The research theme of this chapter is devoted to the influence of China's economic growth on its investment outflow and overseas development assistance (ODA) to the GMS-4 countries, namely Thailand, Vietnam, Laos and Cambodia. In this chapter we deconstruct China's foreign direct investment (FDI) outflow and ODA with a view to establishing past and current trends, and identifying possible future trends. Principally, China's FDI and ODA are looked at from the perspective of China and those of the GMS-4.

The first part of the chapter deals with the issues that relate to FDI outflow from China to the GMS-4, beginning by identifying where China's FDI outflow goes to and how China's FDI flow to the GMS has varied over space and time in terms of total volume, and sectors and enterprises invested in. The second section looks at the agreements that have facilitated this movement of FDI and discusses how these may influence future FDI outflows. The third section provides an analysis of the sources, their geographical distribution and the motivations underlying China's FDI outflows. Finally, the conclusion provides a summary of the key points and possible future policy directions.

The second part focuses on issues concerning China's ODA to the GMS-4. The first section provides a brief background to ODA from China and looks at a selection of literature on this topic. The second section considers motives and goals of China's development assistance to the GMS countries. The third section looks at the main forms of China's ODA to GMS countries while section four discusses the issues that relate to the future prospects for China's foreign aid policy towards GMS countries. Section five looks at the organizational and institutional arrangement of China's ODA. Section six concludes the discussion and provides some policy recommendations.

FDI to the GMS-4

Background

Current research on the issue of China's outward investment in the GMS still constitutes a piecemeal literature and lacks a systematic framework or much in-depth empirical or theoretical research and analysis. However, it can be said that countries in the GMS have outstanding advantages in attracting China's outward capital.

INTRODUCTION

Over the last three decades, China has witnessed dramatic economic transformation, rapid development and greater involvement in regional and global economic and political affairs. Because of the huge size of its economy, China's development is likely to have great impacts on other countries, both positive and negative. For example, its economic and political expansion may squeeze some small, poorer countries out of the world economy, while perhaps pulling others up — the effects may vary according to context-specific factors. Regionally, it can be said that the current increasing economic interdependency implies that China will likely have profound social, political and economic impacts on countries in ASEAN, GMS and Thailand in particular.

Overview

Thai-Chinese Economic Interactions

Thailand and China have a long-standing close relationship. Diplomatic relations between the two countries have been officially established since 1 July 1975. Economic cooperation began in 1978 when China opened its doors to the market economy. Trade between the two countries has increased from approximately US$25 million in 1978 to approximately US$31,062 million in 2007. In terms of investment, Thailand'S investors started to invest in China as early as 1979 (THAI BIZChina.com). More recently, a Thailand-China Free Trade Area (TCFTA) was implemented in October 2003, under an early-harvest programme (EHP) that covered fruits and vegetables. The TCFTA follows an agreement on comprehensive economic cooperation called ASEAN-China Free Trade Area (ACFTA) signed by the leaders of ASEAN and China in Phnom Penh on 4 November 2002. The agreement with ASEAN-6 members (Thailand, Singapore, Malaysia, Indonesia, Philippines and Brunei) and China became effective in 2010 and will include new ASEAN members and China by 2015. In addition, an ASEAN-China Agreement on Trade in Services of the Framework Agreement on the Comprehensive Economic Cooperation was signed on 14 July 2007 in Cebu, the Philippines, and an ASEAN-China Investment Agreement of the Framework Agreement on the Comprehensive Economic Cooperation was reached on 9 November 2008.

INTRODUCTION

Overview

Located in the southwest border area of China, Yunnan province is one of the key economies that constitute the GMS area of regional cooperation, bordering Myanmar to the west, and Laos and Vietnam to the south, with a boundary of 4,060 kilometres. The total size of Yunnan is about 394,000 square kilometres. Its population amounts to 47.5 million, one-third of which is composed of ethnic minorities. As a landlocked province, it is listed in the category of underdeveloped areas. The gross domestic product (GDP) of Yunnan province was RMB570.0 billion in 2008, ranking it twentyfifth of China's thirty-four provinces and regions. The poor population in Yunnan accounted for 13.9 per cent of China's total poor in 2008.

As early as the 1990s, the Yunnan government highlighted an exportoriented economic strategy as a priority for economic development and poverty reduction. In addition, the province has participated in regional and subregional cooperation such as Yunnan-North Laos (nine provinces northern Laos), Yunnan-North Vietnam (four provincial cities in northern Vietnam), and Yunnan-North Thailand (eight provinces in northern Thailand). Apart from this bilateral cooperation, Yunnan's participation in the GMS Programme assisted by the Asian Development Bank (ADB) aims to establish it as the gateway to Southeast Asia by developing its infrastructure and promoting the free flow of goods and people in the subregion.

However, little research has been done on assessing the poverty reduction effect of Yunnan's participation in the GMS. By applying the gravity model, Poncet (2006) finds that GMS integration contributed to the trade relationship between Yunnan and other GMS countries to some degree over the period 1988 to 1999, but the effects varied between different countries. This chapter assesses the impact of the GMS on Yunnan's international trade and poverty reduction at both macro and micro levels. At the macro level, Poncet's (ibid.) methodology is used to evaluate the impact of subregional cooperation on trade between Yunnan and other GMS countries. At the micro level, the province's major export products are selected to identify the quantitative and qualitative poverty reduction effect of trade on those specific industries.

INTRODUCTION

China's rapid economic growth has increasingly attracted the attention of scholars and policy-makers around the globe. There has been much discussion as to the potential impacts of China's rise on the world economy and on the economies of developing countries in particular. In this vein there have been a number of publications and research works related to China's trade, investment and overseas development assistance (ODA) flow in the Greater Mekong Subregion (GMS) (for example, Jenkins and Edwards 2004). However, so far most studies have only provided general overviews and data on China's trade, investment and ODA and lack in-depth analysis on how trade with China, and China's foreign direct investment (FDI) and ODA flows contribute to poverty reduction at local level, especially the flows that contribute to creating employment and income generation activities for local people as well as skill development, expertise and technological transformation. The aim of this chapter is to contribute to existing literature by providing a detailed empirical analysis of China's impact on poverty reduction in Laos through three mechanisms: trade, FDI and ODA.

Poverty in Laos

Classed as a low income country, Laos is not only one of the poorest in the world, but also one of the poorest in the GMS. Poverty is a major concern, and poverty reduction a priority focus of government policy. For policy-makers, poverty in Laos is defined in relation to the national poverty line based on the international standard developed by the World Health Organization (WHO). Using their calorie intake poverty line as a reference, Laos developed two corresponding national poverty lines by converting calories into rice consumption, setting 16 kilogram rice consumption per person per month as the food poverty line, and that plus 20 per cent of its value at local rice prices as the general poverty line. In order to make the poverty measure more practicable, rice consumption has been converted into monetary value.

This literature review, comprising four main sections, discusses the key conceptual and empirical debates around poverty, the rise of China, and the Greater Mekong Subregion (GMS). Principally, the literature on economic growth and poverty reduction in general — and in the GMS region in particular — is reviewed. These key issues are then linked to trade, investment and official development assistance (ODA) as they are the three most important factors that drive national and regional growth. All GMS member countries (except Yunnan province and the Guangxi region of China) are member countries of the Association of Southeast Asian Nations (ASEAN). Therefore the literature review looks at China's growth, its overall impact on ASEAN and its specific impact in terms of trade, investment and ODA in the region on individual GMS countries. This overview gives an academic background to the key issues addressed in the following country studies that follow.

ECONOMIC GROWTH AND POVERTY REDUCTION

While there is a consensus that pro-poor growth strategies play a crucial role in poverty reduction, there is wide debate about what exactly constitutes pro-poor growth and how it can be measured (Ravallion and Chen 2003; Kakwani and Pernia 2000; Klasen 2004). The traditional orthodox economics view (for example, Dollar and Kraay 2001; Ravallion and Chen 2003) suggests that any growth that reduces poverty is pro-poor — unless the incomes of poor people stagnate or decline — irrespective of inequality.

Another view holds that, as poor people are the least likely to share the benefits of growth, pursuing policies that actively focus on reducing poverty through “inclusive growth” should be made a priority. They argue that pro-poor growth should focus not just on reducing poverty, but also inequality. White and Anderson (2000), for example, define pro-poor growth as growth where poor households enjoy higher income growth than other segments of society. Kakwani and Pernia (2000) suggest that pro-poor growth not only reduces poverty, but also results in a more equitable distribution of income. H. Son (2007) adopts the equitable distribution of income definition proposed by Kakwani and Pernia (2000) and examines this issue by using a cross-country analysis of seventeen Asian countries during the period 1981 to 2001.

This volume presents the findings of the Greater Mekong Subregion Development Analysis Network (GMS-DAN) research on “Assessing China's Impact on Poverty Reduction in the Greater Mekong Subregion”, which was undertaken through the generous support of the Rockefeller Foundation. GMS-DAN comprises leading development policy research institutes in Cambodia, Lao PDR, Thailand, Vietnam and Yunnan Province of China. Since its inception in 1997, GMS-DAN has undertaken collaborative research, and published research reports and associated publications, on a range of significant cross-border socio-economic issues for the GMS — the impact of the Asian financial crisis on the Southeast Asian transitional economies; labour markets in transitional economies in Southeast Asia and Thailand; off-farm and non-farm employment in Southeast Asian transitional economies and Thailand; the cross-border economies of Cambodia, Laos, Thailand and Vietnam; pro-poor tourism in the GMS; labour migration in the GMS; agricultural trade in the GMS; and, most recently, assessing China's impact on poverty reduction in the GMS.

GMS-DAN's vision is for a peaceful, prosperous and integrated Greater Mekong Subregion that has achieved inclusive growth and sustainable development for its peoples. GMS-DAN's mission is to collaborate effectively as a network of leading GMS development research institutions; to generate high-quality collaborative development policy research on issues of importance to the GMS; to disseminate it effectively to policy-makers and influencers; and to strengthen the capacity of its member institutes and researchers. GMS-DAN's researchers include both senior experienced researchers with decades of experience working on development issues in ASEAN and the GMS, and a younger generation of emerging researchers who are building their knowledge and skills at a time of rapid change and development in their own countries and in the broader region — economically, socially and geopolitically. Of all these changes, none has more significant implications for these countries, for the GMS, and for ASEAN and the broader East Asian region, than the re-emergence of China as a major regional and global economic and geopolitical power, and the deepening of its relations, both economically and strategically, with the countries of the GMS, particularly the least developed countries (LDCs), Cambodia, Lao PDR and Myanmar.

Introduction

The Context

Emerging as a major driver of regional growth, China is currently presenting Vietnam with enormous business opportunities and challenges. On the one hand, rapid expansion of China's industries, exports and consumer goods markets has led to a surge in demand for raw materials, energy, intermediate products, manufactured goods and services. On the other, China and Vietnam are said to be competing in their domestic and the third country markets, particularly with regard to labour-intensive products.

Vietnam, over the last few decades, has made remarkable improvements in enhancing per capita income and in reducing poverty. Poverty and hunger incidence in the country has been significantly reduced (Table 5.1). In comparison with the standard poverty measurement of US$1 per capita per day, Vietnam has well exceeded the millennium development goal (MDG) of halving the proportion of people whose income is less than US$1 a day by 2015. This proportion was cut eightfold from 39.9 per cent in 1993 to 4.9 per cent in 2006. Poverty incidence as measured by the standard food poverty of Vietnam also declined sharply from 24.9 per cent in 1993 to 10.9 per cent in 2002, 7.4 per cent in 2004 and 6.7 per cent in 2006.

With a view to achieving the standards set by other developing countries in the region, the prime minister issued Decision No. 170/QĐ-TTg dated 8 April 2005, promulgating updated national standards for a new period of development. Measured by the new poverty line, approximately 3.9 million households were still living in poverty in 2005, accounting for 20.2 per cent of total households. The rate then reduced to 15.5 per cent in 2006 and to 14.8 per cent in 2007. At the same time, GDP per capita, measured based on purchasing power parity (PPP), increased from US$402 in 2001 to US$492 in 2003, US$553 in 2004, US$639 in 2005, US$723 in 2006 and to US$834 in 2007.

INTRODUCTION

Over the last three decades, China has witnessed dramatic economic transformation, rapid development and greater involvement in regional and global economic and political affairs. Such significant achievements have become the subject of intense debate, seeing China as both economic threat and opportunity.

Countries in the GMS are geographically close to China and constitute a highly dynamic region with great potential for development that could become a strategic market space and provide institutional arrangement prospects for strengthening China's regional integration. Likewise, China could become the gateway and main market destination for GMS countries, reducing their export dependency on the international market. Through connecting with countries in the GMS, China has built considerable trade and investment relations and provided support in the form of official development assistance (ODA), particularly infrastructure development.

Cambodia views China as a promising development partner that can expedite the country's development and reduce the gap with other Asian countries. Clearly, the weight of China's presence is being increasingly felt in the country, drawing attention to its contributions and impacts. In discussing these issues, therefore, China's increasing role and its impacts within Cambodia should be studied.

Research Objectives

This study is one of a series of country studies conducted by GMS-DAN with support from the Rockefeller Foundation that seek to assess the potential impacts of China on the poor in the GMS countries, namely Cambodia, Vietnam, Laos and Thailand. This chapter focuses on Cambodia and analyses the poverty effects of China's rise through three critical components: (i) trade, (ii) investment, and (iii) official development assistance. It examines the trade relation between Cambodia and China and its poverty implication by mainly looking at the role of China's trade in labour-intensive products. The contribution that China's investment makes to the poor is reviewed through a case study on the garment sector. In recognition of China's support in developing Cambodia's infrastructure, two case studies on Chinese ODA funded projects in the transport sector explore the contributions of China's assistance to livelihood and social development of local people.

Since the dawn of the industrial revolution, and the ushering in of an era of global economic relations, the United States and Europe have been the core poles of economic power. However, China along with India and a select group of other rapidly developing (and mostly East Asian) countries are increasingly challenging the traditional economic hegemony. Such is the level and significance of this challenge that Gu, Humphrey and Messner (2008, p. 275) are moved to assert that this generation is “witnessing a fundamental shift in power centres in the global economy”. Indeed, in 2010, in a moment laden with symbolism, China eclipsed Japan to become the world's second largest economy, cementing its position as one of the globe's foremost economic powerhouses.

An issue of great importance is how this shift in the global economic balance of power will affect developing economies, and in particular the poor residing within them. Developing countries will be offered opportunities by China's growth, but also face challenges. It is important to identify the likely routes of impact so policy can be designed to optimize opportunities and lessen the potential for negative impacts. Nowhere are these issues more relevant than in the transition economies of the Greater Mekong Subregion (GMS), which are located in China's backyard and deeply integrated into its economy through regional supply chains. This volume examines the relationship between transition economies and the rise of China through presenting empirical case studies from the GMS. In doing so, it offers insights into the effect of China on developing countries in general, and offers practical policy directions for the place-specific economies of the GMS.

This chapter starts by giving an overview of the Chinese economy and the key routes through which its rise may affect developing countries. It then focuses on the relationship between China and the GMS, and highlights the key issues that may arise from economic interaction. A method to analyse China's impacts on poverty in the GMS is then forwarded; which informs the empirical studies that follow. The results of the case studies presented in this volume are then surmised, and the organization of the following chapters is detailed.

I.Yu pi xu zi zhi tong jian gang mu. Juan 3 (29th year of the Zhiyuan reign) (1292/93) Translated by Geoff Wade

Emperor Shi-zu of the Yuan dynsty: 29th Year of the Zhi-yuan reign (1292)

In the second month [Feb/Mar 1292], Yi-hei-mi-shi, Shi-bi and Gao-xing were appointed as Managers of Governmental Affairs of the Fu-jian Branch Secretariat, and ordered to command troops in an attack on Java.

Earlier, Meng Hong, the Assistant of the Right had been sent as an envoy to Java, but [those of] Java had branded his face. When the envoy returned, the emperor was angered and ordered Yi-hei-mi-shi, Shi-bi and so on to lead 30,000 troops in a punitive expedition against them. At this time, the king of the country of Java had been killed by the neighbouring country of Ge-lang and his son-in-law Tu-han Bi-she-ye [Tuhan Wijaya] welcomed Shi-bi and sought their assistance. Bi and the others thereupon combined to capture the king of Ge-lang to take back. Then Tu-han Bi-sheye again rebelled and Bi and the others engaged in fierce battle in order to defeat him and take him back. The dead numbered over 3,000 men and the officials estimated that the captured goods and valuables were valued at 500,000 [liang of silver]. However, as so many had died and they had failed to punish Tu-han Bi-she-ye's crimes, the Emperor ordered that one-third of the family assets of Shi-bi and Yi-hei-mi-shi be confiscated. Only [Gao] Xing was exempted as he had not been involved.

II. Mailla's version

My translation from Mailla's Histoire de la Chine, vol. 9, pp. 450–54. In this translation, Chinese names have been rendered in pinyin and Javanese names in the form in which I have used in the first part.

1292. In the year 1292, the first day of the first month, there was a solar eclipse. At the same time work on the Donghuei river canal which runs from Beijing to Dongjiu was finished.

The emperor had sent envoys to several kingdoms in order to urge them to put themselves under his protection and to pay him tribute.

Beginnings are difficult for everyone but God, since for the rest of us every beginning is preceded by and results from prior events. Should an account of the Mongol invasion of Java begin with Khubilai's order to send a naval force? Or with the Javanese king Kertanagara's branding of the envoy Meng Qi? Should it not begin with the history of Chinese-Javanese relations or biographical portraits of Kertanagara and Khubilai, noting those characteristics which lead each of these kings to acts of aggression?

To establish the facts of the invasion in so far as that is possible there is no need to leave the narrow period of their occurrence; to evaluate the narratives through which we learn of those events, to interpret them, to understand how the narrated events relate to prior events, why things happened thus and not otherwise in these histories, it is necessary to look back to the actors and the worlds in which they lived. An infinite regression is unnecessary for many facts can be left out of account, such as the composition of the muddy water Wijaya threw into the eyes of Mundarang. Since the narrative in this section is not intended as an exhaustive study but as a background from which to view the various histories and stories told and written about and around it over the last 700 years, only a few facts will matter, and they will matter because of the questions they raise and my interest in them. The composition of Wijaya's mud and many other matters shall be left for other authors with other interests and other questions.

Why Java?

The most well-known accounts of the Mongols in central and western Asia, Russia and Europe are laments and descriptions of terror on one side, slaughter on the other; the Javanese accounts differ from this pattern, but they are not the only ones to do so. Wassaf tells of a Shi'i group in a southern Iraqi town (Hillah) who greeted the Mongols as those who would destroy injustice, sending an embassy to Hülegü with a letter telling of an old prophecy which they believed referred to the Mongols:

Hülegü thought that this is how people ought to respond, and like the Tibetans and others who submitted, the community of Hillah suffered no harm under Mongol rule.

The Mongol invasions of Japan in 1274 and 1281 and the perceived threat of such an invasion both before and after the actual invasions gave rise to a unique response in Japan: a long-term concerted effort to withstand a future attack.

Why views from the other side? Because no Mongol views have survived into our time.

Wassaf thus describes the Mongol invasion of Java in what is perhaps the closest to an official Mongol version as is extant, having been written for the Mongol Ilkhans of Persia in the early 14th century. The Yuan dynastic history compiled under the Ming gives a very different account, as do the accounts written in Java. Even so, Wassaf's account — and all other accounts of the Java campaign — differ greatly in tone from his own and other accounts of the Mongol campaigns in western Asia and elsewhere. Although Wassaf claims that the Mongols “gained possession of the Island … through spreading fear of the fury of their sword”, he concludes his account with the claim that Khubilai “did not permit that certain death should excercise his power here,” but installed a new king on the throne — Javanese, not Mongol — “conferred on him much grace” and left the kingdom in his hands. Compare the preceding description with his account of the Mongol siege of Baghdad and Ibn al-Athir's account of the Central Asian campaigns:

The historiography of the Mongolian expedition to Java reveals a history of misunderstandings of a historical series of misunderstandings. The original sequence of events, from Meng Qi to the Mongol-Javanese alliance of Wijaya to Wijaya's ambush is as far as can be determined a history of Mongol-Javanese misunderstandings much more than a history of Wiraraja's deliberate deceits. And the histories of that history, are two histories following national lines; each completely misunderstanding and even being completely unaware of the other. Even the name of the Mongols and their country is a misunderstanding in the Javanese versions! The two histories proceed from the facts which had meaning for their writers: Meng Qi and the princesses, the symbols and bearers of authority.

What the campaign reveals of the Mongols and Khubilai at the end of his reign has never been seriously considered. Mongolists and Javanists have discussed the number of ships, the chronology, and the economic or religious background, keeping the discussion focused on details while failing to provide a story in which these details could acquire any meaning. Historians writing on this period of Indonesian history have developed elaborate narratives of spiritual warfare and the clash of worlds without first acquainting themselves with the nature of Mongol religious and political attitudes and practices. Twentieth century commentary on that original sequence of events has followed one or another of those early versions by either relegating the story to a footnote, regarding it as the incomprehensible and misguided folly of an emperor in decline; or by viewing the Mongols as an unimportant detail, a foreign power beaten back shortly after arriving. Neither the extraordinary importance for the Mongols of envoys in general and Meng Qi in particular nor the importance of the princesses for the Javanese has been understood by modern scholars in discussions of these works and the history they describe and interpret.