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Navigating the Tidal Shifts in Myanmar

Economics / Asian Economies Nov 24, 2013 - 03:25 PM GMT

By: Submissions

Economics

Keith Hilden, Georgi Ivanov, and Dylan Waller write: Developments of tidal proportions have occurred in Myanmar in recent years, as the country adopted a pivot in its domestic and foreign policy to re-engage with the world. This polar shift occurred after 50 years of isolation under the rule of a military junta that seized power in 1962. Navigating in Myanmar's quickly evolving position is a challenge, because of the dynamically developing environment in which the country finds itself. Myanmar is emerging from a situation similar to the newly independent post-colonial states in the mid-1900s, as well as the flux in which the post-Soviet space found itself after the collapse of the socialist bloc system and the USSR in 1989-91. Myanmar is developing while straddling two parallel realities.


Myanmar is also between two superpowers, as it borders both China and India. Myanmar thus is in a situation with access to both trade routes and incoming capital from both countries, as China and India no doubt will compete for access to Myanmar’s undeveloped markets.

Myanmar’s political and socio-economic reality is a combination of a post-colonial and post-communist model. It was annexed in 1886 by the British Empire, but regained independence in 1948 to become a democratically-governed state, but a coup d’etat in 1962 introduced the military government, which rules to this day. Yet at the same time, its level of development is not at the point it was for the Soviet ally system at the apogee of the socialist model in terms of socio-economic development, as it has become one of the region’s most impoverished countries over the last 50 years.

We can assume the parallel with post-communist states in the 1990s as Myanmar’s starting point, up to a certain level: low levels of institutionalization and political literacy of the population; low-intensity and inefficient/uncompetitive economy; the cartelization of strategic economic sectors by selected oligarchic elites; and finally, low administrative capacity, which allows for a great latitude of unregulated business activities, including corruption and lobbying for certain interests in a poorly paid, organized and supported state administration.

Leapfrogging the Technological and Structural Gap

One of the most pressing challenges to Myanmar is technological, as its communications industry is entirely nascent and far from the levels of digital penetration that we see in more developed societies. Economically, an integrated digital infrastructure lowers the cost of transfers, which is a critical component of the competitive position for an emerging economy.

Structural investments in communications and other sectors through FDI for large business enterprises, and nurturing the SMEs (small and medium enterprises) through microfinance and other investment and development programs are key for jumpstarting the potential of Myanmar.

The economy of Myanmar is strongly driven by small and medium enterprises, which account for 90% of private enterprises in the country. Foreign direct investment in Myanmar has mainly existed in the form of extremely large investments, as the minimum investment for a joint venture startup company in Myanmar was initially $5 million until September of 2012, when Burmese parliament approved a new FDI law that lowered this requirement. This new amendment to the law combined with legal restrictions being lifted has resulted in a larger inflow of investments that can be now successfully diversified across much wider business portfolios. Based on the new changes to the legal environment as well as the obvious strong presence of SME’s in Myanmar, investors’ perception of the potential for development in Myanmar, catalyzed by small businesses, should not be overlooked.

Understanding Regulations. Understanding Culture.

When considering investing into Myanmar, not just understanding the regulations is enough.  Understanding the culture is very important to grasp, and the shift to corporate social responsibility in Myanmar is one factor that needs to be strongly considered. Consideration should be given not only to the legal restrictions of Myanmar, but also to the cultural perception of development and exploitation of the country’s resources. Throughout Myanmar, locals and political activists have protested the presence of foreign companies exploiting natural resource assets, in terms of profiting at the expense of re-investing revenues towards the sustainable development of the areas in which they operate. A noteworthy project that is being protested by the community of Myanmar is the SWE Gas project implemented by China, which transports crude oil and natural gas from the Arakan state of Myanmar to Southwest China. This project’s construction resulted in a large village protest and the jailing of ten activists, which resulted in criticism from regional and international human rights groups. In addition to this, businesses established in Myanmar that initially received the government’s approval have been forced to shut down due to practices that are not socially responsible. Myanmar's desire for investment that is social responsibility and benefits the country is also reflected in a speech of democratic leader Aung San Suu Kyi who described who investment in Myanmar should be innovative, ethical, and should be a force for good in Myanmar. Based on the attitudes of local human rights groups, democratic leaders, and other citizens of Myanmar, it is very apparent that companies investing into Myanmar must have social responsibility in mind not just for the sake of ethics and reputation, but to sustainably establish themselves in Myanmar.

The importance of corporate social responsibility has emerged as a significant issue for businesses to consider, and at times becomes a necessity for businesses that wish to sustainably operate.  Myanmar has clearly displayed its desire for FDI to be socially responsible and to benefit the country, thus making the implementation of socially responsible practices necessary for investment into Myanmar, and  businesses moving into Myanmar should factor this into their market entry strategies.  In addition to corporate social responsibility, SMEs are another significant component that should not be overlooked by companies considering investing into Myanmar.  The changes in the legal system in Myanmar in 2012 have allowed for FDI to flow into smaller companies in the country, which constitute a large percentage of Myanmar’s economy and are a major opportunity for businesses wishing to invest in Myanmar.  Although SMEs are already a major component of the country’s economy, their numbers can continue to expand through FDI in the microfinance industry of Myanmar.  Investment into the microfinance industry would provide the economically active poor with the necessary capital to increase their standard of living, thus increasing the emergence of SMEs and providing substantial economic growth to Myanmar.  When considering investment into Myanmar, small businesses should not be overlooked and seen as viable opportunities for investment.

Looking at a map of Myanmar, it becomes visible that strategic infrastructure is one of the areas that the country needs to invest in, in order to make use of its entire economic potential; this includes roads, rail, communications, pipelines, power plants, the development of resources, and very potentially, tourism. However, such development must be accompanied with the appropriate regulatory capacities, as well as an understanding of the local culture by investors, in order to create successful enterprises. A major risk here is that the speed of development almost certainly will outpace the ability of governments, central and local, to follow-up and enforce environmental standards, labour codes, measures against corruption and even the implementation of innovations in government. Education is the other most important challenge for Myanmar, because the introduction of new technologies and methods requires the qualification and re-qualification of large swathes of economically active people, and this reality can affect both the levels of employment, wages and potentially, social stability in the most isolated regions of the country. As a result, the economic challenges facing Myanmar are developing in a two-fold framework of a large influx of capital, for one, and two, the ability to govern that capital within a sustainable development framework – capital investments, environment and human capital – to ensure that Myanmar assures its interests as it becomes a part of the global economy.

To conclude, Myanmar remains a dynamically developing state. It combines inadequate institutions, a population with low levels of political culture from 50 years of military authoritarianism, with a rapidly modernizing society and economy. The evolution of its political and social development will take decades and be in the heels of the dizzying technological changes happening, but it must be handled carefully. In the context of religious and ethnic violence, reforms must go towards removing corruption and building up state capacity – refrains not unfamiliar from Eastern Europe to this day – but that are, nonetheless, even more critical for Myanmar.  Then, we can say that the country will be on a path of sustained, integrated, development.

By Keith Hilden, Georgi Ivanov, and Dylan Waller

Keith Hilden and Georgi Ivanov are Researchers at the geopolitical consulting firm Wikistrat.

Dylan Waller has on-the-ground experience in India and Myanmar, and has worked with NGO’s and other institutions in microfinance.

Squawkonomics is a frontier market research firm that sets out to understand these elusive markets like never before. Squawkonomics tracks regulatory changes in Myanmar and other frontier markets, and offers due diligence research, market entry, and sustainment strategies. Contact us.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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