An investor’s paradise : trade in the Mekong region

Shalmali Guttal, Focus on the Global South, March 2006*

The Mekong region is buzzing with trade and investment activities, and there are many takers for its abundant and diverse natural wealth and growing work-force.

A Plethora of Commitments

Trade in the Mekong region is pursued through a variety of official and non-official means. At the non-official end of the spectrum is border trade across the thousands of kilometers of international boundaries in the region. Carried out largely by small merchants and itinerant traders, such trade includes goods as diverse as vegetables, fruit, fish and fish products, livestock, rice, fertilizers and pesticides, processed foodstuffs, gemstones, timber, forest products, animals and animal parts. Much of this trade is unregulated and some is illegal, but it serves as an important source of livelihood for those living along the borders. Border trade-especially in the Golden Triangle area–also includes narcotics and sex work, although this is rarely registered in official economic reports about the region.

At the official end of the spectrum are bilateral trade and investment agreements, and regional cooperation agreements through the ASEAN (Association of Southeast Asian Nations), the Greater Mekong Sub-region Economic Cooperation Programme (GMS), and the more recent Ayeyawadi-Chao Phraya-Mekong Economic Strategy (ACMECS) framework. This is where the big money is.

Vietnam signed a bilateral trade agreement (BTA) with the US a few years ago, and Thailand is currently negotiating BTAs with the US and Australia respectively. Indian companies are also poised to jump into the regional trade fray. Joining hands with the Asian Development Bank (ADB), the Confederation of Indian Industry (CII) established a Mekong Development Forum in November 2005, which seeks to expand India’s share of trade being conducted in the GMS. According to CII, the volume of trade in FY 2003-2004 alone was estimated at US $ 195.4 billion. Of particular interest to India are trade and investment opportunities in the transport, energy, infrastructure and tourism sectors.[i]

Also of importance to countries in the Mekong region are the current negotiations for more trade liberalization commitments within the World Trade Organisation (WTO). The region boasts two of the newest entrants to the WTO, albeit with vastly differing economic strengths: The Peoples’ Republic of China (China) and Cambodia. Thailand is already a long-standing WTO member, while Vietnam and the Lao PDR are negotiating their entry into the WTO. Despite its growing strength as a global trade power, China has thus far played a relatively low-key role within the WTO, it’s most visible action being hosting the sixth Ministerial Conference in December, 2005. Cambodia, as a Least Developed Country (LDC) is not required from making further commitments for at least another five years. However, both Cambodia and China have already made significant liberalization commitments when they became WTO members. Although majority of the Mekong region countries are not presently in a position to alter the current course of WTO negotiations, they will certainly be expected to operate by the rules and commitments written into a new WTO trade deal. LDCs (which include Cambodia) and countries in the process of accession (Lao PDR and Vietnam) are constrained from passing or implementing national regulations that contradict their abilities to meet WTO commitments in the future.

Possibly the most sustained and high profile impetus for free trade and investment in the Mekong region has come from the ADB through the GMS. Initiated in 1992, the GMS is an ambitious master plan to create a “frontier” of rapid economic growth through regional economic cooperation. The GMS aims to transform the rich human and natural endowments of the Mekong region into a region-wide free trade and investment area, fuelled and led by private sector growth. Majority of the capital investment through the GMS programme has been in the areas of transportation infrastructure (road, railways, air and waterways), power/electricity, and trade and investment facilitation. Efforts towards regional economic cooperation had already begun as early as the 1950s among the Lao PDR, Thailand, Cambodia and Vietnam, but were suspended because of revolutionary wars in the region. By establishing the GMS in 1992, the ADB seized the opportunity to fill a post Cold War capital vacuum in the Lao PDR, Vietnam and Cambodia and also secured its own place and influence in the region’s economy. Since 1992, more than 100 projects in transportation, energy, telecommunications, trade and investment, tourism, environment, human resources and agriculture have been launched through the GMS, although investment capital for most of these projects is still to be secured.

On July 4-5, 2005, the Heads of States of the GMS countries met in Kunming at the second GMS Summit and declared that, “The GMS is committed to creating a conducive and competitive environment for trade, investment and private sector development. To strengthen market fundamentals, we will promote financial efficiency, a sound policy and institutional, legal and regulatory framework, and undertake further facilitation and harmonization of trade and investment regimes.”[ii] The Kunming Declaration emphasized the importance of a “GMS Strategic Framework for Action on Trade Facilitation and Investment (SFA-TFI) that commits to time-bound, specific measures to reduce trade and business transaction costs in the sub-region,” and endorsed the importance of the private sector as the “engine of growth” in the Mekong region. Also emphasized were the importance of transport links across the region, rules and operating agreements for regional power trade, and cross border infrastructure: “A well-built, seamless, multi-modal infrastructure is essential to the facilitation of trade, movement of people and the provision of basic services throughout the whole region. We therefore commit ourselves to fully ‘connecting GMS’.”[iii]

Prior to the Kunming GMS Summit, the ADB reported a financial shortfall of around US$ 10 billion for sub-regional infrastructure construction over the next 10 years.[iv] In October, 2005, the ADB approved a Technical Assistance (TA) grant of US $ 2.5 million to boost project development, monitoring and evaluation in the GMS and private sector involvement in GMS projects through public-private partnerships.

Staking Their Claims

Although only one of China’s provinces-Yunnan-is officially in the GMS, China has played a leading role in speeding up investments in the Mekong region, especially in transportation and energy infrastructure. China is arguably becoming the most dominant driver of trade and investment in the Mekong region, as well as one of the most sought after markets for exports of the region’s raw materials and processed products. China has signed a number of agreements with other GMS countries to further Chinese collaboration in areas such as transportation, animal epidemics prevention, information superhighway construction, power trade, tourism and environmental protection. According to an official Chinese daily newspaper, “Ever since the inception of the GMS Programme, China has been both a beneficiary of, and a contributor to it and has made large investments in infrastructure construction within the region.”[v]

Over the past 10 odd years, Chinese leaders have frequently invoked the Mekong River as both, a symbol and reflection of the deep ties that bind the people of the region. In 2004, China set up a special fund totaling $20 million within the ADB for poverty alleviation in the Mekong region. Since 2002, China has already cut or completely exempted tariffs for 600 products from the Lao PDR, Cambodia and Myanmar. After its accession into the WTO, China promised to “fast-track” the WTO accession processes of Cambodia and the Lao PDR. In the Kunming GMS Summit, Chinese Premier Wen pledged that China would unilaterally expand the range of products eligible for preferential tariffs from the Lao PDR, Cambodia and Myanmar starting from January 1, 2006 to boost intra-regional trade co-operation.[vi]

Physical infrastructure is crucial to facilitating trade and investment, and China is pouring massive amounts of money towards transportation and energy facilities. China has funded the “North-South Corridor,” a highway that links Kunming to Bangkok via the Lao PDR, which is scheduled to be fully operational by 2007. For China, one of the most important trade routes is the 4,425 km long Mekong River itself and altering the Mekong’s geography in order to make it navigable has been a subject of much regional controversy over the past decade. On March 6, 2006, the Joint Coordination Committee of Navigation on Lancang-Mekong[vii] River met in Champassak, Lao PDR, to discuss commercial navigation on the Lancang-Mekong as a way to boost trade activities among the upper Mekong countries. A Lancang-Mekong navigation channel is being developed through inter-governmental cooperation among China, the Lao PDR, Myanmar, Thailand and Vietnam, with massive financial support from the ADB and bilateral donors. It is estimated that a total of US $ 36.11 million of capital assistance will be committed to Lancang-Mekong navigation development and management by the ADB, governments of the Netherlands, Sweden and Britain, and other international organizations.[viii]

While an intra-ASEAN free trade agreement (AFTA) has been stalled for some years now, China has given trade with the ASEAN a new push through its ‘ASEAN+3′ trade framework. At a summit meeting in Vientiane, Lao PDR in November 2004, China, Japan, South Korea, and the 10 ASEAN member states agreed on an arrangement by which each ASEAN member can negotiate a bilateral free trade agreement with China. The framework allows duty free entry of an ASEAN partner country’s goods into China for a period of about three years-also known as “early harvest”-after which, China gains reciprocal duty free access for Chinese goods into the partner country’s markets. The “early harvest” offer is not simply an act of goodwill; it would provide China much needed raw materials, agricultural commodities and minerals, and also pave the way for tariff free access of China’s value added products to ASEAN markets.

China’s growing influence is in direct competition with the Mekong region’s traditional economic “hub,” Thailand. With its well developed export capacity and long standing relationship with the world’s large capitalist powers, Thailand has been the most voracious consumer of the region’s natural resources, as well as the region’s favoured destination for capital, labour, goods, services, and tourism. Since its recovery from the 1996-98 economic crisis, Thailand has aggressively promoted itself as a champion of Asian self-sufficiency with Thai businesses leading the charge. A 2005 joint report by the United Nations (UN) and the Thai Foreign Ministry states that Thailand gives more aid to the world’s poorest nations than do most rich countries if measured as a percentage of its income. Thailand imports more from LDCs (3.1 % of its total imports) than any of the members of the Organisation for Economic Co-operation and Development (OECD).[ix] Three of its regional neighbors-Myanmar, the Lao PDR and Cambodia-are LDCs, and Thailand could well be the largest importer of agricultural products and electricity from the Lao PDR.

Thailand is clearly the leader in the ACMECS framework, which brings together Myanmar, the Lao PDR, Thailand, Cambodia and Vietnam. Named after the three major river systems that run through these countries, the ACMECS aims to increase cooperation in five main areas: trade and investment facilitation; agricultural and industrial cooperation; regional transport linkages; tourism, and; human resource development. Building on existing regional and bilateral cooperation agreements, ACMECS seeks to transform the border areas of its five members into special economic zones of high growth. With the fertile lands and hydropower potential that the river basins offer, key areas of investment are agriculture and energy.

China’s growing influence in the Mekong region is also viewed with concern by Japan, which has attempted to maintain a large economic and political presence in the region. As far back as the mid 1960-s, Japan attempted to be a “bridge builder” among the newly formed ASEAN and the communist regimes of Indochina. After the end of the Cold War, Japan stepped up its involvement in the region. In 1990, it hosted an international peace conference for Cambodia. In 1992, Japanese troops were deployed in their first overseas mission since World War II by participating in UN peacekeeping operations in Cambodia prior to Cambodia’s first elections. In 1993, Japanese Prime Minister Kiichi Miyazawa proposed the creation of the “Forum for Comprehensive Development of Indochina,” which held its first ministerial-level meeting in Tokyo in February 1995.

Japan is the largest bilateral donor in Cambodia, Lao PDR, Myanmar and Vietnam (CLMV). On its own, as well as in collaboration with the ADB, Japan has funded several infrastructure projects that transcend national borders in the Mekong region. Most high-profile among these is the “East-West Corridor,” a super highway-including a bridge over the Mekong River-that links Muktahan in northeastern Thailand, Savannakhet in southern Lao PDR and the port of Da Nang in central Vietnam. Scheduled for completion next year, the highway is expected to be extended to Mawlamyine in southern Myanmar at a future date. A second “East-West Corridor” is also in the works to link Bangkok, Phnom Penh and Ho Chi Minh City, scheduled for completion in 2006-2007.

In September 2005, Japan inaugurated an economic ministerial meeting of the CLMV countries in Vientiane (Lao PDR) in which, the ministers agreed on a new Japanese assistance package for the development of the Mekong region, including building a production and distribution network across the region and facilitating intra-regional trade through the use of IC tags (a digital medium that uses radio frequency identification). Japan also committed to supporting capacity-building for economic planning and building human resources for the management of electricity/power networks. The Japanese government claims that it will hold events in Tokyo in 2006 to promote imports from the Mekong region and encourage more Japanese investment in the region.[x]

Agreements vs. People

Official trade is being simultaneously negotiated on multiple fronts by the countries in the Mekong region, but with unequal and uneven institutional infrastructure and capacity among them. The smaller economies-Cambodia, Lao PDR and Vietnam–are at a disadvantage and have to rely on external financing and policy “advice” in shaping their trade and investment agreements. GMS projects are developed almost entirely by ADB hired private consultants and firms. Cambodia’s accession to the WTO was led by the World Bank through the Integrated Framework for Trade Related Technical Assistance to LDCs (IF), and negotiated among a small elite group of decision makers. Most senior level staff in line ministries in Cambodia as well as National Assembly Members are still unfamiliar with the WTO, let alone conversant about the terms of the accession agreement. In the Lao PDR, the situation is not much different, and senior officials in key sectors are overwhelmed by the demands of the WTO accession process. Vietnam has the institutional capacity to negotiate but not the required infrastructure and has wisely slowed down its WTO accession process. However, all three countries rely on loans from the World Bank, IMF and ADB for financing their social and physical infrastructures, which come with rigid policy conditionalities that are antagonistic to building strong and self-reliant domestic economies.

At a workshop on LDCs and trade in Phnom Penh in September, 2005, a farmer asked how Cambodia was able to export rice when the farmers in the country are themselves hungry. His question-which was not answered–points to a serious and fundamental concern that is being sidelined in the rush towards cementing trade deals: who are the ultimate beneficiaries of free trade and investment agreements in the Mekong region?

The Kunming Declaration commits to strengthening the GMS Business Forum and to involving industry and businesses in the planning and implementation of GMS programmes to render these “relevant and responsive to their needs.”[xi] But there is no parallel commitment from GMS leaders towards strengthening peoples’ participation in making decisions about their environments, labour and resources. During the second ACMECS Summit in Bangkok on November 3, Bounnhang Vorachit, the Prime Minister of the Lao PDR, proposed that contract farming be promoted as a primary form of agricultural cooperation among the ACMECS members.[xii] Contract farming and tree plantations are already on the rise in the Lao PDR, Cambodia and Vietnam and while agribusinesses and middlemen are reaping profits from these ventures, local farming communities are left with increased debt burdens and decreased food and livelihood sources.

Clearly, private sector led, export oriented trade and investment is the economic model that governments in the region have adopted. However, past experience indicates that this model is not likely to bring benefits to majority of the people of the region. According to Aileen Kwa, a researcher with Focus on the Global South, “An example of how the export model does not work is Thailand.” Real farm income in Thailand has not increased since 1977, whilst spending on agricultural inputs has increased over the same period. Small farmers are getting increasingly indebted and many farming families have lost their land due to heavy debts that they are unable to service simply because their incomes have fallen so low. Out of 5.7 million farming families, 4.7 million do not have enough land to sustain themselves. Forty percent of rural Thailand lives below the poverty line and the Food and Agriculture Organisation (FAO) has found that undernourishment in rural communities is on the rise. Cambodia has already had a taste of the risks of free trade when the end of the quotas regime led to the closure of numerous garment factories, thus putting thousands of workers out of jobs.

In Cambodia, the Lao PDR and Vietnam, the supposed promise of duty-free and quota free access to the markets of rich countries through the WTO is being touted by donors and policy makers as opportunities for these countries to “trade themselves out of poverty.” However, a deepening agrarian crisis and distress migration from rural to urban areas indicate that exporting primary commodities and natural resources, and selling top-soil to agribusiness companies will entrench rather than alleviate poverty. Garment factories in these countries are filled with young, mostly female workers, many of who work long hours so that their families can hold on to the small family plots that are usually their only source of economic security. And while a factory worker may make more money than a peasant farmer, work conditions and compensations are not necessarily adequate. Over the past three months, workers in foreign owned footwear factories in southern Vietnam have been striking in protest against low pay, forced overtime and bad working conditions. Factory owners complain that in order to compete in international markets, they have to keep production costs low. In a letter to Vietnam’s Prime Minister, Alain Cany, Chairman of the European Chamber of Commerce in Vietnam, asked the Government to exert more control over the strikers and expressed regret that companies had not been consulted over an increase in minimum wage. According to Cany, one of Vietnam’s attractions for foreign investors has been that the “work force is not prone to industrial action.”[xiii]

Perhaps the most critical question regarding free trade and investment in the Mekong region is how it will affect local economies, employment, livelihoods, the environment, food security and access to essential services for the region’s peoples, majority of who are engaged in subsistence production and rely heavily on their immediate environment for survival. None of the official trade and investment agreements have been developed through the participation of local and national communities, nor are they subject to national democratic oversight. But these issues seem unimportant to the region’s governments as they forge their way into yet more trade and investment agreements.

* Shalmali Guttal can be reached at [email protected]

[i] the hindu(click here to go to the link or right click)

[ii]see ADB Page

[iii] Ibid.

[iv] For more information on the GMS, see the ADB website: http://www.adb.org/

[v] Hu Xuan /China Daily, July 7, 2005, page 4.

[vi] Ibid.

[vii] The Mekong River is known as the Lancang in China.

[viii] Xiao Yu-hui, Kunming Daily. 7 March 2006.
http://news.yninfo.com/yunnan/jingji/2006/3/1141712581_18/

[ix] AFP, 14 September, 2005; see also the Thai Foreign Ministry website: http://www.mfa.go.th/web/35.php?id=14021

[x] China, Japan tug-of-war over Indochina. Hisane Masaki, October 5, 2005. http://www.atimes.com/atimes/Japan/GJ05Dh03.html

[xi] See ADB page