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.