Regions and Countries

	Table of Contents
p. 3 of 20 BACK | NEXT I. Introduction II. Background and Rationale III. Economic and Social Trends IV. Program Review - Lessons Learned V. Strategic Directions of the GMS Program for 2001-2003 VI. Sector Properties and Proposed Program for 2001-2003 VII. ADB's Operational Program VIII. Coordination with Donor Agencies and Regional Institutions IX. Cofinancing and Catalyzing External Resources

GMS Assistance Plan

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III. Economic and Social Trends

A. Economic Performance

9. The economic crisis that started in mid-1997 caused serious setbacks in the economies of the GMS countries, curtailing the pace of economic growth, and revealing fundamental structural weaknesses. The crisis resulted in a sharp drop in foreign direct investments (FDI), severe financial difficulties for domestic firms, and high rates of unemployment. These significantly altered the short- to medium-term prospects for the region, and consequently too for subregional cooperation. Subregional energy projects had to be rescheduled as a result of lower demand for electricity and energy prices, and the general pace of project implementation was threatened by fiscal restraint, compounding the more general problem of capital scarcity. Despite these setbacks however, market-based reforms were sustained and intensified. Combined with a low-wage and relatively well-educated labor force, and extensive natural resources, policy and institutional reforms helped pave the way for the steady economic recovery.

10. Recovery ensued with all six countries registering positive GDP growth in 1999. Various factors, both domestic and external, contributed to the recovery. Improvement in agricultural output induced by favorable weather conditions, coupled with robust exports and fiscal stimulus packages have boosted the strong GDP expansion. The recovery was supported in varying degress by new policy measures to address corporate governance and financial sector reforms, and increased exports to US and Japan.

11. Consumer price inflation slowed down in most GMS countries in 1999 on account of improved food supply, relatively stable exchange rates, softening growth in money supply, and, in some cases, weak demand conditions. All GMS countries continued to register fiscal deficits in 1999, reflecting weak revenue performance or higher expenditures aimed at stimulating the economy. "Dollarization" of the economies and a related lack of monetary instruments in Cambodia, Lao PDR, and Viet Nam has limited the effectiveness of monetary policy.

12. In the external sector, exports surged in Thailand, Viet Nam, and Yunnan Province in 1999 due largely to improved external demand and, in the case of Viet Nam, high crude oil prices. As a result, the current account balance was in surplus for Thailand and Viet Nam. Import growth outpaced export growth in Cambodia as economic recovery took hold. In Lao PDR, exports grew marginally, while imports contracted slightly, resulting in a modest improvement in the current account balance. According to data from the ASEAN Secretariat, net FDI to Thailand increased in 1998, while that for Cambodia, Myanmar, and Lao PDR declined significantly. Net FDI to Viet Nam fell by over 35 percent in 1998 since two-thirds of FDI inflows to the country originated from crisis-afflicted countries in Asia.

B. Investment Trends

13. Because of the Asian financial crisis, investors continue to be cautious concerning some areas of the GMS. Despite significant reforms in recent years, the GMS transition economies are unable to attract investors on account of a still highly regulated policy environment, inadequate legal framework, weak institutional capacities, and political uncertainties. In the aftermath of the Asian crisis, investors are taking a more cautious stance on Southeast Asia as a whole. Global factors, such as higher interest rates in the United States and Europe, and the rise in oil prices are factors also contributing to diminishing investor interest in the region. Against this backdrop, investors are closely monitoring the progress of financial reform and the sustainability of economic performance in Southeast Asia.

14. The implications of the above scenario to the GMS countries are profound. While the larger so-called "old ASEAN" economies have been experiencing difficulties in attracting the interest of portfolio investors, which will affect indirectly the other GMS countries, the "new ASEAN" or Cambodia, Lao PDR, Myanmar, and Viet Nam are likely to be (and indeed are) experiencing serious difficulties in attracting FDI. The impact on the GMS countries of the weak investment outlook on Southeast Asia is compounded by the fact that the “old ASEAN” countries have become the largest source of FDI in the GMS. Furthermore, as regional investor participation in the GMS continues to stagnate, international investors are showing little interest in the GMS countries which are seen as high risk environments. For example, of the more than a dozen Viet Nam funds established prior to the Asian financial crisis, only one fund continues to operate. A credible commitment by the GMS governments to ensuring an efficient and conducive investment environment through implementing financial and corporate sector reforms could help restore investor confidence in the subregion.

C. Cross-Border Trade and Investment

15. Available data on cross-border trade among the six GMS countries indicate that intraGMS trade has gained significance over the past years. For example, recorded cross-border exports (in baht) from Thailand to Cambodia, Lao PDR, and Myanmar combined grew by an annual compound growth rate of over 44 percent from 1992 to 1999. As a result, the share of Thai exports to its three neighboring countries as a percentage of total exports expanded from 0.5 percent in 1991 to almost 3 percent in 1999. During the same period, imports of Thailand from its three neighboring countries increased by an annual compound growth rate of almost 12 percent.

16. A similar trend can be observed in intraGMS net FDI flows. According to ASEAN Secretariat data, net FDI flows from the six GMS countries to Cambodia, Lao PDR, Myanmar, Thailand, and Viet Nam combined rose sharply from $130 million in 1995 to $367 million in 1997, but fell to over $240 million in 1998. ASEAN was the largest source of net FDI totaling some $6 billion during the 1995-98 period, surpassing net flows from Japan ($4.8 billion), North America ($2.7 billion), and Europe ($2.7 billion). It is noteworthy that new ASEAN members have also invested in the other ASEAN countries. For instance, during the period 1995 to the first half of 1999, net FDI to ASEAN originating from Cambodia amounted to some $39 million, Lao PDR $12 million, and Viet Nam $9 million.

D. Poverty Assessment¹

17. Poverty assessments in individual countries indicate that poverty is indeed pervasive. Notwithstanding the rapid economic growth experienced over the past years, GDP per capita in most of the subregion remains low at about $1 per day. There are wide disparities between urban and rural communities, a growing gap between rich and poor, inadequate attention to the special needs of ethnic minorities, gender inequities, lack of access to basic health and education, and inadequate protection of the environment on which traditional livelihoods depend.

18. In Cambodia, about 36 percent of the 1997 population or about 4 million people, was classified as poor using a consumption-based poverty line defined as adequate income to buy a daily 2,100-calorie food basket plus an allowance for nonfood expenditure. A large proportion of the population, however, is clustered around the poverty line indicating a potential for significant changes in the incidence of poverty. In Lao PDR, 47 percent of the population was below the poverty line in 1997/98 compared to 63 percent in 1992/93. This was based on poverty thresholds which utilize food and nonfood consumption as well as energy requirements. There is considerable disparity in poverty incidence between urban and rural areas; in rural areas, it is 52 percent, while in urban areas, it is 21 percent. In Myanmar, official poverty incidence for the country as a whole is estimated at 23 percent, while cases of more severe poverty are reported to occur in the border regions.

19. Poverty incidence in Thailand declined significantly from 27 percent in 1990 to 11 percent in 1996, before rising to about 13 percent in 1998. Despite this, certain inequities have been exacerbated (e.g., between urban and rural areas, between regions, between well-educated workers and those with little education), and poverty remains acute in certain areas, particularly in the northeast. In Viet Nam, poverty declined significantly from 58 percent in 1992/93 to 37 percent in 1997/98. Poverty is largely a rural phenomenon, with 45 percent of the rural population living below the poverty line. In Yunnan Province, out of a population of 41 million (1997), around 4.4 million people are officially designated as poor² , accounting for about 11 percent of the total provincial population and 8 percent of the PRC's designated poor. In terms of GDP per capita, Yunnan is the seventh poorest of the 31 provinces of the PRC.

E. Social and Environmental Performance Assessment

20. Social development indicators of the six GMS countries are mixed. In Cambodia, Lao PDR, and Myanmar, education and/or health indicators, as well as the share of public sector expenditure for these two sectors, are lower than in the other GMS countries. Despite the commitment to universal basic education for all, adult illiteracy remains high in Cambodia and Lao PDR. Health indicators remain unfavorable in these two countries due to poor coverage of rural health services (especially at the village level) and uneven rural/urban health staff deployment policies. Public expenditure on health and education as a proportion of GDP in Myanmar is among the lowest in the world. In Thailand and Viet Nam, significant gains have been achieved over the years in terms of providing access to basic social services. These two GMS countries have made significant progress in lowering child/maternal mortality and the incidence of malaria, and in raising contraceptive use.

21. Although the level of economic development differs among the GMS countries, a number of environmental issues are common to all or some of them as they share common natural resources in the border areas. The most critical issues include deforestation, loss of biodiversity, soil erosion, degradation of water and coastal resources, flooding, overfishing, overuse of pesticides, and sedimentation of irrigation reservoirs. On a subregional scale, the environmental impacts of certain types of development are beginning to cross national boundaries. In this regard, utilization of water resources of the Mekong River and its tributaries is a potentially dominant environmental issue in the future, because of the possible cumulative negative effects of existing and planned hydropower developments on water volumes, water quality, and fisheries.

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