» How Thailand Hopes to Capitalize on Its Neighbors’ Success

How Thailand Hopes to Capitalize on Its Neighbors’ Success

Construction workers try to fix a broken piece of equipment while working on the construction of a port inside the planned Dawei special economic zone in Ngapitat, Myanmar. (TAYLOR WEIDMAN/AFP/Getty Images)

Analysis December 22, 2015 | 09:15 GMT

Forecast

Japan’s support for Thailand’s Dawei industrial zone project will enable the long-delayed initiative to move forward to connect the Thai core to Myanmar to the west.
However, only a scaled-back version of the once-ambitious project will proceed initially, while other, more developed projects are given investment and support.
Thailand will continue to connect to its comparatively underdeveloped neighbors for its own benefit, but it will also require progress on the regional economic community’s development to remain competitive.

Analysis

In the past two decades, mainland Southeast Asia has made the slow, painful transition out of a period of intense ideological conflict and stunted development. In the years after World War II, Malaysia and Singapore had strong, consolidated states and experienced steady growth and industrialization. The northern portion of the Southeast Asian peninsula, however, bore the brunt of regional Cold War great power conflict. Today, the eastern half of the peninsula — former French Indochina — is reaping the benefits of a period of relative stability and economic growth. To the west, Myanmar is positioning itself to reap similar gains after emerging from international isolation in 2011.

A small landmark in this regional transition for Thailand occurred Dec. 14 when the Japan Bank for International Cooperation signed an agreement with Thailand and Myanmar officially taking a one-third share in the Dawei industrial zone. The project will establish a special economic zone on the coast of the Andaman Sea in an undeveloped portion of southern Myanmar along the Thai border to the east. One of three such zones planned by the Myanmar government, it is the only one that would connect with Thailand by land. Dawei’s importance, besides assisting with Myanmar’s economic emergence, is its part in Thailand’s broader strategy to take advantage of its neighbors’ rising economic clout for its own sustained growth and regional power. In fact, in addition to the Dawei zone with Myanmar, Thailand is also developing several special economic zones along its land borders with other countries. This will be especially important after the 2016 launch of a major regional economic integration initiative.

Thailand’s Unique Position

Southeast Asia is a region defined by the divide between the integrated mainland portion on the peninsula and the network of archipelagos stretching from Indonesia to the Philippines. The 10-member Association of Southeast Asian Nations (ASEAN) loosely ties these disparate nations together into a single regional bloc. At the end of 2015, ASEAN will officially launch its ASEAN Economic Community, an initiative to more fully integrate the bloc and tie it into the global economy. Many of the foundational agreements are already in place, but the precise shape of the community will not become apparent for years. The vast differences in gross domestic product and development among the ASEAN members, combined with the community’s lack of enforcement mechanisms, mean that integration will be difficult and uneven.

However, though the mountainous mainland portion of Southeast Asia, including Thailand, continues to suffer from a dearth of cross-border infrastructure, the region will be comparatively easier to pull together. Projects such as Dawei are an example of efforts to overcome the region’s geographic divides — with Thailand taking the lead.

Thailand currently holds a unique position on the mainland. While Vietnam, Cambodia and Laos were all embroiled the Indochina Wars from roughly 1946 to 1989 and Myanmar was consumed by internal conflict and insurgencies, Thailand emerged from the Cold War era largely unscathed. The Thai government sided with the Axis powers in World War II, but it quickly became a Western ally in the Cold War, receiving vast amounts of economic aid. Intact and with Western support, Bangkok defeated its Chinese-aligned communist insurgency. It also served as a staging ground for U.S. intervention in the Indochina Wars. And so, while the other Cold War battlegrounds were forced to reconsolidate their governments beginning in the 1990s, Thailand’s relative coherence gave it a major economic advantage over its neighbors. In 1987, GDP growth hit 9.5 percent, rising through 1990 before leveling off to around 8 percent through 1995. Of course, the 1997 Asian financial crisis, which originated with the collapse of the Thai baht, did major economic damage. Still, the nation remained politically and economically attractive to outside investment.

The Baht Zone

Thailand took advantage of its growth to establish itself as the nexus point of the region, launching an informal initiative in the early 1990s it called the “Baht Economic Zone.” The set of policies sought to set up the Thai baht as the currency of choice in the northern peninsula and included relaxed limits on the amount of currency Myanmar, Laos, Cambodia, Thailand and Vietnam would be allowed to carry. Today, the Thai baht is still widely used, often viewed as more trustworthy than other domestic currencies while influencing a vast array of manufactured goods, as many businesses choose to settle their accounts in Thai baht. Thailand also hosts 2-3 million migrant workers, mostly coming from Myanmar, Laos and Cambodia. And over the past two decades, Thailand has accrued $124.5 billion in foreign direct investment as opposed to the collective $104.6 billion among Vietnam, Cambodia, Laos and Myanmar.

But Thailand is beginning to lose its head start. Bangkok has been embroiled in several political crises, culminating in May 2014 with a military coup. Violent street protests alarmed investors, while frequent changes of government led to inconsistent policymaking. Major flooding in 2011 further eroded confidence in Bangkok’s ability to ensure a stable investment environment. Meanwhile, its minimum wage of 300 baht (approximately $8.30) is relatively high compared with the rest of the region, and the cost of doing business is greater. Partially as a result, industry has been gravitating toward newer, more lucrative opportunities east of Thailand and, more recently, west to Myanmar.

But Thailand retains major advantages for manufacturers because of its developed internal infrastructure and knowledge base. Thailand also has the unique geographic advantage of sharing land borders with eastern Myanmar, Laos, Cambodia and northern Malaysia. Although not contiguous with Vietnam, the Laotian territory between them is only 140 kilometers (about 87 miles) at its narrowest point. Vietnam, Thailand, Laos and Cambodia are also stitched together by shipping along the Mekong River system. Through Thailand’s southern provinces, it can connect easily to the Malaysian economy as well.

Looking Outward

To leverage its waning pre-eminent position, Thailand is trying to push outward to harness the growth of other Southeast Asian countries for its own benefit. The Asia Highway network — running from Bangkok, north across the Thai border at Mae Sot and to Tamu, Myanmar, where it crosses into India — launched a new spur in September. In mid-December, Cambodia and Thailand signed an agreement to complete another secondary track connecting the Thai and Cambodian rail systems by 2016.

The Dawei economic zone in Myanmar is another such initiative, but the project has hit major snags. The two countries first signed a memorandum of understanding in 2008, before Myanmar’s transition out of military rule, but the project foundered because of a lack of funding on Thailand’s part and regulatory capacity in Myanmar’s nascent government. In 2014, the two governments announced they planned to relaunch the project and requested Japan’s participation. In January, Japan agreed to participate, partly as a way of countering China while maintaining its involvement in Myanmar. The Dec. 14 signing formalizes this role, with more details to be discussed at a joint meeting in late February or early March.

Dawei is one of three Myanmar special economic zones, and was initially the most ambitious. But it has been outpaced by another Japan-backed project, the Thilawa special economic zone near Yangon, which boasts two pilot factories already producing garments and radiators. The other is at Kyaukpyu on the coast of Rakhine State. Both profit from infrastructure already in place. For this reason, Thailand and Myanmar have scaled back Dawei significantly. It was originally conceived as a 196-square-kilometer industrial park with a deep-sea port, oil and natural gas processing facilities, and an eight-lane superhighway — requiring a total of $10.7 billion in investment. This is all still technically on the table, but now the partners are focusing on a $1.7 billion initial phase consisting of a 27-kilometer zone, liquefied natural gas terminal, jetty and two-lane highway to Thailand. Construction will begin in earnest in 2016, and lots will be handed over to businesses between 2016 and 2023.

The current, small iteration of the project makes Dawei an equally small yet exemplary part of Bangkok’s larger campaign to connect with the region. The 2014 resumption of the project coincided with Thailand’s announcement of a plan to implement special economic zones in border provinces, again to branch outward and shore up investment to Thailand. The first tranche is already functioning: Tak province on the Myanmar border, Sa Kaeo and Trat provinces on the Cambodian border, Mukdahan province bordering Laos and Songkhla province bordering Malaysia. The second set will be inaugurated in 2016. This phase is particularly important because one of the zones will be in Kanchanaburi province where the road from Dawei is set to cross into Thailand, overcoming the infrastructure challenges of building out a major project in the Dawei region.

Source: www.stratfor.com