Joining the club

Brian Mertens

Gains outweigh strains of membership in Asean

As Cambodia and Laos gear up for membership in the Association of Southeast Asian Nations (Asean), the capital cities of Phnom Penh and Vientiane are teeming with the same signs of growth: scores of new shops, restaurants and hotels as well as increasingly heavy motor traffic.

The Lao and Cambodian economies are being fuelled both by significant internal reforms and by growing tourism, trade and incoming investment. Scores of state-owned enterprises have been sold to investors, greatly enlarging the private sector. Education and living standards are improving, and a diaspora of Laotians and Cambodians are returning from overseas to take part in the new opportunities.

Progress shows in World Bank figures: Cambodia's gross domestic product grew 7.6% in 1995, up 3.6 percentage points from the previous year, the institution claims. The economy of Laos grew 7.5% last year, according to an International Monetary Fund estimate, up from 7.1% in 1995. In both countries, inflation has been cut dramatically.

Asean membership, expected in July, will keep progress on track by boosting the trade and investment competitiveness of both nations. Foreign companies will find that doing business there will become easier as integration with Asean induces the two countries, both formerly part of French Indo-China, to harmonise their economies with the region.

But fitting in with Asean poses many challenges. 'In the short term there will be problems,' says Bounlith Khennavong, Laos' vice-minister of finance, 'but we have to sacrifice now to profit Laos in the future.'

Kao Kim Hourn, executive director of the Cambodian Institute for Co-operation and Peace (CICP), says the strains of joining Asean are a small price to pay to end Cambodia's isolation: 'The only choice we have is integration with the region Ä it's an investment in the future of this country.'

Administrative facelift

A major task facing both countries as they assimilate is elimination of legal and administrative anomalies left over from French rule and communism.

Cambodia is revising its commercial code, especially company law. Having inherited a French civil law system, Phnom Penh wants to adopt Anglo-Saxon legal procedures, which are prevalent throughout Asean. Though not a requirement for Asean membership, this will help make Cambodia more accessible to foreign business people. 'Investors from Singapore, Malaysia, Hong Kong and other countries with Anglo-Saxon systems of law will come in and say great, it's easy to invest, I know what I'm getting into,' says David Doran, a Phnom Penh-based lawyer with Dirksen Flipse Doran & Le (DFDL), a law firm advising companies in IndoChina.

Laos has been working to codify its laws since 1991, and aims to increase its number of laws from about 30 now to 62 by 2000. Among those already on the books are the Foreign Investment Law, passed in 1994, which protects businesses from government confiscation and guarantees the repatriation of earnings and capital. A law protecting intellectual property, patents and trade- marks was passed in 1995. But problems remain in such areas as business tax laws, which are unclear on issues like depreciation and charitable donations expenses, according to Mary Flipse, a Vientiane-based partner in DFDL.

Reform of accounting standards is a related issue. In Cambodia, for instance, the lingering use of French and communist systems is sometimes problematic. 'Our former state enterprises are used to the communist accounting system, so it is harder for foreign companies to take them over,' says Try Andy, an adviser to the Ministry of Industry, Mines and Energy.

A taxing situation

Customs reform is keeping officials especially busy. In Cambodia, the task involves revising tariff nomenclatures Ä the classifications whereby products are assigned specific tariffs. Classifications are now categorised internationally using six-digit numbers, but Asean is moving toward a more precise eight-digit system.

Aun Porn Moniroth, policy planner in the Ministry of Economy and Finance, says the government is working to harmonise its tariffs with Asean at the six-digit level. This will let Cambodia tax imports of Indonesian grain, for example, at the same level that Indonesia taxes Cambodian grain.

The customs revamp mandates tariff reductions, which will hit Phnom Penh hard. Asean Free Trade Area (Afta) requirements will force Cambodia to cut its import duties to a maximum of 5% within 10 years. Though the tariffs are already relatively low, the government depends on them for about 72% of its revenue - compared to 31% in Laos and 18% in Thailand.

Less customs revenue means Cambodia must rapidly find other funding. Moniroth is overseeing efforts to widen the revenue base by strengthening the tax collection system and introducing value-added and property taxes. 'We have to start now, not after joining Afta,' he says, noting that the government aims to rely on tariffs for no more than 40% of revenues by 2000.

Adding to the financial squeeze is the fact that tariff declines come when Cambodia's budget for diplomacy is leaping, doubling this year alone to accommodate Asean annual dues of US$1 million and fund the opening of embassies in all member countries Ä a requirement of membership. Cambodia's only Asean embassy as of last month was in Bangkok, doing triple duty for Thailand, Malaysia and Singapore.

Another critical problem that Asean membership poses for both nations is the need for human resources. In Laos, for example, the 10 years of doctrinaire socialism from 1975 to 1985 meant that officials and technicians trained in the Soviet bloc, in skills, standards and languages that are proving less relevant today. Asean's official language is English, so to be able to take part in the more than 300 Asean meetings per year, and to open embassies in all Asean capitals, Laos aims to train 1,000 officials to be fluent in English by 2000 Ä up from just 50 when membership studies began a few years ago. The government is even tying promotions to English proficiency.

Diplomatic gains

Investing in education and revamping laws are a small price to pay if Asean membership can help Cambodia and Laos attain the kind of trade, investment and sustained growth achieved elsewhere in the region. The path to prosperity will be paved not only by these economic harmonisation measures but also by better diplomacy. Now that war and geopolitics no longer isolate these two countries, Asean membership will help them strengthen international ties.

'We'll be entering world affairs through the door of Asean, which has a way of diplomacy that is highly respected in the international community,' says Cambodian undersecretary of state Pok Marina.

Asean she says, will give access to key personal networks and pave the way to groups like the World Trade Organisation. But the diplomatic benefits of Asean membership stack up differently for Cambodia and Laos, each of which has its own particular political needs.

Laos, for example, hopes to ease its external security concerns by gaining access to Asean political clout and diplomatic forums. Sandwiched between more powerful and populous neighbours, Laos' predicament as Southeast Asia's only landlocked nation has long made it vulnerable.

'We have very fresh memories of war,' says Sayakane Sisouvong, deputy director of the Asean department in the Ministry of Foreign Affairs. Closer political ties through Asean will help Laos turn its location into an asset, as it becomes a crossroads of trade between Southeast Asian countries and southern China, he says.

The Asean initiative is just part of Laos' growing diplomatic efforts. Relations with the US are warming up after a Cold War freeze and Laos hopes soon to be considered for US Most Favoured Nation trading status. By meeting Afta requirements, Laos will have effectively cleared most technical hurdles for that status.

For Cambodia, Asean diplomacy is not just a foreign affair: joining the group is expected to help with the critical task of easing tensions within the fragile coalition government. 'Membership in Asean will expose Cambodian leaders to the group's various processes and mechanisms of resolving internal disputes,' says Hourn of the CICP.

Any Asean intervention will help. Fears of political instability were renewed in March by the assassination attempt on opposition leader Sam Rainsy, in which a grenade killed 16 anti-government demonstrators. More constructive politics are needed to boost confidence among investors, many of whom are believed to be hewing to the sidelines pending national elections in 1998.

Association lends a hand

Asean, meanwhile, is working closely with Cambodia and Laos to help them on their way to membership. The association is assisting with personnel exchanges, training and harmonisation issues.

Why is Asean so keen on expansion? According to Andy, the adviser to Cambodia's Ministry of Industry, admitting Cambodia and Laos will reduce the risk to Asean that they might become pockets of poverty or instability. 'They don't want Cambodia to be an obstacle to the economic development of the region,' he says.

Indeed, Asean leaders have placed high priority on expanding the association to cement the region's economic gains.

'The Asean 10 [countries] will create a market of nearly half a billion people with a common low tariff structure and a common investment area,' says Asean secretary general Dato' Ajit Singh.

'This together with other incentives which Asean is offering to investors ... will give Asean a formidable competitive edge.'