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«Industrial Policy Reform in Myanmar Prepared for Proximity Designs | Myanmar April 2012 This research paper was written by Dwight H. Perkins ...»

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RAJAWALI FOUNDATION

INSTITUTE FOR ASIA

Industrial Policy Reform in Myanmar

Prepared for

Proximity Designs | Myanmar

April 2012

This research paper was written by Dwight H. Perkins (Dwight_Perkins@harvard.edu), Harold Hitchings Burbank

Professor of Political Economy, Emeritus, Harvard University, following a trip to Myanmar from March10-22, 2012.

The views expressed herein are the author’s alone and do not necessarily reflect those of Proximity, the Government of the Union of Myanmar, or Harvard University. We wish to extend our sincere thanks to Proximity Designs for organizing the research visit and to Minister U Aung Min, Minister U Soe Thein, and Myanmar Egress for their contributions to the research effort. Funding for the study was provided by the Royal Norwegian Government. This study, along with other recent Ash-Proximity reports on Myanmar, is posted at http://www.ash.harvard.edu/Home/Programs/Institute-for-Asia/Publications/Occasional-Papers About the Author Dwight H. Perkins has been on the Harvard Faculty since 1963 and has served as Chairman of the Department of Economics, Director of the Harvard Institute for International Development, and Director of the Harvard Asia Center. Professor Perkins has written extensively in many books and articles on strategies for achieving sustained growth in developing economies in general and in East and Southeast Asia in particular. He has served as a consultant/advisor to among others the governments of South Korea, China, Vietnam, Indonesia and Malaysia. Much of this consulting/advisory work has dealt with successful and less successful industrial development strategies in Asia. His forthcoming book based on his Reischauer Lectures is a comparative study of industrial policies in East and Southeast Asia and why they succeeded or failed.

Table of Contents Introduction

Choices Have to be Made

1. Past growth has been slow, narrowly distributed and reliant on depleting natural resources........ 7

2. The Economy suffers from poor and unclear regulation and state/military economic domination. 7

3. Infrastructure costs and quality are among the worst in ASEAN

4. The Myanmar market for manufactures is small

5. The role for industrial zones is limited

6. Improved education will be critical

7. Improved banking and financial intermediation is needed

Special Issues Applying to Myanmar

Myanmar Cannot Imitate South Korea

Immediate and Longer Run Steps

–  –  –

Introduction Myanmar faces fundamental choices about its economic future when the sanctions are lifted, and many of these choices will be present even if some of the sanctions remain. There is no technical reason why Myanmar cannot achieve a GDP growth rate of 8 percent a year or more for several decades. If the country did achieve a growth rate of that magnitude, the standard of living of its people would double over the next decade and increase four-fold over the next two decades. Poverty would fall dramatically, first in the more developed regions and then nationwide. In the most recent two decades, in contrast, Myanmar’s electric power consumption suggests that GDP growth per capita has at best been negligible and may even have been negative.1 Furthermore, while there has been some uptick in the GDP growth rate during the most recent two or three years, that growth has been driven by large discoveries of oil and gas together with Chinese related investments of US$3-4 billion a year that have generated revenue for the government but little employment or income for most Myanmar people.

What stands in the way of the potential for sustained high growth that directly involves and benefits the Myanmar people is not the crisis in the world economy. It is not a lack of natural and human resources within Myanmar. And it is not even primarily the existence of sanctions.

Instead, it is Myanmar governments over the past decades that have made decisions with respect to how the economy was organized and managed that have had the effect of stifling growth. Going forward Myanmar’s government and people can make a series of changes that will lead to accelerated industrial growth combined with improvements in agriculture and services that will transform the society within one or two decades. Or Myanmar can make a choice to continue many of its current policies and instead rely on the discovery of more rich natural resources, notably oil and gas, the more energetic exploitation of its other natural resources, and the politically and socially hazardous emergence of a principally foreign-owned plantation sector. This latter strategy might produce growth higher than is presently the case, but over time slow growth or outright stagnation will return. Furthermore this growth will provide benefits to the Myanmar people only if the royalties and rents generated for the government are spent wisely, which to date has often not been the case.

–  –  –

If Myanmar is to achieve a sustainable high rate of GDP growth, therefore, there is no alternative to having a robust industrial strategy. All countries of any size2 from England in the eighteenth century to Japan in the early twentieth century to China today that have achieved growth raising them to middle income and then high income status did so by focusing during the first decades of this growth on industry. Similarly South Korea and Taiwan’s periods of near double digit GDP growth in the 1960s through the 1980s was made possible primarily through the rapid growth of industry in general and manufacturing in particular. In the discussion that follows we will attempt to spell out what a successful industrialization strategy for Myanmar would entail. Successful industrialization, it will be argued, involves a series of choices that only Myanmar itself can make.





Choices Have to be Made

It is the sense of our group3 from meetings with a number of government ministers and business leaders that there is a clear recognition among many that fundamental change is needed, but no consensus or clear understanding of what specific measures are needed to effect change. Does the country want to transform itself over the next two or more decades, or does it want to continue with policies that generate large rents for a few people, but few benefits for the rest? If Myanmar is to transform its economy so that it can increase the average income of its citizens by several-fold and provide meaningful employment for millions, including the many skilled and semi-skilled workers who have left the country, there is no real alternative to an effective industrial development strategy. No such strategy exists at present, however, and creating one presents some unusual as well as some conventional challenges.

The conventional challenges involve maintaining an appropriate exchange rate, building adequate infrastructure, removing many regulatory barriers (and making the regulations that remain in place transparent), improving the human resource base, and providing finance for productive enterprises. The unusual challenges relate to the special role in the economy played by the Myanmar military and the state more broadly, Myanmar’s longstanding hostility toward and fear of foreign domination, the fragile and sometimes hostile relations between the state and some of Myanmar’s ethnic groups, and the large and increasing role that China and Chinese products are playing in the Myanmar economy. This essay will start with the conventional challenges and then move on to the unconventional ones.

–  –  –

1. Past growth has been slow, narrowly distributed and reliant on depleting natural resources Myanmar in 2012 is largely dependent for foreign exchange resources on the export of natural resource products, notably oil and gas but also gems and teak. Thus Myanmar faces the standard problem of natural-resource rich countries: when natural resource prices are high, foreign exchange flows in and drives up the exchange rate, making it difficult for both factories and farms to compete with foreign imports. This puts many factories out of business and lowers the income of farmers4. Myanmar will not always be rich in natural resources—it is only “rich” in natural resources today because it has so little else to export. In addition, incomes are very low, and when incomes rise several-fold Myanmar will probably consume most of the oil and gas that it produces and may even become an importer. At current rates the tropical hardwood teak forests will soon be exhausted and Myanmar like Thailand will no longer be a supplier of teak to the world. Myanmar has now floated its currency, and so deliberate efforts by the government to maintain an overvalued rate need no longer be a serious problem. But the effect of market forces at present has much the same effect of overvaluing the rate. The large influx of foreign exchange to buy primary products, and hence market pressure to revalue upward the Kyat, has been further increased by large-scale Chinese investments. This problem of the overvalued exchange rate is, in a technical sense, easy to solve. The government can deliberately devalue its currency, as Indonesia did under similar circumstances in 1978.

Whether this is also easy to do politically is beyond the scope of this short essay, but devaluation in the 20-30% range does not appear to present a major political problem for the government.

2. The economy suffers from poor and unclear regulation and state/military economic domination

–  –  –

otherwise dominated by state or military firms. These state and military firms operate according to their own rules or lack thereof, and most lose money or would be seen as losing money if conventional accounting rules were used.

This combination of excessive or unknown and arbitrary regulation and government ownership and control of most industrial enterprises discourages people in the private sector from even trying to further the development of Myanmar’s industrial sector. It is also a major source of small-scale corruption and no doubt in some cases of large scale corruption. Equally seriously from an economic efficiency view, having to rely on the discretionary decisions of a myriad of officials is a source of much delay in getting needed authorizations. That delay alone can be a cause of business failure.

When this excessive regulation and lack of regulatory transparency is combined with industry run by military and other government officials who operate by their own rules or are not subject to any rules, it is no surprise that Myanmar ranks far down Transparency International’s Corruption Perception Index at 180th out of a possible 182 countries (see Table 1). This is an index of perceptions of businessmen and other informed people and not necessarily reflections of reality, but whether they are reality or not, this is not a perception that a country wants others to have if it hopes to attract substantial foreign direct investment from countries other than China and Thailand (which ranked 75th and 80th respectively on the Transparency International list in 2011). The World Bank does not even make estimates for Myanmar in its indexes concerning the ease of doing business (though it will begin to do so soon), but indexes of corruption and of ease of doing business tend to be highly correlated. A complementary index of governance, also prepared by the World Bank, places Myanmar’s governance in 2010 among the worst of any country in the world. (See http://info.worldbank.org/governance/wgi/sc_country.asp) Even if the ratings were doubled for 2012, the ratings would still be only similar to North Korea’s!

Table 1: Transparency International Corruption Perception Index

–  –  –

Doing something about excessive regulations and the discretionary implementation of those regulations is easier said than done, although Myanmar has apparently eased many restrictions on imports as its foreign exchange situation has strengthened. The members of our group that traveled to the Chinese border at Muse, for example, learned there that customs procedures had improved considerably in recent years, and one heard similar comments from factories in Yangon.

There is typically a rationale for each regulation that is, on the surface, plausible. More importantly, there are people in power that depend on the existence of those regulations to generate added income and even to justify the existence of their jobs. Trained economists will have no trouble understanding why one has to get rid of these regulations, but others will have to be convinced. Often the most effective way to convince high officials of the need for deregulation is to do a systematic cost-benefit analysis of each type of regulation. The typical justification for a regulation, notably the case with restrictions on trade, is that those restrictions create jobs. Advocates of protection to justify this approach point to factories that employ hundreds or even thousands of people whose jobs depend on such protection. In actual fact, however, the jobs in high cost protected enterprises often cost hundreds of thousands of dollars each; money that is paid ultimately by consumers and producers that purchase these high cost and high priced products. Removing these protective barriers can typically create far more jobs at a much lower cost. Cost benefit analysis can show concretely just what these alternative approaches cost per job created. If Myanmar is to begin a process of deregulation, no doubt either economists within the country will have to be trained in practical cost benefit methods or economists will have to be brought in from outside the country to do this analysis.

Long before that, however, there would have to be a willingness of senior political leaders to even consider deregulation. Businessmen might lobby the leaders they know, but that assumes that the businessmen with ties to the political leaders would have an interest in deregulation— too often the opposite is the case. Foreign investors or potential foreign investors are more apt to be a constituency for deregulation, but foreign direct investment is discussed at greater length below.

Industrial Policy Reform in Myanmar April 2012 Page 10 of 20 _____________________________



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