Download Asian Frontier Economies Burma, Laos, Cambodia, and Vietnam: Same same, but different

eurasia group
Defining the Business of Politics.
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Asian Frontier Economies
Burma, Laos, Cambodia, and Vietnam:
Same same, but different
The frontier economies of Southeast Asia are on track for greater integration into the global economy over the next ten years,
thanks in large part to political stability. But differences in the four countries’ current level of industrialization, policies, and
treatment of investment will result in divergent paths and outcomes.
eurasia group
Defining the Business of Politics.
™
Asian Frontier Economies
Burma, Laos, Cambodia, and Vietnam:
Same same, but different
21 June 2012
Roberto Herrera-Lim
Director, Asia
+1 646.291.4034
[email protected]
Contents
Executive summary . .
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Political and industrial profiles . .
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What could change . .
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The future of the frontier markets . .
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Conclusion . .
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Prepared for PricewaterhouseCoopers Co., Ltd.
This confidential report is intended solely for the internal use of PricewaterhouseCoopers Co., Ltd. and is based on the opinions of Eurasia
Group analysts and various in-country specialists. Eurasia Group is a private research and consulting firm that maintains no affiliations with
governments or political parties.
© 2012 Eurasia Group, 149 5th Avenue, 15th Floor, New York, NY 10010
eurasia group
Defining the Business of Politics.
™
Executive summary
The frontier economies of Southeast Asia will, as a whole, become more integrated into the global economy over the next ten years. This is a continuation of
a trend that started in Vietnam in the 1980s, accelerated in Laos and Cambodia
over the past decade, and appears set to begin in Burma. It is being driven by the
relocation of firms from higher-cost locations in Thailand and southern China,
ongoing structural reforms, and a willingness to attract foreign investment.
Domestic politics will allow these changes to take place, as these countries are
likely to be stable for the foreseeable future and are run by leaders who want
sustained economic growth. Nonetheless, investors will find conditions among
and within these countries to be uneven, with marked differences in the level
of domestic regulation, the availability of infrastructure and skilled labor, the
competence of bureaucrats, and the amount of competition with Chinese and
other regional investors. Corruption will be a persistent challenge.
Political and industrial profiles
Vietnam
Prime Minister: Nguyen Tan Dung
Term: 2011–2016, second term
Party: Communist Party of Vietnam
The political
alternatives
Burma
Aung Saan Suu Kyi (opposition)
Stability:High: Dung’s only threat would come from
conservatives in the event of an economic
shock. He has been prime minister since
2006.
Reform outlook:Medium to high: The goal is to fix SOEs
and improve economic stability, but he
must still placate conservatives.
Cambodia
Sam Rainsy (opposition)
Cambodia
Prime Minister: Hun Sen
Term: 2008–2013, third term
Party: Cambodian People’s Party
Stability:High: Relentless attacks on opposition
leaders and the adept use of patronage
politics have marginalized threats to his regime.
Vietnam
Truong Tan Sang (conservative)
Reform outlook:Medium: He will keep the economy
open, but high-level corruption and
patronage are negatives for the business
environment.
Laos
None
Asian Frontier Economies
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Defining the Business of Politics.
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Laos (Lao PDR)
Prime Minister: Thongsing Thammavong
Term: 2010–2015, first term
Party: Lao People’s Revolutionary Party
Stability:High: Laos has the most consolidated
regime in the region.
Reform outlook:Low to medium: He is slowly adopting
market reforms but remains reluctant to
implement more changes in bureaucracy
and rules.
Burma (Myanmar)
Prime Minister: Thein Sein
Term: 2011–2016, first term
Party: Union Solidarity and Development Party
Stability:Medium: He will likely face a challenge
in 2014 from opposition leader Aung San
Suu Kyi.
Reform outlook:Medium to high: Major changes are likely
in the business environment, but much
depends on reformists retaining the upper
hand politically.
Political stability will not be a major concern in the four Southeast Asian frontier
economies. Their political environments are likely to either remain stable or
improve substantially, in stark contrast to potential instability in Thailand,
the region’s established manufacturing center, and the uncertain outcome for
Indonesia’s 2014 elections.
In Vietnam, the reformist Prime Minister Nguyen Tan Dung survived a challenge from conservatives in the communist party (who blame him for the country’s
macroeconomic problems in recent years) just before his reelection in 2011. Dung
is more popular than any other politician in Vietnam, and unless the economy
suffers a severe shock during his term he will likely control economic policy until his
mandate ends in 2016. In Cambodia, Prime Minister Hun Sen has effectively used
both patronage politics and his control of the bureaucracy and judiciary to debilitate
the opposition. And while his domination of Cambodian politics does not help
build effective checks and balances, it reduces the possibility of policy reversals and
changes in the bureaucracy in the near term. Hun Sen has also been able to respond
to the population’s concerns, such as job growth, improved infrastructure, and
political stability. The Laotian communist party does not face any strong domestic
challenges either, and while factional infighting is an issue, it focuses on policy issues
rather than divisive battles that create political instability.
Burma is the one major exception, where radical political change has created
a wider set of opportunities and risks. Over the past two years, the government
has been implementing political and economic reforms that have the potential to
create radical changes, and further liberalization is likely. But the changes in Burma
are untested. At some point, the reforms may threaten established businesses with
Asian Frontier Economies
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Laos and Burma are less developed, as both have in
relative terms only recently emerged from isolation. In
Laos, the previous prime minister Bousasone Bouphavanh
implemented some pro-market reforms and reduced
corruption and cronyism. The current Prime Minister
Thongsing Thammavong has maintained these policies, but
Laos remains a relatively more difficult environment for
investors than the other three frontier markets given its lack
of infrastructure, its dependence on Thailand’s sea ports
(the country has no direct access to the sea), and its weak
regulatory environment. Recent opportunities in Laos have
been concentrated in natural resources, infrastructure, and
the energy sector. Meanwhile, Burma’s economy is based
predominantly on agriculture and natural resources.
Average 2000–2010
Vietnam
25
20
Percent
15
10
5
0
-5
00 001 002 003 004 005 006 007 008 009 010
2 2 2 2 2 2 2 2 2 2
20
Cambodia
20
Percent
15
10
5
0
-5
00 001 002 003 004 005 006 007 008 009 010
2
2
2
2
2
2
2
2
2
2
20
Laos (Lao PDR)
25
20
Percent
Differences among the four frontier markets are
more noticeable in the current state of their economies.
Despite its missteps over the past two years, Vietnam
remains the most advanced of Southeast Asia’s emerging
economies by a substantial degree. It has the largest
domestic market and the best production capabilities
among the four countries in question. Its infrastructure
and financial system are better developed than those
of the other countries, and it has shown the ability to
absorb investment in industries ranging from textiles
and heavy steel to semiconductors and machinery.
The corollary, however, is that Vietnam’s labor costs
are higher than in the other three frontier economies.
Cambodia opened up its economy to foreign investors in the early part of the previous decade and has
established itself as a destination for garments, textiles,
and tourism. But Cambodia’s population is only a fifth
that of Vietnam’s, which limits its attractiveness to
consumer goods firms. In addition, while Cambodia has
liberalized its investment rules, it suffers from noticeable
weaknesses in its business environment, such as weak
property rights and corruption.
Inflation rates
15
10
5
0
00 001 002 003 004 005 006 007 008 009 010
2
2
2
2
2
2
2
2
2
2
20
Burma (Myanmar)
60
50
40
Percent
strong ties to politicians or the military. Resistance from
these groups could slow economic reform. And while
it is unlikely, there is still the substantial risk that the
military could attempt to push back against reforms if its
privileged status were to be threatened.
30
20
10
0
-10
00 001 002 003 004 005 006 007 008 009 010
2
2
2
2
2
2
2
2
2
2
20
Source: Asian Development Bank
Asian Frontier Economies
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What could change
Integrating into the global economy
Total exports of goods and services as
a percentage of GDP
80
Vietnam
70
Cambodia
Laos (Lao PDR)
Burma (Myanmar)
60
Internet users per 100 people
Vietnam
20
Cambodia
Laos (Lao PDR)
Burma (Myanmar)
15
Percent
Percent
50
25
40
10
30
20
5
10
0
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20
0
99
19
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
Source: World Bank
The relatively benign outlook for the frontier economies gives them more
opportunities to pursue more rapid political and economic changes than is
available to their larger neighbors. These stable governments are likely to pay
increasing attention to public discontent, but they remain less likely to be
distracted by these issues, compared to their counterparts in Jakarta or Bangkok.
Some shifts will be driven by changes in the rest of Southeast Asia. Frontier
economies are likely to benefit from mounting production costs in the manufacturing centers located in southeastern China and Thailand. Manufacturers seeking
low-cost labor will, as they have over the past few years, either move to inland
locations in China or shift their production to other countries where labor costs
are lower. With labor costs rising and shortages of skilled workers being more
prominent in Vietnam, this process will likely reach as far afield as Burma and
Laos; this is similar to the flow of garment production to Cambodia seen over the
past ten years.
Economic policies will also change over the next few years. For Vietnam and
Cambodia, the goal will be oriented more toward creating a stable and predictable
environment, both for industrial and macroeconomic policy. The need for this
type of change became apparent over the past few years. Vietnam experienced two
serious bouts of macroeconomic instability due to high inflation and the impact
of profligate investment by its state enterprises combined with careless lending.
The economic shock from this process caused economic problems and has also led
some investors to delay or reconsider their plans in Vietnam.
Asian Frontier Economies
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08
20
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Per capita GDP growth rate
Vietnam
Cambodia
Laos (Lao PDR)
Burma (Myanmar)
15
12
Percent
9
6
3
0
-3
94 995 996 997 998 999 000 001 002 003 004 005 006 007 008 009 010
2
2
2
2
2
2
2
2
2
2
2
1
1
1
1
1
19
Source: World Bank
The experience in Burma has been different, and changes will be more
fundamental. Its recent economic growth has been based largely on foreign investment in energy and exports of commodities and natural gas. This trend will likely
continue, but it will probably be supplemented by higher levels of development
aid intended to expand infrastructure and improve government capabilities. The
regulatory system, which is a major impediment, will likely improve thanks to
investment and the implementation of a more liberal foreign investment law.
Improvements in the banking system and better macroeconomic management
are likely over the next two years. Changes in Cambodia and Laos will be more
muted, with tweaks to existing economic and industrial policies rather than
wholesale changes.
Investors will likewise encounter large variations in the bureaucratic environment. In some locations, such as in the cities of Ho Chi Minh and Da Nang in
Vietnam and in Phnom Penh in Cambodia, investors are likely to find more accommodating bureaucracies that respond to business concerns. Investors, however, are
likely to encounter more rigidity in Vientiane in Laos or in Vietnam’s Hanoi.
Asian Frontier Economies
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The future of the frontier markets
Bhutan
India
China
Light machinery
Infrastructure
Consumer goods
Electronics
Textiles/garments
Reform
expectations
Low
High
Rice/agricultural products
Oil/gas
Bangladesh
Burma
(Myanmar)
Hanoi
Laos (Lao PDR)
Ramree Island
Gulf of Tonkin
Hain an
Cheduba Island
Vientiane
Bay of
Bengal
Yangon
Gulf of
Martaban
Thailand
Bangkok
Cambodia
A nd am a n
I sla nd s
Ko Chang
Phnom Penh
Vietnam
M e rgu i
Arc h i p e l a g o
Andaman Sea
Gulf
of
T hai land
Dao Phu Quoc
South Chi n a Sea
Ko Samui
N ico b a r
I slan d s
Sum a t r a
Indonesia
Strait of Malacca
Malaysia
Asian Frontier Economies
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Southeast Asia’s four frontier markets will broadly
pursue the same course: moderate political stability,
improving economic liberalization, and further integration into the global economy. But the governments of
these countries (and across Asia more broadly) will turn
their focus away from growth at all costs. They will
instead concentrate on equitable and inclusive economic
expansion that either stabilizes or reduces perceptions
of inequality and leads to more sustainable economic
development. At the same time, differences in costs,
infrastructure, and regulatory capabilities mean that industrial development is also likely to vary. Vietnam will
probably remain the most advanced of the four frontier
markets because of its head start, but higher costs and
inconsistent management of the economy could become
more prominent problems for investors. Cambodia
and Laos will concentrate on basic manufacturing
intended to supply either low-cost products globally
(eg, garments and textiles) or intermediate products for
regional assembly hubs such as Thailand and southern
China. Cambodia will start to move up the production
chain slowly, starting with manufacturing automotive
components and small electric motors. Burma will be
at the back of the pack with only the most rudimentary
manufacturing capabilities, although its economy could
grow faster than those of its counterparts.
In the near term, however, the economies of Laos
and Burma will remain predominantly agricultural and
natural-resource based. The two countries have only
recently started to open up their economies to foreign
investment and still need substantial infusions of capital
for both the public and private sectors before they can
achieve the pace of industrialization seen in Vietnam
and Cambodia during much of the past decade. Much
will depend on whether the two countries’ governments
can implement the regulatory systems and infrastructure
required to attract investors. Burma is likely to pursue
these goals more aggressively than Laos, and as a result,
the pace of industrialization will accelerate quickly and
approach that of Cambodia later in the decade.
The development of these economies will spur
demand for more infrastructure including power plants,
ports, and toll roads. Burma has the worst infrastructure
among the frontier economies but will likely secure the
most development assistance. Cambodia and Vietnam,
Asian Frontier Economies
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Main export markets
Average 2005–2010
Vietnam
Singapore
Australia
China
Japan
US
0
5
10
15
20
Percent
Cambodia
Canada
Germany
UK
Japan
US
0
10
20
30
40
50
Percent
Laos (Lao PDR)
UK
Germany
China
Vietnam
Thailand
0
5
10
15
20
25
30
35
Percent
Burma (Myanmar)
Malaysia
Japan
China
India
Thailand
0
10
20
30
40
50
Percent
Source: Asian Development Bank
7
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which have significantly more infrastructure, will be under more pressure to
implement market-based pricing in order to attract foreign investors to help
finance badly needed upgrades.
Stronger growth in recent years and expectations of ongoing economic expansion heighten the probability that consumer markets will develop in these four
countries. The change will be most visible in Burma. After decades of economic
isolation, the inflow of development aid and private investment, as well as the
return of private capital, will boost both incomes and consumption, particularly
in the large cities. Rural incomes, meanwhile, will be helped by improvements
in agricultural efficiency driven by investment in infrastructure, freer trade, and
higher levels of foreign investment.
Conclusion
There are three general risks to investors in these frontier economies.
Macroeconomic management: All four governments are still learning
to manage the challenges associated with open economies. These
problems include avoiding the inflation or currency volatility caused
by large investment flows, and maintaining stable banking systems
during boom and bust cycles. Economic officials in these countries do
not yet possess the skills needed to do this. As a result, a major internal
or external shock could cause significant macroeconomic instability.
Political regression: A rollback of recent political liberalization is a
risk in both Cambodia and Burma. Cambodia’s political stability is
dependent on the ability of Prime Minister Hun Sen rather than the
development of institutions. That factor implies noteworthy risks if
his power fades or after he leaves office. The reform process seems
entrenched in Burma for the near term, but there is little certainty
about how the government will deal with public discontent (if reform
expectations are not met) or with any pushback from the military if its
privileged status is threatened.
Corruption: Corruption will be an issue for investors in all four
countries both at the operational level and as a source of distortion in
economic policy and bureaucratic behavior. None of the four frontier
economies has strong institutions capable of effectively dealing with
the issue.
Asian Frontier Economies
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8