GEORGE ABONYIVISITING PROFESSORDEPARTMENT OF PUBLIC ADMINISTRATION AND EXECUTIVE EDUCATION PROGRAMMAXWELL SCHOOL, SYRACUSE UNIVERSITY21 JULY 2014

Scoping Study: Developing Border Areas and Cross-border Linkages Between Thailand and its Neighbours

Prepared for Asian Development Bank/Thailand Resident Mission and the National Economic and Social Development Board

Preface Table of contents for Scoping Study on Developing Border Areas and Cross-border Linkages Between Thailand and its NeighboursGeorge Abonyi, Anthony M. Zola, Eggaluck SuwannakarnI. Border Area Development: Special Economic Zones (SEZ) and Beyond 1.Introduction 2.Overview: border area development 3.Special economic zones in Asia and the Greater Mekong Subregion 4.SEZ: lessons from international and GMS experienceII. General Conclusions from the Case Studies 1.Brief description of the border areas in case studies 2.General conclusionsIII. Detailed Case Studies A. Border economic zone and agribusiness linkages at Ubon Ratchatani (Thailand) and Champasak (Lao PDR) B. Toward cross-border economic zones and value chain linkages at Mae Sot (Thailand) and Myawaddy (Myanmar): case study C. Border economic zones at Sa Kaeo (Thailand) - Banteay Meanchey (Cambodia); Trat (Thailand) - Koh Kong (Cambodia)*

Overview of the story *

Economic rationale for border area developmentFrom an economic perspective, a border is basically a barrier to the free mobility of production inputs, including: labour, capital, technology, and information.

This results in differences in available supply, and in factor prices across borders.

In principle, economic activity along a border can expand more efficiently and quickly by combining complementary inputs to produce cost-competitive products/services. E.g. garments/apparel, electrical and electronics (E&E), automotives, agro-industry

Leveraging locational advantages for development of border communities, such areas can also serve as gateways for the wider domestic economy (linkages/spillovers).

Border areas between relatively less-developed and more advanced economies can therefore provide their respective complementary inputs for mutual benefit.

For example, Myanmar can provide lower-cost labour and land, while Thailand can offer other inputs (materials, parts, and components), technology, capital, and information (e.g. on external markets) for complementary development of production.*

Mechanisms for border area development:Special economic zones (SEZ) and beyond (1)Special economic zone (SEZ) is a formally incorporated geographic area that has characteristics such as single management or administration; well defined geographic boundaries; eligibility of businesses located there for various benefits such as tax incentives, access to specially provided infrastructure services within the zone; and often a separate customs area and streamlined procedures.

Widespread use of SEZs in Asia; and received significant attention in the GMS, including in the context of Economic Corridors, and for development of border areas but with uneven results to date.

In the case studies, this may be a most effective mechanism for developing Mae Sot, particularly in the context of Myawaddy.*

Mechanisms for border area development:Special economic zones (SEZ) and beyond (2)

Border economic zone (BEZ) is an area that uses effectively linkages with economic activities across the border. It should be guided by a clear and coherent vision and strategy, but need not involve a formal special economic zone with separate administration, regulations, and services.

The goal is to develop the comparative advantage of a given area, leveraging economic developments across the border, for example, focusing on specific value chains; and strengthen related cross-border linkages, e.g. customs procedures, logistics services, access to labour.

Case study example is Ubon Ratchatani and Champasak (Lao PDR), involving particularly agro-industry, including contract farming; and may be appropriate for Trat (and Sa Kaeo)*

Mechanisms for border area development:Special economic zones (SEZ) and beyond (3)Cross-border special economic zone (CSEZ) is established in close collaboration by two (or more) governments, with synchronized rules and regulations, for example related to trade, investment, and customs. It involves creating an interdependent operational and administrative environment for business on bothsides of a border. CSEZ builds on viable SEZs in the respective countries; requires agreements related to specific cross-border linkages between two adjacent SEZs No examples in the GMS, but there has been an initiative to establish a Cross-Border Economic Zone (CBEZ) along the North South Corridor between Hekou in Yunnan Province, PRC, and Lao Cai in Viet Nam. CSEZ may be very effective for collaborative development of Mae Sot (Thailand) and Myawaddy (Myanmar) to support cross-border mutually beneficial linkages in labour intensive value chains, particularly garments.*

Business context: border area development (e.g. SEZ) and cross-border value chains Traditionally, SEZ strategy focused on strengthening the general business environment in these zones to compensate for constraints in the wider domestic economy Often missing: link to particular value chains reflecting global fragmentation of production in key industries such as electronics, automotives, garments, agro-industry; and their differing competitive needs, e.g. special purpose logisticsSEZs addressing particular constraints facing firms in specific value chains e.g. logistics, warehousing, skills are more likely to attract competitive firmsFor less developed economies (e.g. Myanmar) this can help link to even sophisticated value chains such as electronics and automotives, first in labour intensive, lower skill, lower technology, lower value activities such as assembly; with potential to upgradeFor Thailand, this can provide basis for upgrading to higher value activities and products. General supportive business environment in SEZ is not likely to be sufficient: necessary to also support effective cross-border production linkages in particular value chains

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Example: Cross-border value chain in garments and textiles in the GMSSource: UNESCAP (2013/14): Business for Development: Capacity building of enterprises (SMEs) in the Greater Mekong Subregion for their effective penetration into regional and global markets*

Example: Thailand-Cambodia cross-border linkages in the electronics and electrical (E&E) value chain (Unescap (2013/14)) *

CASE STUDIES*

Ubon Ratchatani (Thailand) Champasak (Lao PDR)

This involves well-functioning border economic areas and related cross-border cooperation, that create a viable border economic zone (BEZ).

Lao PDR provides labour, commodities and some processing; and Thailand provides higher value added processing and related services (e.g. logistics).

The interests of the participating countries and local communities are strategically and operationally relatively well aligned.

The challenge now is to strengthen and expand what is already there. For example there are opportunities to strengthen connectivity (e.g. transport linkages) through coordinated investment; to expand existing trade, by building on Ubons Charoensrie Market as a regional commodity hub; and more effective involvement of stakeholders, for example government and business, including through public-private collaboration (PPP) and related to that, greater authority to the GMS Governors Council.*

Contract farming arrangements between Ubon Ratchatani (Thailand) and Champasak (Lao PDR)*

Sa Kaeo (Thailand) Banteay Meachey (Cambodia) Trat (Thailand) Koh Kong (Cambodia)

Thai and Cambodian governments, and local communities have strong interest in developing these areas. A basic constraint to date, and that could hinder future development and cross-border linkages, is apparent key differences between visions and aspirations of local communities (Trat, Sa Kaeo), and perceived preferred strategy and related implementation mechanism (SEZ) of the Thai central government. The local (business) communitys vision for development focuses on leveraging cross-border linkages through trade-related services, value added agro-processing (including bio-energy), and tourism. Industrial (e.g. manufacturing) development through SEZs is seen as neither feasible, given local constraints such as land (particularly in Trat), nor fitting with local aspirations for development (Trat as the lung of Eastern Thailand).The basic requirement for successful cross-border collaboration therefore is to first reconcile conflicting visions and strategies for local development.Depending on the strategy selected, the implementation mechanism may also take different forms. For example, it could involve an SEZ, if suitable for agro-processing or services such as logistics; or a more informal border economic zone (BEZ), strategically focused on particular cross-border linkages, as in Ubon. The location of this area on the GMS Southern Economic Corridor could provide opportunities for wider subregional development and linkages, for example through expanded logistics services.*

Mae Sot (Thailand) Myawaddy (Myanmar): Overview There are significant opportunities but also challenges for developing this border area in a way that builds on the comparative advantages of the two economies. There is strong interest at all levels in Thailand to develop a Mae Sot SEZ. But it seems to lack a coherent and shared guiding vision and strategy; and therefore the appropriate implementation mechanism is also not clear, e.g. what kind of SEZ.The basic initial challenge is to define a clear, coherent shared vision and collaborative strategy for cross-border cooperation and development. The case analysis suggests that such a vision and strategy could focus on complementary development of labour-intensive industries, in particular garments, linked to Myawaddy (Myanmar). This could be an effective response to broader development challenges and priorities in both Myanmar and Thailand; and for local communities. It could be implemented through collaborative development of linked SEZs to form a cross-border special economic zone (CSEZ), including in-bond processing system (Taguchi), supported by appropriate infrastructure and border procedures.*

Mae Sot Myawaddy Cross-border special economic zone (CSEZ)Build on collaborative development of viable linked SEZsMae Sot Strong support for Mae Sot SEZ at all levels of government and local stakeholders; and there is sound economic and business rationale. But preparation and approval of various plans for Mae Sot SEZ has faced continuing difficulties since initial approval of the concept by Cabinet in 2002; planning for a Mae Sot SEZ has been on-going since 2004Mae Sot emerged in recent years as production base for labour-intensive industries, in particular, garments, driven by global and domestic factorsAt its peak 470 garment factories, with 20,000 migrant workers from Myanmar. However, introduction of the Baht 300/day minimum wage in January 2013, has led to movement away from Mae Sot by garment producers.Presents basis for sound economic and business case for SEZ focused on specific needs of upgrading in the garment value chain, IF inputs from Myawaddy SEZ

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Mae Sot Myawaddy Cross-border special economic zone (CSEZ)Build on collaborative development of viable linked SEZsMyawaddy Focus on labour intensive production in garment value chain IF linked to Mae Sot Build on Myawaddy Industrial Zone, now under constructionNeed to upgrade to SEZ and related privileges to address constraints of uncertain Myanmar business environment, and infrastructure gaps Requires general approval from the Myanmar Investment Committee (MIC) at the Union Government level, as well as approvals from the Ministry of IndustryRevision of the Myanmar SEZ law is in progress Note: Myawaddy is on Myanmar first priority corridor for development

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Mae Sot Myawaddy Cross-border special economic zone (CSEZ)Build on collaborative development of viable linked SEZsFacilitating Mae Sot Myawaddy garment production linkages through in-bond processing system; supported by infrastructure, trade facilitation, and HRD development initiatives. (Dr. Hiroyuki Taguchi, 2013)

Requires consultative preparation of a focused strategy for border area development with explicit focus on cross-border production linkages

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Mae Sot Myawaddy CSEZ on the GMS East West Economic Corridor (EWEC)Source: Asian Development Bank*

General conclusions from the case studies (1)Clear and coherent vision and related strategy of border area development, anchored in local conditions, is essential The starting point for the viable and sustainable development of border areas, particularly for cross- border economic linkages, is a clear and coherent vision and strategy for development. This has to reflect both local and national interests; needs to be anchored in local conditions (constraints and opportunities); and consider potential spillovers to the wider domestic economy. The cases of Mae Sot (Thailand) Myawaddy (Myanmar); Sa Kaeo (Thailand) Banteay Meanchey (Cambodia); and Trat (Thailand) Koh Kong (Cambodia), all illustrate the importance of this issue for border area development and cross-border linkages.*

General conclusions from the case studies (2)Strategy focused on specific (cross-border) value chainsA viable and sustainable strategy of developing particular border areas should also focus on strengthening cross-border linkages in specific value chains of joint interest, consistent with local conditions. This builds on recognition that constraints facing firms in the garment value chain or industry are likely to differ in important ways from those facing firms in electronics or agro-industry, for example with respect to needed logistics and skills. For example, it is not clear to what extent the proposed Mae Sot or Trat SEZ has such focus; and this may be contributing to uncertainty, and constrain future viability. Example: The minimum wage of Baht 300/day may seem to suggest that Mae Sot is no longer viable for garment production. However, the strategy for joint development of Mae Sot (Thailand) Mywawaddy (Myanmar) based on cross-border linkages in the garment value chain could use this constraint as an opportunity.*

General conclusions from the case studies (3)Collaborative development of a shared vision and strategy It is essential to align the visions and strategies of key stakeholders with respect to border area development. This vision and strategy should reflect the aspirations of the local community; and should also be consistent with broader national development priorities. Otherwise it will be resisted by key stakeholders, and will be difficult to implement. This is reflected in Sa Kaeo and Trat, (and perhaps Mae Sot), where developing a shared vision and strategy is a pre-requisite for viable local development and effective cross-border linkages.*

General conclusions from the case studies (4)There is a diversity of mechanisms for border area development and cross- border cooperationSEZ is not the only option for implementing a strategy of border area development. In some settings the focused but more informal approach of a Border Economic Zone (BEZ) may be more appropriate. This is the case in Ubon Ratchatani Champasak; and may be an effective option for addressing constraints and opportunities in Trat. The Mae Sot (Thailand) Myawaddy (Myanmar) case illustrates possible application of cross-border special economic zone (CSEZ), involving the collaborative linking of SEZs on each side of the border, focused on cross-border linkages in the garment value chain.*

General conclusions from the case studies (5)Align selected strategy and implementation mechanism with the neighbouring countys development strategy and local conditions Focus on cross- border linkages for mutual benefit requires collaboration in various forms, strategies and mechanisms of participating countries must be aligned from the outset. This is essential to guide more specific subsequent decisions to ensure complementarity. For successful development of Trat and Koh Kong, a shared cooperative strategy between Thailand and Cambodia, including the local communities, is necessary to guide specific decisions on issues such as infrastructure investment and trade facilitation measures. Similarly, for a Mae Sot Myawaddy CSEZ, Thailand and Myanmar (and the local communities) have to align their strategies and implementation mechanisms from the outset, to ensure viable and sustainable cross-border development.*

General conclusions from the case studies (6)Approach cross-border economic development, where possible, in the context of wider subregional (e.g. GMS) cooperation and integrationDeveloping border areas and cross-border linkages within the wider framework of subregional cooperation can provide significant additional benefits; and facilitate such wider cooperation and development. Cross-border cooperation in logistics in Sa Kaeo (Thailand) Banteay Meanchey (Cambodia), and Trat (Thailand) Koh Kong (Cambodia), could accelerate implementation of linkages along the GMS Southern Economic Corridor with additional benefits to border areas and beyond. Similarly, a Mae Sot (Thailand) Myawaddy (Myanmar) CSEZ can link development to the GMS East West Economic Corridor (EWEC).*

THANK YOU*