The Surge of Foreign Investment in Myanmar: Raining Gold or Acid?

As the military junta relinquished their power in Myanmar, the world became hopeful for the country’s growth under democracy and a liberalized economy. This has sent a signaling effect to staunch critics and investors around the world that Myanmar can now be discerned as the new field of opportunities.

And so, the quest for growth begins. What seemed elusive in the past is not so distant now. Like many other newly liberalized countries, it is not surprising to see that Myanmar has been growing rapidly in recent years since the democratization and economic liberalization. In fact, the country’s GDP growth rate remarkably soared from -0.5% in 2003 to 5.5% in 2011. This rapid growth is captured in Solow Economic Model that explains how developing countries usually have lower capital to labor ratio, indicating that there is a high marginal product of capital in which the capital has not experienced depreciation or diminishing returns and will in turn boost the economic growth to a higher rate.

“Under the core scenario…which assumes that the military-backed Union Solidarity and Development Party (USDP) maintains its grip on political and economic power while orchestrating superficial reforms to win international legitimacy,(Myanmar’s) GDP growth for the period 2016-2020 will rise to an average of 7.7% per year.”

Investment is a condiment for “Catch-Up Growth”

As Myanmar opened up, capital accumulation has been increasing due to the external influx. Consequently, Myanmar holds optimism for “catch-up growth”, a state where developing countries’ per capita income will rise as a byproduct of a high growth rate. In the long run, the per capita income of a developing country, provided that it can sustain the growth rate, is expected to converge to the level of per capita income in developed countries.

To many, foreign investment is seen as a crucial channel for such capital accumulation and growth. It also provides positive spillovers, such as technology and skills transfer for the receiving end. Myanmar, too, believes in such a notion. Following the lift of economic sanctions on Myanmar placed by several countries during the military-led government period, the highly anticipated and lauded Myanmar Foreign Investment Law was signed in November 2012. The reformed Law contains significant changes, such as the improved easiness to register foreign companies and a tax holiday.

This green light has catalyzed many multinational firms, such as General Electric and Pepsi, to vie for opportunities in tapping into this potential market of 60-million people. Currently, there are approximately 30 foreign companies “active in the onshore exploration” and this number is projected to keep growing. Underdeveloped sectors, such as property, healthcare and other businesses are primarily sought by the firms and companies.

In addition to the surge of private capital inflows, Myanmar has also held hands with multinational organizations and foreign governments. World Bank has recently stated that they are prepared to disperse financial and technical assistance to support augmenting economic stability, and more importantly to assist the improvement of electricity. Meanwhile, Japan through its development agency, Japan International Cooperation Agency (JICA), and some of its finest corporations, are cooperating with Myanmar’s government and entrepreneurs to develop the Thilawa Economic Zone.

Overwhelmed, Myanmar still needs “Midas Touch”

Caveats, however, should be applied when reviewing Myanmar’s future growth and investment environment. Both Myanmar’s government and foreign investors should tread cautiously in managing the rate of current investment.

“Some investors…worry that the political and economic risks in Myanmar are still too big, and that asset prices are getting pushed beyond reasonable levels.”

Although Myanmar has undertaken reforms, the country still needs a “Midas Touch” to turn the murkiness of capital inflows management to long-term sustainable growth. With the current government’s enthusiasm, this transformation is highly possible. First, there needs to be banking system reform. With the current “rudimentary banking system,” it is futile to expect significant extension of foreign investment as it is “limiting the ability of investors to cash out of their investment through local markets” as the Wall Street Journal reports. A sound banking system will concurrently ensure a legal protection for foreign investors and their funds, explains the WSJ.

Second, in regards to “uncertain regulatory ” concerning the Investment Law, Myanmar should ease the ambiguous restriction for investment in manufacturing.  This sector  is currently categorized as one of the 11 sensitive sectors whose foreign ownership ratio shall be determined by Myanmar Investment Committee (MIC). This will, nonetheless, beget the MIC substantial power that some fear will create inefficiency and rent seeking.

With around 13 million people between the ages of 15-28, Myanmar is destined to be a powerhouse in the manufacturing sector in Southeast Asia. However, underdeveloped manufacturing, receiving only 0.3% of the total FDI inflows, is in dire need of new technology and skills enhancement. This gap can be filled by the presence of foreign companies in the aforementioned sector. Concurrently, developing Myanmar’s manufacturing sector can stop the brain drain – flow of workers that mostly migrate to Thailand in search of better jobs and wages. Most importantly, manufacturing should be sought as an alternative path to growth as Myanmar cannot exclusively rely on its extractive industry, as the former option has more potential in creating middle class and “wage appreciation” and the latter has the risk of being exhaustive.

Third, to sustain the positive spillover effects, such as  skills transfers, the government should encourage foreign investors to employ and train local populations and possibly provide preferential treatment or rewards to those who comply with the “employ and train” policy. A similar strategy catapulted the Bangladeshi garment industry in the late 80s.

Fourth, with many of the projects soon to take off, Myanmar needs to imminently resolve land rights issues that will not only potentially drive investors away, but also create internal repercussions. In Thilawa, for instance, farmers have been protesting a land acquisition scheme. They were reportedly forced to sell the land for $20 per acre, an abysmal amount of settlement  in comparison to the current price of $10.000 to $20.000 per acre.

Finally, as the surge is arguably creating an economic bubble, Myanmar needs to tread warily before this gold-rush bubble bursts into acid rain. Overall, a more people-focused and inclusive economic development agenda should be put forward by the government, especially in attempting to “reduce disparity, inequality and conflict with ethnic minorities.”

In addition to enhance the institutional capacity, Myanmar’s government needs to bolster the investment for human capital, including increasing the government support for educational institutions, only 1% of total expenditures at the moment, and the healthcare investment, currently $2 per capita. Through this people-centric agenda, Myanmar can ensure that it channels  foreign investment to achieve sustainable economic growth.

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