecting 32 Asian countries with Europe.

Last month, members of the Central Asia Regional Economic Cooperation program agreed to an $18.7-billion plan, supported by the Asian Development Bank, to improve Central Asia’s network of roads, airports and railway lines, with the hope of creating a trade route between Europe and Asia.

Even in the days of the old Silk Road, some goods were too bulky or heavy to transport overland. So it is today. Until container ships are replaced by direct oil pipelines or equivalents, there will always be a need for shipping routes.

Whether these will continue to run through Singapore and the Straits of Malacca and the Suez Canal or newer, shorter routes through an ice-free Arctic Sea that would link northeast Asia with northern Europe, only time and climate change will tell.

Dominic Barton is chairman of McKinsey & Co., Asia