Indochina economies on the path to reform and liberalisation [-Dream on in Cambodia's case?]

Saturday December 24, 2011
By JOHN LOH
The Star Online (Malaysia)

[Cambodia's] 15 million population, more than half of which is below 21 years of age, is one of the world's poorest, a situation that led to it becoming a substantial recipient of aid money. The Asian Development Bank and even China are among its benefactors. China also happens to be one of Cambodia's largest sources of FDI.

IN many ways, the Indochina region comprising Vietnam, Cambodia, Laos, and Myanmar is akin to an emerging giant.

Racked by decades of civil war, military rule and socialism, the region has, for the longest time, been a political and economic outcast; its instability a bane to foreign investors and economic progress.

But these countries, led by Vietnam, have been quietly plotting a return to the world stage. Vietnam's gross domestic product (GDP), for instance, grew 8% annually between 1990 and 1997, and then 7% between 2000 and 2005, making it one of the fastest growing economies in the world.

The low base, of course, is one reason for this. Yet, Indochina remains on the margins of our imagination, drowned out by the din of its powerhouse neighbours China and India, and the ever-pressing woes of debt in the United States and Europe.

Nonetheless, if one is to be ahead of the curve, the region is worth another look. Reforms and liberalisation are taking shape, and Indochina is on the cusp of change.

Just this week in Naypyidaw, Myanmar's new capital city, Thai Prime Minister Yingluck Shinawatra concluded the fourth Greater Mekong Subregion summit with a proposal for the countries in the pact to expand their economic cooperation.

Established in 1992 with the help of the Asian Development Bank, the sub-region consists of China, Cambodia, Laos, Myanmar, Vietnam, and Thailand countries that share the Mekong river. Its purpose is to enhance economic integration.

A 10-year strategic framework for 2012 to 2022 was also endorsed at the summit, setting out eight broad areas for cooperation such as economic corridor development, infrastructure linkages, energy, agriculture, and environment.

On the other hand, the region has just as many things holding it back political patronage, rampant corruption, and in some places, a stubbornly high inflation rate.

StarBizWeek takes a look at how four countries in Indochina are faring, and what they have been doing to get ahead.

Myanmar

Probably the most significant event that took place in Myanmar this year was Hillary Clinton's visit. Last month, she became the first US Secretary of State to make a trip to the hermit kingdom in more than 50 years.

The former British colony fell into the hands of the military junta in 1962, leading to a kind of “lost period” for Myanmar. It was the largest exporter of rice and second-richest nation in South-East Asia under the British, before the repressive regime threw the once-thriving nation into disrepair.

Its healthcare system is ranked one of the worst in the world, and its GDP is growing at some 3% the lowest in the region.

With a reputation of entrenched human right violations, child labour and human trafficking, it has earned the ire and sanctions of the United States, European Union (EU) and Canada.

A scheme called the Burmese Way to Socialism to rationalise all industries except agriculture was introduced in the 1960s to disastrous results. It further impoverished the country, prompting the United Nations to designate Myanmar a “Least Developed Country” in 1987.

But the junta had a change of heart, and in 2003, they drew up a roadmap for democracy. As part of the plan, Myanmar held a general election in November last year, and despite claims of fraud by international observers, a civilian government was voted into office.

Although the heavy sanctions imposed by the West are unlikely to be dropped anytime soon, the Wall Street Journal recently wrote that the country and its 54 million population could present opportunities for US businessmen.

Another report by the Wall Street Journal notes that Myanmar's tycoons, who had received lucrative contracts in return for their backing of the regime, are recasting themselves as eager supporters of reform.

One of the businessmen, construction and mining magnate Zaw Zaw, is lobbying for the United States and EU to drop sanctions and allow Myanmar to compete in the global economy, instead of relying on China.

The new civilian government has also bared its teeth, so far breaking up cartels, holding discussions with the opposition and even blocking a US$3.6bil Beijing-backed hydropower project that would have benefited Myanmar businessmen.

Laos

The communist Lao People's Democratic Republic, with a population of some 7 million, launched its stock exchange in January.

The Lao Securities Exchange which was a US$20mil venture with Korea Exchange, the fourth largest bourse operator in Asia has a few companies slated for listing next year including a brewery, the national airlines, a telecommunications provider, and a cassava and tapioca firm, according to Reuters.

Malls, cafes with Wifi and other modern amenities are mushrooming in Vientiane, its capital, signs of growing affluence in the former French colony.

Laos' GDP expanded by some 6% between 1988 and 2006, and nearly 8% since then. Some forecasts have pegged its growth this year at between 8.1% and 8.6% one of Asia's highest.

Though its US$7.5bil economy is relatively small, this figure has more than doubled from 2006, along with GDP per capita. The main drivers include hydropower production, copper and gold mining, tourism, and domestic consumption.

Together, mining and hydropower bring in 80% of FDI and fuel half of GDP. The other half comes from agriculture such as rice, its mainstay, as well as corn, cotton, and potatoes. Agriculture also makes up a large portion of employment.

Laos' myriad waterways has enabled the construction of dozens of new dams, and it aspires to be the “Battery of Southeast Asia” with the capacity to supply 8% of its power by 2025.

For now, the bulk of Laos' FDI comes from China, Thailand and Vietnam, but its economy continues to encumbered by poor regulation, an unskilled workforce, and close ties between business and the political elite none of which are favourable terms to Western firms.

Cambodia

Despite the devastation brought on by its deadliest floods in over a decade, Cambodian Prime Minister Hun Sen said last week that the Cambodian economy could still grow 7% this year. In contrast, the International Monetary Fund revised down its growth projection for the country to 6% from 6.7%.

The floods in August and September had killed almost 250 people and ravaged 10% of Cambodia's rice fields, its major export.

Hun Sen, who has been in power for over 25 years and is the longest serving head of state in Southeast Asia, acknowledged that although the agriculture sector would see zero growth, the economy could still get a boost from its garment exports, construction industry and tourism, its fastest growing industry.

Those who have visited Cambodia and its infamous Killing Fields would remember it as the country where the violent Khmer Rouge regime took root.

But the country has bounced back, its GDP growing by more than 7% between 2001 and 2010.

Its 15 million population, more than half of which is below 21 years of age, is one of the world's poorest, a situation that led to it becoming a substantial recipient of aid money. The Asian Development Bank and even China are among its benefactors. China also happens to be one of Cambodia's largest sources of FDI.

The much-awaited catalyst for Cambodia's economy was the discovery of oil and gas deposits in its territorial waters in 2005. When commercial extraction gets underway in 2013, a substantial amount of oil money is expected to flow into its coffers.

With a huge labour force, its main challenge is to spur the private sector so that there are enough jobs to fill. Besides that, it has the usual teething problems that can be expected in an emerging nation like corruption in government and political instability.

Vietnam

Vietnam is in quite a different place from its neighbours. The poster boy for emerging Asia, it enjoyed steady economic growth since the 1990s and a “gold rush” period before the recession of 2008.

By some estimates, Vietnam could be the fastest-growing of the world's emerging economies by 2025. Its growth story began with the Doi Moi (renovation) reforms where, in 1986, free market policies were introduced with the aim of creating a socialist-oriented free market economy.

The reforms encouraged private ownership in its industries, and at its peak, Vietnam had the highest FDI per capita of any country.

Today, it is the world's largest exporter of cashew nuts and black pepper with one third of global share, and the second largest exporter or rice behind Thailand. Rich with natural resources, it is also a top three exporter of oil in Southeast Asia.

Poverty and unemployment have been reduced significantly, no easy feat for a country of some 90 million people. But after this growth spurt, observers say Vietnam is starting to lose its lustre.

Its total FDI received in 2011, a lot of which goes into manufacturing and education, will almost certainly be lower than last year. For the first 11 months, Vietnam obtained US$12.7bil in FDI, down 20% from the same period last year.

Furthermore, its trade and budget deficit is made worse by the low value its currency, the dong, which has slid 8% to the US dollar this year. In 2010, it was devalued three times.

Another perennial problem is inflation, which has stubbornly remained near 20%. The latest figures show that inflation slowed for a third month in November to 19.83%.

A bank-backed analyst who had spent some time in Vietnam tells StarBizWeek that because Vietnam is a socialist state, its workers are always on strike. “The labour unions are strong, and because wages can't rise fast enough to keep up with inflation, there are protests. But productivity suffers as a result.”

While there, the analyst also witnessed the Vietnamese stock exchange plunge 80% to 200 points from 1,000 points. High inflation and interest rates had led to a heavy selldown by foreigners, which then sparked mass panic among domestic shareholders.

Moreover, the country is bogged down by red tape and corruption. “In China the corruption is at the top. In Vietnam, the whole supply chain is corrupt. Paying the boss is not good enough - the subordinates expect kickbacks too,” the analyst says.

That aside, Vietnam is on the path to reform, beginning with the divestment of its state-owned enterprises (SOE), which are similar to Malaysia's government-linked corporations.

In four years, its more than 2,000 SOEs, many of them major corporations, will be pared down to just 692. Some of them include big players in the shipping, mining, and oil and gas industries. However, the government will retain controlling stakes of about 70% in these companies.

The banking sector is also poised for a round of consolidation. After years of skyrocketing credit growth, its banks are saddled with huge amounts of bad debt, which foreign observers suggest could be at least 10% of their assets, AFP reported.

Vietnam has about 100 banks either state-owned, private or foreign but many are cash-strapped. According to its central bank, loans have reached 244% of GDP in September.

To fix this, the government plans to halve the number of banks by 2015 and create about two or three regional champions.