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As an unprecedented amount of investment is set to pour into Burma soon, DVB’s David Stout spoke with Jared Bissinger, a PhD candidate at Macquarie University who is studying Burma’s economy, about how new regulations and international loans are likely to affect the country.
In your research studying the investment climate in Burma during this reform period, what have been the most encouraging signs you’ve seen and also what’s worried you the most?
I think one of the things I’ve found most interesting and encouraging, throughout not just the top levels of the civil service but also throughout civil servants and government people I’ve met at lower levels, I’ve been really surprised by their commitment to reform and their openness to discussing things.
When I was doing my research, I didn’t know exactly what to expect, so possibly my expectations were off, but I have been really surprised to just the commitment and openness and the desire among people in government have to these reforms. That’s not to say that there aren’t issues with capacity but even then, the government is increasingly turning to others for advice and assistance. But I have been struck by the desire among people in government to really get things done and get them done right.
As far as challenges go, there’s plenty. I’m really concerned about the exchange rate. It’s really quite high if you compare prices in Myanmar to prices in other countries. It’s really difficult to export things from Myanmar. I think the reason it’s really concerning is because so many people who depend on agriculture a lot of them are dependent on exports. People who grow beans and pulses, they’re exporting to India and a few other places and I really think exports in that particular sector would’ve grown a lot more had it not been for the appreciation of the exchange rate. I think that has a big impact on rural incomes and that hurts Myanmar’s international competitiveness when foreign investors are looking at the country. I think that’s a big issue.
Obviously things like land rights and all the problems surrounding that, that’s another really key issue. And just general macroeconomic management is going to be really important. It seems like they’ve been really engaging with the IMF [International Monetary Fund] and some other organisations. They’re making progress there it seems.
From the conversations you’ve had with members of the business community in Rangoon and economists following the region, what do they think about the investment climate currently and what do they think about the laws and the behavior of the Myanmar Investment Commission (MIC)?
I can tell you more about the investment climate just simply because it’s a big part of my PhD research. I did a survey of about 150 businesses last year and a lot of it looked at the business climate. So one of the things I did in one section of the survey was to assess a bunch of different aspects of the business climate – everything from access to water and electricity and land to tax administration to skills of the work force and even things like corruption.
The thing that businesses said was the biggest obstacle to them was electricity. That’s not an uncommon response in a developing country and you know it’s pretty reasonable in Myanmar with the electricity problems that they have and especially considering that the survey was given in the middle of the hottest part of the year. You’ve got your other business environment problems that I guess you run into elsewhere. Corruption was one of the more commonly cited ones, skills of the workforce was commonly cited, access to finance was commonly cited, interestingly foreign sanctions was cited quite common as well, but that’s maybe not as applicable now as it was a year ago.
Outside of those specific obstacles in the business environment, it’s definitely improving especially on the governance side. Perceptions there are improving quite quickly, but with things like infrastructure, that’s something that just can’t change overnight. It’s going to take a long time for Myanmar to improve its infrastructure. Telecommunication may go quicker than say road and rail infrastructure, but certainly infrastructure problems are still there and it still takes time and effort to deal with the government bureaucracy. It’s definitely improving.
One other thing that stands out. Myanmar is not an inexpensive place to open and run a business. The costs of operating really are quite high. So while labour costs may be lower than in some other countries, you’ve got other costs such as shipping or having a phone and internet connection in your office, electricity and all of that might be actually more expensive than in some other countries. That’s going to be a big challenge for investors who are looking at Myanmar. It’s something the government I think recognises and they are addressing it, but it’s not something you can solve overnight.
What about the extractive industries? What challenges come with the country being so resource-rich?
It’s not that the resource industries and the extractive industries are in and of themselves bad. It’s just that they require good governance and that’s the missing link. While it’s improving in Myanmar, it’s not happening overnight. It’s going to take a while for the government to really learn how to regulate and manage these resource projects better and also for them learn how to take the revenue that’s generated from these projects and use it for development.
There are a lot of good examples worldwide with countries that have been really resource-rich and that’s just inspired a lot of corruption. It’s a really great risk. The other thing I think is concerning there, is if you have a lot of foreign investors coming into the resource sector that goes back to the exchange rate. Not just the foreign investment itself will affect the exchange rate, but also the revenues generated by those projects will have an affect on the exchange rate as well. That could have a negative impact on labour-intensive sectors like manufacturing or agriculture. I really think with the new foreign investment law, a lot of people in government are hoping that this will create jobs. I think it will, but its important for them to realise that investments in one sector, if they happen in great enough numbers, can have impacts across the economy. It’s not easy by any stretch of the imagination.
From what you’ve seen in the foreign investment law that was passed, what blind spots still remain? What areas need further clarification?
There were definitely areas in the foreign investment law that I thought were big question marks. There was this big list of restricted sectors, but it wasn’t really well codified what the restrictions are, whether foreign investors could invest or they couldn’t, how much ownership they could have if they did invest. That’s something that has been addressed. There were also things like tax incentives where the law gave foreign investors coming in a range of different incentives for investment.
The thing was the law had a short provision that said the MIC could decide when those didn’t apply. The same thing actually happened with the labour provision, which mandates hiring Myanmar national skilled labour – 25 percent after two years, 50 percent after four, 75 percent after six. I don’t know if those have been clarified at all yet. But certainly the restrictions certainly have and the ownership stuff has and those were two of the biggest question marks.
With respect to the proposed bylaws that were introduced this month, in what ways are they addressing potential blind spots or areas that were not defined in the foreign investment law?
What they’ve done with the bylaws is added a lot more detail about areas of the law that were questionable. There were lots of uncertainty about things like ownership requirements, whether someone would have to have a joint venture partner in particular sectors, whether certain activities were going to be just completely restricted – things like that.
What they’ve done is gone through and provided a lot more detail about exactly what investors can do in different areas. They’ve given a list of which activities are not permitted, which are permitted only with a local joint venture partner and which are permitted only under certain conditions. It definitely gives a lot more direction. From what I’ve seen it doesn’t answer every question, but it certainly does provide a lot more guidance than just the investment law itself.
With the recent settling of certain debt in Burma and engagement with the World Bank and International Monetary Fund and new loans coming in, what advantages does Burma seek to gain from these new relationships and new influxes of capital and what do they stand to lose as well if it’s not managed properly?
I think one of the biggest gains for them will be just building relationships and interacting with international financial institutions and getting their technical assistance and advice on a whole range of issues – everything from continuing with financial sector reforms to trade policy. There are all sorts of benefits that just come with those relationships and the technical assistance and resources from the human resources that those organisations can provide.
The loans themselves, I think was about USD$ 900 million. I’m not sure what those are going to go to yet. It’s a little tough to make an assessment about what their effectiveness will be. I wouldn’t be surprised if a decent portion of it especially from the ADB [Asian Development Bank] goes to infrastructure and human capital as well. I’m not exactly sure where they’re going to be focusing those funds.
I guess the biggest drawback is like with any loan, if you take out a loan you generally need to invest it in something that you’re going to get a return on so that you can pay the loan back. That’s going to be important for the government. They need to take the money and use it wisely and hopefully they will. They need to invest it in things that provide a return, which could be something like improving human capital through better health and education, or improving infrastructure, which reduces the costs of doing business. But that’s the key.
What type of oversight do these financial institutions have over where this money goes? For example with this influx of capital that’s being invested in infrastructure, certainly there are areas in the country particularly conflict zones where that money – if it’s not correctly spent or proper negotiations aren’t had – could potentially be inflammatory to these peace talks in the country.
There’s plenty of oversight. That’s not to say that things can’t go wrong. But certainly these guys, they’re in country, they work closely with the government about what will happen with the money and they monitor how it’s implemented. It’s definitely not perfect. But if you look at all the capital that comes into Myanmar right now, you’ve got these World Bank and ADB loans and that’s initially 900 million, then you get a lot of foreign direct investment and you get a lot of resource money. Those are some of the biggest sources of cash coming into the country right now. Realistically the World Bank and the IFI [International Financial Institutions] loans are probably going to be the most closely watched. I would be a bit surprised if they did anything in conflict zones right now, but that’s not to say they won’t. In fact the ADB is interested in supporting projects like the development of the Myawaddy-Mae Sot trade corridor. But I would be a bit surprised if they did something in these areas without seriously considering the implications for the ceasefires, as they should be well aware of the sensitivities there.