On November 21, the presidents of Turkey, Azerbaijan and Georgia inaugurated the construction of the Baku-Tbilisi-Kars (BTK) railroad in Marabda, South Georgia. Linking Baku in Azerbaijan with Kars in eastern Turkey via Tbilisi in Georgia, the railroad is scheduled to be completed in 2009-2010 and will transport goods, especially oil and passengers.
According to Pinr.com, the project includes construction of a 29-kilometer segment in Georgia and a 76-kilometer segment in Turkey. There are plans to extend the railroad corridor to Europe once a tunnel under the Istanbul strait becomes operational around 2012. According to Azeri officials, Kazakhstan and China are interested in the project, as the new railroad would allow them access to Europe faster than the existing trans-Siberian route.
The BTK railroad is far from being an isolated project in the Eurasian context. After the breakup of the Soviet Union, the increase in trade between the former Soviet states and the need for new outbound intra-continental transportation corridors have prompted landlocked states to seek various forms of cooperation in developing a transnational infrastructure.
For Central Asian states, road and rail transportation corridors are indispensable vectors of regional and global integration. It also means manpower mobility, increased communication and cooperation among cultural communities and businesses.
It seems that 2007 was the year of a renewed interest in the revival of the old projects, in addition to new transnational initiatives backed by a complex mesh of geopolitical, national and economic interests that are emerging throughout the Central Asian and Caspian regions.
China and seven other Central Asian states announced in November a plan to build a modern version of the ancient Silk Road, which will include a network of highways, airports, rail lines and seaports connecting China with Western Europe.
It was clear from the early stages of the project that Yerevan would oppose a transportation corridor that continues to isolate Armenia, consequently reinforcing its dependence on Georgia and Iran. Given the tense situation in Nagorno-Karabakh, there are fears that the future railroad could be used to carry military equipment and weapons from Turkey to Azerbaijan. Even if Georgia’s participation is not appreciated in Yerevan, it appears unlikely that this new trilateral project will undermine future cooperation between the two countries.
Armenian leaders insisted that the existing railroad between Kars and Gyumri in northeast Armenia would offer the best option. The railroad has been closed since 1993 when, after the Nagorno-Karabakh conflict, Turkey closed its border with Armenia.
Initially, Armenia managed to produce a standstill. In 2005, the Parliamentary Assembly of the Black Sea Economic Cooperation (PABSEC) supported Armenia’s proposal to reopen the railroad link with Turkey.
Azerbaijan and Turkey are strongly opposed to Armenia’s participation in regional projects and asked Yerevan to withdraw its troops from Azerbaijan as a precondition for joining the project. Yet, there is practically no chance that in the foreseeable future Armenia will accept such a request.
The railroad, estimated to bring $50 million annually, is part of Azerbaijan’s strategy of becoming a key segment of the transportation corridors on both the east-west and north-south axes. As the shortest way westward through Armenia is closed for an indeterminable period of time, Azerbaijan is maximizing the access to transport corridors via Georgia.
Given its pivotal role in the area, Azerbaijan wants the railroad to become a catalyst for increased regional integration and to foster trade and foreign direct investment. Moreover, the new railroad will allow Central Asian and Caucasus states to connect with Europe, bypassing Russia.
Tbilisi hopes that the railroad will contribute to the economic development and stability of the turbulent Javakheti region where the population is predominantly Armenian. The local economy is now threatened after it was largely dependent on a Russian army military base, closed last November.
Although it is too early to predict how the future “iron“ Silk Road will look, it seems that Russia will remain well positioned to play a major role on both the north-south and east-west axes.
The BTK railroad is a small but key segment of the emerging transcontinental corridor that may encourage other former Soviet states to settle their disputes and join in. At the moment, the railroad is rather a signal to Russia than a challenge to its domination over the railroad networks between East and West. As a reaction, Russia will likely increase the pressure on Georgia; it will try other alternate routes to Iran via Azerbaijan, while bringing Armenia closer to Iran.
Although the three presidents present at the inauguration hailed the project as a “geopolitical revolution,“ and a key contribution to the security of the region and even of the world, there is still a long road ahead until the region can achieve this level of security.

Skill-based technical progress and the transition from agriculture to industry appear to be the main forces shaping income distribution in Asia.

Today, Asia is among the star performers in the global economy. The region found strength in no small part by turning crisis into opportunity.
As reported by the International Monetary Fund (IMF), the testing times of the late 1990s have rekindled a sense of regional identity and shared economic destiny. Regional policy forums have taken on renewed importance. Policy cooperation is gaining traction, and initiatives like the Chiang Mai network of bilateral swap lines among Asian central banks, which is now being converted into a reserve-pooling arrangement, and the Asian Bond Fund project provide a welcome measure of self-insurance and commonality of purpose. In addition, intraregional trade has grown rapidly, with the development of complex supply chains centered on China.
At the same time, Asia has not turned its back to the outward-looking orientation that propelled its spectacular rise on the world’s economic stage. Intraregional commerce is so far complementing global trade. With deepening financial and trade connections inside and outside the region, Asia’s economic vitality 10 years after the crisis stands out. The countries that were most affected by the crisis have made good progress in laying solid foundations for continued growth and their medium-term prospects are bright.
What lies behind their success? The key to today’s dynamism has been nimbler macroeconomic policy frameworks and comprehensive reforms in the financial and corporate sectors. More flexible exchange rate regimes have cushioned external shocks and an impressive war chest of official reserves has been built up; inflation targeting has provided a monetary anchor in many cases; and fiscal policies have taken on a longer-term perspective to safeguard debt sustainability.
As for structural reforms, measures to deal with the immediate strains in the financial system have been complemented by steps to address the underlying weaknesses. Mechanisms to facilitate financial restructuring are now in place, regulatory and prudential frameworks have been upgraded, and corporate governance has been strengthened. More work lies ahead, but financial institutions and corporates in Southeast Asia have, on the whole, regained a solid footing.
While the hardest-hit countries were busy cleaning up the legacies of the crisis, the rest of Asia was not standing still. China and India have made further strides as regional powerhouses, the Philippines has weathered bouts of turbulence and gained considerable resilience, Vietnam has burst onto the global economic scene, and Japan has finally extricated itself from its “lost decade“ and entrenched deflation.
So what is ahead for Asia? Much will depend on whether it can tackle a number of issues over the medium term. While priorities differ across countries, a common theme stands out--coping with globalization and harnessing the tremendous upside it could deliver.
Over the past decade, inequality has risen steadily across the region. For example, China displays now a more skewed income distribution than the United States or Russia. Even Japan, once the poster child of a fairly equalitarian society, is today more unequal than the average industrial country.
The causes of Asia’s growing disparities are complex. Several factors may be at play, but skill-biased technical progress in the more advanced economies and the transition from agriculture to industry in developing ones appear to be the main forces shaping income distribution in the region.
Globalization is of course providing the broader context for the changes in technology and patterns of production that are at the root of differential wage and sectoral developments. Besides ethical or social implications, worsening inequality is a concern for economic policymakers.
If unattended, growing disparities could strain social cohesion and undermine the support for further engagement in the global economy, in spite of great potential benefits.
More broadly, tears in the social fabric could lead to inferior economic outcomes--namely, lower long-term growth, macroeconomic instability, and dwindling room for maneuver when adverse shocks occur.
Asian policymakers are looking for ways to stem the trend. Growth holds out the greatest promise for lifting the poor out of poverty and providing better opportunities to the disadvantaged.

One of the most common misunderstandings about economics is the notion that currencies are yardsticks for wealth, power and glory of a country. As if a nation was better off with a strong currency than with a weak one.
As reported by Forbes.com, the reality is much more complex. In the years of the ’Wirtschaftswunder’ (German for “economic miracle“), when West Germany was rebuilt after World War II, the Deutschemark was constantly undervalued, which made it part of its success story. After World War I the British authorities tried to make the pound as strong as it was before 1914, a terrible mistake that contributed significantly to the Great Depression.
Today the dollar is extremely cheap by historical standards. Measured by the famous Big Mac Index of the Economist, the US currency is undervalued by more than 22 percent. With a bit of tongue-in-cheek you can use the cost of a Big Mac to measure the purchasing power of a currency.
For the US economy that means no disaster at all, just the opposite. The weak dollar might help the country regain strength, provided there is no panic or real hard landing of the exchange rate. And provided Washington and Wall Street draw the right conclusions and also do not panic.
Exchange rates are, effectively, prices. As such they reflect the opinions of sellers and buyers of a currency. Obviously views of the dollar have been bearish for months. There is kind of an opinion poll going on in the markets, and investors seem to be deciding that there are many more arguments against bringing money to the US than the reverse.
There is a non-trivial risk of a US recession next year. US interest rates are being lowered, at least gradually, the subprime mess is damaging the financial industry and the trade deficit has reached an unsustainable level of 6 percent of gross domestic product. Maybe even the current weakness of the outgoing Bush administration plays a role in this drama.
As always, a falling currency is an indicator of problems, but it’s also part of the solution. The most obvious consequence is its direct effect on trade. A cheap dollar makes US products and services more competitive and therefore boosts American exports. The trade deficit already is shrinking.
Maybe even more important are the indirect effects of currency movements. Prices not only contain important information. They contain also, as the economist Friedrich Hayek put it, a strong motive to act. Therefore the fall of the dollar brings some powerful messages for Washington and Wall Street:
First, clean up the subprime mess. The new private sector alliance, Hope Now, brought together by Secretary Hank Paulson, is an important first step. It will help some 300.000 homeowners prevent foreclosure and send a calming signal to the financial markets.
But there is much more to be done. America needs a reform of regulation, at least in the mortgage industry, in order to re-establish responsible lending practices. Wall Street has to reinstall best practice standards in risk management and lending. Some banks will also need infusions of cash. To put it more generally: America can stand a trade deficit. But it’s vital for the country that its financial sector remains healthy and attractive for the rest of the world.