Japan’s ODA paves way for further economic ties with CLMV

Author: EIC | Economic Intelligence Center
Published in Bangkok Post/Asia In Depth: Asia Focus section, 7 March 2016

To unlock the enormous economic growth potential of Cambodia, Laos, Myanmar and Vietnam, these countries need all the help they can get from the international community to improve the basics. According to the World Economic Forum’s 2015-2016 Global Competitiveness Report, the CLMV countries lag far behind their ASEAN counterparts in several areas such as infrastructure quality, higher education and training.

Japan has been playing a big role in filling those development gaps for the CLMV in the form of Official Development Assistance (ODA) since the 1990s. Japanese ODA provides “grant aid” to the government of developing countries without repayment obligation, and “loan aid” in the form of long-term development funds at low interest rates. In terms of net disbursement for grant and loan aid, Japan was the top bilateral donor for the CLMV in 2012, with the total amount of around $2 billion. The total net disbursement doubled to around $4 billion in 2013; with $142 million for Cambodia, $76 million for Laos, $2.5 billion for Myanmar, and $1.3 billion for Vietnam.

The influx of Japanese ODA to the CLMV is a good leading indicator for future economic strength as it traditionally paves way for inflows of FDI.
 

For Cambodia, Japan is not only the largest donor in economic infrastructure development, but also plays a crucial role in poverty reduction. Japan cooperated to expand Sihanoukville Port, the deep-sea port which was completed in 2012. Cambodia is becoming a supplementary production base for labor-intensive industries such as motors and auto parts for Japanese companies in Thailand.

In Laos, human resources development in forms of grants and technical assistance accounts for a large proportion of Japanese ODA projects. However, Japan’s ODA and FDI in Laos has been relatively small and composed of investments in some agricultural and manufacturing products such as auto parts, garments, shoes, and wood processing.

In 2015, Japan signed an ODA loan agreement in Myanmar for a stable power supply system that will meet Myanmar's rapidly growing demand for economic infrastructure and telecommunications. Japanese FDI for Myanmar mostly involves factories that are still labor-intensive, such as garments and footwear production, but there are also some value-added manufacturers producing digital camera lenses and medical products.

Japan’s ODA to Vietnam has placed a high priority on achieving a balanced economic growth. Human resources and institutional development have seen the largest allocations in the technical assistance program. Vietnam has as much potential as a market as it does a production base for Japan in the electronics, electrical and information technology industries.

There are also examples where a business case can turn ODA needs into business opportunities. With rising demands for life’s basic facilities and rapid urbanization in recent years, healthcare industries and urban infrastructure development have gained traction among target industries in the CLMV.

Vietnam is a case in point. With its huge population and increasing spending power, the country represents a potentially large healthcare and medical equipment market with a total size of $265 million in 2014. Vietnam also has supporting industries for medical appliances, such as those manufacturing medical lenses and precision equipment.

Urbanization under the environmentally harmonious new town development concept has also attracted attention from Japanese investors. In 2011, Japanese railway operator and real estate developer, Tokyu Corporation, signed an urban development plan agreement with a Vietnamese developer, Becamex IDC Corporation, for the construction of Binh Duong New City, located about 30 kilometers north of Ho Chi Minh City. In Phnom Penh, a new town area composing a large Japanese housing complex, shopping and community center has been initiated since 2011. Notably, Japanese mall operator, Aeon Corporation, opened Cambodia’s first high-end shopping mall (Aeon Mall) worth $205 million at a prime location in Phnom Penh in 2014. These new town development projects provide a spark for related industries, including housing, sewage, and environmental technology.

Overall, the investment climate has been rapidly improving in the CLMV countries. EIC thinks that continued expansions of target and supporting industries will lead to the improvement of living standards, job creation, and more value-added industries. As the global FDI trend shifts toward services, EIC believes that the new wave of Japanese ODA and FDI into the CLMV will be aimed not only at manufacturing but also service industries.

With the announcement of the new three-year aid plan at the 2015 Japan-Mekong Summit to promote stability and growth in the CLMV and Thailand, Japan has set out a clear course to deepen cooperation in this region. Further ODA, new trends in FDI, and the development of Thailand-plus-one strategy for manufacturing industries should be further explored and closely watched.

This article is the second in a three-part series that will next discuss the progress of Thailand-plus-one strategy and provide an analysis of winning industries in CLMV from Japan’s FDI perspective.