The Mekong: who’s training who? And who’s supplying who?

A key plank of the region’s development agenda is its Special Economic Zones, with a staggered approach evident across both Asia and the Mekong in particular.

" SEZs are succeeding in attracting investment and production into the Mekong economies that would have otherwise not have occurred."
Eugenia Fabon Victorino & Weiwen Ng, Economists, ANZ

So how are companies based in these SEZs performing and are they having a positive effect on economic performance?

It does appear this is the case. New ANZ research suggests EZs are succeeding in attracting investment and production into the Mekong economies that would have otherwise not have occurred.

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Three types

As the Asia Development Bank noted in their ASEAN Economic Report 2015, there are broadly three types of SEZs currently operating across the Mekong.

First-stage enclave type SEZs.  These are relatively small and new, employing low-skilled workers in a range of low value-added industries largely for export

Second-stage linked-type SEZs.  These have grown to such an extent that they have helped diversify an economy’s production base, in particularly by strengthening linkages with the domestic economy

Third stage reform-driving-type SEZs.  These final-stage SEZs break down barriers between the SEZ and the broader economy by facilitating nationwide reforms in labour and product markets.

As part of its ongoing presence in the Mekong, ANZ conducted a survey of its clients operating in the region’s special economic zones. Below are some highlights of the insights we gained.

TRAIN THE TRAINER

SEZs appear to enable structural changes to occur relatively quickly through a combination of both ‘linkages’ and demonstration effects.  Skill transfers are readily apparent and dynamic, occurring across all Mekong economies, with Vietnam a clear origin.

For SEZs in the region, ‘Train the Trainer’ programs are working as both incentives for talented workers and aiding the retention of skilled staff while also serving as a further medium for skills transfer.

The skills tipping point to higher salaries is relatively – and surprisingly –low, being dictated by just two factors. The two basic skills at which salaries start to inflect upwards are a basic knowledge of English and a basic knowledge of manufacturing/production line processes.

Vietnam appears to be cascading up value chains faster than expected and positive flow-ons are being created for Cambodia, Laos and Myanmar as a result, creating the economic space for their first steps into basic manufacturing.

Still a ‘skills gap’ is most often highlighted as a key frustration with most clients reporting they devote an unproductive amount of time to micro-managing staff.

BARBELL

This ‘skills gap’ appears to follow a ‘barbell’ shape with the management skill set and practice of the Special Economic Zones often seen as falling short of expectations.

Most clients surveyed do not have, or were not prepared to share, their exit strategies or at what point the negative externalities identified from operating in the Special Economic Zone were likely to prompt an exit. 

This suggested considerable ‘sunk costs’ were involved in the decision to move into a  SEZ, very long-term plans were in place, and that companies choosing to enter frontier markets were fully aware of the myriad of risks and in for the “long haul”.

Myanmar was the only frontier economy where production was seen as viable in an autonomous sense to service a domestic market. Indeed, we found most estimates and forecasts of the size at which a sustainable consumer market would emerge in Myanmar to be particularly optimistic.

For the majority of Mekong economies, SEZs were seen as providing significant insulation from the uncertain environment outside the zone.  Where this was not the case, confidence in the management of the SEZ became the paramount consideration.

If there is one consistency we found across all economies, it was the answer to the question, ‘would this economy have attracted FDI in the absence of SEZs?’  The answer was a resounding no.

Eugenia Fabon Victorino & Weiwen Ng are economists at ANZ

For related articles on this topic, please visit ANZ’s institutional website or see ‘Wages – and ambitions – rise as Mekong workforce enters a new era’, and ‘Along the Mekong: a new regional network takes shape’.