Three SE Asian nations face problems entering ASEAN
Three SE Asian nations face problems entering ASEAN
By Riyadi
BANGKOK (JP): Problems remain looming toward the adoption of
Cambodia, Laos and Myanmar into the realm of the Association of
Southeast Asian Nations (ASEAN) as they are struggling over
reforming their economy.
Unlike most countries in ASEAN, all three have embarked on a
major structuring of their economy from a socialist, centrally
planned economy to a market oriented one.
The economic liberalization experiences of all three
countries, plus Vietnam, began in response to external crises
which had profound effects on their economies, according to Maria
Soccorro Gochoco-Bautista and Maria Claret M. Mapala -- both
economists at the University of the Philippines.
The fall of the former Soviet Union and the loss of trade and
subsidies from the Soviet bloc necessitated dramatic changes in
the way their economies operate.
Liberalizing socialist economies is not an easy task. Under
the old socialist system, the government owned all agricultural
and industrial property and controlled the price. The system of
taxation was largely implicit and uncodified.
With liberalization and market reforms, price controls are
removed to varying degrees to allow the price signaling mechanism
to allocate resources in place of central planning. State
ownership is reduced as private property rights evolve.
Consequently, the state's ability to raise revenues will collapse
for a certain period of time.
Cambodia is one of the poorest countries in the world, with a
per capita income of US$290, although in 1990 it was only $119.
Agriculture still accounts for almost half of the gross domestic
products (GDP).
In 1979, when Cambodia was invaded, its economy was in ruins.
There were no industry, education system, or currency. The new
socialist government then embarked on reconstructing the economy
along Soviet lines. And Cambodia received about $80 million in
aid from the Soviet bloc.
Withdrawal of this aid in 1990 had major adverse effects on
the Cambodian economy. The budgetary deficit grew to
unsustainable levels. To finance the deficit, the government
resorted to borrowing from the state bank, and the result was an
inflation of over 100 percent.
Nearly two-thirds of total revenues in 1989 were made up of
non-tax revenues, mainly from the sale of timber. This fell to
less than one-fifth in 1993 but increased to one-third in 1995.
The royal government took power in 1993 after a UN-sponsored
election, at a time when Cambodia had already made progress in
its transition to a more market-oriented economy.
Deputy director of the Cambodian Ministry of Economy and
Finance's ASEAN department, Kun Nhem, said revenue mobilization
became a key element in the current Cambodian government's fiscal
strategy.
The government targeted to increase the revenue ratio from the
current 9 percent of the GDP -- one of the lowest in the world --
to 13 percent by the end of the century.
"The government will act on two fronts: putting in place the
structural elements of a modern tax system and strengthening the
administrative capacity to collect taxes," Kun Nhem said at a
meeting here.
A comprehensive tax reform was promulgated in February 1997.
And the government is working on providing rulings to support the
tax law.
On the monetary side, Cambodia has followed a market-oriented
exchange rate policy since 1993. It is basically managed-
floating, and from July last year, it has been set equal to the
rate at three major markets in Phnom Penh the previous day.
Since 1995, the exchange rate has been broadly stable. After a
depreciation of 9 percent in 1994, the exchange rate appreciated
by 2.4 percent in 1995, due to low inflation.
Cambodia has also transformed its monobanking system into a
two-tier system, consisting of the central bank and commercial
banks, and has allowed foreign banks to enter the country.
In general, macroeconomic performance has shown significant
progress. Economic growth rebounded strongly from 4 percent in
1994 to 7.5 percent in 1995 and 6.5 percent last year. Inflation,
which had soared to over 100 percent in 1993, dropped to single
digits in 1995 and 1996.
Cambodia has made significant progress in investment by
enacting an investment law in 1994 which allows 100 percent
ownership. It has also taken steps to revise the commercial code,
provide guarantees against nationalization and expropriation, to
permit free repatriation of profits and to attract foreign
investment.
Since the promulgation of the investment law, the government
approved 202 investment applications between August 1994 and
August 1995. And last year, the government had approved
investment projects worth $1.33 billion.
Although much progress had been made, Cambodia's trade
remained very small. Domestic exports reached $265 million in
1995, of which 70 percent was from timber. In addition, it
reexported certain products, whose value exceeded domestic
exports in 1995.
Laos
The New Economic Mechanism, introduced in 1986, represented a
major shift in the economic policy of Laos. The program embodied
commitment and plans to reform the economy from a centrally
planned system to a market-oriented one.
The program, however, did not really work until late 1989,
when the International Monetary Fund and the World Bank helped
the structural adjustment program.
Within the next five years, the implementation of the program
had been largely successful. Several small and medium state firms
have already been privatized. Most prices and the exchange rate
were liberalized and stabilized. Inflation rate, which was 60
percent in 1989, was brought down to 6.7 percent by 1994.
Developments in the financial sector have also taken place.
Like Cambodia, Laos has also established a two-tier banking
system.
There was also some success in the fiscal picture, as
suggested by the fall in an overall fiscal deficit to 9.7 percent
of the GDP by 1995 from 14.4 percent in 1990. The decrease was
partly due to the increase in revenues from 9.9 percent of the
GDP in 1990 to 12.5 percent in 1995.
During the same period, the share of taxes to total revenues
increased from 62 percent to 82 percent. However, almost 50
percent of the tax revenues were from import tariffs and timber
royalties.
The efforts toward market economy also succeeded in
transforming the structure of the economy. Between 1990 and 1995,
agriculture's share of total output fell from more than 60
percent to 55 percent of the GDP, while the industry's share
increased from 14 percent to 18.5 percent of the GDP.
The economy grew by an impressive average rate of 6.5 percent
per annum from 1990 to 1995, with a peak of 8.1 percent in 1994.
Inflation, however, rose to 19.4 percent in 1995, after having
fallen to some 6.5 percent in the previous two years.
Myanmar
Myanmar began its economic reform in 1988/1989 after pursuing
development for a quarter of a century following a "Burmese Way
to Socialism".
The reform program embraces a private-sector driven
development strategy and, as such, removes restrictions on
private enterprises, allows the private sector to participate in
foreign trade and allows private ownership of financial
institutions.
Unlike Cambodia and Laos, Myanmar is a founder member of the
General Agreement on Tariffs and Trade and also a founder member
of the World Trade Organization. Thus, it is more prepared to
follow legally binding procedures.
It has also been inviting foreign investment since the passage
of a foreign investment law in 1988. The sectors open for foreign
participation include mining, oil exploration and production,
power generation, manufacturing and infrastructure.
Since then, foreign direct investment flows increase
significantly. As of last February, the government had approved
investment by 244 companies from 21 countries worth $6 billion.
On the fiscal side, the Myanmar government has put emphasis on
maintaining high growth. Consequently, it has suffered from a
deficit, which is kept at around 5 percent of the GDP.
To finance the deficit, the government issues three to five-
year Treasury Bonds and sells them to the public. Up to last
January, the government had sold Kyat 3.3 billion ($550 million)
worth of bonds.
On the monetary side, the Central Bank of Myanmar has used a
combination of market-friendly instruments to control money
supply, including reserve requirements for commercial banks,
interest rates and open-market operations.
The reform process has, so far, produced encouraging results.
Trade increased significantly, 50 percent of which was undertaken
by the private sector.
The value of external trade reached the peak level of Kyat
15.8 (about $2.6 billion) in 1995/1996. Trade deficit reached
Kyat 3.9 billion.
The economy posted a strong growth of 6.8 percent in 1994, 7.5
percent in 1995 and 8.2 percent in 1996. The growth was mainly
driven by the mining and the construction industries.
Myanmar, however, remains a least-developed country, with a
per capita income of $200 to $225 in 1995. Nevertheless, its rich
national resources will continue to attract foreign investors.
"In the light of strengthened macroeconomic foundation of
Myanmar, and the fact that Myanmar's abundant natural resources
are still not fully exploited, there is ample scope and room for
collaboration and cooperation from neighboring countries," said
Daw Thaung Tin, deputy director general of the Planning
Department at Myanmar's Ministry of National Planning and
Economic Development.
Warning
Mapala warned that although significant progress had been made
by all three countries, there was still a long way to go until
these reforms were completely and satisfactorily undertaken.
"During the economic reforms, stumbling blocks and bottlenecks
will present themselves as constraints to the process, making an
already complicated task of transition even more difficult," she
said.
She suggested that the Cambodia, Laos and Myanmar governments
continue to put in place policies, infrastructure and
institutions necessary to relax constraints and ensure a
successful transition into a market system.
As the political decision to access the three countries into
ASEAN had been made, ASEAN countries should also help them in
their efforts in transforming their economies into market-driven
ones, said Indonesia's Center for Strategic and International
Studies executive director, Mari E. Pangestu.
She said ASEAN should also think of giving them concessions in
terms of joining the ASEAN Free Trade Area (Afta), as it had
accorded to Vietnam when it entered the grouping in 1996.
In joining ASEAN, Vietnam was allowed to accede to Afta
immediately but was given more flexible terms whereby it will
have a time frame to implement Afta commitments to 2006, or three
years after the Afta deadline.
Under Afta, member countries are required to cut their tariffs
under the Common Effective Preferential Tariffs to below 5
percent by 2003.