«Industrial Policy Reform in Myanmar Prepared for Proximity Designs | Myanmar April 2012 This research paper was written by Dwight H. Perkins ...»
Finally, the problem is not just one of deregulation. Military and “crony” companies apparently are involved in practices to stifle competition and gain control of particular markets that would be illegal in most countries. There thus need to be rules that prohibit such practices, and these rules need to be enforced. Without a switch to more competitive firms, growth will be narrow and slow and FDI will be limited5.
3. Infrastructure costs and quality are among the worst in ASEAN
Good infrastructure is critical to a successful industrialization drive. The key infrastructure items are reliable and reasonably priced electric power and good transport facilities. What this means in practice is that most of Myanmar’s industry, particularly that involved in the export of manufactures, is for the foreseeable future likely to be located in or around Yangon. Items produced for the domestic market such as furniture may locate in places like Mandalay, where they are closer to their raw material (tropical hard wood) and to some of their customers.
Internal transport over any distance, however, is very expensive. Our group learned, for example, that it cost $2000 to ship a container from the Thai border to Yangon but only $500 to ship the same container the longer distance to Bangkok. Even for Yangon, however, current infrastructure is not adequate. There are serious electric power shortages in Yangon, and the port currently handling most shipments is clearly inadequate. For Yangon, however, as contrasted to the rest of the country, these infrastructure problems can be readily solved. New thermal power plants can be built quickly and the capacity of existing ones brought up to full capacity, provided that some of Myanmar’s rich gas resources are allocated to supplying these plants6. There is also a modern port already built near the city, but it is currently underutilized.
The potential large investments in a new port far south of the city are not necessary or desirable since the cost would be large and the location is so far from Yangon that substantial costs would be involved transporting the goods between the port and the city.
4. The Myanmar market for manufactures is small
Furthermore, Myanmar’s domestic market for most consumer items is quite small. If Myanmar’s exchange-rate calculated GDP is around US$25 billion (PPP GDP is not appropriate for estimating the size of the market), and if food makes up 60% of average household expenditure, then the market for consumer manufactures of all kinds is likely to be only about
$5 billion.7 Expenditure on manufactures used for investment projects (cement, steel, machinery, etc.) would amount to perhaps another $5 billion, excluding oil and gas exploration projects. What this means in practice is that any industry that is subject to increasing returns to scale either would have to develop early on a capacity to export a substantial part of its production or would have to operate at an inefficient scale and with high costs behind protective barriers. In South Korea, for example, the Pohang Iron and Steel Mill (POSCO) was designed from the outset in the early 1970s to produce more steel than the domestic market could absorb at the time thus making it necessary for it to export steel early on or operate at a smaller scale with much higher costs. At the time starting with a smaller scale steel plant would also have meant lower efficiency and thus high steel costs for all domestic users. Given the high cost of internal transport in Myanmar, most of these exporting industries would have to be located near Yangon’s port.
Not all consumer manufactures, however, have large economies of scale, and many of these could no doubt be produced in Myanmar (various plastic goods, for example). But then the question becomes whether firms producing such goods could compete with cheap but reasonably good quality (for the price) imports from China. China exports these products at competitive prices all over the world including Myanmar, and the northern half of Myanmar is closer to Yunnan, China, (physically and in transport-cost terms) than it is to Yangon. Mandalay does produce a few items that are special to the area, such as cut gems and various local handicrafts, but it is mostly a commercial (and tourist) center through which trade from China passes. One industry that could be and sometimes is located outside of the Yangon area is cement, since cost of transport is a major part of the cost of getting cement to where it is being used. Certain food processing industries (rice milling for example) also require locations near to the sources of their raw material.
5. The role for industrial zones is limited
Myanmar to match). Food processing is also something that has been done locally for centuries, but much of that can hardly be classified as industry. An industrial zone on the Thai border might also attract a few firms that want to use cheap Myanmar labor to export into Thailand. Myanmar’s inadequate infrastructure means that there would appear to be no prospect at all of locating industries in industrial zones in more remote regions to produce consumer or producer goods for the national market, let alone for export.
Creating industrial zones may be worthwhile in some of the 18 areas and could be worthwhile in all 18 if the costs of the related infrastructure were kept to a minimum. There may well be some symbolic or political value to building remote industrial zones, but what is really needed is more comprehensive investments in roads and power throughout the states and divisions.
Major investments in these industrial zones, however, are not likely to be a major vehicle for bringing substantial industrial development to remote regions anytime during the next decade and thus should be avoided. Small initial investments could be expanded if some of the zones proved successful in attracting significant interest.
Much of this infrastructure investment, whether for industrial zones or for improved transport and electricity will no doubt be undertaken by government agencies. This is one of many reasons why the government budget needs to be unified with all government expenditures in the budget, and that the resulting budget needs to be transparent. In the absence of a unified and transparent budget, it will be impossible to ensure that infrastructure projects will be carried out efficiently.8
6. Improved education will be critical
they do employ a great many people. China was and to a degree still is where many of these kinds of products are made, but labor costs in China are rising and companies that export these kinds of products have gone to countries such as Vietnam and Bangladesh. There is no reason why companies would not be willing to move to Myanmar. For products for the North American and European Union markets sanctions would have to be lifted, and that is likely to happen.
Once a country begins to move up the industrial ladder, however, there needs to be a steady improvement in the skills of the labor force and increasing numbers of managers, engineers, and marketers. In the 1950s through the 1970s and perhaps the 1980s Myanmar was arguably well positioned to supply these higher-skilled personnel. Since then, however, the education system at all levels has deteriorated. At the lowest level of skills there is now a minimal level of functional literacy in the country, and there are limits on the degree to which industries can use illiterate workers. Half of those who enter primary school do not stay through the full five years, and then only about 60% of those who do stay go on to complete middle school. Those that do make it to the university have often found the universities closed and the quality of the teaching to be generally quite poor. The military has its own education system for itself and its families, but the quality of this system is unknown to this analyst.
Many Myanmar people go abroad, but it is not known how many of those receive educations abroad or how many are likely to return home at some point in the future. Right now there are simply too few jobs in Myanmar for most of the skilled people abroad, and many Myanmar people—particularly in the 25- to 60-year-old group—have family situations that make return difficult. However, there is a belief that most Myanmar people would prefer to return if they could find meaningful employment and their family situations (children well along in school, etc.) did not make return too difficult. Included among Myanmar residents abroad are large numbers with engineering and other technical skills.
Even if many of those with technical skills return, however, there is no substitute for a major upgrading of the country’s education system at all levels and particularly at the tertiary level.
There are groups trying to do this, but there is a long way to go.
7. Improved banking and financial intermediation is needed
bank, such as observed by our group on the road from Mandalay to Muse, the main purpose of that bank is apparently to handle remittances. Much of what the banks do is to finance the government by buying government bonds in amounts far greater than their credit to private business. This practice needs to stop. Total domestic bank credit in 2010 was only about a quarter of GDP, but most of it went to the government.
The above are problems that are common to many countries, and the solutions are relatively straightforward. To be sure, some of the solutions (deregulation) are difficult to implement, others require substantial funding (infrastructure), and still others take time (improving and expanding education). Finding the right sequencing, priority, and feasibility of these reforms will in itself be very challenging.
Special Issues Applying to Myanmar There are also issues that, while not unique to Myanmar, are less common among developing economies. These issues complicate some of the standard solutions that might be proposed to get industrialization--and rapid development more generally--started.
(a) One such problem is that the military itself runs huge industrial conglomerates (notably the Myanmar Economic Holdings Corporation and the Myanmar Economic Corporation) employing hundreds of thousands of workers. In addition, most of the other industrial enterprises of any size are state-owned. In 2008 there were 794 such enterprises, up from 624 such enterprises in 1988.9 The only exceptions to this pattern of state ownership are rice milling, and there is some indication that sugar mills will be privatized. The government’s monthly economic indicators publication lists only the output of state enterprises. For the rest, there is scattered private ownership, but most industrial sectors are completely dominated by one form or another of state ownership.
be an extreme example, the factories themselves have been closed down, and the enterprises in question are simply used as a vehicle to import the product, e.g. steel.
Prior to the unification of the exchange rate at the market price, imported steel purchased by one former state steel mill was paid for in Kyat at the extraordinary exchange rate of 6.4 Kyat to the USA dollar, while the market rate was 100 to 200 times as high! Where the money from these transactions goes – whether to individuals or to fund the military – is unknown to this analyst.
(b) In a sense this situation is not unlike that of Vietnam, where heavy industry is stateowned and the state is run by the Communist Party, although the situation in Myanmar is far worse than in Vietnam. The result in Vietnam is a heavy industry sector that is very inefficient and a drag on the rest of the economy. That, however, does not have to be the case. China was in a similar situation in the early to mid-1990s, but Premier Zhu Rongji used his country’s ambition to join the World Trade Organization as a vehicle for forcing China’s state enterprises to become internationally competitive. Even before China joined the WTO, its Premier used the prospect of joining to force state-owned enterprise to shed some 30 million surplus workers, but in reality the situation in Myanmar is much worse than China’s was. In Vietnam and China state control of various industries does not preclude coordination among different industries and their investment programs either by the Party or by the government offices that used to be called the state planning commissions. Myanmar has a planning ministry, but there is little evidence that it has any control over the various state and military owned firms other than those that might be directly under its authority.
As long as this situation prevails, there is virtually no prospect for a successful industrialization drive in Myanmar. Domestic private businesses certainly cannot compete with these state and military industries, given that the latter often have monopoly rights over their markets or benefit from other barriers to competition from the private sector. Foreign investors would certainly be unwilling to compete in this context, given that most such investors can go elsewhere. It is thus no accident that most foreign investors concentrate their energies on the natural resource sectors, mainly oil and gas. There is also much foreign investment, mainly from China, in the more remote northern regions, where investors can take advantage of the lack of rules or the lack of enforcement of rules over everything from land ownership to protection of the environment.