Greater Mekong Subregion: From Geographical to Socio-economic Integration

8. Trade and Investment in the Greater Mekong Subregion: Remaining Challenges and the Unfinished Policy Agenda

8 trade and inveStment in the greater mekong SuBregion remaining challenges and the unfinished policy agenda* Jayant Menon and Anna Cassandra Melendez The Greater Mekong Subregion (GMS) is often described as one of the most successful stories of economic transition and integration among developing countries.1 For much of the 1970s and early 1980s, while the rest of Asia was busy growing and integrating with the global economy, the GMS remained extremely poor and isolated — the outcome of years of conflict and central planning in Cambodia, the Lao People’s Democratic Republic (Lao PDR), Myanmar, and Vietnam (CLMV). Beginning in the mid-1980s, however, these countries began a gradual process of reform and liberalization. The CLMV countries’ transition towards a market-based system has allowed the GMS to reinvent itself as one of the most dynamic subregions in the world. In the last twenty years, the GMS has grown at a faster pace than the whole of developing East Asia and the Pacific, with much of this growth coming from the CLMV countries. While Thailand and the rest of Asia reeled from the impact of the 1997/98 Asian financial crisis, the CLMV countries continued to post positive growth, given their limited connection 119 120 Jayant Menon and Anna Cassandra Melendez to global financial markets at the time (Figure 8.1). While these countries were not as immune to the more recent global financial crisis (GFC), with sharp drops in growth that have begun to reverse only recently, this underlies a decade of growing openness and integration with the global economy. The sustained economic growth leading up to the GFC has been accompanied by a gradual shift away from agriculture, which has traditionally accounted for the biggest share of value added in the CLMV countries. Across the subregion, industry, manufacturing, and services now account for a bigger share of value added (Table 8.1). This economic progress has translated into marked improvements in human development outcomes across the subregion (Table 8.2). GDP per capita in constant 2000 U.S. dollars has more than doubled in Cambodia, Lao PDR, and Vietnam since the early 1990s. Infant mortality rates have declined rapidly in the last fifteen years, while literacy rates have shown gradual improvements since the beginning of the decade. Perhaps more importantly, poverty rates (that is, the poverty headcount ratio at $1.25 a day, PPP) have fallen dramatically across the subregion. In Cambodia and Thailand, poverty rates have declined by roughly half in just a little over a decade; meanwhile, in Vietnam, poverty rates fell from 63.7 per cent of the population in 1993, to 21.5 per cent of the population in 2006. Strong rates of economic growth have been fuelled in part by increased trade and investment in the subregion. Since the beginning of the 1990s, increased trade has played a huge part in spurring growth in the GMS, with exports playing a critical role in the subregion’s recovery after the 1997/98 crisis. Just as trade has increased throughout the region, foreign direct investment (FDI) inflows have also risen dramatically over the last two decades. These positive developments notwithstanding, a number of critical challenges continue to limit the subregion’s potential to reap gains from trade and investment. This chapter explores these challenges and identifies key elements of the unfinished policy agenda, which need to be addressed going forward. The chapter is organized in five sections. Following the introduction, the next section looks at the evolution of trade and investment policy and economic cooperation in the GMS countries, highlighting policy changes that have helped spur trade and investment growth. The third section brings together available data to examine the changing structure of trade and investment in the GMS. The following section examines remaining challenges and identifies key elements of the unfinished policy agenda. A final section concludes. Trade and Investment in the GMS 121 Figure 8.1 gDP growth in gMS Countries, 1990–2009 Source: Asian Development Bank Statistical Database System (SDBS). -15% -10% -5% 0% 5% 10% 15% 20% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Cambodia Lao PDR Myanmar Thailand Vietnam 122 Jayant Menon and Anna Cassandra Melendez Table 8.1 economic growth and restructuring in the gMS Country/Region Real GDP growth (%) (in constant 2000 US$) Agriculture Industry Manufacturing Services 1990 1995 2000 2005 – – – – 1995 2008...