burma, laos, cambodia, and vietnam: same same, but different · pdf fileburma, laos, cambodia,...

Asian Frontier EconomiesBurma, Laos, Cambodia, and Vietnam: Same same, but differentThe 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 groupDefi ning the Business of Politics.

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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

21 June 2012

Roberto Herrera-LimDirector, Asia+1 [email protected]

Asian Frontier EconomiesBurma, Laos, Cambodia, and Vietnam: Same same, but different

Contents

Executive summary . . . . . . . . . . . . . . . . . . . . 1

Political and industrial profiles . . . . . . . . . . . . . . . . . 1

What could change . . . . . . . . . . . . . . . . . . . . 4

The future of the frontier markets . . . . . . . . . . . . . . . . 6

Conclusion . . . . . . . . . . . . . . . . . . . . . . . 8

Asian Frontier EconomiesPrepared for PricewaterhouseCoopers Co., Ltd. | 21 June 2012 1


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Executive summaryThe frontier economies of Southeast Asia will, as a whole, become more inte-grated 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 profilesVietnam

Prime Minister: Nguyen Tan Dung

Term: 2011–2016, second term

Party: Communist Party of Vietnam

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 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 re-gime.

Reform outlook: Medium: He will keep the economy open, but high-level corruption and patronage are negatives for the business environment.

The political alternatives

BurmaAung Saan Suu Kyi (opposition)

CambodiaSam Rainsy (opposition)

Vietnam Truong Tan Sang (conservative)

Laos None



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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 chal-lenge 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



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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.

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 inves-tors 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.

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.

-5

0

5

10

15

20

25

20102009

20082007

20062005

20042003

20022001

2000

Vietnam

Perc

ent

-5

0

5

10

15

20

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Cambodia

Perc

ent

0

5

10

15

20

25

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Laos (Lao PDR)

Perc

ent

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0

10

20

30

40

50

60

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Burma (Myanmar)

Perc

ent

Inflation ratesAverage 2000–2010

Source: Asian Development Bank



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What could change

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80

20102009

20082007

20062005

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19981997

19961995

19941993

Integrating into the global economyTotal exports of goods and services as a percentage of GDP

Source: World Bank

Perc

ent

Vietnam

Laos (Lao PDR)Cambodia

Burma (Myanmar)

Vietnam


Burma (Myanmar)

0

5

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25

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20062005

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Internet users per 100 people

Perc

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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 manufac-turing 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.



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-3

0

3

6

9

12

15

20102009

20082007

20062005

20042003

20022001

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19981997

19961995

1994

Per capita GDP growth rate

Source: World Bank

Perc

ent

Vietnam


Burma (Myanmar)

The experience in Burma has been different, and changes will be more fundamental. Its recent economic growth has been based largely on foreign invest-ment 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 environ-ment. 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 accom-modating bureaucracies that respond to business concerns. Investors, however, are likely to encounter more rigidity in Vientiane in Laos or in Vietnam’s Hanoi.



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The future of the frontier markets

South China Sea

Strait of Malacca

Gulfof

Thai land

Gulf of Tonkin

Gulf ofMartaban

A n d a m a n S e a

B a y o fB e n g a l

Hainan

AndamanIs lands

MerguiArchipelago

NicobarIs lands

Sumatra

Dao Phu Quoc

Ko Chang

Ko Samui

Ramree Island

Cheduba Island

Vietnam

China

Thailand

Laos (Lao PDR)

Cambodia

MalaysiaIndonesia

Burma(Myanmar)

IndiaBhutan

Bangladesh

Hanoi

Bangkok

Vientiane

Phnom Penh

Yangon

Light machinery

Infrastructure

Consumer goods

Rice/agricultural products

Electronics

Textiles/garments

Oil/gas

Reformexpectations

Low

High

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Southeast Asia’s four frontier markets will broadly pursue the same course: moderate political stability, improving economic liberalization, and further integra-tion 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 in-dustrial 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,

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US

Japan

China

Australia

Singapore

Vietnam

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US

Japan

UK

Germany

Canada

Cambodia

Percent

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Thailand

Vietnam

China

Germany

UK

Laos (Lao PDR)

Percent

0 10 20 30 40 50

Thailand

India

China

Japan

Malaysia

Burma (Myanmar)

Percent

Main export marketsAverage 2005–2010

Source: Asian Development Bank



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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 expan-sion 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.

ConclusionThere 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.

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