Cross-Border Impacts of Thai Sezs on Lao Sezs and Collaboration in the Midst of Regional Integration
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CROSS-BORDER IMPACTS OF THAI SEZS ON LAO SEZS AND COLLABORATION IN THE MIDST OF REGIONAL INTEGRATION Alay Phonvisay, Viengsavang Thipphavong and Thantavanh Manolom1 Abstract Out of the 10 new SEZs of Thai Government, five will be located in the Thai provinces along the border with Laos where SEZs have already been set up and some are in operation. To attract investors to these planned SEZs, Thai Government has proposed a new measure to facilitate cross border labor movements of both skilled and unskilled types. This paper aims to address potential impacts of Thailand‟s SEZ initiative on Laos‟ SEZs by combining desk studies and semi-structured interview based on locational choice model in majors Laos‟s SEZs. Considering SEZs in Laos tends to be more attractive to investors because of cheaper electricity, treated water supply, land lease, and labor cost. Moreover, the direction and the objective of SEZ development has been cleared compare to Thailand‟s SEZs which are not clearly identify. Moreover, there is high probability of cooperation between those SEZs along the border in order to gain the most benefit. In order to gain the most benefit from SEZs for Laos and Thailand, strengthening coordination between public and private sector is necessary. Key words: SEZs, cross-border impacts, Thai-Lao, regional integration. 1 Dr. Alay Phonvisay, Economic lecturer, Faculty of Economic and Business Administration, National University of Laos ([email protected]). Viengsavang Thipphavong, Director of Trade Policy Research Division, The Economic Research Institute for Industry and Trade (ERIIT), MOIC, Lao PDR ([email protected]). Dr. Thantavanh Manolom, Research Fellow, The Economic Research Institute for Industry and Trade (ERIIT), MOIC, Lao PDR ([email protected]). CROSS-BORDER IMPACTS OF THAI SEZS ON LAO SEZS AND COLLABORATION IN THE MIDST OF REGIONAL INTEGRATION 1. Introduction SEZs have been established in many countries as a mechanism for attracting foreign direct investment (FDI), accelerating industrialization and creating jobs. SEZs have the potential to create immense employment opportunities, directly, by firms invested in the SEZs, and indirectly, by local suppliers providing inputs to firms located in SEZs and by local businesses selling goods and services to workers employed by those firms. Also, SEZs are townships of their own, with shopping malls, restaurants, amusement parks setup around to attract people, thus resulting in more economic development in that area. Technology and knowledge transfers could be other benefit of SEZ development to a host country in particular a country which has a chronic shortage of skilled and qualified workers in order to keep up with its economic growth. Recently, Thai Government has planned to develop 10 SEZs along the border areas with Laos to attract investors to the areas, and five will be located in the Thai provinces bordering Lao provinces, where Lao SEZs have already been set up and some are in operation. This will inevitably directly compete with Lao SEZs located right across the border. However, Thailand sees this strategy as crucial to accelerating border trade, which currently accounts for 12% of the country‟s total exports and it is projected to grow to 20-25 percent in 2015. Under this plan, Thailand has identified 13 target industries for those SEZs, including agriculture and fisheries; ceramics; garments, textiles and leather; furnishings and furniture; gems and jewelry; medical equipment, automobiles and parts; electrical appliances and electronics; plastics; pharmaceuticals; logistics; industrial estates and tourism-related to education, healthcare, retail, and hospitality. The planned new SEZs have completed the Environmental Impact Assessment within October 2015, and construction is expected to start in the end of 2016 and ready for space sales in 2019 (BOI, 2015a). To attract investors to these planned SEZs, Thai Government has proposed a new measure to facilitate cross border labor movements of both skilled and unskilled types. Also, the new Thai SEZs will allow investors to employ foreign unskilled workers, in addition to providing tax and non-tax incentives (BOI, 2015). The Thai planned SEZs as such has raised two major concerns among Lao policy makers and leaders: 1) competition for workers away from Lao SEZs, which has already faced difficulties attracting qualified workers, and 2) competition for investors away from Lao SEZs. As SEZs in Laos grow, the need for both skilled and unskilled workers also increases. However, as Thai employers commonly offer wages higher than those offered by Lao employers, and with Thailand‟s growing need for unskilled workers, there is a strong concern that the Thai new SEZs along the border regions would attract Lao workers at the expense of the SEZs on the Lao side of the border. Beside the fact that Thailand generally has better infrastructure and services (better road and telecom services, hospitals, school for children, modern shopping malls) that provide the convenience of daily living, with tax and non-tax incentives to investors in the Thai SEZs, Thai SEZs may not just attract workers, but future investments at the expense of Lao SEZs and Laos as a whole. 1 Nonetheless, Thailand has recently expressed an interest in cooperating with Laos in investment promotion, industrial linkage program and knowledge sharing. With cooperation, it is unclear how will Thai SEZs impact Lao SEZs. In the light of this, the Lao National Committee for Special Economic Zone Secretariat Office (S-NCSEZ) is in need for a study to provide an insightful analysis of the repercussions Thailand‟s planned new SEZs would have on Laos‟ SEZs. S-NCSEZ also needs to know strengths and weaknesses of the SEZs in Laos vis-à-vis those in Thailand in order to identify possible areas for cooperation for mutual benefits of the two countries. Major questions that this study seeks to answer are: (1) What are the potential impacts of Thailand‟s SEZ initiative on Laos‟ SEZs and beyond the SEZs, especially on FDI and labor supply? (2) How attractive and competitive are Lao SEZs and in which areas are they required for improvement in order to improve their attractiveness and competitiveness? (3) What are the potential areas for win-win cooperation with Thai SEZs in the context of regional integration? (4) What would be a suitable labor policy that Lao SEZs should advocate for in order to ensure an adequate and sustained supply of labor in the context of regional integration? (5) How and by how much do Lao SEZs contribute to job creation and income generation in the local economies, and what strategic policy would be appropriate for enhancing linkages between SEZs and local economies? 2. Literature Review Special Economic Zone (SEZ) is a geographical region that has economic laws that are more liberal than a country‟s typical economic laws. The SEZ category covers a broad range of special zone types, including Free Trade Zone, Export Processing Zones, Free Zones, Industries Estates, Free Ports, Urban Enterprises Zone and others. Usually, the goal of SEZ structure is to increase foreign investment. There are approximately 3,000 SEZs operating in 120 countries worldwide, which account for over US$ 600 billion in exports and about 50 million jobs (N. Kadam, 2012). SEZs are important in today‟s context for the third world countries which have been in the race for rapid economic growth. There are many positives which emerge out of establishing an SEZ. By offering privileged terms, SEZs attract investment and foreign exchange, create employment and boost the development of improved technologies and infrastructure. To undertake any kind of massive development program, the Government requires a huge amount of funds. So, it looks out for potential partners to help carry out the program. For setting up an SEZ, the Government may partner with a private investor, who is willing to invest in that area, thus creating a win-win situation for both. As the Government gets the capital and expertise needed to establish the required infrastructure, the private investor, on the other hand, gets the right to market and use of the SEZs with relaxed tax laws. With such a partnership arrangement, the private company can increase its revenue generating capacity and grow in a more efficient way. Actually, SEZs with relaxed import tariffs help the import- dependent and export-driven industries to flourish by helping them develop manufactured goods at competitive prices. 2 The concept of SEZ is described in no less than 19 different terms across countries in the world, such as Free Trade Zone (FTZ), Industrial Zone (Singapore), Maquiladoras (Mexico), Export Processing Zone (EPZ) and the common variants are FTZ, EPZ and SEZ. They are undistinguished from one another in meaning. Thomas (1956) defines Free Trade Zones as: “An isolated, enclosed and policed area, in or adjacent to a port of entry, without resident population, furnished with necessary facilities for loading and unloading for supplying fuel and ship‟s stores for storing goods for reshipping them by land and water, an area where goods may be landed, stored, mixed, blended, repacked, manufactured and reshipped without payment of duties and without the intervention of custom officials.” This definition highlights their function as trading and reshipping ports. Later the revolutionary decline in the transportation costs and emergence of standards made it possible to move goods efficiently towards where processing had comparative advantages. Thus the “Free Trade Zones” evolved into export processing zones. “Export Processing Zone” is one of the most common terms. Warr (1988) defines it in the following way, “Export Processing Zones (EPZs) are economic enclave within which manufacturing for export occurs under virtual free trade conditions.” This is a generic definition that also fits most SEZs very well, naming that there should be enclaves, manufacturing for exports and free trade conditions. World Bank (1992) describes EPZs as an area with free trade zone elements and industrial park elements.