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Support for Implementing the Action Plan for Transport and Trade Facilitation in the GMS:

Scoping Study on Developing Border Economic Areas and

Cross-border Linkages Between Thailand and its Neighbours

Revised June, 2014

Prepared for the Asian Development Bank, Thailand Resident Mission

George Abonyi* Anthony M. Zola

George Abonyi (gabonyi@gmail.com), Team Leader, is Visiting Professor, Dept. of Public Administration and International Affairs, and Executive Education Program, Maxwell School, Syracuse University; Anthony M. Zola is a Laos and Thailand-based consultant and Senior Researcher, Mekong Environment and Resources Institute (MERI). Research assistance for the case studies provided by Mr. Eggaluck Suwannakarn, Senior Researcher, Fiscal Policy Research Institute (FPRI), Bangkok.

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CONTENTS

Page CURRENCY EQUIVALENTS ABBREVIATIONS Executive Summary I. Border Area Development: Special Economic Zones (SEZ) and Beyond 10 1. Introduction 10 2. Overview: border area development 10 3. Special economic zones in Asia and the 12 Greater Mekong Subregion 4. SEZ: lessons from international and GMS experience 18 II. General Conclusions from the Case Studies 22 1. Brief description of the border areas in case studies 22 2. General conclusions 24 III. Case Studies 26 A. Border economic zone and agribusiness linkages at 26 Ubon Ratchatani (Thailand) and Champasak (Lao PDR) B. Toward cross-border economic zones and value chain linkages 43 at Mae Sot (Thailand) and Myawaddy (Myanmar): case study C. Border economic zones at Sa Kaeo (Thailand) - Banteay Meanchey 61 (Cambodia); Trat (Thailand) - Koh Kong (Cambodia)

References 82

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CURRENCY EQUIVALENTS (as of 27 June 2014)

Currency Unit Baht (B)

B1.00 = $0.0308 $1.00 = B32.4580

ABBREVIATIONS

ACMECS - Ayerwaddi - Chao Phraya - Mekong Economic Cooperation Strategy AEC - ASEAN Economic Community AFTA - ASEAN Free Trade Area ASEAN - Association of Southeast Asian Nations AISP - ASEAN Integration System of Preferences BEZ - Border Economic Zone BOI - Board of Investment (of Thailand) CBEZ - Cross-border Economic Zone CBTA - (GMS) Cross-Border Transport Agreement CCA - Customs Controlled Area CCQ - Customs, Immigration (controls), and Quarantine CLMV - Cambodia, Lao PDR, Myanmar, and Viet Nam CP - Charoen Pokphand CMP - Cutting, Making, and Packing EWEC - East-West Economic Corridor (GMS) FDI - Foreign Direct Investment FTA - Free Trade Agreement GDP - Gross Domestic Product GMS - Greater Mekong Subregion GSP - Generalized System of Preferences IPP - Independent Power Producer IZ - Industrial Zone (Myanmar) JCBD - Joint Committee (Thailand-Cambodia) on Border Area Development and Connectivity JPPCC - Joint Public-Private Sector Consultative Committee Lao PDR - Lao Peoples Democratic Republic MOU - Memorandum of Understanding OBM - Original Brand Manufacturing ODM - Original Design Manufacturing OEM - Original Equipment Manufacturing OSS - One Stop Service PPP - Public Private Partnership PRC - Peoples Republic of China SEC - Southern Economic Corridor (GMS) SEZ - Special Economic Zone SME - Small- and Medium-scale Enterprises

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Executive Summary I. Context Thailands national development strategy includes a focus on border areas, with particular emphasis on strengthening cross-border economic linkages, especially with neighbouring Greater MekongSubregion (GMS) countries. This is intended to support the competitive performance of Thai firms, and the development of local communities. More generally, effective collaboration through increased economic linkages in border areas can support the development of all the participating countries by developing local communities, and also serving as gateways for the wider domestic economy. A key objective of less developed GMS economies such as Myanmar, Cambodia and Lao PDR, is product/market diversification, initially through labour-intensive activities and industries, aimed at regional and global markets. A key objective of Thailand, a more developed economy that is losing comparative advantage of low labour costs, is upgrading to more capital-, skill-, and knowledge-intensive activities and industries. Therefore strengthening cross-border economic (e.g. production) linkages through effective development of border areas can bring benefits to all participating economies. II. Mechanisms for border area development Consistent with Thailands national development strategy, an important dimension of GMS cooperation has involved a focus on special economic zones (SEZ), including in border areas. However, border area development for exploiting local and cross-border advantages can take broadly 3 different forms: (1) special economic zone (SEZ); (2) border economic zone (BEZ); and (3) cross-border special economic zone (CSEZ).

Special economic zone (SEZ) is a formally incorporated geographic area that has certain general characteristics such as single management or administration; well defined geographic boundaries; eligibility of businesses located there for various benefits such as tax incentives, access to specially provided infrastructure services within the zone; and often a separate customs area and streamlined procedures. In the case studies, this may be a most effective mechanism for developing Mae Sot, particularly in the context of Myawaddy (Myanmar).

Border economic zone (BEZ) is an area that uses effectively linkages with

economic activities across the border. It should be guided by a clear and coherent vision and strategy, but need not involve a formal special economic zone with separate administration, regulations, and services. The goal is to develop the comparative advantage of a given area, leveraging economic developments across the border, for example, focusing on specific value chains; and strengthen related cross-border linkages, e.g. customs procedures, logistics services, access to labour. In the case studies, this exists in Ubon Ratchatani; and may be appropriate for developing border areas in Trat and Sa Kaeo, given the goals of local communities, and local constraints and opportunities.

Cross-border special economic zone (CSEZ) is established in close collaboration

by two (or more) governments, with synchronized rules and regulations, for example related to trade, investment, and customs. It involves creating an interdependent operational and administrative environment for business on both

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sides of a border. In principle, a CSEZ builds on viable SEZs in the respective countries. This requires agreements related to specific cross-border linkages between two adjacent SEZs. There are no examples in the GMS, although there has been an initiative to establish what is referred to as a Cross-Border Economic Zone (CBEZ) along the North South Corridor between Hekou in Yunnan Province, PRC, and Lao Cai in Viet Nam. This form of border economic development may be very effective for collaborative development of Mae Sot (Thailand) and Myawaddy (Myanmar) to support cross-border mutually beneficial linkages in labour intensive value chains or industries, particularly garments.

III. Case Studies The key conclusions with respect to the case studies may be summarized as follows: Ubon Ratchatani (Thailand) Champasak (Lao PDR): This involves well-functioning border economic areas and related cross-border cooperation, that creates a viable border economic zone (BEZ). Lao PDR provides labour, commodities and some processing; and Thailand provides higher value added processing and related services (e.g. logistics). The interests of the participating countries and communities are strategically and operationally relatively well aligned. The challenge, at this stage, is to strengthen and expand what is already there. For example there are opportunities to further strengthen connectivity (e.g. transport linkages) through coordinated investment; to expand existing trade, for example by building on Ubons Charoensrie Market as a regional commodity hub; and through more effective involvement of key stakeholders, for example government and business, including through public-private collaboration (PPP) and related to that, greater authority to the GMS Governors Council. Mae Sot (Thailand) Myawaddy (Myanmar): There are significant opportunities but also challenges for developing this border area in a way that builds on the comparative advantages of the two economies. There is strong interest at all levels in Thailand to develop a Mae Sot SEZ. But it seems to lack a coherent and shared guiding vision and strategy; and therefore the appropriate implementation mechanism is also not clear, e.g. what kind of SEZ. The basic challenge is to define a clear, coherent shared vision and collaborative strategy for cross-border cooperation and development. The case analysis suggests that such a vision and strategy could focus on complementary and linked development of labour-intensive industries, in particular garments. This could be an effective and sustainable response to broader development challenges and priorities in both Myanmar and Thailand. It could be implemented through collaborative development of linked SEZs to form a cross-border special economic zone (CSEZ), including in-bond processing system, supported by appropriate infrastructure and border procedures. Sa Kaeo (Thailand) Banteay Meachey (Cambodia), and Trat (Thailand) Koh Kong (Cambodia): The Thai and Cambodian governments, and local communities all have strong interest in developing these border areas. The basic constraint to date, and that could significantly hinder future development and cross-border linkages, is apparent key differences between the visions and aspirations of the local communities (Trat, Sa Kaeo), and the perceived preferred strategy and related implementation mechanism (SEZ) of the Thai central government. The local (business) communitys vision for development focuses on leveraging cross-border linkages through trade-related services, value added agro-processing (including bio-energy), and tourism. Industrial (e.g. manufacturing) development through SEZs is seen as neither feasible, given local

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constraints such as land (particularly in Trat), nor fitting with local aspirations for development. The basic requirement for successful cross-border collaboration therefore is to first reconcile conflicting visions and strategies for local development. Depending on the strategy selected, the implementation mechanism may also take different forms. For example, it could involve an SEZ, if suitable for agro-processing or for services such as logistics; or a more informal border economic zone (BEZ), strategically focused on particular cross-border linkages, as in Ubon. Furthermore, the location of this area on the GMS Southern Economic Corridor could provide opportunities for wider subregional development and linkages, for example through expanded logistics services.

IV. General conclusions from the case studies for border area development Specific recommendations with respect to the border area development include relatively wellunderstood requirements such as strengthening local infrastructure, and upgrading trade facilitation factors (e.g. customs facilities and procedures). The history of GMS cooperation suggests that although such issues are well known, addressing them operationally can be challenging, and success varies with local conditions and constraints. Beyond this, a number of more fundamental conclusions emerge from the case studies, consistent with international experience. These include:

Clear and coherent vision and related strategy of border area development, anchored in local conditions, is essential: The starting point for the viable and sustainable development of border areas, particularly in the context of cross-border economic linkages, is a clear and coherent vision and strategy for development. This has to reflect both local and national interests; needs to be anchored in local conditions (constraints and opportunities); and consider potential spillovers to the wider domestic economy. The cases of Mae Sot (Thailand) Myawaddy (Myanmar); Sa Kaeo (Thailand) Banteay Meanchey (Cambodia); and Trat (Thailand) Koh Kong (Cambodia), all illustrate the importance of this issue for border area development and cross-border linkages.

Strategy focused on specific (cross-border) value chains: A viable and

sustainable strategy of developing particular border areas should also focus on strengthening cross-border linkages in specific value chains of joint interest, consistent with local conditions. This builds on recognition that constraints facing firms in the garment value chain or industry are likely to differ in important ways from those facing firms in electronics or agro-industry, for example with respect to needed logistics and skills. It is not clear the proposed Mae Sot or Trat SEZ has such focus; and this may be contributing to uncertainty, and constrain future viability. Furthermore, it is important to be imaginative in formulating such a strategy. The minimum wage of Baht 300/day may seem to suggest that Mae Sot is no longer viable for garment production. However, the case analysis presents a strategy for the joint development of Mae Sot (Thailand) Mywawaddy (Myanmar) based on cross-border linkages in the garment value chain.

Collaborative development of a shared vision and strategy: It is essential to align

the visions and strategies of key stakeholders with respect to border area development. This vision and strategy should reflect the aspirations of the local community; and should also be consistent with broader national development priorities. Otherwise it will be resisted by key stakeholders, and will be difficult to

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implement. This is reflected in the experience in Sa Kaeo and Trat, (and perhaps Mae Sot), where developing a shared vision and strategy is a pre-requisite for both viable local development and effective cross-border linkages.

There is a diversity of mechanisms for border area development and cross-

border cooperation: A SEZ is not the only option for implementing a strategy of border area development. In some settings the focused but more informal approach of a Border Economic Zone (BEZ) may be more appropriate. This is reflected in the Ubon Ratchatani (Thailand) Champasak (Lao PDR) case; and may also be an effective option for addressing constraints and opportunities in Trat. The Mae Sot (Thailand) Myawaddy (Myanmar) case illustrates possible application of the alternative mechanism of cross-border special economic zone (CSEZ), involving the collaborative linking of SEZs on each side of the border, focused on cross-border linkages in the garment value chain.

Align selected strategy and implementation mechanism with the neighbouring

countys development strategy and local conditions: Since the focus is on cross-border linkages for mutual benefit, which require collaboration in various forms, strategies and mechanisms of participating countries must be aligned from the outset. This is essential to guide more specific subsequent decisions to ensure complementarity. For successful development of Trat and Koh Kong, a shared cooperative strategy between Thailand and Cambodia, including the local communities, is necessary to guide specific decisions addressing issues such as infrastructure investment and trade facilitation measures. Similarly, for a Mae Sot Myawaddy CSEZ, Thailand and Myanmar (and the local communities) have to align their strategies and implementation mechanisms from the outset, to ensure viable and sustainable cross-border development.

Approach cross-border economic development, where possible, in the context of

wider subregional (e.g. GMS) cooperation and integration: Developing border areas and cross-border linkages within the wider context of subregional cooperation can provide significant additional benefits; and in turn, facilitate such wider cooperation and development. For example, cross-border cooperation in logistics in Sa Kaeo (Thailand) Banteay Meanchey (Cambodia), and Trat (Thailand) Koh Kong (Cambodia), could accelerate implementation of linkages along the GMS Southern Economic Corridor with additional benefits to the border areas and beyond. Similarly, a Mae Sot (Thailand) Myawaddy (Myanmar) CSEZ can link development to the GMS East West Economic Corridor (EWEC).

V. SEZ: lessons from international and GMS experience, and case studies Given the extensive use of SEZs in border area development, it is useful to summarize key lessons from international and GMS experience:

1. Special economic zones must be special: Successful SEZs offer investors something significantly different from and better than what is available in the rest of the economy, not just marginal improvements. The exact characteristics of SEZs depend on their goals. For example, a Mae Sot SEZ may (should) differ in important ways from a Sa Kaeo SEZ, if they aim to attract mostly different industries (e.g. garments vs. agro-industry). International evidence indicates that SEZs are likely to be most successful when they are targeted at particular value

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chains or industries, and offer concrete and efficient solutions to the specific competitive challenges faced by firms in those value chains.

2. Global -- or regional -- competitiveness is what counts: Being better than the

host domestic economy is unlikely to be sufficient for viable and sustainable SEZs. Investors, especially foreign investors, have a wide range of choices, and select particular SEZs for a variety of different reasons. A wide range of factors is considered in investment decisions, including location, market access, logistics, trade facilitation, and stability of rules and regulations. It is the overall contribution of an SEZ to competitiveness in particular value chains that is critical; and these are largely dependent on the competitive dynamics of the specific value chains. Few investment decisions are made on the basis of financial incentives alone. The relevance of this general issue is illustrated in the context of Banteay Meanchey (Cambodia), where logistics costs and time are important constraints.

3. SEZs are not the best instrument to solve the problems of poor regions: SEZs

are often established as a means for developing poorer regions of a country. This is also reflected in the experience of the GMS. These are generally some of the least successful SEZs. Regions are usually poor because they lack key factors for development such as infrastructure, access to markets, or labour skills. It requires extensive investment and/or subsidies to overcome such constraints. It is generally very difficult to compensate for such shortcomings in a way that is economically viable or sustainable, particularly if the costs are to be recovered.

4. The rest of the domestic economy also has to work: Although SEZs are

specific and bounded geographic areas, their contributions to national development will be severely limited if they are isolated islands in an economy. The more supportive or business friendly the surrounding environment, and the more such external linkages are consistent with business performance, the more an SEZ is likely to contribute to the wider domestic economy. This specific issue, and the more general relationship between an SEZ and the domestic economy is reflected in the experience to date of Cambodian SEZs (Section III.C).

5. SEZs should have clear, coherent and viable business and economic

rationale, anchored in local conditions: SEZ design has a great deal of flexibility, and can offer tailored responses to local business constraints and opportunities. The key is for an SEZ to help address specific constraints that limit the growth and performance of particular value chains or industries in the domestic economy. For example, in a low income and low productivity and long isolated economy such as Myanmar, an SEZ at Myawaddy should focus on addressing the needs of labour-intensive industries, involving lower skill activities in particular global value chains such as garments and electronics. In a more developed economy such as Thailand, an SEZ at Mae Sot, could focus on the needs of more knowledge intensive activities in particular value chains, that strengthen the capacity for innovation for regional (AEC) markets, while leveraging lower cost labour in through focused linkages with Myawaddy.

6. For economies where labour is a key resource, the costs and flexibility of

employment matter: This is largely the case in the CLMV countries, where SEZs have to address the particular needs of labour-intensive industries. Factors such as wages, flexible labour markets, and laws governing work, have to allow firms

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to respond to changing competitive pressures, which are particularly intense in low skill, labour intensive activities and industries. It is also important to ensure appropriate working conditions, both for improving quality of life in local communities, and in response to demands of global markets for proper labour standards. Labour intensive activities and industries require more than unskilled workers. They also need cost-efficient and reliable services (e.g. logistics) and inputs, and a level of skilled workers, which may have to be supplied initially from abroad. Koh Kong (Cambodia), and Myawaddy (Myanmar), provide examples.

7. SEZs need clear, credible and consistent political commitment at the highest

levels: SEZs involve a number of government-linked agencies and enterprises to provide needed support, services, and enabling conditions. This requires clear, credible and consistent commitment from the highest levels of government to ensure that businesses feel assured the basic strategy for the SEZ, and related policies and rules, will be sustained over the longer term. Mae Sot, Sa Kaeo and Trat all seem to be government priorities. Yet expressed support is not seen by the local (business) communities as sufficiently clear, credible, and consistent.

8. The most successful SEZs are public-private partnerships: Government owned

and operated SEZs have had generally limited success. International experience suggests that the governance structure for successful SEZs requires effective collaboration between the public and private sectors. Governments role is to formulate policy and strategy, make and enforce laws and regulations, and provide key public goods. The private sectors role is to develop and operate SEZs, including master planning, investing in real estate and services, undertake construction, manage operations, and market the zone to investors. This division of roles and labour reflects the comparative advantages of the partners. This is generally the pattern followed in the GMS, though with mixed results.

9. Effective investment promotion agencies are a key part of a viable SEZ

strategy: SEZs are most successful when investment promotion agencies can attract appropriate FDI. This includes delivering on promises, such as one-stop-shops that involve a variety of government-related agencies. Furthermore, the nature of FDI is changing. In the fragmented world of global value chains and related production networks, less visible contract manufacturers such as Flextronics, and international suppliers such as Li & Fung, are key players organizing international production and sourcing. Effective investment promotion agencies therefore play a more focused and proactive role. This begins with a clear understanding of differing structures and competitive dynamics of particular value chains and industries (e.g. garments, electronics), and targeting for particular SEZs firms with key and leading roles in specific value chains.

10. SEZs should fit with local conditions, and local communities vision of

development: For a viable and sustainable SEZ, and one that is more than an isolated island, it must have local community support, and fit with local needs, constraints, and aspirations. Unless this is the case, it may be difficult to initiate or sustain an SEZ. This is reflected in the cases of Sa Kaeo and Trat, and also Mae Sot. Successful development of these areas requires mutual understanding and alignment of the development visions and strategies of key stakeholders; and on that basis selecting appropriate implementation mechanisms, which will shape the design of an SEZ, or alternatively, may not involve an SEZ at all.

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I. Border Area Development: Special Economic Zones (SEZ) and Beyond 1. Introduction Thailands national development strategy includes a focus on developing border areas, with particular emphasis on strengthening cross-border economic linkages, especially in the Greater Mekong Subregion (GMS). This is intended to support the competitive performance of Thai enterprises, and the development of local communities. Consistent with Thailands development strategy, an important dimension of GMS cooperation has included a focus on special economic zones (SEZ), including in border areas. Such initiatives are seen as important for strengthening subregional economic integration to support the growth of participating countries, and to facilitate local development. Experience to date with border SEZs in the GMS, however, has been very uneven at best. Although there have been many such planned SEZs, relatively few have been implemented to date. Furthermore, existing border SEZs have generally been far less effective than had been hoped in their contribution to facilitating cross-border economic integration and strengthening linkages to external markets; and more generally in their contribution to subregional economic growth and local development. Building on a review of the literature, interviews, and four (4) case studies, the purpose of this scoping study is to identify key issues that should be considered in developing viable and sustainable border and cross-border economic zones to strengthen Thailands economic linkages with neighbouring countries. This has potential implications for wider GMS cooperation and development, an issue not directly addressed in this study. As a scoping study, the case studies are intended to identify key issues for further and more detailed analysis (e.g. through feasibility studies). The organization of this report is as follows: Part I presents an overview of border area development, including the role of special economic zones (SEZ), and with particular focus on the GMS experience. It summarizes key lessons from international and GMS experience; but suggests that SEZs may not be the only or even the most appropriate mechanism for border area development, particularly in the context of fostering cross-border economic linkages. Part II reverses the usual organization of such reports by first summarizing key general conclusions from the four case studies. Part III then presents a discussion of the four case studies that are the source of these conclusions, namely1: (1) Ubon Ratchatani (Thailand) Champasak (Lao PDR); (2) Mae Sot (Thailand) Myawaddy (Myanmar); and two on the Thai Cambodia border (3a) Sa Kaeo (Thailand) Banteay Meanchey (Cambodia); (3b) Trat (Thailand) Koh Kong (Cambodia). 2. Overview: border area development 2.1 Rationale From an economic perspective, a border is basically a barrier to the free mobility of production inputs, including: labour, capital, technology, and information. This results in differences in available supply, and therefore factor prices across borders. In principle, 1 Preparation of the case studies included field visits to the Thai side of the border and to Ubon Ratchatani (Lao PDR); but did not include visits to Cambodia and Myanmar.

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economic activity along the border can expand more efficiently and quickly by combining complementary inputs to produce cost-competitive products and services. Border areas between relatively less-developed and more advanced economies can therefore provide their respective complementary inputs for mutual benefit. For example, Myanmar and Cambodia can provide lower-cost labour and land, while Thailand can offer other inputs (materials, parts, and components), technology, capital and information (e.g. on external markets) for the complementary development of production. In this context, border areas in the relatively less-developed economies, such as Myanmar and Cambodia, constrained by high service-link costs (e.g. transport) and unstable utility services (e.g. power) can, in principle, take advantage of the higher-level infrastructure (e.g. transport, power, telecommunications) in the more advanced economy, Thailand; and gain access to international transportation hubs, for example Bangkok and Laem Chabang ports. This can provide a complementary, and potentially more effective strategy for developing border communities than focusing only, or even primarily, on strengthening domestic internal linkages to central areas of the respective economies. Effective collaboration through increased economic linkages in border areas can support the development of participating countries. A key objective of less developed GMS economies such as Myanmar, Cambodia and Lao PDR, is product market diversification, initially through labour-intensive activities and industries, aimed at regional and global markets. A key objective of Thailand, a more developed economy that is losing its comparative advantage of low labour costs, is upgrading to more capital-, skill, and knowledge-intensive activities and industries. Therefore strengthening cross-border economic (e.g. production) linkages can bring benefits to all the participating economies. In addition to leveraging locational advantages for the development of border communities, such areas can also serve as gateways for the wider domestic economy. They can provide access to international input and end markets, for example by linking to regional and global value chains and related production networks. This, in turn, can be the basis for spreading development to the wider economy through spillovers, such as linkages to domestic suppliers, and transferring knowledge, skills and technology. To achieve these gains, development of border areas, building on cross-border economic linkages, requires cooperative strategies within and across borders, and effective frameworks or mechanisms for collaboration. 2.2 Mechanisms for border area development Border area development for exploiting locational advantages, in particular, focused on strengthening cross-border linkages, can take broadly 3 different forms: (1) special economic zone (SEZ); (2) border economic zone (BEZ); and (3) cross-border special economic zone (CSEZ).

Special economic zone (SEZ) is a formally incorporated geographic area that has certain general characteristics such as single management or administration; well defined geographic boundaries (often physically secured or fenced in); eligibility of businesses located there for various types of benefits such as tax incentives, access to specially provided infrastructure services within the zone; and often a separate customs area (e.g. duty-free benefits) and streamlined procedures. It will be discussed in more detail, as SEZs have been used extensively for development, and there are important lessons to consider, including from their uneven performance in the GMS. In the cases in this study, this form of border

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area development may be very effective for Thailands Mae Sot, particularly in the context of potential developments in Myawaddy (Myanmar).

Border economic zone (BEZ) may be defined as an economic area on one side

of the border, e.g. in Trat (Thailand), that utilizes effectively linkages with economic activities across the border, e.g. production in Koh Kong (Cambodia). BEZ development should be guided by a clear and consistent vision and strategy; but it need not require creation of a formal special economic zone with separate rules, regulations, and services. The goal is to develop the comparative advantage of the border area, including focusing on specific value chains, to leverage developments across the border, and to strengthen, as needed, related cross-border linkages, e.g. customs procedures, logistics services, access to labour. As reflected in the cases, this may be appropriate for developing the border areas in Thailands Trat and Sa Kaeo, given the goals of local communities, and existing economic opportunities and constraints.

Cross-border special economic zone (CSEZ) is an area established in close

collaboration by two (or more) governments, with synchronized rules and regulations, for example in trade facilitation and customs. It involves creating an interdependent operational and administrative environment for business. In principle, a cross-border economic zone builds on viable SEZs in the respective countries. This is the most complicated form of cross-border economic cooperation involving agreements on specific linkages between adjacent SEZs (at the limit, joint sovereignty). There are no such examples in the GMS, although there has been an initiative to establish what is referred to as a Cross-Border Economic Zone (CBEZ) along the North South Corridor between Hekou in Yunnan Province, PRC, and Lao Cai in Vietnam. This may be an effective mechanism for the collaborative development of Mae Sot (Thailand) and Myawaddy (Myanmar) to support cross-border linkages in labour intensive value chains or industries, for mutual benefit.

3. Special Economic Zones in Asia and the Greater Mekong Subregion There has been widespread use of SEZs in Asia. They have also received significant attention in the GMS, including in the context of Economic Corridors, and for the development of border areas. For example, in the cases in this study, SEZs are the primary mechanism put forward by the respective governments in their planned strategies for border area development. Given the uneven experience with SEZs in the GMS, it is useful therefore to examine very briefly their nature in the broader context of Asia (3.1); touch on the relationship between SEZs and global value chains and related production networks (3.2); look at the GMS experience with SEZs (3.3); and building on these and wider international experience, draw general lessons on SEZ success (3.4), especially in the context of border area development.

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3.1 SEZs in Asia: Introduction2 Starting with the establishment of the original export-processing zone in Kaohsiung, Taipei,China in 1965, variations on special economic zones have been designed in Asia to overcome constraints on investment climates in the wider domestic economy. Since the 1980s SEZs have proliferated in Asia also as catalysts for economic reform, and to alleviate poverty. Some SEZs have been successful in achieving significant employment and trade growth, and in strengthening technology and skills transfers, as illustrated by Shenzen (PRC), which also played a key role in broader spillover of economic reforms. The most successful locations for SEZs in Asia have been in close proximity to global gateways. Examples include SEZs in the Pearl River Delta in PRC; Singapores linkages to the Indonesian provinces of West Sumatra and Riau in the Malaysian state of Johor or the Singapore Johor Riau (SIJORI) Growth Triangle, a forerunner of the GMS program; and the developing Seoul Incheon Gaesung triangle.3 The recent emergence of new special economic mega-zones is intended to overcome the often enclave-like character of SEZs that limits their benefits to the wider economy; and to link more effectively to global value chains and production networks (as discussed in section 3.2). Such special economic mega-zones often integrate the traditional characteristics of SEZs with airport, seaport, new town, and tourism under a single authority. This model of SEZs is anchored in the historical success of Shenzen, which was selected to leverage its locational advantage as a gateway to the international economy, and provided access to its own container port terminals (Yantian, Chiwan, and Shekou), and the Shenzen Baoan International Airport. In general, successful SEZs in Asia are characterized by factors such as improved business environment through streamlined legal and regulatory framework; more efficient operational environment, through the provision of infrastructure and other services, for example related to labour and immigration; effective trade facilitation environment, including on-site customs services; often combined with fiscal and tax incentives, but more generally competition on the basis of business facilitation and services rather than financial incentives; and top-level support from government. Increasingly SEZs integrate broad economic activities and foster competitive enterprise clusters in particular value chains or industries, e.g. electronics, garments, automotive. 3.2 SEZ and cross-border value chains and production networks Traditionally, SEZ strategy focused on strengthening the general business environment in specific protected settings to compensate for existing constraints in the wider domestic economy. Often missing has been the link to particular value chains and enterprise clusters, reflecting the fragmentation and globalization of production in key 2 There are a number of extensive discussions of experience with SEZs in Asia. See for example Bhattacharyay, Biswa Nath, Mashiro Kawai, and Rajat Nag (eds.), 2012. Infrastructure for Asian Connectivity. ADBI and Edward Elgar; Carter, Connie and Andrew Harding (Eds.), 2011. Special Economic Zones in Asian Market Economies. Routledge, London; Rimmer, P.J., and H. Dick. 2010. Appropriate Economic Space for Transnational Infrastructural Projects: Gateways, Multimodal Corridors, and Special Economic Zones. ADBI Working Paper 237. Tokyo: Asian Development Bank Institute; and FIAS, 2008. Special economic Zones performance, lessons learned, and implications for Zone development. The World Bank, Washington D.C., April. 3 See Bhattacharyay et al (2012), op cit.

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industries. Until relatively recently there has been much less emphasis on recognizing this role of SEZs as nodes in cross-border production networks, and the related need to address more specific and differentiated constraints of firms in particular value chains. This alternative perspective on SEZs builds explicitly on recognition of the international fragmentation of production in key industries such as electronics, automotives, garments, agro-industry and tradable services; and the differing competitive needs of such value chains or industries. Constraints facing firms in the garment and textile value chain or industry are likely to differ in important ways from those facing firms in electronics or agro-industry. Similarly, although strengthening general transport infrastructure will benefit all cross-border economic activities, specific types of logistics services needed for cross-border linkages in electronics are likely to differ from those required for agro-industry. Therefore SEZs that are able to loosen particular constraints facing firms in specific value chains -- such as special purpose logistics, warehousing, particular types of skills can gain the benefits of access to regional and global markets, as well as facilitate enterprise clustering to strengthen competitive performance. An SEZ may then be approached as a platform for participation in global value chains aimed at extending the reach of domestic economies across national borders. In the case of less developed economies such as Myanmar and Cambodia, this can provide an important means for diversification of economic structure by linking to even sophisticated value chains or industries, such as electronics and automotives, initially in labour intensive, lower skill, lower technology, and lower value activities such as assembly; but with the potential opportunity to upgrade or add value over time. In the case of more developed economies such as Thailand, this can provide the basis for upgrading to higher value activities and products. From a value chain perspective, providing a generally supportive business environment in an SEZ is then not likely to be sufficient. It is also necessary to facilitate cost efficient and effective cross-border production linkages for firms to access key inputs and markets essential in particular value chains. Approaching SEZs as nodes in specific value chains, and as the basis for related enterprise clusters, potentially also changes the kinds of firms desired as core tenants. It can shift the focus from well-known global brands, the traditional target of investment promotion agencies, to less well-known contract manufacturers that organize global and regional production and sourcing, such as Flextronics in electronics, and international suppliers such as Li & Fung in garments. In many cases such firms will also attract their suppliers, as in the case of Flextronics industrial park strategy for example in Chennai (India) ; and may spur the development of local supplier capabilities and their clustering. 3.3 SEZ: The Greater Mekong Subregion (GMS) Experience 3.3.1 GMS SEZs in context In GMS cooperation SEZs have been promoted to build on subregional initiatives in hardware and software, and also to leverage locational advantages of border economic areas, as for example in the case of Savannakhet (Lao PDR) next to the Thai border. In this context, SEZs are seen as a potentially effective mechanism to deepen subregional integration; and to strengthen linkages of the GMS to the wider region (e.g. ASEAN Economic Community or AEC), and more broadly to the global economy, in order to stimulate economic activity and employment, and promote exports and FDI.

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In this context, GMS cooperation has also focused on the development of economic corridors, which include the establishment of SEZs in border areas, e.g. Savannakhet (Lao PDR) and Lao Bao (Vietnam) located along the East West Economic Corridor (EWEC). Economic Corridors are intended to facilitate cross-border economic linkages by leveraging subregional infrastructure investments. They also build on the GMS Cross-Border Transport Agreement (CBTA) and the Strategic Framework for Action on Trade Facilitation and Investment (SFA TFI), which address non-physical barriers to the movement of goods, services, and people. At this stage, significant gaps in infrastructure still remain; and implementation of the CBTA has been hampered by the differing pace of its adoption by participating countries, as well as by constraints on local institutional capacity. Therefore Economic Corridors have resulted in limited development to date, both in terms of strengthening GMS cross-border economic linkages, and in attracting and leveraging FDI for local and subregional diversification and growth.

GMS countries have used SEZs as vehicles for domestic development by focusing on population and economic centres, as well as border areas. For example, in Cambodia, SEZs have located near the key economic centres of Phnom Penh and Sihanoukville; as well as Bavet on the Viet Nam border, and Poipet and Koh Kong on the Thai border. In the case of Lao PDR, SEZs have been established in Vientiane; as well as at Savannakhet, Nong Khai and Huai Xai on the Thai border, and Denh Savanh on the Viet Nam border. In the case of Myanmar, particularly in the context of the recent push for reform and integration with the global economy, SEZ development has focused on the key population and economic centres of Yangon/Thilawa port, Mandalay, as well as Kyaukpyu near the PRC border; with interest in Myawaddy, Tachilek and Dawei on the Thai border. Among the CLMV countries, Viet Nam has been most active in establishing SEZs, often near large population centres and access to deep ports, conditions more difficult to find in Cambodia, Lao PDR and Myanmar. In addition to areas such as Ho Chi Minh City and Hanoi, there has also been development of SEZs in border areas, including at Lao Bao on the Lao border; and Mochai on the Cambodian border. 3.3.2 Assessing the GMS SEZ experience Building on the basic rationale for SEZs in the GMS, and consistent with experience around the world, two criteria emerge for assessing their success and sustainability4: (1) how effective is an SEZ in addressing key constraints faced by investors to improve their competitive performance; and (2) to what extent enterprises in an SEZ establish effective linkages with the rest of the domestic economy in order to improve overall competitiveness, e.g. through expanded supplier relations, transfers of technology, knowledge, and spurring wider policy reform. The first relates to SEZs as a business proposition; and the second to their role as gateways for broader development and international integration of the domestic economy. Applying these criteria to experience in the GMS, the performance of SEZs has been uneven at best.5 Furthermore, they have had limited impact on strengthening subregional economic linkages and integration.6 4 See Arenas, Guillermo and Thomas Farole, 2013. Coping with a Demanding Investment Climate? Special Economic Zones in Cambodia. Investment Climate Assessment Background Note (Draft), International Trade Department, June. 5 See for example Diaz Nicolas, Sophie Guerin, Allison Morris, and Sophia Sen, 2012. Developing Dependency Special Economic Zones in the Greater Mekong Sub-Region: A Comparative Perspective (no source); Yang Xianming, Zanxin Wang, Ying Chen, and Fan Yuan,

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Analysis of the experience of three SEZs -- Phom Penh; Bavet, in Cambodia on the Vietnam border; and Savannakhet in Lao PDR, near the Thai border7 has found similar approaches and constraints, although these are at different levels of development:

They all benefit from strategic locations involving proximity to key urban areas and economic centres, border regions, or along economic corridors.

Each has a government agency dedicated to assist in its development. Incentives are not targeted at value chains, industries or sectors; nor link firm

practices or investments to broader domestic economic development. They are located mostly in areas lacking infrastructure and supporting services,

requiring significant investment in site preparation. They are focused to a large extent on low wage labour, which is marketed as a

(usually the) key locational comparative advantage of the SEZ. These SEZs share other characteristics with each other, and also with SEZs elsewhere in the GMS:

Production structure involves mainly assembly and low skill job creation. This is responsive to the immediate employment and diversification needs of the CLMV countries. However, it is not clear how these SEZs will facilitate upgrading over time to higher skilled activities and technology. For example, there is limited presence in, or linkages by businesses or production activities to research and product-market innovation centres either within or outside the SEZs.

Investment incentives are generally not aimed at strengthening SMEs and

promoting entrepreneurship, but are focused on large investors with limited consideration of local capabilities and potential domestic suppliers. This is understandable, as larger enterprises are the primary source of FDI. However, strengthening local SME supplier capability, while often an expressed objective, are usually not supported in practice by effective SEZ-related initiatives

There is generally no clear strategy focusing on particular value chains or

industries, and related agglomeration of firms. This constrains any enterprise clustering process that could strengthen the attractiveness of GMS SEZs as a base for suppliers within the framework regional and global value chains. For example, there is limited focus on facilitating the exchange of information or interaction among firms within an SEZ; on support for the formation of value chain or industry-specific business associations essential for effective clusters; or on building linkages among different SEZs within the subregion.

Partly as a consequence of these characteristics, GMS SEZs have had limited success to date either as business propositions, or as gateways to the domestic and/or international economy. In addition to the above, key issues include the following: 2011. Factors Affecting Firm-Level Investment and Performance in Border Economic Zones and Implications for Developing Cross-Border Economic Zones between the Peoples Republic of China and its Neighboring GMS Countries. Asian Development Bank; and Arenas and Farole (2013), op cit. 6 Two assessments of GMS SEZs are of particular relevance to border areas, Yang et al, 2011, and and Arenas and Farole, 2013; and these are supplemented by interviews. 7 Arenas and Farole (2013), op cit

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They are focused on FDI, which provides a key means of linking to the international economy. However, they are highly dependent on foreign expertise, capital, technology, and increasingly uncertain external markets; and there has been limited success in developing local linkages to the domestic economy. Although some SEZs have contributed to economic growth as reflected in increased GDP and trade, they are generally not actively promoting or contributing significantly to local development and upgrading. For example, SEZs have limited links with domestic institutions and training centres for generating the required labour supply and enhancing the skills of the labour force; and limited involvement and strengthening of domestic suppliers, particularly SMEs. Therefore the contribution of GMS SEZs to growth is primarily limited local labour and some supplier development, with little effect on improving local economic opportunities and strengthening the competitive capabilities of local firms.

GMS SEZs, including those on the border, have played a limited role in

strengthening subregional trade and cross-border production integration by facilitating linkages in particular value chains. There has also been very limited development of horizontal linkages among different GMS SEZs. Similarly, they have contributed relatively little to regional market integration.

They have played little role in facilitating and accelerating efficient

implementation of the CBTA, (to standardize trade-related rules and regulations to reduce cost, time and risk). More generally, they have made very limited contributions toward harmonizing incentives, cross-border rules and regulations, cross-border development objectives, and subregional governance structures.

There has been limited policy coherence between national government and local

community development within GMS economies8; and between national and subregional objectives and initiatives.

3.3.3 GMS Cross-Border Economic Zones (CBEZ) There have been some limited initiatives to develop CBEZs in the GMS. One program underway since 2005 between PRC and Viet Nam along the North South Corridor, involves Hekou in Yunnan Province, PRC and Lao Cai in Viet Nam. More recent efforts include a focus on CBEZ between Mohan, PRC and Boten, Lao PDR; and Dehong, PRC and Muse, Myanmar.9 The experience to date is instructive, since these initiatives have implications for some of the border economic areas under consideration in this study.

Most firms are involved in the production of primary products, with limited processing and production activities; and very narrow local linkages to the wider domestic economies.

Most firms are relatively new local enterprises, with limited capacity for product market innovation.

There has been very little success attracting FDI to these areas, primarily because of limited business and economic potential of more general interest.

8 As reflected in the cases of Sa Kaeo Banteay Meanchey; and Trat Koh Kong, in Section III. 9 See Yang et al (2011); and Government of Peoples Republic of China and United Nations Development Programme Project Document, 2007. Project Title: Enhancing China ASEAN Economic Integration: Cross-Border Economic Cooperation at the China Vietnam Border

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High proportion of firms face financing difficulties, as local financial sector and mechanisms (e.g. for currency clearance) have been slow to develop.

The availability of qualified labour is an important bottleneck to the local operations of firms. There has been very limited development to date of training programs and institutions, and related incentives.

In principle, key comparative advantage of a cross-border economic zone is more efficient flow of inputs, including raw materials and labour, across borders. However, constraints on trade facilitation including logistics and customs procedures have impacted adversely on firms production and operations costs. Furthermore, key customs issues and policies usually cannot be addressed locally, but require national level decisions, which have been slow in coming.

Despite general similarities in incentive policies of participating countries, there are also differences, contradictions and gaps. For example, in Yunnan Province (PRC) investment policies offer no advantages for firms to locate in lagging border areas. More generally, there are no mutually agreed differentiated policies by the participating countries for developing border economic zones.

To sum up, the general performance of enterprises in GMS initiatives to develop cross-border economic zones is not high; and it has been difficult, to date, to attract competitive manufacturing firms to these border areas.

4. SEZ: lessons from international and GMS experience10 Lessons from international and GMS experience suggest that SEZs must do more than offer a business case that is marginally better than what is available in the rest of the economy. In order to be successful, SEZs must be globally or regionally competitive. Because of the fragmentation of production in global value chains, and the related availability of potential suppliers almost anywhere in the world, firms have significant scope in decisions on sourcing, investment and production location. Key lessons from international experience for successful SEZs include the following:

1. Special economic zones must be special: Successful SEZs offer investors something significantly different from and better than what is available in the rest of the economy. The exact characteristics of particular SEZs in terms of what they offer should depend on the goals of an SEZ programme aligned with particular value chains, e.g. kinds of activities and firms they aim to attract, markets intended to reach. For example, an SEZ in Myawaddy (Myanmar) is likely to differ from an SEZ in Mae Sot (Thailand), given their very different development roles and contexts. Similarly, a Mae Sot SEZ may differ in important

10 See in particular Special Economic Zones: Lessons for South Africa from international evidence and local experience, Edited proceedings of a Round Table convened by the Centre for Development and Enterprise, Johannesburg, 2012. See also: FIAS (2008), op cit; Zeng, Douglas Zhihua, 2011. How Do Special Economic Zones and Industrial Clusters Drive Chinas Rapid Development? Policy Research Working Paper 5583, The World Bank, Africa Region, Finance & Private Sectors Development, Washington D.C., March; Rimmer and Dick (2010), op cit; and Aggarval, Aradhna, 2010. Economic impacts of SEZs: Theoretical approaches and analysis of newly notified SEZs in India. MPRA Paper 20902, Munich Personal RePEc Archive, Online at http://mpra.ub.uni-muenchen.de/20902/

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ways from an Ubon Ratchatani SEZ, if they are intended to attract mostly different industries (e.g. garments in Mae Sot; agro-industry in Ubon). International evidence indicates that SEZs are likely to be most successful both as business propositions, and as gateways to the domestic economy, when they are targeted at particular industries or value chains, and offer concrete and efficient solutions to the competitive challenges faced by firms in those industries.

2. Global or regional competitiveness is what counts: Being better than the host

domestic economy is unlikely to be sufficient for viable SEZs over the long term. Investors, particularly foreign investors, have a wide range of choices, and select particular SEZs for different reasons. Most consider location, market access, logistics, trade facilitation and stability of rules and regulations as key factors; some consider wage levels and labour market practices; still others put an emphasis on skilled labour, access to knowledge-institutions, or supportive regulatory environment. Many SEZs offer investors financial incentives such as tax concessions and subsidies. However, international experience suggests that few investment decisions are made on the basis of financial incentives alone. Although such incentives may help attract first movers who are particularly concerned about the risks of a new SEZ or financially weaker firms -- it is the overall contribution of an SEZ to competitiveness in particular value chains that is critical. Access to regional and global suppliers and markets is particularly important, requiring effective and appropriate trade facilitation, including logistics services and import/export (e.g. customs) procedures. The relevance of this issue is illustrated in the context of Banteay Meanchey (Cambodia), where logistics costs and time are important constraints (see Section III.C).

3. SEZs are not the best instrument to solve the problems of poor regions: SEZs

are often established as a means for developing poorer regions of a country, as reflected in the experience of the GMS. These are generally some of the least successful SEZs. Regions are usually poor because they lack key factors for development such as infrastructure, access to markets, or labour skills. It requires extensive investment and/or subsidies to overcome such constraints. It is generally very difficult to compensate for such shortcomings in a way that is economically viable or sustainable, particularly if the costs are to be recovered.

4. The rest of the domestic economy also has to work: Although SEZs are

specific and bounded geographic areas, their contribution to national development will be severely limited if they are isolated islands in an economy. The more supportive or business friendly the surrounding environment, and the more external (domestic) linkages are consistent with business performance, the more likely is an SEZ to contribute to the wider domestic economy. The need for workers with higher-level skills provides an example. As a required input to firms in a specific SEZ, this may be addressed by locating it where the population is better educated, for example near urban areas; or by linking it to educational and training institutions. In terms of contribution to national development, there is evidence to suggest that SEZs can contribute to the creation of skills in the wider economy, for example through on-the-job training which can spread beyond a specific SEZ through the movement of labour, leading to wider productivity gains. This issue, and the more general relationship between an SEZ and the domestic economy is discussed in the context of Cambodian SEZs in Section III.C.

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5. SEZs should have clear, coherent and viable business and economic rationale anchored in local conditions: An SEZ should offer tailored responses to business constraints and opportunities, in order to facilitate the growth and performance of particular value chains or industries in the domestic economy. In principle, SEZs have a great deal of flexibility: they can be designed to respond to the specific requirements of particular value chains, consistent with local conditions and aspirations. For example, in a low income and low productivity and long isolated economy such as Myanmar, an SEZ at Myawaddy can focus on addressing the needs of labour-intensive industries, involving lower skill activities in value chains such as garments and electronics. In a more developed economy such as Thailand, an SEZ at Mae Sot, could focus on the needs of more knowledge intensive activities in particular value chains (e.g. garments) that strengthen the capacity for innovation, for example for regional (AEC) markets, while leveraging lower cost labour through focused linkages with a Myawaddy SEZ.

6. For economies where labour is a key resource, the costs and flexibility of

employment matter: A number of GMS economies, in particular, the CLMV countries, have labour as a key abundant factor. Employment generation, with increasing levels of productivity, is therefore particularly important in their development. In this context, firms in SEZs are most likely to create and sustain needed jobs if their characteristics address particular needs of labour-intensive industries. Factors such as wages, flexible labour markets, rules and laws governing work, have to create conditions that allow firms to respond to changing competitive pressures which are particularly intense in low skill, labour intensive activities and industries. At the same time, it is essential to ensure appropriate working conditions, both for local development, which ultimately involves improving the quality of life; and in response to the increasing demands of global markets for proper labour standards. Furthermore, labour intensive activities and industries require more than unskilled workers. They also need cost-efficient and reliable services and inputs, including skilled workers -- which may be supplied initially from abroad, but should be provided domestically over time through improved education and training. This is relevant, for example, in the cases of Myawaddy (Myanmar) and Koh Kong (Cambodia). Although there is a general perception that FDI in developing economies is attracted primarily by cheap local labour, most FDI, including in SEZs, is in medium-skill activities and industries.

7. SEZs require clear, credible and consistent political commitment at the highest

levels of government: SEZs generally involve a number of government or government-linked agencies and enterprises to provide services and enabling conditions. For example, international experience suggests that most effective governance arrangements involve administration by an autonomous government-linked agency with authority and capability to oversee implementation of regulations, laws, policies, and practices in an SEZ; provide regulatory oversight for SEZs developers, operators, and tenants; ensure efficiency of the delivery of services; and act as the principal interface with private developers and operators. This requires credible, consistent, and sustained commitment from the highest levels of government to ensure that businesses feel assured that policies, rules and supporting services will be sustained over the longer term. Development of the border areas in Mae Sot, Sa Kaeo and Trat seem to have high level support. Yet in all these cases, such expressed support is not seen by the local (business) community as sufficiently clear, credibly, and consistent.

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8. The most successful SEZs are public-private partnerships: Government owned and operated SEZs have had generally limited success. International experience suggests that the governance structure for successful SEZs requires effective collaboration between the public and private sectors. Governments role is to formulate policy and strategy, make and enforce laws and regulations, and provide key public goods. The private sectors role is to develop and operate SEZs, including master planning, invest in real estate and services, undertake construction, manage operations, and market the zone to investors. This division of roles reflects the comparative advantages of the respective partners. This is generally the pattern followed in the GMS, though with mixed results.

9. Effective investment promotion agencies are a key part of a viable SEZ

strategy: SEZs are most successful when investment promotion agencies can attract appropriate FDI. This includes delivering on promises such as one-stop-shops that involve a variety of government-related agencies. It also includes not imposing unrealistic performance requirements on investors as conditions of entry. Such requirements may seem, in principle, desirable to support domestic development. But in practice, they may significantly constrain the competitiveness of businesses and therefore their likely interest and/or performance; or may attract the wrong type of firms (adverse selection). Furthermore, the nature of FDI is changing. Historically investment promotion agencies focused on attracting investment from large, well-known multinational brands from the US, Europe or Japan by offering incentives such as tax breaks. In the fragmented world of global value chains and networks, less visible contract manufacturers such as Flextronics, and international suppliers such as Li & Fung, are key players organizing production and sourcing. Effective investment promotion agencies are therefore playing a more focused and proactive role. This starts with an understanding of the differing structures and competitive dynamics of particular value chains and industries (e.g. garments vs. electronics); then targeting firms with key roles in particular value chains for specific SEZs that address their specific concerns.

10. SEZs should fit with local conditions, and the local communities visions of

development: For an SEZ to be more than an isolated island in the local economy, and to have the communitys support -- essential for long term success -- it must fit with local needs, constraints, and aspirations. For example, if the local communitys vision of development is oriented more toward environmental and social sustainability, an SEZ focusing on heavy industry may have significant difficulties with local stakeholder support, increasing uncertainty, risks, and costs. This requires either a different type of SEZ or mechanism for development of border area, or a mutually acceptable and viable accommodation between SEZ design and operations, and the local community. For example, local business and community interests and aspirations in Trat are oriented toward developing the area as a service centre (e.g. logistics and retail) and a tourism destination; and are much less supportive of an industrial SEZ. Furthermore, as reflected in the case study, an SEZ may not be the best mechanism for development of Trat (and perhaps Sa Kaeo). The more flexible and informal approach of a border economic zone (BEZ) may be more appropriate and effective. At the very least, success in developing this border area requires mutual understanding and alignment of the development visions of key stakeholders, and on that basis selecting appropriate implementation mechanisms (e.g. type SEZ or BEZ).

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II. General Conclusions from the Case Studies Revising the usual organization of such reports, this section briefly identifies the 4 border area case studies; and summarizes relevant general conclusions that emerge with respect to border area development. Detailed case analyses, the basis of these conclusions, follow in Section III, including more specific case-related conclusions. 1. Brief description of the border areas in case studies 1.1 Ubon Ratchathani (Thailand) - Champasak (Lao PDR) The border area between Thailand and Laos at Ban Chongmek, Sirinthon District, Ubon Ratchathani Province, Thailand, and Ban Vangtao, Phonthong District, Champasak Province, Lao PDR, has developed rapidly since the mid-1990s. It is dominated by: (i) agricultural exports from Laos to Thailand; and (ii) Thai tourism to southern Laos. Thai and regional multinational, large, and medium agribusiness enterprises have demonstrated the feasibility of cross-border commerce by operating profitably in the area for ten years or longer. Investment has been facilitated by Thai Government incentives, improved transport and communication infrastructure; and trade facilitation measures (e.g. customs, immigration, quarantine and SPS procedures). It has also been stimulated by economic and demographic growth and tourism in southern Laos. A viable border economic zone (BEZ) has de facto emerged in this area, without the presence of a formal SEZ on either side of the border. Value chain linkages for several crops are functioning profitably for producers, traders, agro-processors, and investors; including for premium coffee (organic and Fair Trade); vegetables (organic and non-organic); and, field crops (for processing in Thailand). Cross-border tourism has also grown. Therefore the challenge to development at this stage is to build on what is already there -- to strengthen and expand the existing, relatively well-functioning BEZ.

1.2 Mae Sot (Thailand) - Myawaddy (Myanmar) The border area at Mae Sot and Myawaddy has the potential for significant mutually beneficial development, utilizing the complementary factor endowments of the two countries. Thailand is increasingly concerned about the challenges of middle-income trap: losing competitiveness in labour-intensive industries and activities because of rising wages and more intense competition from lower wage economies in key export industries such as garments. This has led to a strategy, in part, of focusing on outward investment by Thai enterprises and the relocation of labour intensive activities, particularly to neighbouring countries. In this context, there has been a renewed interest in the development of an SEZ at Mae Sot; particularly with the clustering of garment and textile factories there, until the increase to Baht 300 of the minimum wage. In Myanmar, the democratically elected (in 2010) government of President U Thein Sein has begun to chart comprehensive and bold new directions and reforms for the countrys transformation and development, particularly since 2012. This includes an emphasis on strengthening and diversifying external economic linkages, especially with neighbouring countries and the emerging ASEAN Economic Community (AEC). The development of border economic areas is therefore emerging as a priority both as gateways to the region and the international economy; and as the basis for economic diversification, and

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more balanced national development. There is a corresponding emphasis on attracting FDI, particularly to link to labour intensive cross-border export-oriented value chains such as garments and electronics, for employment and income generation. In this context, the Union of Myanmar Government and the Kayin State Government have decided to establish an Industrial Zone (IZ) at Myawaddy, taking advantage of proximity to Thailand. This is intended to facilitate and accelerate development of the border area, and to support the product market diversification of Myanmars economy.11 The planning and development of an SEZ at Mae Sot, and the IZ at Myawaddy are in the relatively early stages. The case study suggests the rationale for, and potential benefits of collaboratively establishing a Cross-border Special Economic Zone (CSEZ) at Mae Sot Myawaddy, with particular focus on labour intensive manufacturing (garments and textiles) that respond to the development challenges and priorities of both countries. 1.3 and 1.4. Sa Kaeo (Thailand) - Banteay Meanchey (Cambodia); and Trat (Thailand) - Koh Kong (Cambodia) The border area of Thailand and Cambodia provides a range of opportunities for developing cross-border economic and business linkages, building on complementary comparative advantages, consistent with development priorities of the two economies, and meeting the aspirations of local communities. The two countries established a Joint Committee (Thailand-Cambodia) on Border Area Development and Connectivity (JCBD); and agreed to set up SEZs in two adjacent border areas: Sa Kaeo Banteay Meanchey, and Trat Koh Kong. The basic objective is to boost trade and investment and improve the livelihood of the peoples along the border of the two countries.12 Cambodias interest is to establish viable and sustainable SEZs to attract investors in labour intensive industries, to a large extent on the basis of low wages and available land, and to leverage proximity to the more developed Thai economy, e.g. access to more efficient infrastructure. Thailands interest is to develop the local border area economies, and to use Cambodian SEZs to facilitate Thai firms upgrading of products and processes (move up) in relevant value chains. The subregional context underlines the potential utility of cross-border collaboration in economic development in this area, as it is located on the GMS Southern Economic Corridor (SEC) that stretches from Thailand, through Cambodia, to Viet Nam. The case studies suggest that SEZs on the Thai side of this border area at both Trat and Sa Kaeo -- may not be the most effective or even appropriate mechanism to take advantage of potential cross-border linkages. Therefore the model of border area development that may be most suitable on the Thai side is more informal border economic zone (BEZ), with well-defined linkages that focus on development of services and agro industry, complementary to Cambodias industrial SEZs. 11 An Industrial Zone (IZ) in Myanmar has the general characteristics of an industrial estate, focusing on development of a geographic area, for example through the provision of supporting infrastructure services. It differs from an SEZ in that an IZ does not have the range of privileges usually associated with such zones. Myanmar is now revising the SEZ law. 12 From the statement following the first meeting of the Joint Committee (ThailandCambodia) on Border Area Development and Connectivity (JCBD) on June 11, 2013.

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2. General Conclusions As reflected in the detailed case studies that follow in Section III, there are significant opportunities for cooperative border area development between Thailand and its neighbouring countries. Specific observations and suggestions with respect to particular border areas are presented in the discussions of the case studies. These include relatively wellunderstood basic requirements such as strengthening local infrastructure, and upgrading trade facilitation factors (e.g. customs facilities and procedures, and logistics services). The history of GMS cooperation suggests that although such issues are relatively well known, addressing them operationally can be challenging, and success varies with local conditions and constraints. Beyond case-specific, and also relatively well-understood basic factors that condition border area development for cross-border economic linkages, a number of more fundamental conclusions emerge from the case studies. These include the following:

Clear and coherent vision and related strategy of border area development, anchored in local conditions, is essential: The starting point for the viable and sustainable development of border areas, particularly in the context of cross-border economic linkages, is a clear and coherent vision and strategy for development. This has to reflect both local and national interests; needs to be anchored in local conditions (constraints and opportunities); and consider potential spillovers to the wider domestic economy. The cases of Mae Sot Myawaddy; Sa Kaeo Banteay Meanchey; and Trat Koh Kong, all illustrate the importance of this issue for border area development and cross-border linkages.

Strategy focused on specific value chains: A viable and sustainable strategy of

border area development should focus on strengthening cross-border linkages in specific value chains of joint interest, consistent with local conditions. It is not clear that proposed the Mae Sot or Trat SEZ has such focus; and this may be contributing to existing uncertainty, and could constrain future viability. Furthermore, it is important to anchor a strategy in the structure and dynamics of value chains. One perspective is that Thailands minimum wage law of Baht 300/day makes Mae Sot no longer viable for garment value chain-related activities. However, the case analysis suggests a possible strategy for the joint development of Mae Sot Myawaddy, based on cross-border linkages in the garment value chain that leverage the comparative advantages of the adjacent border areas, consistent with national economic development priorities.

Collaborative development of a shared vision and strategy: It is essential to align

the visions and strategies of key stakeholders with respect to border area development. This vision and strategy should reflect the aspirations of local stakeholders (e.g. business and wider community); and should also be consistent with broader national development priorities. Otherwise it will be resisted, and difficult to implement. This is reflected in the experience in Sa Kaeo and Trat, (and perhaps Mae Sot), where developing a shared vision and strategy is a pre-requisite for both local development and effective cross-border linkages.

There is a diversity of mechanisms for border area development and cross-

border cooperation: An SEZ is not the only option for implementing a strategy of border area development. In some settings a more informal but focused

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approach, termed here as Border Economic Zone (BEZ), may be more effective. This is reflected in the Ubon Ratchatani Champasak case; and may also be an effective option for addressing constraints and opportunities in Trat and Sa Kaeo. Alternatively, the Mae Sot Myawaddy case illustrates the possible application of Cross-border Special Economic Zone (CSEZ), linking SEZs on both sides of the border, focusing on cross-border linkages in the garment value chain.

Align selected strategy and related implementation mechanism with the

neighbouring countrys development strategy and local conditions: Since the focus is on cross-border linkages for mutual benefit, which require collaboration in various forms, strategies and mechanisms of participating countries must be aligned from the outset. This is essential to guide more specific subsequent decisions and ensure their complementarity (e.g. in investment, rules and regulations). For successful development and linkages at Trat and Koh Kong, the governments and business communities of Thailand and Cambodia, (and the respective local communities), need to have a shared cooperative strategy that will guide specific decisions addressing issues such as infrastructure investment and trade facilitation measures. Similarly, for a Mae Sot Myawaddy CSEZ, Thailand and Myanmar (and the local communities) have to align their strategies and implementation mechanisms from the outset, to ensure successful and sustainable cross-border development.

Approach cross-border economic development, where possible, in the context of

wider subregional (e.g. GMS) cooperation and integration: Developing border areas and cross-border linkages within the wider context of subregional cooperation can provide significant additional benefits. It can also facilitate and reinforce wider subregional cooperation and development. For example, cross-border cooperation in logistics at Sa Kaeo Banteay Meanchey, and Trat Koh Kong, could accelerate implementation of linkages, and economic integration, along the GMS Southern Economic Corridor, with additional benefits to the border areas and beyond. Similarly, a CSEZ at Mae Sot Myawaddy can link such development to the GMS East West Economic Corridor (EWEC).

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III. Case Studies A. Border economic zone and agribusiness linkages at Ubon Ratchatani (Thailand) and Champasak (Lao PDR)

1. Background The border between Thailand and Laos at Ban Chongmek, Sirinthon District, Ubon Ratchathani Province, Thailand, and Ban Vangtao, Phonthong District, Champasak Province, Lao PDR has developed rapidly since the mid-1990s. From a small traditional (informal) trading post in the 1990s, the crossing has expanded significantly, and is dominated now by regional tourism and agricultural trade. Chongmeks expansion was endorsed by a Thai Cabinet resolution in 2003,13 leading to extensive infrastructure investment at the border by both the Thai and Lao governments. Thai authorities currently plan to further modernize trade facilitation services in the area in response to present high levels of trade and anticipated growth following inauguration of the Association of Southeast Asian Nations (ASEAN) Economic Community (AEC) in 2015. Modernization on the Lao side of the frontier is underway. 13 23 December 2003 (2546)

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The Thai-Lao border at Chongmek is dominated by two growth factors: (i) Thai tourism to southern Laos; and, (ii) agricultural exports from Laos to Thailand. Short visits by Thai tourists to southern Laos focus on cultural- and eco-tourism (principally the Mekong River waterfalls at Khonephapheng, and World Heritage Site at Vat Phou) and coffee tourism on the Bolovens Plateaux. Lao agricultural exports to Thailand include mainly fresh fruit and vegetables for Thai retail and wholesale markets and agro-processors. This is a case study of key characteristics of the area around Ubon Ratchathani Province, Thailand, and Champasak Province, Lao PDR, centered on the Chongmek-Vangtao border area; the economic and commercial rationale for strengthening what is an already viable border economic zone (BEZ) at Chongmek; cross-border production linkages and their implications for key stakeholders; key factors shaping and constraining further development; and recommendations. 2. Key characteristics Key characteristics of the Ubon Ratchathani (Thailand) and Champasak (Laos) area that contribute to Chongmeks suitability as a BEZ include the growing volume and diversity of trade with Laos, policy push and demand pull factors, and changes in production factors on both sides of the border. These characteristics are discussed below. 2.1 Trade Trade through the two border crossings14 between Ubon and Lao PDR in 2012 was recorded as follows:15

Exports to Laos: 11,777.53 million baht Imports from Laos: 1,515.15 million baht

Growth of trade through the two official Ubon Ratchathani border crossings with Lao PDR increased significantly between 2007 and 2012, namely: a 219 percent increase overall in Thai exports to Laos; 181percent increase in Lao exports to Thailand; and, 453 percent increase in Lao agricultural products exported to Thailand. Details of Thai-Lao cross-border trade for this five-year period are presented in Table A1. 14 Ban Chongmek, Sirinthon District, an international crossing; and, Ban Pak Saeng, Khemmarat District, a traditional crossing. 15 Provincial Commerce Office, Ubon Ratchathani

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Table A1: Thai-Lao cross-border trade data for Ubon Province: Chong Mek and Pak Saeng checkpoints

Rank Principal Exports Principal Imports 2007 2012 2007 2012 Item Value

(mil. baht) Item Value

(mil. Baht) Item Value

(mil. baht) Item Value

(mil. baht) 1 Fuel 1,245.55 Fuel 3,645.88 Logs,

lumber 386.14 Agriculture

products 1,287.48

2 Construction materials

595.30 Construction materials

2,460.00 Agriculture products

232.44 Logs, lumber, wood products

216.25

3 Consumer items

537.53 Consumer items

1,820.47 Leather goods

4.60 Textiles 141.38

Other 1,312.93 Other 3,851.18 Other 58.47 Other 274.08 Total 3,691.31 Total 11,777.53 Total 681.65 Total 1,919.19

Source: Ubon Ratchathani Provincial Commerce Office, June 2013 Other Lao exports to Thailand through Ubon in 2012 included the following:16

Logs, lumber, wood products; value: 214.25 million baht Textiles; value: 141.38 million baht

The principal Thai exports to Laos through Ubon in 2012 included consumer goods, fruit, construction materials, and fuel. The significant increase in Thai exports to Laos reflects the expanding Lao economy, with GDP growth of between 7 and 9 percent annually between 2005 and 2013. The export of Lao agricultural products to Thailand through Chongmek is governed by an annual memorandum of understanding (MOU) between Ubon Ratchathani and Champasak provinces. This process began in 2004 under the Ayerwaddi - Chao Phraya - Mekong Economic Cooperation Strategy (ACMECS). Each MOU is negotiated annually between interested Lao and Thai companies that have registered with their respective provincial commerce offices as being interested in participating in cross-border trade. The MOU serves as an umbrella agreement acknowledged by provincial government authorities under which Lao and Thai companies record the results of their trade negotiations, specifying the terms and conditions for trading a range of food and agricultural products. In total, nine MOUs have been concluded between Champasak and Ubon Ratchathani provinces between 2005 and 2012.

As explained by provincial authorities: A two-tiered meeting is held annually, at which Lao and Thai provincial commerce officials conduct a policy level dialogue to review and resolve trade issues between the two provinces. Simultaneously, registered Lao and Thai trading companies negotiate trade terms for a list of food and agricultural products for the next year. During both meetings, problems that arose during the past year are reviewed; measures for resolving problems are agreed; proposals for new initiatives are reviewed; a list of agricultural products to be traded under the contract farming project during the next calendar year is formulated; and, the terms and conditions for importing those products into Thailand, including floor prices, are established.

16 Source: Ubon Ratchathani Provincial Commerce Office, June 2013

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In Ubon Ratchathani Province, the Provincial Commerce Office coordinates the program. In Champasak Province, the Provincial Industry and Commerce Office (PICO) serves as the host organization.

The broad objective of the MOU is to promote production of and facilitate cross-border trade in food and agricultural products between Lao PDR and Thailand. Simultaneously, other less immediate objectives are realized, namely:

The objective of the Lao and Thai governments to implement the ASEAN Integration System of Preference (AISP) initiative.17

Achieving Thai Government foreign agricultural policy goals that are not specifically recognized in cross-border arrangements, related to the following:

o Systematic and continuous sourcing of large quantities of low cost raw materials regionally for value-added processing in Thailand;

Expanding regional cross-border trade in agricultural commodities linked to raw material needs of Thai agro-processors;

Sourcing of food and agricultural imports from neighboring countries where commodities can be purchased in Thai baht, thus reducing the need to utilize non-baht currencies to settle trade transactions;

Creating on-farm income generating opportunities in neighboring countries as alternative livelihood options that contribute to poverty alleviation and preclude poor farmers from migrating to seek economic opportunities in Thailand; and,

Maximizing the use of trade and logistics infrastructure construc