Introduction

Indonesia's services sector is relatively small at 42 per cent of Gross Domestic Product (GDP), compared to an ASEAN average of 47.3 per cent and a world average of 68.3 per cent in 2014. The share of services to GDP increased marginally from 40.6 per cent in 2011 to 42 per cent in 2014. Services trade as a share of total trade is also relatively low at about 6.4 per cent in 2014 compared to the world average of 13 per cent. Furthermore, compared to the manufacturing sector, policies governing the services sector are relatively more restrictive, as for example in the case of Indonesia's foreign direct investment (FDI) policy.

The logistics sector is no exception to the above pattern in Indonesia's services performance. The contribution and performance of this sector is below that of Singapore, Malaysia and Thailand. The World Bank's Logistics Performance Index (LPI) indicated that Indonesia's logistics performance ranked the 63rd out of 160 countries, while Singapore ranked the 5th, Malaysia the 32nd and Thailand the 45th (World Bank 2016).

Given its current performance, improving the logistics sector's efficiency is among the main priorities of the current government. The immediate challenge for Indonesia is to make the sector more efficient so that logistics cost can be reduced, remove barriers to entry as well as to improve the quality of logistics infrastructure. The logistics cost for international and domestic freight in Indonesia in relatively high compared to its peers in the region. World Bank (2012) reported the typical charge for a forty-foot dry container or a semi-trailer (total freight including agent fees and other charges) in 2012 was only US$178 in Singapore while it costs around US$415 in Indonesia. Therefore, the logistics costs for exporting and importing in Indonesia are more expensive than a neighbouring high labour cost country like Singapore.

Domestic logistics cost in Indonesia, especially inter-island, is also higher than international export–import costs. The cost of sending a 100-kilogram package from Jakarta to Tanjung Pinang, in Kepulauan Riau Province of Indonesia, using Jalur Nugraha Ekakurir's (JNE) cheapest service is IDR2.5 million (about US$260).

ASEAN turns fifty this year. And there is cause for celebration. For a group of countries that are so economically, politically and culturally varied, it has achieved much over the five decades. To appreciate the strides made by this regional grouping one has to explore ASEAN's economic journey from modest goals of a preferential trade agreement (PTA) in the 1970s through the establishment of the ASEAN Free Trade Area (AFTA) in the 1990s, the AEC Blueprint 2015 (AEC 2015) and AEC Blueprint 2025 (AEC 2025).

The ASEAN story reflects the grouping's step-by-step confidence building approach towards integration. This served the members well, allowing for domestic adjustments even as it deepened its regional commitments, moving from voluntary liberalization under the PTA, through the rules-based ASEAN Trade in Goods Agreement (ATIGA) and services liberalization under the ASEAN Framework Agreement on Services (AFAS), and laying the foundation for an integrated investment region through the ASEAN Comprehensive Investment Agreement (ACIA). The latter three agreements are core to both the AEC 2015 and AEC 2025 as the region looks to deepening economic integration not just among the ASEAN Member States (AMS) but also with its Dialogue Partners.

ASEAN has been successful in the removal of tariffs for intra-ASEAN trade in goods; done significant work on services liberalization; and has managed some measure of streamlining of investment rules. Much work has also been done on Mutual Recognition Agreements and Standards and Conformance.

Even as ASEAN revels in its achievement, much more needs to be done. Key to ASEAN economic integration is trade facilitation. Meaningful market access for both goods and services requires that ASEAN move forward with work on Non-Tariff Measures, domestic regulations as well as continued infrastructure and human capital development. These measures are outlined in the AEC Blueprint 2025, which has the following features: (i) A Highly Integrated and Cohesive Economy; (ii) A Competitive, Innovative, and Dynamic ASEAN; (iii) An ASEAN with Enhanced Connectivity and Deeper Sectoral Cooperation; (iv) A Resilient, Inclusive, People-Oriented, and People-Centered ASEAN; and (v) A Global ASEAN.

Introduction

After a few decades of self-imposed economic isolation under the Burmese Socialist Programme Party, Myanmar began to embark upon a gradual and staggered journey to reintegrate with the global economy in the 1990s. In 2011, the government under President U Thein Sein introduced a series of liberalization measures in selected sectors. The recent transition from semi-military to democratic government and the concomitant removal of the US sanctions presented a strategic window to further facilitate Myanmar's integration into the regional and global economy. Myanmar also chaired the 2014 ASEAN Summit and was granted observer status in the 2014 G20 Summit.

Although successive governments have stressed the critical and central role of the development of infrastructure in Myanmar's economic development, the logistics sector has yet to receive dedicated policy attention. This chapter draws attention to the role of the logistics sector in overcoming some of more critical challenges in the formation of positive linkages between Myanmar's economy and the global value chains (GVCs). Facilitating foreign direct investment (FDI) in logistics infrastructure and services is a critical link for domestic enterprises to participate in GVCs. It will also help to create productivity gains through the use of new technology and generate positive spillovers through linkages with local service providers. In this chapter, we discuss two interlocking layers of challenges, namely, governance of FDI and governance of the services and logistic sector in Myanmar's development strategy.

The chapter examines various issues of agency in the governance of the services sector and posits that agency issue at the national level, manifests itself as an issue of coordination given the vast differences in information and incentives amongst multiple principals (focal agencies) and agents (implementing agencies) in terms of negotiation and implementation of agreements. However, at the local level, “thinness” of the presence of government agencies in regulating and monitoring economic activities at the border leads to limited agency of the state in the governance of the services and logistics sectors. Second, it is important to induce inflows of FDI into the logistic sector in the broader context of regulatory and institutional reforms in order to create an enabling ecosystem for logistics in Myanmar.

Introduction

Since the Doi Moi in 1986, Vietnam has been progressively opening up its services sector. In recent years, it has made significant efforts to liberalize the sector by participating in various trade agreements, including bilateral, and multilateral agreements related to trade in service, namely GATS (General Agreement on Trade in Services), AFAS (ASEAN Framework Agreement on Services), different ASEAN+1 FTAs and recently the EU–Vietnam FTA (EVFTA) and Trans-Pacific Partnership (TPP) agreement. In line with its commitments, Vietnam has reviewed, revised and issued numerous legislative regulations and policies towards a freer flow of services. Consequently, the regulatory framework related to the services sector in Vietnam has become more transparent and open to foreign suppliers, enabling them to have better access to its domestic services market.

However, the ease of doing business in Vietnam remains at a relatively low ranking — the 90th among 189 countries (World Bank 2016), partly because the services-related policies are still relatively restrictive towards foreign direct investment (FDI). Therefore, there is a need for Vietnam to evaluate its challenges in services liberalization, especially in the aspect of commercial presence (i.e. mode 3), by examining the impediments to FDI inflows in services so as to enable Vietnam to benefit from ASEAN's initiatives to liberalize services.

This chapter analyses the development and contribution of the services sector to Vietnam's economy. It also discusses services trade liberalization under AFAS and GATS along with the domestic FDI policies in the services sector. The logistic sector was selected as a case study for a deeper analysis of Vietnam's services liberalization. Based on these economy-wide and sector-specific discussions, the chapter will identify key challenges facing Vietnam in attracting FDI into the services sector. The chapter concludes with policy recommendations for Vietnam as well as for ASEAN.

A frequent question raised in discussions on Free Trade Agreements (FTAs) is the impact of liberalization in services on inflows of Foreign Direct Investment (FDI). Policymakers are concerned if liberalization has encouraged FDI inflows while researchers are keen to test the same relationship. Likewise, the public is curious as to whether FTAs are as useful as touted. Yet the relationship between liberalization and inflows of FDI is not as straightforward for services as in the case of manufacturing. This is because the services sector is frequently highly regulated due to information asymmetries between producers and consumers. Domestic regulations therefore play an important role in protecting domestic consumers but these regulations can at the same time hinder the entry of both domestic and foreign service providers. While liberalization is important, it is not sufficient and any attempt at investigating the impact of liberalization on inflows of FDI has to take into consideration the FDI enabling environment in a country.

Given this, we are motivated to undertake a study that can illuminate the academics, policymakers and businesses on liberalization issues in the services sector for the ten member countries in ASEAN. We decided to focus on FDI liberalization in services as commercial presence is considered as the most important mode of trade in services. Given the heterogeneity of the services sector, we chose to focus on the logistics industry as a case study as the industry plays a key role in the movement of goods, services and people across ASEAN.

The main objective of this book is, thus, to compare international and domestic policy measures for attracting FDI and its impact on inflows of FDI in the services sector in the ten ASEAN member countries. This has implications for ASEAN's economic cooperation, in general, and for the logistics sector integration, in particular.

Introduction

Over the last two decades, inflows of foreign direct investment (FDI) to Cambodia has increased significantly, due to its relatively liberal investment law and pace of services liberalization, including the logistics sector. Liberalization of the services sector started soon after the country's accession to the World Trade Organization (WTO) in 2004 through the General Agreement on Trade in Services (GATS) and later in 2007 through the ASEAN Framework Agreement on Services (AFAS). The services sector, accounting for 42.3 per cent of Gross Domestic Product (GDP) in 2015, plays a critical role in socio-economic development through job creation and productivity improvement. Within it, logistics is regarded as a strategic sector for national and regional connectivity, socio-economic development, and poverty reduction.

This chapter reviews Cambodia's economic development and FDI climate, along with its efforts in services liberalization. The chapter also looks at the liberalization initiatives in logistics services and the current state of logistics development and connectivity in Cambodia. Investment in logistics, especially in infrastructure, and enhancing regional connectivity is one of the key areas of national development as it can help to improve the country's economic performance and competitiveness by reducing transactions cost, improving broad investment climate, and promoting international trade.

Investment Climate

As a small economy, Cambodia has been performing well in the last two decades in terms of sustaining high economic performance and reducing poverty significantly. It has achieved a high average growth rate of 7.9 per cent from 2000 to 2015, thus making it one of the fastest growing economies in ASEAN. The poverty rate has reduced from more than 53.2 per cent in 2004 to 13.5 per cent in 2014. Per capita income has increased from US$417 in 2004 to US$1,215 in 2015, making Cambodia a lower middle-income country, according to the classification by the World Bank Group. Cambodia aims to become an upper middle-income country by 2030 and a high-income country by 2050, if it can sustain an annual growth rate of around 7 per cent.

Introduction

In the last two decades, the services sector has gained increasing importance in terms of its contribution to a country's Gross Domestic Product (GDP) and employment. Its share in total GDP for the Organisation for Economic Co-operation and Development (OECD) countries has grown from 70 per cent in mid-1990s to 75 per cent more recently, while its share for the countries in East Asia and Pacific has moved up from 37 per cent to 48 per cent over the same period. It further accounts for about 70 and 47 per cent respectively of total employment in the OECD countries and East Asia and Pacific region respectively (World Bank 2016).

The increasing importance of the services sector is driven by production fragmentation or outsourcing activities. While production fragmentation entails goods to be produced in multiple countries, outsourcing happens when multinational corporations (MNCs) focus on functions that they have comparative advantage while other functions are subcontracted to other firms. The resulting spatial or functional fragmentation is connected through service links such as transportation, ICT, distribution services, financial intermediation services and others (Jones and Kierzkowski 2005). Consequently, the competitiveness of manufacturing firms in an increasingly globalized world is determined to a large extent by the cost effectiveness and reliability of these service links.

In turn, the changing nature of manufacturing production has led to an increasing importance of trade in services as opposed to the earlier significance of trade in goods (Grossman and Rossi-Hansberg 2008). Trade in services now accounts for more than a fifth of global trade volumes (Saez et al. 2015). For the past two decades, trade in services has grown faster than merchandise trade, reaching over US$9 trillion for the first time in 2013 and constituting 11.9 per cent of the world GDP (UNESCAP 2015). It has also increased in recent years vis-àvis trade in goods as the latter has been affected by the slowdown in growth in the developed world after the global financial crisis while economic recovery is retarded by the crash in commodity and oil prices in 2015.

Introduction

Lao PDR is known as one of the poorest countries in ASEAN. In recent years, the economy has performed well. In 2015, its Gross Domestic Product (GDP) has increased by about 6.7 per cent, implying that Lao PDR is one of the top ten world's fastest growing economy (ADB 2016). This growth is a result of exports in energy, mostly in mining and electricity, which is due to an increase in Foreign Direct Investment (FDI) in these sectors, given its high return. FDI inflows to Laos rose remarkably, with more than 80 per cent in 2012–15 compared with 2009–11 (UNESCAP 2015). It is worth noting that FDI is a major source of investment that supports the growth of the economy.

It is a well-accepted fact that FDI has both positive and negative impact on an economy. For an open economy, higher FDI flows may contribute positively to GDP growth. Alternatively, at the sectoral level, higher investment, particularly in the mining sector, may lead to declining economic growth when both energy and mining sectors have reached a saturation level. It is difficult to keep up economic growth by only depending on these sectors. This implies that countries that focus on natural resources only may face an economic slump eventually. However, in Lao PDR, services sector value added as percentage of GDP is growing faster than the industrial and agricultural sectors’ growth rates since 2013 (ADB 2016). Thus, the services sector is likely to be an alternative source of growth for the economy.

Lao PDR is a latecomer in services sector liberalization in ASEAN. The country opened up to FDI in 1988, but significant investment inflows only occurred after the early 2000s. In recent years, Lao PDR has achieved steady economic growth, mainly fuelled by large FDI inflows and exports of natural resources. Of the total accumulated FDI stock during 1989–2015, services sector was ranked fourth, after electricity, mining and agricultural sectors (IPD 2016a). Vietnam, Thailand and China are the three key investors in Lao PDR.

Introduction

Services now account for a significant share of output and employment in the Philippines. It has become a major growth driver for the Philippine economy with rising growth rates in transportation, communication, storage, finance and IT-business process management. Together with a resurgent domestic manufacturing it is expected to continue to propel growth in the immediate term. The liberalization of the services sector will be important in order to bring in foreign direct investment (FDI) that will further strengthen its growth prospects. The logistics services comprise an important part of the service economy. This chapter examines the liberalization of the services sector, domestic regulatory reform and inflows of FDI to the logistics services. Liberalization is expected to lead to an infusion of capital, expertise, modern technology, and to expand market opportunities through FDI.

The chapter is structured as follows: after a brief introduction, Section 2 provides an overview of the services sector with a focus on maritime transport industry and freight forwarding services, which have the biggest share of the logistics industry. Data availability drives the discussion to these two components of the logistics sector. Section 3 reviews the policy measures for the development of the logistics services industry. The policy measures cover: (i) domestic policies and incentives, (ii) regulations, and (iii) unilateral, regional, as well as multilateral liberalization measures under ASEAN Framework Agreement on Services (AFAS) and General Agreement of Trade in Services (GATS). Section 4 discusses the overall enabling environment and inflows of FDI to the economy and, data permitting, the logistics sector. Section 5 identifies outstanding challenges and policy suggestions.

Gonzalez (2014) points out two aspects of the rise of services: first, because of improvements in information and communications technology (ICT), services have become more and more tradable, and second, domestically produced services serve as vital inputs to the production and trade of goods and services. Services are used and traded along with inputs into other economic activities, with both playing a key role in a country's competitiveness and participation in global value chains (GVCs) (Hollweg et al. 2014).

Introduction

Brunei's economy is in the middle of a critical transition from an oil-rich and oil-dependent state to a diversified economy that is dynamic and sustainable. The rich natural endowment of oil resources has enabled Brunei to become one of the richest state in ASEAN and the world. According to IMF (2016a), based on Gross Domestic Product (GDP) (in PPP terms) per capita, Brunei is the fifth wealthiest state in the world and the second wealthiest in ASEAN in 2016, after Singapore which is ranked at number four in the world. The oil wealth, in turn, has enabled the country to depend primarily on oil for its revenue since there is no income nor sales tax for locals. Free education through university and subsidized housing is additionally provided for its citizens. It has also led to a dominant role of the state in terms of its control over the economy as well as employment, as an estimated 70–80 per cent of the Bruneians work for the government or government-linked institutions (Prusak 2016).

Economic diversification, although viewed in terms of a more balanced contribution of manufacturing and services, may in reality entail far more than that. It may necessitate, for example, a reconsideration of the country's fiscal budgeting and its ensuing implications on the extent of public goods provided by the state. The sharp drop in global price of oil in 2014 and after, had a detrimental impact on the state revenue, leading to a fiscal deficit of 16 per cent of its GDP for the fiscal year 2015/16 (Prusak 2016). Economic growth was also affected, with the country's annual growth falling into negative rates from 2013 to 2016. Current forecasts of future oil prices do not seem to indicate that there will be a price recovery to its peak value in 2010 (Knoema n.d.). Hence sustainability will require considering diversifying sources of fiscal revenue, tightening government expenditure and a restructuring of the privileges enjoyed by the citizens. Injecting dynamism into the economy will also require rebalancing the role of the state and the private sector in generating economic growth.

Introduction

Trade in services plays an important role in the economic development of a country. The Asian Development Bank (ADB) in 2012 reported that the services sector of ASEAN member countries contributed around 28.1 per cent to 70.1 per cent to their Gross Domestic Product (GDP) from 2000 to 2007 respectively (Park and Shin 2012, p. 35). Among ASEAN countries, Singapore's services sector accounts for around 70.1 per cent of its GDP — highest in the region, followed by the Philippines (50.3 per cent), Malaysia (50 per cent), Thailand (47.7 per cent), and Vietnam (43.3 per cent). Wholesale and retail business has taken up the highest proportion in terms of value added in the services sector in ASEAN, followed by finance and insurance. Singapore has the highest employment share in the services sector, followed by Malaysia, the Philippines, Indonesia, and Thailand.

According to the ASEAN Economic Community (AEC) Blueprint 2025, ASEAN member states (AMS) are required to cooperate under the ASEAN Framework Agreement on Services (AFAS). AMS need to be compliant with the agreed upon liberalization programmes, procedures, and timeframe. One of the objectives of the AFAS is to decrease and eliminate restrictions to trade in services based on the twelve types of services, as classified in the General Agreement on Trade in Services (GATS). These are business services, communication services, construction services, distribution services, education services, environmental services, financial services, health and social services, transport and tourism services, leisure, cultural and sports services, transportation services, and other services that are not included in the above eleven fields, such as spa and beauty services.

According to the established protocols, if any AMS has any reservations or limitations with regard to any measures, these should be specified in the horizontal commitment table. These commitments are legally binding between members. Logistics and other related services fall mostly within the domain of the transport sector and that complicates matters as logistics is much more than just transport related services. Logistics in ASEAN has been identified as a priority integration sector with its own liberalization roadmap by 1 January 2013 (Tongzon 2011).

Introduction

The use of a foreign direct investment (FDI)-led development strategy in Malaysia started in the early 1970s when the first Free Trade Zone was established to attract FDI for manufacturing development. With this early mover advantage, FDI flowed into labour-intensive manufacturing based on Malaysia's host country advantages at that time such as cheap labour, economic and political stability, relatively good infrastructure and supportive government policies. Malaysia became one of the top ten developing host economies by the early 1990s but its rapid manufacturing development led to the dissipation of its low wage advantage as wages rose swiftly in response to the excess demand for labour after full employment was attained.

In recognition of the loss in competitiveness in low wage manufacturing, the government promoted a manufacturing ++ strategy based on cluster development using services development as a means to move up the value chain in the Second Industrial Master Plan (IMP2) 1996–2005. Despite this, the advent of the Asian Financial Crisis (AFC) in 1997– 98 stalled the implementation of IMP2 by redirecting the focus of government policies from industrial development towards managing the financial crisis and its aftermath. Nevertheless, the focus on service sector development continued to be prioritized in the Third Industrial Master Plan (IMP3) 2006–20, where the services sector was targeted as the next engine of growth. The development of services has shifted from its role as a facilitator for deepening manufacturing development to the development of selected services with the logistics sector as one of the targeted services. Reportedly, the government allocated RM3 billion for the development of this sector under the IMP3 with a target of 36 million TEU or 751 million tonnes of cargo to be handled by Malaysian ports by 2020 (MPC n.d.).

The emphasis on services development continued in the New Economic Model (NEM) that was launched in 2010 for re-energizing economic development. Likewise, it is also the focus of development in the Economic Transformation Plan (2010) and the Tenth Malaysia Plan (10MP) 2011–15, although the logistics sector was not included among the 12 targeted sectors in these plans.