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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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important ways this is a legacy of the era of British colonialism, in which much of the economy fell into the hands of Indian immigrants; a major step of the Ne Win government was to expel these Indians. At present there are few Indian-run businesses, but much of the business in the country is run by Chinese, both local Chinese who are citizens of Myanmar and Chinese from China. Those from China include many that are in the country on private business, but they also include large Chinese state-owned firms such as the China National Offshore Oil Company (CNOOC). Chinese firms are also building a large number of dams on rivers in the north of the country, and most of the power from these dams will be shipped to China. The suspension of work on the Myitsone Dam gives some indication of the sensitivity of many of these efforts, and some believe that Myanmar’s recent interest in attracting more investment from ASEAN, the West and Japan is partly due to the worry in the government as well as among many Myanmar people about excessive Chinese domination of businesses in the country.

Given the lack of Myanmar experience with the efficient running of industrial and many other kinds of enterprises, any industrialization drive would need to rely more heavily on foreign investors to provide the necessary management and technical skills at least for the next two or three decades. Many countries, notably China but also Singapore and others, have discovered that having foreign ownership of local enterprises does not need to mean loss of control to foreigners over industrialization and development more generally. It is not clear that the Myanmar government currently has the confidence to believe that it can make sure that foreign involvement serves Myanmar’s interest.

Given the limited experience with modern enterprise development and the enormous size, wealth, and power of its northern neighbor, that is an understandable concern. If the recent decision to postpone the Myanmar Industrial Development Ministry (MIDM) project is sustained, however, that is one indication that the country is capable of controlling foreign investment that is not directed to the real needs of the Myanmar economy. The MIDM project was financed by a $4 billion loan from China and was designed to produce heavy machinery that was well beyond Myanmar’s current capacity, not unlike Indonesia’s very wasteful and ultimately unsuccessful attempt to develop commercial aircraft. The issue of loss of control, however, is not just a problem with Chinese investments since large investments from ASEAN neighbors are also in prospect, although these neighbors do not have the global clout of China10.

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Myanmar Cannot Imitate South Korea Given the situation described above, if Myanmar wants to increase its overall economic growth rate through industrialization, there are not many options open to the country. Basically the country must move to create a functioning market system to govern the development of industry (and modern services such as tourism). Government regulatory oversight over those activities should be minimal. An activist state-led industrial policy on, say, the model of South Korea or China today is completely unrealistic. The ministries responsible for the economy (and most other ministries appear to have their hand in the economy in one way or another) simply lack the capacity to efficiently manage that approach to development. The only real choices are outright divestiture of almost all state- and military-run enterprises to private owners who will try to reorganize them and run them at a profit. Alternatively, some state and military industries could remain under government ownership but mainly in fields where the private sector is not likely to enter in the short run. Examples of such manufacturing and service industries could include those producing weapons and ammunition or service firms set up to directly support military operations. Even truck assembly plants might remain for a time under military control if the military was itself the main user of the output. It will be some time before Myanmar is able to be internationally competitive in the manufacture of trucks and the military may have security reasons for maintaining an in country capacity in this area. The private sector should meet most of its trucking requirements through imports.

Large parts of the economy would therefore have to be reserved for the private sector—that is industries attached to the military or other government ministries would be excluded since they could not be counted on to operate on a level playing field with the private sector. This would include all labor-intensive consumer goods (textiles, shoes, toys, electronic assembly, etc.). It would also increasingly include many producer-goods industries such as cement, steel, etc. Loss-making state enterprises that cannot be reformed and made profitable using conventional accounting practices should be closed.

For some of these issues involving divestiture of ownership by the military and the government, there will no doubt need to be a well thought out transition process. Studies will have to be done to determine which enterprises should be closed outright and which may need

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restructuring before being put on the market. For those that are designated for privatization, there is the question of privatization to whom and on what terms. Are foreign companies allowed to bid, will credit be made available to domestic groups that may want to bid, etc.?

Before government and military divestiture of some or all of the enterprises under their jurisdiction, the new rules governing the divested enterprises will have to be decided and written and, where necessary, independent regulatory agencies or offices of government set up and personnel trained to enforce those new rules. For enterprises that remain under government control, what (transparent) rules should govern their behavior? This process will not be completed in a few months or even a year given the complexities of these problems and of the many stakeholder interests involved in Myanmar. Dragging out this process over many years, however, is a formula for limited reform and slow growth.

Immediate and Longer Run Steps While there is thus a need for a transition that could take several years even if there were a clear political consensus to act, there are steps Myanmar can and needs to take immediately to

generate rapid industrial development, and they are as follows:

1. The currency must be devalued by at least 20-30 percent from the current 800 kyat range to a range closer to 1,000. Myanmar has taken the first important steps by having the exchange rate float and move with market forces and by eliminating the old “official” Kyat 6.4: US$ 1.00 exchange rate, but market forces need to be modified by government steps to make sure that the exchange rate returns to levels at which industry can compete internationally and farmers do not face severely depressed prices for their crops.

2. Most state and military industries that are making losses and cannot be made profitable easily should be closed. The remainder should be turned over to professional managers and be made to face competition on a level playing field. Many of these will be easy to identify. Other more complicated cases will take longer.

3. A process of removing unnecessary regulations that inhibit the start-up and operation of businesses should begin immediately, and the regulations that are needed should be transparent and fairly and efficiently administered.

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5. Laws needed to attract foreign direct investment in industry need to be written and published (this process has already begun) and a one-stop shop should be set up to handle all procedures connected with the registration of new foreign enterprises. A similar institution or institutions should be set up to enforce the regulations that are written.

6. Investment to ensure a reliable source of electric power first in Yangon and then in as much of the rest of the country as feasible should begin immediately, using either public or private sources. Prices for electricity should cover the full costs of efficient generation and delivery.

7. Road check-points and other similar barriers should be removed except where there is a compelling security need. Major road improvements need to be made so that the costs of transport can be reduced, without overloading trucks in a way that destroys the roads. (Enforcing weight limits does raise trucking charges, but saves more in road repairs.)

Over the longer run, the government and private sources need to take steps to:

1. Radically improve the quality of education at all levels by ensuring that all children finish primary school, that a large and rising share go on to secondary school. Secondary education must be geared to the needs of the economy, and high-quality universities free from political interference must be rebuilt.

2. Facilitate the return of Myanmar people resident abroad, particularly those with needed skills—recognizing that the most important step will be to accelerate GDP and industrial growth and thus provide jobs to the skilled returnees. South Korea provides a good example of other measures that can facilitate the return process. In the 1960s and 1970s the Korean government created major research institutions such as the Korean Institute of Science and Technology (KIST) and the Korea Development Institute (KDI).

These institutes paid high salaries by the Korean standards of that time and were explicitly designed to attract back to Korea scientists, engineers, and economists who were living abroad in the United States and Germany.

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Final Thoughts on Industry, Agriculture and the States and Divisions This discussion of industrial policy is primarily oriented toward steps to accelerate Myanmar’s rate of growth of GDP. A high growth rate of GDP based on the rapid development of industry over the long run is also the most effective way to deal with poverty. Over the short and intermediate run, however, industrialization will have a limited impact on poverty in Myanmar.

The reason is that the first stages of an industrialization drive are likely to be concentrated around Yangon and most of those who get the better paying skilled jobs will be residents of Yangon or returnees from Thailand, Singapore and beyond. Unskilled jobs will go to rural migrants, but many of them initially are likely to come from nearby rural areas that are not as poor as the areas of the country far from Yangon and populated by the country’s large minority populations.

Thus on humanitarian grounds and because of the need to demonstrate positive changes in the minority areas in order to maintain peace, there needs to be a major effort to show economic progress in the poor rural areas in general and in the minority areas in particular. Industrial parks and industrialization in these areas more generally are not likely to be an effective answer to this challenge, at least not any time soon. What is needed are steps that will increase agricultural productivity and related services. Devaluation of the Kyat is the least expensive and quickest way to help these areas in the short run. Eliminating the various tolls and security checks along the roads would also lower transport costs and make it easier to produce highervalue agricultural products for urban and foreign markets (rubber, coffee, etc.). Investing in major road improvements would be even more important, and rural electrification would also make a substantial difference. Industrial parks, as suggested above, will have only a limited impact even in the longer run. Industry does not generally locate in remote areas even in countries such as China that have had a very successful experience with rural small- and medium-scale industries. Those rural industries in China tend to cluster near the many large cities and not in remote or mountainous areas.

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