Order Before Peace
Kissinger’s Middle East Diplomacy and Its Lessons for Today
Mainland Southeast Asia -- long fought over and controlled by outside powers, from the colonial era through the Cold War -- is finally fending for itself, and then some. Cambodia, Laos, and Vietnam, which were once French Indochina, have grown at an impressive clip in recent years, with the last two taking their cues from China to blend communism and capitalism. Myanmar (also called Burma), once part of British India, is rapidly opening up to trade and foreign investment after decades of insular military dictatorship. And Thailand, the only Southeast Asian country never to have been taken over by a European colonial power, has proved resilient despite its prolonged political discord, humming along as the region’s manufacturing, tourism, and service-sector hub.
Even as mainland Southeast Asia moves forward, it is beginning to resemble, in a curious way, parts of its precolonial past, when its mainly Buddhist peoples freely crisscrossed the region in search of better lives, mixing across ethnic and linguistic lines. As trade barriers fall and borders open up, people and commerce are moving more freely throughout the region, which also includes China’s southern Yunnan Province. Yunnan’s economy and culture have become inextricably linked to these five countries, as they were in centuries past.
Understanding the region’s promise requires a grasp of not just its growing interconnectedness but also its demographics. Together, the mainland Southeast Asian economies now constitute a consumer and labor market of over 300 million people, with rising incomes and a combined GDP that could exceed $1 trillion by 2020. Add in maritime Southeast Asia -- Brunei, Indonesia, Malaysia, the Philippines, and Singapore -- and you get the Association of Southeast Asian Nations, a 46-year-old bloc that is home to a combined GDP of over $2.2 trillion and 620 million people. ASEAN’s members have young, working-age populations and an abundance of natural resources, from land suitable for agriculture and timber to vast mineral deposits and considerable oil and gas reserves. With greater economic integration planned for 2015, the countries of mainland Southeast Asia will enter a new era of promise and prosperity.
Foreign powers still have a role in the region, but now that involvement could benefit locals and foreigners alike. In a parallel to the Great Game of the nineteenth century, when the British and Russian empires fought over Central Asia, today, China and the United States are vying for influence in mainland Southeast Asia, while Japan remains heavily invested and India exerts significant cultural influence. The involvement of these major powers bodes well for the region, as long as the involvement can minimize any geopolitical tension and maximize the economic benefits. With so much of the rest of the global economy looking volatile and uncertain, mainland Southeast Asia, with its relative stability, diversity, and strategic location, is luring investors from near and far.
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FOLLOW THE RIVER
Cambodia, Laos, Myanmar, and Vietnam should be able to maintain their recent annual growth of five to eight percent in the coming decade. Thailand’s growth is expected to hover in the four to six percent range. And Yunnan Province has an economy that would make many independent countries jealous: it has a population of 50 million people, GDP of $150 billion, and economic activity well above the Chinese national average. In all these economies, inflation has been brought into the single digits, although it remains highest in Vietnam. They all have healthy international currency reserves, sustainable external accounts, and manageable debt profiles. With the exception of Thailand, with its minor GDP contraction in 2009, all the mainland Southeast Asian countries managed to keep growing through the 2008 financial crisis. Yet the region’s potential extends beyond headline numbers. A good way to grasp it is by looking at geography -- in particular, the Mekong River.
The Mekong is the 12th-longest river in the world. It charts a course south from Yunnan to Vietnam, covering one million square miles, more than a quarter of the size of the United States. Since 1992, the Greater Mekong Subregion, an initiative administered by the Asian Development Bank, has sought to harness the economic potential of the six countries along the river through a series of road and rail development projects. These efforts have focused on extending mainland Southeast Asia’s links to southern China; the GMS also includes China’s Guangxi Zhuang Autonomous Region, which lies east of Yunnan and north of Vietnam and is home to 50 million people and a $200 billion economy.
Integration requires transportation, and the GMS now counts over 540,000 miles of roads and 11,700 miles of railways. The length of the road network has grown by more than 37 percent since 2005, and rail has grown by ten percent since 2001. Those networks will only expand across the region and within individual countries as their economies grow. Thailand, for example, plans to spend more than $66 billion over seven years to more than double its rail capacity. According to the Asian Development Bank, ongoing and new construction of highways in the region will further shorten travel times already cut in half over the past two decades, reducing transaction costs and expanding markets, and thereby spurring growth in the GMS countries by between 1.1 and 8.3 percent by 2015. That could lift millions of people out of extreme poverty, mainly in Cambodia and Vietnam.
Better road and rail networks will also link labor markets across mainland Southeast Asia and move investment from one country to the next. More than 2.5 million migrant workers, most of them from Myanmar but 250,000 of them from Cambodia, are already in Thailand; 70 percent are undocumented and work in low-wage service and manufacturing industries. Without them, the Thai economy would sink. Better transportation infrastructure could also encourage more investment from Thailand, already a leading investor in Cambodia, Laos, and Myanmar. As the aviation and tourism hub of the region, Bangkok is benefiting handsomely from the continued growth of its neighbors, as the foreign (mostly Western) tourists and diplomats and the various development specialists and businesspeople enticed by new opportunities in those rapidly changing countries visit the Thai capital.
For its part, Laos sends Thailand more than just expatriate vacationers. Known as “the battery of Southeast Asia,” Laos is a major hydroelectric exporter and sells almost all its excess power to Thailand (nearly $1 billion worth in 2013). Without electricity from Laos, Thailand could return to the rolling blackouts so common in the 1960s and 1970s. And Laos plans to expand its output: a massive new dam is already under construction along the lower Mekong, and the communist regime has approved the construction of another -- with plans for nine more.
Cambodia, one of Laos’ downstream neighbors, is using light manufacturing and tourism to wean itself off the Chinese aid to which it is beholden; China is Cambodia’s largest investor and a major aid donor. Cambodia’s garment industry is the country’s biggest foreign exchange earner, representing 75 percent of its total exports. Two million tourists now visit the country every year. Sandwiched between Vietnam and Thailand, Cambodia has had its prospects buoyed by a young work force, most of whom were born after the peace process of the early 1990s, which finally ended the years of bloody rule under the Khmer Rouge and the subsequent war with Vietnam.
Just over the border, Vietnam looks likely to see its GDP expand by six to eight percent in the next few years, despite credit troubles, inflation of 11.8 percent, and three currency devaluations in 2010 and 2011. Notwithstanding its struggling economic reforms, Vietnam is resilient, with an internal market of more than 90 million people, which has made it an attractive target for growth and one of the largest regional recipients of foreign direct investment this decade.
Thailand, meanwhile, is far from this region’s upstart: its export-driven economy expanded by an average of over seven percent annually over three and a half decades until 1997, when the Asian financial crisis forced Bangkok to devalue the baht and bring in the International Monetary Fund. But when the Thai economy recovered, it still could not shed its trouble with competitiveness, a result of being stuck between such lower-wage competitors as China and Vietnam and such higher-skilled peers as Malaysia and South Korea. The lack of a highly skilled, well-educated work force has kept Thailand stuck in the “middle-income trap,” around the $5,000 per capita income level. The country could get out of it with better education and worker training and by making its labor market more competitive, especially in the service sector.
Myanmar, which is now slowly opening, stands in stark contrast to Thailand. With such a low economic base, Myanmar resembles Cambodia in the early 1990s, when it relied on foreign aid, brought about a semblance of political stability through constitutional reform and elections, and wooed foreign investment in labor-intensive light-manufacturing industries, such as textiles and garments. Myanmar has the advantage of possessing a bounty of timber, minerals, and oil and gas. But resources also carry risks. An overdependence on natural resources and foreign aid can make for quick and easy GDP growth that discourages long-term investments in infrastructure, education, and technology. Fortunately, Myanmar’s leaders have the benefit of seeing how other countries with similar profiles have pursued overdue economic development.
One advantage all these economies share is young, working-age populations -- so unlike the developed world -- which also bodes well for their future growth. And as income levels rise, greater purchasing power from Myanmar to Vietnam will keep these economies attractive for foreign multinationals and industries interested in cheap, available labor and nearby markets. Rising incomes will also allow mainland Southeast Asia to rely more on its internal markets for consumption, which will keep the region insulated from the uncertainties and fluctuations of global markets. Apart from Thailand, the other Mekong countries will climb the middle-income ladder more slowly but will be able to avoid the usual pitfalls of lagging productivity along the way. Yet even if these countries enjoy another decade of growth, they will still need to shore up their economic and social foundations if they hope to see sustainable expansion in the longer run.
Indeed, mainland Southeast Asia still has plenty of work to do. Most consumers in the region have little disposable income, so governments must focus on raising those incomes as part of their countries’ broader social development. Education also remains poor. Thailand has the region’s best universities and other higher-learning institutions, but its recent global rankings have been abysmal, which speaks to the urgency of better education not only there but also in the other countries in the region. According to the World Bank, enrollment among high school students in Cambodia, Laos, and Myanmar is at or under 50 percent, even though adult literacy rates are above 70 percent in Cambodia and Laos and above 90 percent in the rest of the GMS countries. Woeful health care is another problem in all these countries, although less so in Thailand. Well-heeled citizens of Cambodia, Laos, and Myanmar head for Thai hospitals when they need treatment, since their own countries’ options are so inadequate. Governments must also try to narrow conspicuously rising income disparities and eliminate extreme poverty altogether. In Cambodia, for example, an estimated four million people live on less than $1.25 per day; 37 percent of Cambodian children under five years old suffer from malnutrition.
As for the political systems of the Mekong countries, these are already being tested. As Thailand has shown, when incomes rise, the emerging middle class demands a say. This means pressure to democratize will soon intensify on governments long used to ignoring it. The generals of Myanmar and the Communist ministers of Laos and Vietnam will need to find a delicate way to preserve their political legitimacy while allowing sufficient popular representation for their increasingly demanding masses.
Foreign aid, on which much of the region still relies, can be as much of a curse as natural resources. The newly opened and opening economies of Cambodia, Laos, and, especially, Myanmar will have to pay particular attention to this threat: abundant foreign aid reduces pressure on the government to generate income through job creation, education, better training for workers, and other productive activities. Corruption, too, is a persistent ailment; the countries of the Mekong score extremely low on Transparency International’s annual Corruption Perceptions Index. Thailand, at 88th in the world, does the best of the lot; Myanmar ranks a deplorable 172nd; and Laos does not fare much better. This disease will not disappear overnight, but it must ebb over time. If it does not, these countries will be stuck with subpar economic performance, and their regimes, with little popular legitimacy. Businesses and investors can lead by example, cultivating a sense of good governance and respect for regulations and laws. Thailand leads the way with its corporate social-responsibility programs and anticorruption campaigns.
Finally, the Mekong countries must avoid becoming their own worst enemies. Water conflict could become a real threat in the region in the next decade: Laos’ dam building has already raised concerns among its downstream neighbors over water access and environmental degradation. Laos hosts the headquarters for the Mekong River Commission, an intergovernmental agency that works with Cambodia, Laos, Thailand, and Vietnam on hydroelectric development and water management. But the Laotian government too often flouts its rules. China must also be persuaded by its neighbors to join the commission, and to abide by its strictures.
With its combination of frontier markets (in Cambodia, Laos, and Myanmar) and emerging economies (in Thailand, Vietnam, and Yunnan Province), mainland Southeast Asia hardly constitutes a conventional target for investors. Frontier markets are typically the riskiest investments, since they are even less economically developed than emerging markets and often lack such basics as stable currencies and stock exchanges. Save Thailand, the region does not offer attractive stock markets. But it does offer promising retail, hospitality, agricultural, fishing, electronics, and automobile sectors. In car-obsessed Thailand, for example, the automotive industry, which includes such Japanese manufacturers as Honda, Isuzu, and Toyota, accounts for half a million jobs and over ten percent of GDP.
Growth in all the economies along the Mekong River, including those of Guangxi and Yunnan, should complement one another’s development in these different sectors. Southern China and Thailand can provide capital and expertise, and Cambodia, Laos, Myanmar, and Vietnam can contribute labor, land, and natural resources. Infrastructure projects and manufacturing offer outside investors funding opportunities, and foreign companies can provide much-needed expertise and technology. Although there are short-term gains to be made in industries such as mining, forestry, and oil and gas, long-term investment should be the name of the game here.
Every October in Laos and Thailand, people gather along the banks of the Mekong to celebrate a Buddhist festival and witness what they insist is an unexplained natural phenomenon: bursts of light, known as “the Naga fireballs” or “the Mekong lights,” rising from the river. Likewise, having shaken off the legacy of colonialism and great-power rivalries, the countries of mainland Southeast Asia are rising from the great river and could also catch fire. They have geography, natural resources, and increasingly connected and integrated populations on their side. The future is theirs -- now they need to grab it.