Myanmar Foreign Investment

Myanmar for foreign investment

Dan Harris and I just returned from Yangon, Myanmar, where we attended the first Myanmar Investment Summit and then met with local attorneys and discussed the foreign investment situation with local business people and interested foreign investors.

I was quite surprised at the situation in Myanmar and the path the government has chosen for promoting the local economy and integrating foreign investment into that development. As described by government officials at the Summit, the development path Myanmar will follow will progress in three stages:

Stage 1: Transition to a stable, open political system. This stage includes at least the following factors:

a. Participation of all parties in the government. The recent participation of Aung San Suu Kyi’s New Democratic Party in the parliament is an example of this process.

b. Accommodation with all minority groups. The government has signed peace treaties will all the important minority groups (Karen, Kachin, Shan, Chin, Wa, Mon) and intends to bring these groups into a multi-ethnic union of Myanmar where their interests are respected.

c. Termination on restrictions of information. This will be manifested in several ways: free press (newspaper and magazines), open internet, general access to mobile phones and other forms of communication, free and uncensored publication of books, access to foreign newspapers, periodicals and books.

The central theme is that without political stability in an open society the development process cannot succeed.

Stage 2: Reform of the financial system. The government is working with the IMF to entirely reform the domestic financial system. The first step was to unify exchange rate conversion. Myanmar until recently had five different exchange rates. These have been eliminated in favor of a single exchange rate that more closely reflects the value of the Myanmar currency. The next steps will be to modernize Myanmar’s banking system and integrate that system with the world system. Eventually, this will involve partial or complete convertibility of the Myanmar currency.  Finally, Myanmar plans to open a stock exchange within the next five years. The goal is to fully internationalize the Myanmar economy within a five-year period.

The central theme is that Myanmar cannot hope to rapidly increase its GDP if its financial system is not modernized and integrated into the world financial system.

Stage 3: Increase GDP through local and foreign investment. While the Summit was in session, Myanmar’s current, Thein Sein, announced that his goal is for Myanmar’s GDP to triple within the next five years. Speakers at the Summit announced a more modest goal of doubling GDP within five years. This shows the focus of the government on GDP development.

Foreign development will be important for this process in two ways. The first and most obvious is that Myanmar will need substantial foreign investment to build the infrastructure required for any substantial increase in GDP. The second is that Myanmar lacks the technical skills required for any form of modern economic activity. Myanmar will look to foreign investors to transfer such skills as part of the foreign investment process. Currently, foreign investment in Myanmar is concentrated in oil and gas, minerals and power.

The government seeks to push development into manufacturing, real estate, agriculture and services, areas that are virtually untouched currently by foreign investment. The government is working to make foreign investment more attractive by overhauling its legal system for foreign investment. The showcase project for this is the adoption of a new Foreign Investment Law. A preliminary draft of the new Foreign Investment Law has been approved by the parliament. This law is expected to be promulgated some time in July.

Though the government seeks to promote foreign investment, the current steps show an extreme level of caution. This can be seen in two ways. First, unlike the current situation in China, foreign invested enterprises are treated dramatically differently than domestic enterprises. For example, a foreign invested enterprise cannot lease a building for a period greater than one year. For longer periods, foreign invested enterprises must rent land and build the related buildings at their own expense. The resulting lease is limited to an overall term of 60 years, at which time the building and land revert back to the government. Second, all foreign investment projects must be approved by the central government. Local governments are not permitted to grant such approvals. Many business terms such as the price of leased land must be approved by the central government, preventing private business people from negotiating their own terms.

The central theme is that the government desires to increase GDP and to allow the benefits of such increase to accrue to the people rather than to government officials. Though FDI will be a part of such GDP growth, the government is still concerned about preventing foreign investors from obtaining an unfair advantage over the local people. For this reason, the government still insists on restrictive terms for foreign investment and still insists on remaining actively involved in investment decisions to “protect” the people and the assets of the country. In this way, the opening to foreign investment on the part of the government can at best be termed half-hearted.

The striking thing about the Myanmar approach described above is that it is almost exactly the opposite of the approach taken by China towards economic development and foreign investment. The China approach has been:

Stage One: Rapid increase in GDP. With respect to foreign investment, the Chinese ordered local governments to increase foreign investment with virtually no restriction. Key features were:

 a. The Chinese made the investment decision simply too good to refuse. Strong incentives, such as tax holidays, cheap to free land, reduced utility costs, reduced labor costs.

b. The Chinese provided a complete turnkey system to foreign investors. For example, they did not require foreign investors to build factory buildings. They provided already built factories or they built them to foreign specifications.

c. For all but the largest projects, local authorities were permitted to make all investment decisions. Local authorities were never criticized for offering too much to the foreigners; they were only criticized for not securing sufficient investment.

None of this is being done in Myanmar, which comes as a surprise to foreign investors who have become accustomed to the Chinese approach.

Stage Two: Reform of the financial system. The Chinese have always taken the position that financial reform must go slow and must follow advances in GDP growth. This has caused and continues to cause considerable friction between China and the developed world. It has also resulted in a limited range of investment vehicles for the Chinese people, contributing to instabilities in China’s real estate and stock exchange markets.

The Chinese government accepts these dislocations as the price for stability and control. The Myanmar government is taking the opposite position by moving towards an open and international financial system as a prerequisite for enduring and stable economic development.

Stage Three: Political reform. The Chinese government position is that one party rule will endure forever, together with the attendant restrictions on political participation, freedom of expression and access to information. The Chinese government equates one-party rule with stability. The Myanmar position is that one-party, autocratic rule does not result in stability, but rather the opposite. The Myanmar officials I talked with point to the experiences of Taiwan and Korea. Neither of these countries really “took off” as an economic power until after they shifted from autocratic, one party rule to an open democratic system. The Myanmar government sees this experience as an absolute requirement for enduring economic development. This is why they see political reform as the first requirement.

The discussion above is heavily theoretical. What is the reality? In a following post I will discuss what Dan and I saw and heard on the street in Yangon and in our meetings with locals.

14 responses to “Myanmar Foreign Investment”

  1. I wonder to what extent the theory and practice line up. On the border with Yunnan, the Myanmar army and the Kachin Independence Orgnization are fighting a war, and UN humanitarian relief operations are being blocked. President Thein Sein’s writ doesn’t seem to extend very far over the country’s former military rulers.

  2. Very interesting information. I would encourage everyone to not forget though, that until the recent case of Syria, Taiwan was under the longest ever period of martial law, most of Taiwan’s growth preceded political freedom. Read the White Terror. 
    As for South Korea, currently the daughter of the autocratic ruler that presided over South Korea for nearly 40 years is running for president. South Korea has only within the last 15 years become a true democracy, and most of its GDP growth also occurred before liberalization. 
    The belief that democracy induced growth has been thoroughly debunked by India. China and India achieved independence in the same year, although the Chinese level of development is estimated to be nearly one hundred years ahead of India’s. 
    People often point to Taiwan and South Korea as examples of politics as a mode of economic growth. However, this is actually historically inaccurate. Rights and a developed legal system are without a doubt needed to promote growth, but freedom seems to be less necessary. Look to Singapore.  
    In economics we actually have a saying, that the best government for economic expansion is a benevolent dictator. Now, admittedly having a benevolent dictator is basically impossible. But in terms of pure economic transformation, most often periods of rapid economic growth have been lead by the hands of a strong personage. Take Queen Elizabeth and the Enlightenment period as an example in the West. 
    [I am not arguing for one political system over another. I just wanted to correct the idea that democracy creates growth. Good economic policies create growth. Political infighting hampers growth.]
    http://www.npr.org/2012/05/29/153937348/indias-parliament-blamed-for-slow-economic-growth

  3. Fascinating. Burma is a country which until recently has seemed almost North Korean in its secrecy and isolation.
    Doubling GDP by 2017? At last year’s estimated growth rate (5.5%) they’re falling short of this by a significant margin – it’ll take about 13 years for the economy to double at that rate. It would take an annual growth rate of 15% for the economy to double that quickly. I think we can take the doubling of GDP in 5 years as more of a ‘value statement’ than a realistic goal.
    Settling ethnic disputes – well, we’re literally talking about parts of the country which have never been under Rangoon’s control. It is very hard to believe that somewhere like the Wa State, essentially a narco-state defended by an army armed by the PLA, where Mandarin is the lingua franca, will ever come under effective government control without a military conquest which the Chinese government may object to.
    Particularly when it comes to the relaxing of internal repression, it is very hard not to think that we – the outside world – are merely being told what we would like to hear. Yet – Aung San Suu Kyi is free, elections have been held, political prisoners are being slowly released.
    I’ll be interested to read the next piece, particularly whether the ordinary people are willing to accept such a development without extracting a bit of revenge against the junta.

    • Myanmar has extensive plans for infrastructure development, particularly for hydropower from Chinese built dams, that could boost GDP significantly, and remember Naypyidaw starts from a low GDP base. What I wonder, though, is whether those deals, which were intended by the former military junta to provide export earnings by selling the power generated to China and Thailand to prop up its dictatorship are appropriate for the country’s new direction.

      • Yeah, Naypyidaw, about that – is the construction of a new capital miles from anywhere likely to boost GDP growth in the long-run? Is it really what they should be spending money on? If the the transition to civilian government is successful, will they still want a capital in the middle of the jungle?

  4. It’s funny they mentioned Taiwan, because for the last 10 years democracy there has produced nothing but infighting, encouragement for discrimination, and stagnant (and actually deflating) economy, not to mention the slew of corruption cases from government officials. Has transition to democracy been good to Taiwan? I would say only the first 15 years from 1985 to 2000. DPP and KMT both suck badly at governing.

  5. > The Myanmar officials I talked with point to the experiences of Taiwan
    and Korea. Neither of
    > these countries really “took off” as an economic
    power until after they shifted from
    > autocratic, one party rule to an
    open democratic system.
    I’m curious if the second sentence is something the Burmese said or if it was something that the poster assumed.  The Taiwanese and South Korean economies both started to take off in the late-1960s, but it wasn’t until the late-1980’s that either of them became democratic.  In the 1970’s, South Korea was a military dictatorship and Taiwan was under martial law.  Now they were both well run dictatorships with some openness, but they were still dictatorships.
    So if the Burmese are looking at Taiwan and South Korea as a model, that means a semi-authoritarian but less brutal military dictatorship for the next generation, with the US ignoring any human rights issues for geopolitical reasons.

    • I also picked up on this. A very interesting point you bring up, one that is commonly overlooked both in international and domestic circles. 

  6. “The Chinese government equates one-party rule with stability.”
    So do we. We do not permit more than one party, though we do allow public, factional disagreements in the Capitalist Party.

  7. As a burmese in foreign land i really wish they do as they promised cuz they’re people who don’t even have access to pure water or electricity,even in biggest city yangon there’s not a day gone by without power being cut off!

  8. Taiwan and South Korea have outperformed other countries in terms of GDP growth, despite some troughs they bounced back quickly. Over several decades, these countries come top. So learning from history we can also see what has happened in the Middle East with one party system. I agree with the Myanmar authorities. We should take a leaf out of those countries despite some set backs they have had, of one kind or another.

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