The Greater Mekong Subregion has become a magnet for manufacturing FDI while bucking a global slowdown in trade. The Post’s Kali Kotoski sat down with Eugenia Victorino, South and Southeast Asia economist for ANZ, to talk about the region’s long-term economic outlook.

What potential for growth do you see in the Greater Mekong Subregion (GMS)?

We believe that the Mekong countries are poised to rise compared to the rest of the Asia. Of course, there is some risk that Bangladesh or Sri Lanka could take the Mekong’s role, but now is the time for this region. Of the Mekong countries, Vietnam is leading the pack and is showing the way for the other economies to grow. So despite overall trade in Asia being in a two-year recession, the Mekong is a top global performer that is slowly climbing up and value-added chain by adopting manufacturing diversification.

What is driving this diversification?

Manufacturing diversification is only possible because of the support of foreign direct investment. Vietnam is often referred to as an FDI magnet and you can see how it has rapidly changed the country’s production capability by attracting almost $90 billion over the last 15 years.

Do you believe that investment into the region is sustainable over the long term?

We believe that it is because the Greater Mekong Subregion has transport corridors and is the only land route that connects the countries between India and China. The transport corridors are not something that gets enough attention when looking at regional macroeconomic growth. What that means is that by having these linkages from China to Myanmar, through Cambodia to Vietnam’s ports, it provides the opportunity for development to branch out.

Have companies fully utilised this potential?

What we found is that some of our clients did not understand the very strategic location of the majority of special economic zones. Admittedly, the utilisation rate of the transport corridors has been mixed. Some are widely used and some are not so much. But we have already seen how they are transforming trade as production is cut into stages.

For example, previously you had Japanese companies going into Thailand and producing the whole car there. That is not the case anymore. Some companies are putting the labour-intensive part of production in Cambodia, the capital-intensive part of production in Laos, because of cheaper electricity, while the more value-added part remains in Thailand. This diversification is how the Mekong Region can climb up the value-added chain as logistics throughout the region becomes easier.

Now that the US has pulled out of the Trans-Pacific Partnership (TPP), what future does multilateral trade hold for the region?

The TPP was a trade agreement on steroids. While it increased the standards for signatory countries, there are more regionally inclusive agreements that will benefit emerging economies. That is what makes the Regional Comprehensive Economic Partnership (RCEP) a viable alternative for the region, as it allows China to step in and fill the void.

Although some would say that RCEP is China-led, officially on paper it is ASEAN-led and it provides a standardised platform for many of the existing bilateral agreements with ASEAN countries to become incorporated into the framework. Countries like Cambodia, Myanmar and Laos have more growth opportunities under RCEP.

How does Cambodia stack up to neighbouring countries in terms of manufacturing development?

Well it would appear that it is the last to catch up, but it is on the right path. It still has a long way to go in terms of climbing up the value-added chain. However, the fact that the country is already slowly starting to decrease its labour-intensive manufacturing is a good first step.

Are there laws that can be updated to encourage further investment in Cambodia?

Usually investment is encouraged with long-term consistency. For an investment, it is not enough to have five-year concessions. Usually when you talk about special economic zones, tenants are talking about decades of operations. Longer concessions need to be implemented to get foreign investment to stick in the country.

This interview has been edited for length and clarity