1

Integrating the Mekong Region into ASEAN

Chia Siow Yue 1/

Singapore Institute of International Affairs
chiasy@singnet.com.sg

Paper for presentation at the Seminar on

Accelerating Development in the Mekong Region – The Role of Economic Integration
26-27 June 2006
Siem Reap, Cambodia

1. Introduction
The focus of this paper is on the Mekong countries of Cambodia, Laos, Myanmar and Vietnam
(CLMV). Since the mid-1980s, they have been undergoing economic transition, from central planning to
market economy, from inward-looking to outward looking economic development strategies and policies,
and from close economic relations with the Soviet-bloc to closer economic relations with market
economies.
With the end of the Cold War and the break-up of the Soviet-bloc, Cambodia, Laos and
Vietnam have been seeking integration into the global and regional economy. Membership in the
WTO has been a long drawn out process, involving wide ranging reforms in economic policies and
institutions and legal frameworks in CLV. Cambodia applied for WTO membership in December 1994
and finally joined the WTO in October 2004. Vietnam applied for WTO membership in January 1995
and is expected to join the WTO by end-2006. Laos applied for WTO membership in July 1997 and
negotiations are still ongoing. WTO membership will enable these countries to receive non-
discriminatory MFN status in international trade, a benefit enjoyed by WTO’s 150 members. Myanmar is
one of the founding members of the WTO in 1995.
Regionally, ASEAN was formed in 1967 and AFTA established in 1992. Vietnam acceded to
ASEAN in 1995, Laos and Myanmar in 1997, and Cambodia in 1999. The CLMV countries also enjoy a
positive regional effect in East Asia through two transmission mechanisms. First is the transfer of
development experiences and lessons within East Asia, from Japan, the Asian NIEs and ASEAN, in
particular following the ASEAN model of natural resource development and export-led and FDI-led
manufacturing. The second is the flow of investment resources from Japan, the Asian NIEs and
ASEAN-6 to CLMV, resulting in the integration of some Mekong economies into regional production
networks and supply chains. Membership in ASEAN has facilitated the regional integration of the
Mekong sub-region.

1/ The views expressed in this paper are those of the author and should not be attributed to the International
Monetary Fund, its Executive Board, or its Management.
Table 1: Basic Economic Data on ASEAN-6 and CLMV Countries

Total area Population GDP GDP growth rate Merchandise GDP per GDP per Trade/GDP
2004 2004 1980-1990 1990-1995 1996-2003 trade 2004 capita 2004 capita 2004 ratio 2004
thousand million US$million % % % US$million US$ US$ppp %
sq km (1) (1) (1) (2) (2) (2) (1) (3) (3)
Brunei 5.8 0.4 5,181 na na 2.0 6,585 13,879 25,243 127
Indonesia 1,890.8 216.4 258,266 5.4 7.8 1.0 122,239 1,193 3,134 47
Malaysia 330.3 25.6 117,776 6.0 9.5 3.4 221,471 4,625 9,857 188
Philippines 300.0 82.7 86,407 1.7 2.2 3.5 76,940 1,042 4,482 89
Singapore 0.7 4.2 106,884 7.3 9.1 3.6 363,431 25,207 24,853 340
Thailand 513.3 64.5 163,525 7.9 8.6 1.5 190,446 2,537 7,488 116

Cambodia 181.0 13.6 4,517 na 5.8 6.3 5,414 358 1,428 120
Laos 236.8 5.8 2,439 6.0 6.4 5.9 1,004 423 1,896 41
Myanmar 676.6 54.7 10,463 1.3 5.7 8.1 5,034 166 1,408 48
Vietnam 330.4 82.0 45,277 5.9 8.2 6.7 55,261 554 2,491 122
ASEAN-6 3,040.9 393.8 738,039 981,112 1,874 4,821 133
CLMV 1,424.8 156.1 62,696 66,713 396 1,997 106
ASEAN-10 4,465.7 549.9 800,735 1,047,825 1,454 4,020 131
CLMV/ASEAN-10 (%) 31.9 28.4 7.8 6.4 27.2 49.7
Sources:
(1) ASEAN Secretariat, ASEAN Basic Data
(2) World Development Indicators 2005
(3) ADB, Key Indicators of ASEAN Member Countries
Table 2: Intra-ASEAN Trade, 1993 and 2001-2002

Value in US$million % of intra-ASEAN trade % of country's trade

1993 2001 2002 1993 2001 2002 2001 2002
Intra-ASEAN Exports by:
Brunei 487 775 684 1.1 0.9 0.8 21.9 25.4
Indonesia 4,997 9,507 9,934 11.4 11.3 11.5 16.9 17.4
Malaysia 12,987 21,024 22,127 29.7 24.9 25.6 23.9 23.7
Philippines 795 4,986 5,530 1.8 5.9 6.4 15.5 15.7
Singapore 18,406 32,815 33,963 42.1 38.8 39.3 27.0 27.2
Thailand 6,008 14,357 12,840 13.8 17.0 14.9 22.0 19.4
ASEAN-6 43,681 83,464 85,077 98.8 98.5 22.5 22.2
Cambodia na 73 92 na 0.1 0.1 4.9 4.8
Laos na na na na na na na na
Myanmar na 951 1,221 na 1.1 1.4 42.9 49.8
Vietnam na na na na na na na na
Total intra-ASEAN 43,681 84,488 86,391 100.0 100.0 100.0 22.8 22.5
As % of ASEAN total 21.1 22.8 22.5
Intra-ASEAN Imports by:
Brunei 886 545 599 2.3 0.8 0.8 41.6 37.4
Indonesia 2,659 5,727 6,932 6.9 8.5 9.6 18.5 22.2
Malaysia 8,904 15,254 17,245 23.0 22.6 23.9 20.9 21.9
Philippines 1,883 4,665 5,542 4.9 6.9 7.7 15.8 16.5
Singapore 18,761 28,991 30,441 48.4 42.9 42.1 25.0 26.2
Thailand 5,671 10,047 9,683 14.6 14.9 13.4 16.2 15.4
ASEAN-6 38,763 65,229 70,442 100.0 96.4 97.5 20.6 21.5
Cambodia na 1,092 598 na 1.6 0.8 72.7 35.9
Laos na na na na na na na na
Myanmar na 1,319 1,191 na 2.0 1.6 46.9 56.2
Vietnam na na na na na na na na
Total intra-ASEAN 38,763 67,640 72,231 100.0 100.0 100.0 21.3 22.0
As % of ASEAN total 17.4 21.3 22.0
Intra-ASEAN Exports and Imports:
Brunei Darussalam 1,374 1,320 1,283 1.7 0.9 0.8 27.3 29.9
Indonesia 7,656 15,234 16,865 9.3 10.0 10.6 17.5 19.1
Malaysia 21,891 36,279 39,372 26.6 23.8 24.8 22.5 22.9
Philippines 2,678 9,651 11,072 3.2 6.3 7.0 15.6 16.1
Singapore 37,167 61,806 64,404 45.1 40.6 40.6 26.0 26.7
Thailand 11,680 24,404 22,524 14.2 16.0 14.2 19.2 17.5
ASEAN-6 82,444 148,693 155,520 100.0 97.7 98.0 21.9 22.1
Cambodia na 1,164 690 na 0.8 0.4 23.0 19.3
Laos na na na na na na na
Myanmar na 2,271 2,412 na 1.5 1.5 45.1 52.8
Vietnam na na na na na na
Total intra-ASEAN 82,444 152,127 158,622 100.0 100.0 100.0 22.1 22.3
As % of ASEAN total 19.2 22.1 22.3
Source: Chia 2005, Table 13
Table 3: CLMV - FDI Inflows from ASEAN Sources

1995 1996 1997 1998 1999 2000 2001 2002 2003 2001-2003
US$million
Cambodia:
from ASEAN 37.2 8.5 19.9 65.6
from World 151 294 168 243 232 149 149 145 87 381.0
ASEAN/World, % na na na na na na 25.0 5.9 22.9 17.2
Laos:
from ASEAN 6.5 102.6 64.4 28.3 31.4 13.7 3.1 7.9 3.0 14.0
from World 88 128 86 45 52 34 24 25 19 68.0
ASEAN/World, % 7.4 80.2 74.9 62.9 60.4 40.3 12.9 31.6 15.8 20.6
Myanmar:
from ASEAN 96.7 228.6 323.3 153.9 41.2 74.0 67.4 25.1 24.3 116.8
from World 318 581 879 684 304 208 192 191 128 511.0
ASEAN/World, % 30.4 39.4 36.8 22.5 13.5 35.6 35.1 13.1 19.0 22.9
Vietnam:
from ASEAN 387.3 328.7 547.2 398.7 289.3 202.4 241.5 200.4 100.4 542.3
from World 1,780 1,803 2,587 1,700 1,484 1,289 1,300 1,200 1,450 3,950.3
ASEAN/World, % 21.8 18.2 21.1 23.5 19.5 15.7 18.6 16.7 6.9 13.7
CLMV:
from ASEAN 490.5 659.9 934.9 580.9 361.9 290.1 349.2 241.9 147.6 738.7
from World 2,337 2,806 3,720 2,672 2,072 1,680 1,665 1,561 1,684 4,910
ASEAN/World, % 21.0 23.5 25.1 21.7 17.5 17.3 21.0 15.5 8.8 15.0
Source: FDI data from the ASEAN Secretariat website
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2. CLMV Participation in ASEAN Economic Integration

Progress in ASEAN Economic Integration

The ASEAN Free Trade Area (AFTA) was established in 1992 to enable ASEAN members become
more internationally competitive in the face of pressures from globalization and regionalism in the
Americas and Europe. It entails the removal of tariffs and non-tariff barriers on intra-ASEAN trade in
goods. AFTA was followed by the ASEAN Framework Agreement on Services (AFAS) in 1995 and
the ASEAN Investment Area (AIA) in 1998.

Critics point to the slow progress in ASEAN economic integration despite the introduction of
numerous initiatives. The McKinsey study (2003) found that the many initiatives have had limited
impacts, as seen in the following examples -----intra-ASEAN trade share has not grown with
implementation of AFTA, unlike the case of NAFTA, EU or MERCOSUR; in 2000 less than 5% of
intra-ASEAN trade made use of the AFTA tariff preferences; wide divergences exist in consumer
prices of common household products in the region; economic complementarity, such as in the
electronics sector, has not been well leveraged; and progress with removal of NTBs has been slow,
particularly with regard to harmonisation of standards, implementation of mutual recognition
agreements, (MRAs), and streamlining of customs procedures.
ASEAN’s response is to realise the ASEAN Economic Community by 2020 (brought forward
to 2015), in which there will be free flow of goods, services and skilled labour, and freer flow of
capital. As laid out in the Vientiane Action Programme (VAP) for 2006-2010, activities to realise the
AEC focus on 4 components --- (i) intensify current economic initiatives and accelerating the
integration of 11 priority sectors; (ii) remove, as far as possible, barriers to the free flow of goods,
services, skilled labour, and a freer flow of capital by 2010; (iii) develop measures to attract
investments, liberalise and facilitate trade in goods, promote regional trade in services, upgrade the
competitiveness of ASEAN SMEs, and strengthen the ASEAN dispute settlement system; and (iv)
pursue strong external economic relations through FTAs and CEPs. As less developed and
transitional economies, the CLMV countries are concerned that they have limited capacity to meet the
challenges of accelerated liberalisation and integration.
Progress in AFTA, AFAS and AIA and economic cooperation are summarised below:
(1) Trade in goods: AFTA originally had a timeframe of 15 years to reduce tariffs to the 0-5 percent
target range. The end-date was progressively brought forward to 2002 for the ASEAN-6, and set
at 2006 for Vietnam, 2008 for Laos and Myanmar, and 2010 for Cambodia. AFTA has also since
agreed to the zero-tariff level, to be achieved by 2010 for ASEAN-6 and 2015 for CLMV. For
ASEAN-6, by January 2005, 99% of all products in the CEPT Inclusion List have their tariffs
reduced to the 0-5% range, 64.2% have achieved zero-level tariffs, all CEPT products have been
put into the Inclusion Lis, and the average tariff is down to 1.87% as compared to 12.76% in
1993. Notwithstanding the sharp decline in tariffs, intra-ASEAN share of ASEAN’s total exports
 3

remained stagnant, with 22.5% in 2004 as compared to 21.1% in 1993. Japan, US, EU, China and
Korea remained ASEAN’s main trading partners.
For CLMV, 87.2% of the products have been moved into the Inclusion List and tariffs on
71.05% have been brought down to the 0-5% level. Vietnam has moved all products while Laos
has moved all manufactures into their Inclusion Lists, Myanmar has moved 98.74% into its
Inclusion List, and Cambodia will move all products into its Inclusion List by 2007.
As tariffs come tumbling down in AFTA, more emphasis is being placed on trade facilitation,
especially customs barriers, electronic processing of trade documents, harmonisation of product
standards and technical regulations, and mutual recognition agreements, including for test reports
and certification.
Eleven priority sectors have been identified for accelerated integration. The sectors are agro-
based products, air travel, automobile products, e-ASEAN, electronics, fisheries, healthcare,
rubber-based products, textiles and apparel, tourism, and wood-based products. Some of these
sectors, such as fisheries, textiles and apparel, tourism and wood-based products, are those in
which the CLMV sub-region has a comparative advantage. As compared to AFTA deadlines of
2010 and 2015, tariffs will be eliminated on 85% of the products in the priority sectors by 2007
for ASEAN-6 and 2012 for CLMV.
(2) Trade in services: Services trade liberalisation under AFAS has been very slow and efforts are
being made to accelerate it. Two flexibilities were introduced in 2003. First is the faster
liberalisation for modes 1 and 2 (cross-border supply and consumption abroad), and slower
liberalisation for modes 3 and 4 (commercial presence and presence of natural persons). Second,
a “ASEAN minus X” formula allows two or more ASEAN countries to proceed first with services
liberalisation, with other members joining at a later date.
MRAs are being negotiated to facilitate movement of experts, professional and skilled
workers in ASEAN in engineering, architectural and accounting services, as well as nursing and
medical practitioners. There are also measures to facilitate intra-ASEAN travel for ASEAN
nationals and movement of business people, experts, professionals and talents.
(3) Investment liberalisation: The AIA aims at making ASEAN a competitive and liberal
investment area. In particular, it would allow investors to leverage on the various
complementarities of the ASEAN region to improve business efficiency and lower costs and
adopt regional business strategies and establish network operations. Originally confined to the
manufacturing sector, investments under the AIA are now open to manufacturing, agriculture,
mining, forestry and fishery sectors and only services incidental to these sectors. ASEAN
members are committed to gradually eliminate investment barriers, liberalise investment rules and
policies, and grant national treatment and open industries to ASEAN investors by 2010 and to all
other foreign investors by 2020. However, there are sensitive lists and temporary exclusion lists
to the granting of national treatment and opening up of industries and sectors to foreign
investments. The end-dates for phasing out the TEL in manufacturing are set at January 2003 for
 4

ASEAN-6 and Myanmar, and January 2010 for CLV countries. The end-dates for phasing out the
TEL in the other designated sectors are set at January 2010 for ASEAN-6 and Cambodia, 2013
for Vietnam, and 2016 for Laos and Myanmar.
(4) Regional economic cooperation is also pursued in various sectors and areas such as SMEs,
energy, food, forestry and agriculture, IP, minerals, statistics, telecommunications and IT, tourism
and transport.

CLMV’s Global and Regional Integration Through Trade and Investment

Table 1 shows the global trade integration of CLMV countries. Vietnam has the largest volume of
trade, followed by Myanmar and Cambodia, while Laos has a very small external trade. Trade
integration, as measured by the trade/GDP ratio is very high (over 100%) for Cambodia and Vietnam,
but is less than 50% for Laos and Myanmar, the latter reflecting Laos’ position as a land-locked state
and Mynmar’s international isolation because of its domestic politics. The trade ratios have risen
significantly since 1990, from 18% to 120% for Cambodia, 30% to 41% for Laos, 6% to 48% for
Myanmar, and 80% to 122% for Vietnam.
Up to the early 1990s, the CLMV countries were heavily dependent on exports of primary
products. Cambodia, Laos and Myanmar have been transformed from being exporters of various
primary commodities to exporters of clothing (HS61, HS62), the latter accounting for 85.5% of
Cambodia’s total exports, 77.5% of Laos’ total exports, 39.5% of Myanmar’s total exports in 2002.
The external trade of the CLMV sub-region has shifted from the COMECON socialist
countries towards US-EU. For Cambodia, the US and EU accounted for 84% of total exports in 2002,
with the exports dominated by clothing and footwear (Chia, 2005). The expansion in Cambodia’s
textiles and clothing exports since 2000 is due largely to favourable quota allocations and MFN tariffs
from the US, following the 1999 US-Cambodia bilateral agreement. For Vietnam, the export share of
1
US expanded rapidly following the 2001 US-Vietnam Bilateral Trade Agreement (BTA). For Laos,
the export share to the US remained low but there was a quantum leap in the export share to the EU.
There were also quantum leaps in Myanmar’s export shares to the US and EU. The sharp growth in
CLMV exports to the US and EU is in sharp contrast to those experienced by the ASEAN-6.
The CLMV countries, particularly Vietnam and Myanmar, are beginning to be plugged into the
East Asian production networks for electronic products and components. There are good prospects for
relocation of investments from the more advanced economies in East Asia as Vietnam and Myanmar
have abundant low-wage labour and as investors seek to diversify dependence on China. However, the
electronics industry is extremely time-sensitive, and Vietnam and Myanmar will need to reduce risks of

1
The BTA commits Vietnam to reduce import tariffs and quotas, reform customs system and procedures,
liberalise trade in services, liberalise foreign investment, liberalise trading rights, upgrade commercial dispute
settlement procedures, enhance intellectual property rights protection, and grant MFN and national treatment to
US companies and nationals.
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supply disruptions, and improve the skills base and transport and logistics infrastructure to become
production and export nodes.
CLMV trade with ASEAN has not grown as dramatically as with the US-EU since joining
ASEAN. As shown in Table 2, in 2002, intra-ASEAN trade accounted for only 4.8% of Cambodia’s
exports and 35.9% of its imports (there are no comparable figures for Laos and Vietnam). Myanmar is
much more integrated with intra-ASEAN trade accounting for 49.8% of its exports and 56.2% of its
imports, reflecting the country’s political isolation by the western powers. Myanmar exports to
ASEAN comprise largely of mineral fuels (largely crude), forestry products and vegetables, while its
imports comprise largely of mineral fuels (refined petroleum), textiles and clothing, machinery and
electrical appliances, and plastics. Austria’s study (2004) on the ASEAN priority sectors, shows
ASEAN is a significant market for CLMV exports, ranging from 42% for Vietnam to 76% for Laos.
Agro-based and wood-based products accounted for the largest share.
WTO accession is expected to bring substantial trade and FDI benefits to Cambodia, Laos and
Vietnam. First is the MFN market access. Non-membership has subjected Cambodia, Laos and
Vietnam to discriminatory treatment of their exports in various global markets, particularly the US
market. Vietnam had to be subject to the annual waiver, and “normal trade relations” (NTR) was
finally achieved with the signing of the US-Vietnam Bilateral Trade Agreement (BTA) in July 2000
after a 4-year negotiation. The US granted NTR status to Cambodia in 1997 and to Laos in 2004.
Second, accession means the countries can turn to the WTO dispute settlement mechanism to defend
their trade interests. With falling tariffs and quantitative restrictions in the WTO, importing countries
increasingly resort to the use of technical barriers to trade (particularly SPS standards) and
antidumping measures to protect domestic interests. Third, WTO membership is forcing the CLV
countries to undertake and accelerate domestic reforms initiated since the early/mid-1980s --- the
legal framework and transparency of rules, regulations and practices governing administration, trade
and investment and state-owned enterprises. These should serve to improve economic efficiency and
lower business transaction costs. Fourth, the CLMV countries are beneficiaries and potential
beneficiaries of the WTO's special and differential treatment for developing and least developed
countries.
The CLMV countries show a growing FDI penetration as measured by the FDI stock/GDP
ratio,, with the highest ratio in Vietnam, followed by Cambodia and Laos. These stock ratios are higher
than some of the ASEAN-6 countries despite the more recent history of FDI in the sub-region. However,
in absolute amounts, the CLMV received considerably less FDI than the ASEAN-6. Apart from a less
favourable investment climate, FDI inflows were adversely affected by the Asian financial crisis of 1997-
98, and for Myanmar by the restrictions imposed by the US and EU. As shown in Table 3, data on
intra-ASEAN FDI for the period 1995-2003 shows a declining share of FDI from ASEAN in the post-
financial crisis years. Dependence on investments from ASEAN during 2001-2003 averaged 15.0% for
the CLMV sub-region, and ranged from 22.9% in Myanmar (mostly Singapore and Thailand), to 20.6%
 6

in Laos (mostly Thailand and Malaysia), 17.2% in Cambodia (mostly Singapore and Malaysia) and
13.7% in Vietnam (mostly Singapore, Malaysia, Thailand).
Two factors impact on FDI prospects for the CLMV sub-region. First, while these countries have
abundant low wage labour (especially Myanmar and Vietnam), they are handicapped by the legal and
regulatory framework, shortages of skills, lack of local suppliers of parts and components, and
transportation and logistics inefficiencies. These countries will have to hasten the process of economic
integration into ASEAN. Second, the sub-region faces formidable competition for regional and global
FDI from China, which has a much larger domestic market and pool of low-wage labour as well as
availability of skills and infrastructure. There is recent evidence, however, that investors are attracted to
the Vietnam location to avoid putting all their eggs in the China basket. WTO membership should further
improve Vietnam’s attractions for FDI.

Impact of ASEAN Membership on CLMV Economies

ASEAN enlargement to include the CLMV countries achieved the political objective of overcoming
the historical Cold War divide in Southeast Asia. However, enlargement also meant that ASEAN had
to face new challenges of dealing with different political and ideological outlooks and external
relations (particularly between Myanmar and the US and EU). On the economic front, CLMV
membership has slowed the pace of ASEAN economic integration, as the transitional economies have
to be given extra time and greater flexibility to fulfil their trade and investment liberalization
commitments. The CLMV membership did not considerably expand the AFTA market. As Table 1
shows, although accession added 156.1 million or 28.4% to ASEAN’s population, it added only
US$62,696 million or 7.8% to ASEAN’s GDP in 2004.
Theoretically, membership in ASEAN is expected to bring several economic benefits for the
CLMV economies, enabling them to diversify and upgrade and respond more effectively to the
challenges of globalisation, the technological revolution, and the rise of China.
● First, the CLMV countries have preferential access to the ASEAN regional market, enabling them
to have greater market security, specialise according to comparative advantage, exploit scale
economies, and improve the prospects for attracting FDI. As noted earlier, Cambodia (until
October 2004) Laos and Vietnam are not WTO members and do not enjoy MFN treatment for
their exports. ASEAN offers preferential market access, and production for a larger regional
market would improve economic efficiency. Ttrade liberalisation in ASEAN also introduced the
dynamic effects of increased competition andtransfer of technological and management skills
through FDI.
● Second, integration into ASEAN provides opportunity to leverage economic complementarities
between CLMV and the more advanced ASEAN countries. With abundance of agricultural,
marine and mineral resources and low-wage labour, the CLMV economies have comparative
advantage in primary-resource-based activities and labour intensive manufacturing. Technical
assistance is necessary to raise SPS standards in food processing to meet demands in the regional
 7

and global markets. Relocation of labour-intensive manufacturing products and processes from
the more advanced ASEAN economies would enable the CLMV countries, particularly Myanmar
and Vietnam, to be integrated into the regional production networks and industry clusters, but
the low wage advantage has to be accompanied by improvements in productivity and transport
infrastructure and logistics for just-in-time and time-sensitive manufacturing.
● Third, ASEAN membership increases the attractiveness of the CLMV sub-region for FDI in
resource processing and labour intensive manufacturing. In particular, Vietnam’s geographic
proximity to China, large population, competitive labour costs and membership in a stable
ASEAN region makes it an attractive alternative investment destination for investors wishing to
diversify investment risk. Also the joint development of tourist infrastructure and common
marketing of ASEAN as a tourist destination have benefited CLMV tourism.
● Fourth, CLMV countries could learn from the best practices in economic development and economic
management of the more advanced ASEAN countries. In particular, in the transition from command
to market economies and from economic isolation to economic opening up, CLMV could draw on
the expertise and experience of the more advanced ASEAN countries, and not rely solely on the
international and regional development and financial institutions. CLMV countries could also access
more technical assistance, including customs harmonization and procedures, technical and sanitary
and phytosanitary standards, setting up of test labs, as well as capacity-building measures such as
training of government officials.
● Fifth, ASEAN membership could put further pressure on CLMV to pursue necessary domestic
economic, institutional and regulatory reforms, in addition to those required for WTO
membership.
Implementation of AFTA/AFAS/AIA /AEC agreements and obligations also poses costs and
concerns for the CLMV sub-region. A primary concern is the loss of customs revenue from the removal
of import tariffs on intra-ASEAN trade. The McKinsey study (2003) noted that customs duties as a
share of total tax revenue in CLMV in 2001 ranged from 35% in Cambodia, to 23% in Vietnam, 16% in
Myanmar and 11% in Laos. Technical assistance is required to enable these countries to improve tax
collection efficiency and explore alternative sources of government revenue. Another major concern is
the social cost of restructuring uncompetitive industries and the state enterprise sector. As with most
ASEAN-6 countries, the CLMV countries lack formal social safety nets to deal with structural
unemployment. There is also concern that economic integration will cause the CLMV countries to fall
further behind the other ASEAN economies as manufacturing production may be drawn away from the
CLMV to the more advanced economies in ASEAN. A further concern is that services liberalisation
under AFAS would touch on politically sensitive and strategic sectors such as
telecommunications, financial services, transportation and utilities, many of which are
monopolised by inefficient SOEs and governments are under tremendous pressure to protect them.
Additionally, as skilled labour is crucial to comparative advantages in the services sectors, there is
concern that services trade liberalisation would marginalize the CLMV countries and widen the income
 8

gap between them and ASEAN-6. There is also concern that preferential access for ASEAN service
providers would later preclude the entry of more efficient global service providers.

3. Narrowing the Development Gap

The Development Gap
When the CLMV acceded to ASEAN in the late 1990s, there was considerable concern over the
emergence of a “two-tiered ASEAN” because of the wide disparity in development and income levels.
The sharp differences in per capita incomes between the ASEAN-6 and the CLMV are shown in
Table 1. The average nominal per capita GDP in 2004 for CLMV is US$396 as compared to
US$1,874 for the ASEAN-6. The ppp-adjusted per capita GDP gap is narrower, with US$1997 versus
US$4821. However, it should be noted that there is also a wide disparity in per capita GDP among the
ASEAN-6 and the development gap between Indonesia and Philippines and the CLMV countries is
much narrower than among the ASEAN-6. Furthermore, in the 1996-2003 period, the CLMV
countries have achieved faster GDP growth rates than the ASEAN-6 countries. However, while faster
growth will lead to a narrowing of the development gap in relative terms, the absolute gap can only be
narrowed with sustained high growth for CLMV.
There is concern that, as low income and least developed economies, the CLMV may not be able
to exploit the opportunities of economic integration in ASEAN. They need the capability to maintain a
competitive business environment and economic and social development in order to participate
effectively in both regional integration and globalisation processes. More direct government interventions
at the national and regional levels are required to narrow the gap.

ASEAN Efforts to Narrow the Development Gap

The challenge of economic integration would be lessened for the CLMV sub-region with targeted
technical assistance from the ASEAN-6. In the immediate years following the CLMV accession, the
ASEAN-6 economies were pre-occupied with pulling their economies out of the 1997-98 Asian
financial crisis. Since then, there is a greater sense of commitment to ensure that the CLMV countries
are not left behind in economic development. The Hanoi Declaration on Narrowing Development
Gap for Closer ASEAN Integration of 2001 noted that the development gap would be further widened
without effective measures. The Declaration of ASEAN Concord II in October 2003 reaffirmed the
commitment: “The ASEAN Economic Community shall ensure that the deepening and broadening
integration of ASEAN shall be accompanied by technical and development cooperation in order to
address the development divide and accelerate the economic integration of CLMV countries…”

The Vientiane Action Plan (VAP) is a 6-year plan to realise the end goal of ASEAN Vision
2020 and Declaration of ASEAN Concord II, and focuses on deepening regional integration as well as
to reduce the large disparities in per capita GDP (and other human development dimensions).
Measures and strategies to narrow the development gap include the following:
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● Special and differential treatment to CLMV countries in implementing ASEAN agreements and
obligations under AFTA/AFAS/AIA, in recognition of the different capacities of adjustment to
the liberalisation process.
First, the CLMV countries have been given a longer time frame for tariff reduction
obligations under AFTA. ASEAN-6 completed the first phase of AFTA on 1 January 2003 with
tariffs down to 0-5% level except for Malaysian automobile tariffs. Vietnam is scheduled to reach
0-5% level by 2006, Laos and Myanmar by 2008 and Cambodia by 2010. For zero tariffs, CLMV
have also an extra five years until 2015. CLMV have also acceded to AFAS and AIA, with
delayed or flexible schedules.
Second, the ASEAN Integrated System of Preferences (AISP) is a unilateral preferential scheme
by ASEAN6 offered to imports from CLMV and implemented in January 2001. CLMV countries
have been unable to benefit fully from AFTA because of their own delayed schedule of trade
liberalization. AISP is implemented on a voluntary and bilateral basis. As at May 2005, the CLMV
countries have received 102 tariff preferences (either zero tariffs or 0-5% tariffs) from Brunei, 440
from Indonesia, 553 from Malaysia, 77 from the Philippines and 990 from Thailand. As Singapore
has no import tariffs, it did not implement any AISP. However, the AFTA Council meeting in
September 2005 noted with concern the low utilisation rate of AISP and called for the ASEAN-6 to
further improve the preferences given to the CLMV both in terms of product coverage and
AISP rates, and for CLMV to take advantage of the opportunities provided under the
scheme.
● A collective ASEAN enjoys better negotiating leverage with major industrial countries. ASEAN can
extend its collective weight to CLMV efforts to attract FDI, technology, and development assistance
and gain market access. ASEAN sponsors investment road shows, expositions and fairs. It supports
CLMV membership of WTO, APEC, and ASEM.
● Sharing experiences on how the more advanced ASEAN countries have planned and implemented
their development policies, strategies and programmes, so that CLMV countries can draw lessons
and best practices to apply to their own development strategies and efforts.
● Technical and development cooperation at the ASEAN and bilateral levels to help CLMV
members build the necessary capabilities and skills to facilitate and accelerate the process of
economic integration and narrow the development gap.2 Technical assistance covers both the
transfer of technical knowhow as well as targeted financial assistance. Provision of technical
knowhow could be aimed at facilitating the adoption and implementation of specific policies and
include training, workshops, seminars, and secondment of experts --- for example, help

2
The EU experience has shown that the less developed members of Spain, Portugal and Ireland, experienced
accelerated GDP growth after accession to the EU and receipt of targeted technical and financial assistance from
the EU budget. In particular, Ireland leveraged the technical assistance and undertook major domestic
regulatory reforms, so that by 2000 it had transformed from a predominantly agricultural economy to a leading
world exporter of software and the major headquarters of international companies and MNCs
 10

governments improve fiscal management to offset revenue loss from elimination of import tariffs;
improve the efficiency of trade documentation and customs procedures; assistance with mutual
recognition of test reports and certifications; assist with intellectual property rights legislation and
enforcement. Targeted financial assistance could include building hardware and software
capacity in infrastructure, ICT, and human resource development.
● The Initiative for ASEAN Integration (IAI) adopted in November 2000 is ASEAN’s main
instrument for delivering technical and development cooperation to the CLMV sub-region. Capacity
building for regional economic integration is intended to help the CLMV countries take part in and
benefit from AFTA/AFAS/AIA and other economic integration schemes. The IAI Work Plan for
2002-08 initially focuses on 4 priority areas--- infrastructure, human resource development, ICT, and
capacity building for regional economic integration, but this was later extended to include energy,
investment climate, tourism, poverty reduction and improvement in the quality of life. In many
instances, the measures and projects in the Work Plan are part of region-wide programmes of
ASEAN but specially focused on CLMV.3
. The ASEAN-6 contributions take various forms, including training, provision of technical
experts and supply of equipment, and seeking funding support from ASEAN’s dialogue and
development partners. Since 1996, the ASEAN-6 have contributed some US$165 million,
comprising 58 projects worth US$4.59 million, and bilateral contributions of US$159.4 million to
implement 209 projects. Obviously these resources are limited, when compared to the needs of
CLMV countries and their total receipts of ODA. ASEAN-6 need to leverage their IAI activities
through cooperation with donor countries such as Korea, Japan, India, Norway and Australia and
cooperate closely with the ADB’s Greater Mekong Subregion (GMS) scheme.
A comprehensive review undertaken of the IAI Work Plan found most of the projects have been
judged to be beneficial, with positive feedbacks from all CLMV countries.. However, some
shortcomings have been revealed, such as the narrow focus of the Work Plan; weak inter-agency
coordination, reporting mechanisms, implementation and follow-through actions; weak ownership of
the IAI projects by the CLMV countries; and inadequate coherence of training programmes and
duration of training courses. This led to recommendations to expand the scope of the Work Plan;
improve the criteria for selection of IAI projects; improve coordination among the countries and
agencies involved; and improve CLMV ownership through CLMV’s active participation in all stages
of the project and CLMV contribution to the project in cash or kind.

4. CONCLUSION

3
Most of the proposals in infrastructure are segments of the Singapore-Kunming Rail Link, the ASEAN
highway network, the ASEAN Power Grid and the Trans-ASEAN Gas Pipeline Network. The ICT component
is derived largely from the e-ASEAN programme and the ASEAN e-readiness assessment. The HRD component
runs through all the other components of IAI.
 11

ASEAN economic integration and the integration of the CLMV sub-region into ASEAN have
proceeded much more slowly than many analysts and observers would like to see. However, ASEAN
has come a long way from the days of national autarkic and inward-looking policies and the ASEAN
region has improved on their ability to respond to the challenges of technological change,
globalisation and the rise of China.
The CLMV sub-region can draw on and contribute to the strengths of ASEAN. The CLMV
sub-region has achieved remarkable results in transforming their economies since the early 1980s. They
have enjoyed buoyant economic growth, and become increasingly integrated with ASEAN, East Asia and
the global economy as witnessed their rising trade and investment flows and participation in the
international and regional division of labour. Membership of ASEAN has helped overcome some
political obstacles and provide many economic opportunities. Membership of the WTO will no doubt
open up more economic opportunities for Cambodia, Laos and Vietnam. However, above all, economic
success of the CLMV countries has depended crucially on undertaking the necessary domestic reforms of
the legal and regulatory framework, institutions and economic policies. Membership of ASEAN and
WTO will help ensure that the CLMV countries continue to reform and restructure their economies and
improve their capacity building to remain globally and regionally competitive.
ASEAN will be stronger and more united when the CLMV sub-region has caught up with the
more developed ASEAN sub-region. In the mean time, ASEAN should continue and expand capacity-
building for the CLMV sub-region. The various ASEAN+1 initiatives in the pipeline (with China, Japan,
India, Korea, and CER) contain special and differential treatment, flexibility, and development
cooperation provisions that should open up new economic opportunities and capacity-building resources
for the CLMV sub-region.

REFERENCES
ASEAN Secretariat (2005). ASEAN Annual Report 2004-2005. Jakarta: ASEAN Secretariat.
ASEAN Secretariat website. Hanoi Declaration on Narrowing Development Gap for Closer ASEAN
Integration (23 July 2001)
ASEAN Secretariat website. Bridging the Development Gap among Members of ASEAN (undated)
ASEAN Secretariat website. Initiatives for ASEAN Integration: Work Plan for the CLMV Countries
(2003)
ASEAN Scretariat website. Progress of IAI Work Plan: Status Update (10 February 2006)
ASEAN Secretariat website. Joint Media Statement of the Nineteenth Meeting of the ASEAN Free
Trade Area (AFTA) Council, Vientiane, 27 September 2005.
ASEAN Secretariat website. Narrowing the Development Gap (May 2005)
ASEAN Secretariat website. Report on the Mid Term Review of the Initiative for ASEAN Integration
(IAI) Work Plan (undated)
ASEAN Secretariat website. Options for Managing Revenue Losses and Other Adjustment Costs of
CLMV Participation in AFTA. REPSF 02./002:
 12

ASEAN Secretariat website. McKinsey & Co, ASEAN Competitiveness Study (March 2003).
Austria, Myrna (August 2004). The Pattern of Intra-ASEAN Trade in the Priority Goods Sectors,
REPSF 03/006e
Chia Siow Yue (2005). “Integrating East Asia’s Low Income Countries into the Regional and Global
Markets”, in K Fukasaku, M Kawai, M G Plummer and A Trzeciak-Duval (eds) Policy Coherence
Towards East Asia: Development Challenges for OECD Countries. Paris: OECD.
Vo Tri Thanh (2005). “ASEAN Economic Community: Perspective from ASEAN’s
Transitional Economies”, in Denis Hew (ed), Roadmap to an ASEAN Economic Community.
Singapore: Institute of Southeast Asian Studies.
Integrating the Mekong Region into
ASEAN

Chia Siow Yue

Singapore Institute of International Affairs

Presentation prepared for the seminar “Accelerating Development in the Mekong Region–the
Role of Economic Integration”, Siem Reap, Cambodia, June 26–27, 2006. The views expressed in
this presentation are those of the author and should not be attributed to the International
Monetary Fund, its Executive Board, or its Management.
 Indicators of CLMV Integration into
ASEAN…1
● ASEAN was formed in 1967, AFTA implemented in 1992,
AFAS in 1995, AIA in 1998
● Vietnam joined ASEAN in 1995, Laos and Myanmar in
1997,Cambodia in 1995
● Indicators of CLMV integration into ASEAN show a
mixed picture, given the inadequate statistics
● Intra-ASEAN trade in goods 2002
● Cambodia $690 million, 19.3% share

● Myanmar $2.4 billion, 52.8%

● Are trade statistics reliable?

● Intra-ASEAN investment flows 2001-2003

● Laos $14 million, 20.6% share

● Myanmar $116.8 million, 22.9% share

● Vietnam $542.3 million, 13.7% share

 Indicators of CLMV Integration into
ASEAN…2
● Intra-ASEAN industrial complementation and production
networks?
● Electronics, textiles/garments, automotive?

• Intra-ASEAN trade in services

● Financial services, e-services, telecomms services,

tourism, professional services etc

● Intra-ASEAN people exchange and flows
● Tourist flows

● Student and cultural flows

● Meetings of politicians, government officials,

business sector, NGO sector
● Transport & logistics integration
Factors Impacting CLMV Integration
into ASEAN…1
● CLMV are low income transitional economies
● Lack of economic complementarity between ASEAN6
(except Singapore) and CLMV
● Asian financial crisis reduced capacity of ASEAN6
to provide markets and investments for CLMV
● EU-US markets became much more important for CLV
with restoration of normal trade relations and
preferential treatment
● Rise of China diverted investors from ASEAN6 to China
● Japan provided much more ODA and technical
assistance to CLMV
● Cambodia, Laos and Vietnam preoccupied with WTO
accession
 Impact of ASEAN Membership on
CLMV…1
• ASEAN implemented AFTA in 1992, AFAS in 1995 and
AIA in 1998. AEC to be realized by 2015 with free trade
in goods and services, free flow of skilled labour and
freer flow of capital
• Expected economic benefits for CLMV
• Preferential market access under AFTA and AFAS
• Benefits from efficient resource allocation,
economies of scale, dynamic effects from increased
competition
• Better access to FDI and technology transfer
• Learning from best practices
• Pressure to sustain domestic economic reforms
 Impact of ASEAN Membership on
CLMV…2

• Costs and concerns of CLMV

• Loss of import tariff revenue
• Concern over non-competitive domestic industries
and services
• Concern over “strategic” industries and services and
SOE sector
• Concern over investment and trade diversions
• Concern over structural unemployment and lack of
social safety nets
 Narrowing the Development Gap in
ASEAN …1
• The development gap
• Per capita incomes in CLMV much lower than most of
ASEAN6; same for other development indicators
• Some catch up in recent years as CLMV have been
growing faster than most ASEAN countries,
particularly Indonesia and Philippines
• But absolute gap between CLMV and advanced ASEAN
countries in per capita income will remain large
• Need to narrow development gap
• For ASEAN economic cohesion and community
building
• For CLMV to exploit the economic opportunities
 Narrowing the Development Gap in
ASEAN …2
• ASEAN efforts to narrow development gap
• Limited efforts in immediate post-Asian financial crisis
years
• Hanoi Declaration of 2001
• Declaration of ASEAN Concord II in 2003
• Vientiane Action Plan
• Special and differential treatment in
recognition of different capacities
• Longer time frame to fulfill obligations under AFTA,
AFAS and AIA
• ASEAN Integrated System of Preferences (AISP)
 Narrowing the Development Gap in
ASEAN …3
• Leveraging on ASEAN in negotiations with non-
ASEAN economies and improved market access
and access to FDI, technology transfer and ODA
• Learning from the development experiences
and best practices of ASEAN6
• Technical and development cooperation at
ASEAN level and bilateral level from ASEAN6
• Transfer of technical and managerial knowhow and
targeted financial assistance
• Initiative for ASEAN Integration (IAI) adopted in
November 2001
 Narrowing the Development Gap in
ASEAN …4
• International and regional help (through
ASEAN) can help CLMV to narrow the
development gap by providing additional
resources, economic opportunities and
incentives.
• Crucial domestic role of furthering and
sustaining economic reforms to improve
economic competitiveness and efficiency and
ensure growth with equity
• Among the CLMV countries, Vietnam has the
brightest economic prospects and could
overtake Indonesia and the Philippines .