Worker outflows a risk for Greater Mekong

The incoming ASEAN Economic Community presents both opportunities and risks for the Mekong economies, with structural transformations on the way. The Greater Mekong region includes Cambodia, Laos PDR, Vietnam, Thailand and Myanmar.

A common market for capital and labour in ASEAN will attract inward Foreign Direct Investment (FDI) and make the most of youthful and inexpensive labour forces. However, if production platforms prove sticky and are slow to migrate to the country that can best accommodate them, an outflow of labour from the frontier Mekong economies to the current economic powerhouses would prove challenging.

But first. What is the AEC?

The ASEAN (Association of South East Asian Nations) Economic Community, aimed to be achieved by 2015, is a common market for capital and labour within the ASEAN region. This includes Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Cambodia, Laos, Myanmar and Vietnam.

The AEC is designed to have four main characteristics:

  1. A single market and production base
  2. A highly competitive economic region
  3. A region of equitable economic development
  4. A region fully integrated into the global economy

The AEC will cement ASEAN as a hub not just for production networks but also for Free Trade Agreement (FTA) networks across East Asia more generally. The AEC aims to leverage the connectivity that is created through the spokes (or trade-corridors) to countries and regions outside ASEAN that are signatories to FTAs. In effect, it will be one large community with advantageous trade relationships due to the FTAs between signatory countries.

In theory, greater economic integration within ASEAN should boost the economic welfare of the populations within the Mekong regions, due to an efficient use of capital and labour. However, as some countries within ASEAN feature the most sophisticated production networks in the world, for example Vietnam, it will provide challenges for less developed nations. This will in turn effect the AEC as a whole.

The process of economic integration for the Mekong into the AEC is likely to be asymmetrical. It cannot be thought of as a simple 'add on' to existing economic structures. It is likely to require major structural adjustments and the movement of production factors amongst economies in order to maximise profit in the new common market.

The fundamental premise of a common market is that the private sector will have maximum freedom to relocate operations and supply chains to more profitable geographies. Therefore it is likely that some economic activities will lose out, while others gain.

Outward labour migration could therefore be a key development risk for Cambodia, Myanmar and Laos PDR.

This process is already occurring, and additional outflows would merely build upon existing dynamics. Over 2.5 million migrant workers from the Mekong – mainly from Myanmar and Cambodia – are already resident in Thailand. Most of these workers are undocumented and work informally in low wage service and manufacturing industries. This is lost tax revenue for both nations.

However, the trends identified above show the need for workers in the recipient nations, such as Thailand. Thailand is already likely to be seeing its domestic surplus working age population peaking and would suffer from significant unskilled labour shortages in the absence of these workers. Opening up the movement of labour will create a more efficient and productive labour market.

Laos PDR in particular has much to gain. With immense growth to continue in the region, electricity is in short supply. Laos is known as the “battery of Southeast Asia”, as it is a major producer of hydroelectric power and sells its surplus supply into Thailand. In fact, without Laos’ supply, Thailand would probably return to the rolling blackouts that were common in the 1960s and 1970s. This would have the effect of removing Thailand’s status as a production hub overnight.

Laos currently has plans to expand production significantly with a new dam currently under construction, one more approved for construction, and 9 more in the pipeline. The AEC creates opportunities for this expansion through a more rapid industrialisation and movement of labour.

It will be vitally important not to overly protect existing economic activities over this period of structural adjustment. The best policy is likely to be facilitating inter-sectoral and inter-regional mobility of production factors.

Cambodia, Myanmar and Laos PDR must manage risks of labour migration through making sure their educational systems align with the skills required domestically at the time. This will help to prevent workers from leaving to try and find employment elsewhere. Additionally, countries at risk of losing workers will need to ensure that their FDI regimes are transparent in order to attract industries, which will in turn provide employment opportunities.

In summary, though the AEC is expected to usher in a faster pace of industrialisation across the Mekong, we would assess the key risk as being strong outward labour migration in the event that production platforms do not shift to the less developed Mekong nations - Cambodia, Laos PDR and Myanmar - quickly enough.  Though this is a near term risk, the medium term benefits of faster industrialisation are clearly evident.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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