Vietnam and Cambodia Model: Which Road Will Timor-Leste Take in ASEAN?

Timor-Leste’s engagement in ASEAN must be guided by the necessity to avoid the debilitating effects of premature liberalization, particularly the risk of becoming a pure import market for its more industrialized neighbours.

1. The CLMV Lessons and Timor-Leste's Dilemma

Timor-Leste’s long-awaited accession to the Association of Southeast Asian Nations (ASEAN) marks a diplomatic triumph on 26 October 2025, but the real challenge has only just begun. The focus must shift on navigating the dense competitive, neoliberal framework of the ASEAN Economic Community (AEC). 

The post-accession workshop was held in Dili from 4 to 6 November 2025, where technical experts and resources were heavily drawn from the CLMV countries—Cambodia, Laos, Myanmar, and Vietnam. This focus on the CLMV nations is telling and deeply provocative. It suggests that Timor-Leste recognizes the need to learn from peers with similar developmental gaps. 

Yet, the choice is far from simple. Should Timor-Leste draw its most critical lessons from Cambodia, which embraced rapid, open, and often volatile market liberalization following its conflict? Or should Timor-Leste study the model of Vietnam, which pursued a highly controlled, state-guided, and gradual transition? The choice is between a liberal, market-shock approach and a strategic, sovereignty-first development model.

2. Shared Fate with Cambodia and the Differentiating Timor-Leste's Starting Line

Timor-Leste and Cambodia, despite their distinct geopolitical and histories, share critical structural and institutional vulnerabilities rooted partly in their respective periods of conflict, but also United Nations transitional administration, which established similar, yet fragile, governance foundations. A core deficiency lies in the weak rule of law, manifested through a lack of regulatory transparency, particularly within government approval processes. This environment is exacerbated by systemic corruption.

Economically, both nations are constrained by small domestic market size and reliance on low-value economic activities, evidenced by limited manufacturing and the absence of high-value industry. This lack of diversification, coupled with inadequate social, physical and digital infrastructure as well as limited supply of skilled labor, severely hampers competitiveness.

Paradoxically, the adoption of highly liberal and open investment regimes—offering substantial incentives like tax holidays fails to fully compensate for these structural impediments. Moreover, these weaknesses have made both countries' jurisdictions increasingly susceptible to being exploited for illicit financial flows, including tax evasion, organized crime, and sophisticated scam operations, further undermining their integrity to secure foreign investment and long-term economic resilience. The shared ambition of Timor-Leste and Cambodia to achieve Upper-Middle-Income (UMI) status by 2030 appears highly improbable within the next five years, given current economic trajectories and persistent structural impediments.

Despite some common experiences, there are divergent and particularities too. The developmental trajectories of the CLMV nations, and now Timor-Leste are fundamentally divergent, making a simple copying of models disastrous. Vietnam and Cambodia, while both less developed than the original ASEAN-5, began their integration journeys from central planning economy and post-conflict state with pre-existing, albeit damaged, institutional and productive bases.

Vietnam’s transition was defined by Đổi Mới (Renovation), a gradual process initiated in 1986 that strategically introduced market mechanisms while maintaining core political control and protecting key state assets. Cambodia, emerging from the conflict and subsequent civil war, experienced a much more immediate and unguided exposure to global capital flows, often categorized as a form of rapid liberal "shock therapy."

Timor-Leste’s situation is unique, and arguably more precarious. The nation was regain independence in 2002 after 24 years of brutal Indonesian occupation and the scorched-earth violence of 1999, which destroyed 80% of its infrastructure. Timor-Leste did not transition from a socialist economy or a deep, pre-existing modern industrial base. Instead, it built its state from scratch under the direct, heavy tutelage of international financial institutions, donor nations - thanks to the petroleum resources generated since the early times of independence.

Timor-Leste’s economy did not transition into neoliberalism, rather, it was constructed as a neoliberal state from the very top. This "neoliberalism from scratch," financed by a dependency on the Petroleum Fund, overseen by international expertise and the diktat of Western-led international financial institutions, meant Dili lacked the strategic institutional muscle or the protected state assets that Vietnam used to navigate its transition. This condition of ab initio neoliberalization means Timor-Leste is uniquely vulnerable to the competitive forces of the AEC, differentiating its immediate shock from Cambodia's and sharply contrasting with the guided phases of Vietnam. The pressure to open markets is instantaneous, threatening to swamp nascent private sectors before they even mature.

3. Understanding Vietnam’s Market Economy (SOME)

Timor-Leste, especially following its recent ASEAN accession, should treat Vietnam’s experience as a non-founding member as an essential, critical case study. Vietnam's journey offers real lessons in successfully leveraging regional integration to overcome development deficits, direct the FDI, make the regional and global value chain and trade serve the national goals and sustain the real economy.

If uncontrolled market opening is the risk, then Vietnam's developmental philosophy offers a powerful alternative model for strategic state action. The Vietnamese approach is formally known as the Socialist-Oriented Market Economy (SOME), a framework that rejects the pure, unfettered capitalism favored by Western institutions while harnessing market dynamics for national goals.

The essence of SOME lies in a proactive interaction of reform by promoting market efficiency while maintaining a socialist orientation towards equity, stability, and state control over strategic sectors. Accordingly, the market is viewed as a tool, not an end in itself. This framework operates on three critical pillars:

1. Political and Ideological Hegemony: The ruling one-party maintains absolute political control, ensuring that economic development is subordinate to national and social stability goals. This political guidance allows for long-term strategic planning, insulating core development decisions from short-term market pressures.

2. Strategic State Dominance: Unlike truly liberal economies, the Vietnamese state maintains a predominant position in "strategic" sectors. State-Owned Enterprises (SOEs), particularly in banking, energy, telecommunications, and heavy industry, are deliberately protected and prioritized. They act as "locomotives" guiding the rest of the economy and ensuring that national infrastructure development aligns with state interests, not solely profit motives.

3. Gradualism and Selective Opening: Đổi Mới was not a single shock, but a 30-year process of incremental change. Foreign Direct Investment (FDI) was strategically welcomed, but only into areas that served Vietnam's developmental needs (e.g., technology transfer, export capacity building) and often alongside strict local content requirements or joint venture rules. Vietnam utilized its protected domestic base to build export competitiveness before fully exposing its economy to global forces.

Vietnam has demonstrated remarkable success in attracting and maintaining high volumes of FDI, positioning itself as a major global manufacturing hub - transforming the country into one of the world's most open economies in terms of trade and investment. FDI inflows have surged, remaining resilient even during global financial crises in 2008, demonstrating the state's success in creating a stable and attractive investment environment. 

The economy has dramatically shifted from being agriculture-based (contributing 50% of GDP in the late 1980s) to one geared towards industry, manufacturing, and services. The foreign-invested sector accounts for approximately 20% of GDP. Vietnam GDP swelled nearly seventeen-fold from $24.66 billion in 1996 to $408.8 billion in 2022. This persistent growth, marked by an impressive average annual rate of around 6-7%. The country's total foreign trade volume reached a remarkable $732.5 billion in 2022.

The cumulative FDI stock of over $322 billion by year-end 2024 is equivalent to approximately 67% of its GDP. Furthermore, Foreign Invested Enterprises (FIEs) dominate the trade sector, accounting for nearly 71% of the nation's total goods exports with a value of close to $291 billion in 2024, demonstrating a profound expansion of productive bases and material wealth. In the first half of 2025, Vietnam’s foreign direct investment inflows surged by an impressive 32.6 percent to USD 21.52 billion, with neighboring countries like Thailand also recording significant increases. 

Vietnam’s development success is most evident in welfare and poverty alleviation. While life expectancy increased from 63 to 75 years, and the poverty rate (using the $1.90/day standard) plummeted from around 58% in 1990s to below 6% by 2020. This dramatic improvement in material wealth and access to services is widely cited as one of the most significant development achievements globally.

For Timor-Leste, the lesson here is political: the state should not passively accept the AEC rules, but it must leverage its sovereign and rights to strategically delay, protect, and guide its economic sectors.

For the Government of Timor-Leste and its people, the path of ASEAN integration is fundamentally a political choice about economic sovereignty. Will Timor-Leste allow the external shock of the AEC to define its economic structure, or will it strategically emulate the Vietnamese principle of state guidance and gradualism?

4. Strategic Imperative for Timor-Leste’s ASEAN Integration

Timor-Leste’s engagement in ASEAN must be guided by the necessity to avoid the debilitating effects of premature liberalization, particularly the risk of becoming a pure import market for its more industrialized neighbours. The CLMV experience, especially the Vietnamese path, suggests several strategic imperatives:

1. Adopt a Pace of Gradualism: Timor-Leste must utilize the Initiative for ASEAN Integration (IAI) framework and the flexibilities granted to new members to strategically delay full implementation of commitments in highly sensitive sectors, such as agriculture and nascent manufacturing. The goal is securing the necessary institutional and productive "breathing room" window in order to allow domestic industries to achieve scale and competitiveness.

2. Implement a Sovereign Industrial Policy: Timor-Leste’s most powerful tool is its fiscal sovereignty, primarily the Petroleum Fund. Instead of relying heavily on foreign aid or unguided private investment, Timor-Leste must use its capital for a strategic industrial policy that protects and diversifies the economy. This involves targeted investment that shifts public spending from consumption to strategic, high-value, non-oil sectors.

3. Build Institutional Depth, Not Just Compliance: The current focus on bureaucratic capacity building (ratifying treaties, attending meetings) is insufficient. Timor-Leste needs deep, technical expertise capable of negotiating complex trade and investment agreements, and, critically, of identifying Non-Tariff Barriers (NTBs) and technical standards that can shield domestic producers without violating ASEAN rules outright. Learning to use strategic protectionism within the rules is the essence of Vietnam's success.

4. Reject the Import Market Destiny: The greatest risk is that the AEC simply solidifies Timor-Leste’s role as a consumption economy, financed by dwindling oil revenues and flooded by cheap imports from ASEAN powerhouses. Strategic integration means focusing on export niches where Timor-Leste has a competitive advantage (like organic coffee or sustainable fisheries) and protecting the sectors that provide the majority of livelihoods (subsistence agriculture).

6. Conclusion: Choosing a Path, Securing Sovereignty

Cambodia's path, while yielding rapid growth in specific sectors, has often been critiqued for deepening inequality and reliance on volatile foreign capital. Vietnam’s model, conversely, prioritizes political stability, state guidance, and phased market opening, resulting in remarkably steady development and poverty reduction.

For the Government of Timor-Leste and its people, the path of ASEAN integration is fundamentally a political choice about economic sovereignty. Will Timor-Leste allow the external shock of the AEC to define its economic structure, or will it strategically emulate the Vietnamese principle of state guidance and gradualism? 

To secure a future where the economy is sustainable, Timor-Leste must use strategic protection, leverage its sovereign wealth for productive national ends, and ensure that ASEAN integration serves the long-term goal of national resilience and sovereignty.