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.