Globalisation of the Transitional Economies of the Greater Mekong Subregion: Trade and Investment Linkages Jayant Menon Principal Economist Office of Regional

Globalisation of the Transitional Economies of the Greater Mekong Subregion:

Trade and Investment Linkages

Jayant MenonPrincipal Economist

Office of Regional Economic Integration Asian Development Bank

International Conference on

Globalisation Trends and Cycles: The Asian Experience, GEP, 12-13 January 2011, KL

The views expressed in this presentation are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank, or its Board of Governors or the governments they represent.

Presentation Outline

Socioeconomic Progress in the Greater Mekong Subregion: 1990-2009

Changing patterns of trade and investment in GMS

Remaining Issues and Challenges - Unfinished Policy Agenda - Reducing vulnerability to shocks

Progress in the GMS

The GMS enjoyed sustained economic growth in the lead up to the Global Financial Crisis in 2008/09.

In real terms, the GMS has grown at a faster pace than the whole of East Asia and the Pacific, with much of this growth coming from the CLMV countries.

This growth has been accompanied by a gradual shift away from agriculture towards manufacturing and services, which now account for a bigger share of value added.

Economic progress has also translated into marked improvements in human development outcomes across the subregion.

Table 1. Economic Growth and Restructuring in the GMS

Country/Region

Real GDP growth (%) Value Added as a % of GDP

(in constant US$2000) Agriculture Industry Manufacturing Services

1990-1994

1995-1999

2000-2004

2005-2008 1995 2008 1995 2008 1995 2008 1995 2008

Cambodia .. 6.9 8.5 9.9 49.6 34.6 14.8 23.9 9.5 16.4 35.6 41.5

Lao PDR 6.1 6.4 6 7.7 55.7 34.7 19.2 28.2 14.3 9.3 25.1 37.1

Myanmar 5.07 7.2 12.9 13.2 60 48.3 9.9 16.2 6.9 11.6 30.1 35.4

Thailand 9.01 1.5 5.1 4.3 9.5 11.6 40.7 44.2 29.9 34.9 49.7 44.2

Viet Nam 7.32 7.5 7.2 7.8 27.2 22.1 28.8 39.7 15 21.1 44.1 38.2

East Asia & Pacific 9.45 3.6 4.1 5.2 19.3 12.2 44.3 47 30.9 32.8 36.5 40.9

Source: World Bank World Trade Indicators 2009/10 and World Development Indicators 2010

Table 2. Socio-economic and Poverty Indicators in the GMS, 1995-2008

Country/Region

GDP per capita (constant 2000

US$)

Infant mortality rate, (per 1,000 live

births)

Literacy rate, adult total (% of people ages 15 and above)

Poverty headcount ratio at $1.25 a day

(PPP) (% of population)

1990 2008 1995 2008

Cambodia 206/1 511 86.3 69.3

67.3 (1998)

77.0 (2008)

48.6 (1994)

25.8 (2007)

Lao PDR227 475 81.5 47.5

60.3 (1995)

72.7 (2005)

55.7 (1992)

44.0 (2002)

Myanmar - - 80.6 70.6

89.9 (2000)

91.9 (2008)

- -

Thailand 1400 2640 21.1 12.5

92.7 (2000)

93.5 (2005)

5.5 (1992)

2.0 (2004)

Viet Nam 227 647 32.9 11.8

90.3 (1999)

92.5 (2008)

63.7 (1993)

21.5 (2006)

East Asia and the Pacific

481 1760 38.9 23.190.6

(2000)93.1

(2008)50.8

(1993)16.8

(2005)/1 Cambodia data for 1993Source: World Bank World Trade Indicators Online, 2009/10, World Bank Development Indicators 2010

Increased openness and economic cooperation have helped spur growth in GMS

Unilateral liberalization in CLMV economies Cambodia in 1985 Lao PDR and Viet Nam in 1986

Membership in economic cooperation and trade agreements ADB’s GMS Program ASEAN, AFTA and WTO Preferential trading agreements (PTAs)

Trade in the GMS: Overall Trends

Unilateral policy reforms and greater economic cooperation have led to positive trade growth in the GMS.

With the exception of Myanmar, trade openness has increased throughout the region, with trade as a percentage of GDP above 100% in Cambodia, Thailand and Viet Nam.

Figure 2. Increasing Trade and Trade Openness in GMS, 1990-2009 (in current US$)

(a) Cambodia

0

2000

4000

6000

8000

10000

12000

14000

0%

20%

40%

60%

80%

100%

120%

140%

Total Trade, in million US$ Trade Openness Trade as % of GDP

(b) Lao PDR

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


(c) Myanmar

0

2000

4000

6000

8000

10000

12000

14000

16000

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


(d) Thailand

0

50000

100000

150000

200000

250000

300000

350000

400000

0%

20%

40%

60%

80%

100%

120%

140%


(e) Viet Nam

0

20000

40000

60000

80000

100000

120000

140000

160000

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%


Sources: IMF Directions of Trade Statistics; IMF World Economic Outlook database

Direction of Trade

Except for Cambodia, the direction of trade over the past two decades suggests a marked expansion in GMS’ countries trade not only with the world, but more particularly among themselves.

Thailand and Viet Nam have shown modest increases in intra-GMS trade, and trade predominantly with the rest of the world, and have more diversified partners.

The share of intra-GMS trade in total trade has been higher for the smaller countries, Lao PDR and Myanmar.

Figure 3. Direction of Trade, 1990-2008

(a) Cambodia

30%

4%

13%

8%

5%

1%

27%

5%4%

11% 11%

8%

14%

1%2%

13%

16%

31%

17%

1% 2%

11%

22%

26%

0%

5%

10%

15%

20%

25%

30%

35%

GMS ASEAN 5 Japan EU PRC US

1990-1994

1995-1999

2000-2004

2005-2008

(b) Lao PDR

51%

0%

9% 7% 7%

1%

61%

0%4%

8%4%

1%

59%

0% 2%

14%

7%

1%

65%

1% 2%

7% 9%

1%0%

10%

20%

30%

40%

50%

60%

70%


1990-1994

1995-1999

2000-2004

2005-2008

(c) Myanmar

1%

7% 8% 9%

26%

3%3%

6%8% 9%

21%

4%

22%

3%5%

9%

18%

6%

35%

2%4% 5%

21%

0%0%

5%

10%

15%

20%

25%

30%

35%

40%


1990-1994

1995-1999

2000-2004

2005-2008

(d) Thailand

1%

6%

24%

19%

5%

16%

1%

8%

20%

16%

6%

16%

3%

9%

19%

13%

10%

14%

4%

8%

16%

11%

13%

10%

0%

5%

10%

15%

20%

25%

30%


1990-1994

1995-1999

2000-2004

2005-2008

(e) Viet Nam

4%

7%

17%

10%

9%

0%

5%

8%

15%14%

9%

3%

5%6%

14%14% 14%

8%

6% 5%

10%

12%

16%

10%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%


1990-1994

1995-1999

2000-2004

2005-2008

Source: IMF Direction of Trade Statistics

Composition of GMS Exports

Changing demand for export products has helped transform the structure of exports from the subregion.

In Cambodia, textiles and garments quotas from the US and EU led to the emergence of an extremely narrow export base dominated by clothing and footwear.

In Thailand, trade in machinery and other equipment comprised almost half of total exports in 2008 due to production fragmentation trade.

In Viet Nam, primary commodities still make up close to 40% of

total exports, but there is a clear shift towards a more diversified export base.

In Lao PDR and Myanmar, there was a similar shift away from primary commodities in 2000. However, this trend has since been reversed due to increased external demand for primary commodities, particularly ores and metals in the case of Lao PDR, and natural gas in the case of Myanmar.

FDI in GMS: Overall Trends

In 2008, total FDI stock in GMS amounted to US$153 billion, or 37% of total GDP. Historically, Thailand has been the largest FDI recipient in the region, but Viet Nam has been catching up in the last couple of years.

Cambodia and Viet Nam have FDI stock to GDP ratios well above the GMS average, with Thailand just slightly below it.

The source country composition of FDI to GMS countries is characterized by a clear (Asian) regional bias.

As for intra-GMS FDI flows, data for 1995-2005 suggest that these have been important sources of capital for the smaller GMS countries, particularly Lao PDR, where they accounted for more than a third of total FDI flows, originating mostly from Thailand.

Figure 6. FDI and FDI Openness in GMS, 1990-2008

(a) GMS

10 13 16 18 22 2733 31

4655 57

6371

8490

100

120

145153

0

20

40

60

80

100

120

140

160

180

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

FDI Stock (current US$) in billions FDI stock as % of GDP

(b) Cambodia

0.0 0.0 0.1 0.1 0.20.4

0.9 1.01.2

1.4 1.6 1.7 1.9 2.0 2.12.5

3.0

3.8

4.6

0

1

1

2

2

3

3

4

4

5

5

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20080%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Cambodia FDI Stock (current US$) in billions Cambodia FDI stock as % of GDP

(c) Lao PDR

0.01 0.02 0.03 0.060.12

0.210.34

0.42 0.47 0.52 0.56 0.58 0.60 0.62 0.64 0.67

0.86

1.18

1.41

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1990 199119921993 19941995 19961997 199819992000 20012002 20032004 200520062007 2008

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Lao PDR FDI Stock (current US$) in billions Lao PDR FDI stock as % of GDP

(d) Myanmar

0.30.5 0.7 0.8 0.9

1.2

1.8

2.7

3.43.7

3.9 4.1 4.24.5

4.8 4.9 5.05.3

5.5

0

1

2

3

4

5

6

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

0%

10%

20%

30%

40%

50%

60%

70%

Myanmar FDI Stock (current US$) in billions Myanmar FDI stock as % of GDP

(e) Thailand

8.2 10.3 12.3 14.1 15.7 17.7 19.713.3

25.531.1 29.9

33.338.4

48.953.2

60.4

77.2

94.1 93.0

0

10

20

30

40

50

60

70

80

90

100

1990 1991 1992 19931994 1995 1996 19971998 1999 20002001 2002 2003 20042005 2006 2007 2008

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Thailand FDI Stock (current US$) in billions Thailand FDI stock as % of GDP

(f) Viet Nam

1.6 2.0 2.5 3.45.4

7.110.1

13.315.6

18.220.6

23.026.1 27.5 29.1

31.133.5

40.3

48.3

0

10

20

30

40

50

60

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20080%

10%

20%

30%

40%

50%

60%

70%

80%

Viet Nam FDI Stock (current US$) in billions Viet Nam FDI stock as % of GDP

Source: UNCTAD World Investment Report 2010

Figure 7. FDI Inflows into GMS Countries by Source Country, 2000-2008

(a) Cambodia

ASEAN , 28%

EU, 6%

Asian NIEs, 22%

Japan, 2%

PRC, 18%

Unclassified*, 5%

USA, 4%

Others , 15.1%

(b) Lao PDR

ASEAN , 22%

EU, 23%

Asian NIEs, 11%

Japan, 4%

PRC, 9%

Others , 30.8%

USA, 0.5%

(c) Myanmar

ASEAN , 16%

EU, 33%

Asian NIEs, 24%

Japan, 1%

PRC, 17%

USA, 6%

Others , 2.5%

(d) Thailand

ASEAN , 26%

EU, 9%

Asian NIEs, 5%

Japan, 34%

PRC, 0%

USA, 4%

Others , 21.5%

(e) Viet Nam

ASEAN , 16%

EU, 18%

Asian NIEs, 28%

Japan, 13%

PRC, 2%

USA, 7%

Others , 15.7%

Source: ASEAN Statistical Yearbook 2008

Figure 8. Share of Intra-GMS Inflows in Total FDI, 1995-2005

5.4%

30.6%

0.1%

2.8%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Cambodia Lao PDR Thailand Vietnam

Intra-GMS FDIInflows Shareof Total FDI

Source: ASEAN (2006). Statistics of Foreign Direct Investment in ASEAN, Eighth Edition

Unfinished Policy Agenda and Reducing Vulnerability

Two general issues considered.Unfinished policy agenda: - trade policy reformReducing vulnerability to shocks: - Diversification of exports and

export markets - Rebalancing growth

Trade Policy Reform

Biggest challenge is dealing with trade facilitation and NTBs

Widely recognized, focus of attention, work ongoing

Should not neglect traditional area of tariff related liberalization since reforms incomplete

Furthermore, growth in FTAs present new challenges in rationalizing tariff structures

Multilateralizing AFTA Preferences

Original ASEAN members have been multilateralizing most of their CEPT tariff preferences.

When fully multilateralized, margin of preference (MoP) is zero, as is potential for trade diversion

In this way, AFTA a building block towards open and free trade


New ASEAN members have not. MoPs in 2007 around 15% in Viet Nam, and

7-8% in Cambodia and Lao PDR Running two-tier tariff (MFN and CEPT)

system on most tariff lines This will increase to at least 6 rates and

then more when the ASEAN+1 and other individual bilateral FTAs kick-in; with as many deadlines and potentially as many RoOs!


Why? Trying to mitigate revenue loss? Unlikely, given trade deflection

opportunities and potential for increased rent seeking behavior

Furthermore, cost of administering two-tier system and implementing RoOs costly and burdensome, given institutional weaknesses and an overstretched customs bureaucracy

Reducing vulnerability to shocks

Diversification of exportsIntra-sectoral diversification more viable

and less costly than inter-sectoral diversification

Can be mostly accommodated by factor transfer within export-oriented industries

Consider activities related to agro-processing eg. rice milling, before cars and planes!

Rebalancing Growth

GFC highlighted the need to rebalance growth from foreign to domestic sources

China should, and maybe Thailand, but what about other GMS?

Despite growing exports, net exports contribution to growth still small or negative

As capital importing countries, most run trade & current account deficits

Thank you!Thank you!For inquiry or comments, please

contact:

Jayant Menon Principal Economist, OREI Telephone: (63-2) 632-6205Email: [email protected]

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Globalisation of the Transitional Economies of the Greater Mekong Subregion: Trade and Investment Linkages Jayant Menon Principal Economist Office of Regional