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FDI and Burma’s future development

What impact will rising levels of foreign direct investment (FDI) have on Burma?

Two decades ago the response would have drawn on what has been called the Washington Consensus, and the answer would have been enthusiastic “foreign direct investment is good, and the more FDI the better!”

Today, the more sophisticated contemporary perspective is that FDI can generate favorable or harmful outcomes for the host economy, society, and political system, depending upon the framework within which foreign direct investment takes place.  Nowhere is this truer than with regard to FDI in the extractive sector, and FDI in manufacturing and assembly.

Starting with FDI in the extractive sector (oil, gas, copper, coal, precious stones), older text books on development always considered a rich natural resource base to be a valuable asset; today, modern text books on development are likely to begin with a discussion of the “resource curse”, along with evidence that countries that have abundant natural resources are likely to grow more slowly and have more social and political dysfunction than those that have less.

Today we know that whether FDI in natural resources contributes to broad economic and social development (as in Chile, Botswana, and Malaysia) or to economic distortion, corruption, and political suppression (as in Equatorial Guinea and Angola) depends upon the degree of transparency and accountability in taxes and payments made by investors.

In this context, the declaration of Burma’s intention to take part in the Extractive Industry Transparency Initiative (EITI) is much to be welcomed. The EITI is a voluntary group of governments, companies, civil society groups, and international organizations that promote publication and monitoring of natural resource payments.

Even with the best of intentions, the creation of public and private institutions that can provide effective transparency and accountability requires arduous effort drawing on EITI and moving in parallel directions across many fronts. Government ministries must reinforce their auditing and financial skills; so too must parliamentarians and their staffs; so too must Burmese civil society and the NGO community.  Current programmatic dialogue between Burma and the World Bank will want to include capacity-building for auditing resource payments, plus access to the World Bank’s special multi-donor Trust Fund for revenue transparency.  International NGO’s like Revenue Watch and the Publish What You Pay coalition can also be sources of support and training.

Alongside transparency and accountability in taxes and other payments made by investors are environmental and labor regulations-and-enforcement.  Once again standards set by the World Bank – in particular, the International Finance Corporation – offer models that can be applied to investors in Burma.

Finally, policies to allocate natural resource revenues between national government programs and local communities where the investment projects are located are always controversial.  Sometimes national-level expenditures provide best results (development of Antofagasta in Chile); sometimes regional ear-marking of revenues provide superior outcomes (medical and social programs in Ancash in Peru).  Both approaches might offer lessons for Burma.

Turning to foreign direct investment in manufacturing and assembly, the most significant benefits for a host country like Burma derive from job creation, exports, and (over time) local supplier development, not tax revenues as in the case of extractive FDI.  Once again, however, it is important to recognise that FDI can have negative as well as positive impacts.  The positive benefit from FDI in manufacturing and assembly comes from positioning the host economy along the cutting edge of new industries, enabling the country to occupy a growing place in world markets.  The negative damage from FDI in manufacturing and assembly would come if FDI locks the host economy into a non-competitive production structure that cannot survive in the face of international economic pressures – via using FDI for import substitution, for example.

The most obvious source of damage would derive from protective measures aimed at excluding foreign investors from particular sectors, so as to shelter local companies from international competition.  Less obvious but no less harmful are requirements that foreign investors operate only as minority shareholders in joint ventures with locals.  Mandatory requirements to operate via joint ventures – in particular as minority partners – induce foreign investors to withhold their most advanced technology.  Comparative evidence from Malaysia, Thailand, and even China show that foreign manufacturers who are required to have a local partner incorporate older and less sophisticated technology in their operations, out of fear that the local partner will appropriate such expertise for its own use.

It may seem counterintuitive but foreign investors transfer more advanced technology into the domestic economy when they are not “required” to do so than when technology sharing mandates are imposed upon them. So the most promising path to incorporate cutting-edge technology into manufacturing and assembly plants in Burma is to allow foreign multinationals to design their own production processes without restrictions and requirements built into the FDI law.   The same holds true for FDI in agribusiness, fishing, and services.

Pull Quote: [pullquote]“For now, it is most important that the FDI law and approval process be rapid and transparent”[/pullquote]

A source of much debate among developing countries is whether to offer subsidies and tax breaks to attract FDI in manufacturing.  In fact, subsidies and incentives are NOT the most important ingredients to attract FDI.  The most important factor in attracting FDI is steady improvement in doing-business indicators, such as enforcement of contracts, lack of red tape, low incidence of corruption.  Alongside progress in strengthening the local business environment, other powerful magnets to attract FDI are reliable infrastructure and access to well-trained workers and middle-level managers and engineers.

Many successful hosts have focused on building special economic zones and industrial parks, like those to be associated with Myanmar Port Authority at Rangoon and the Dawei deep sea port, backed by public-private partnerships to ensure vocational training nearby. At the end of the day, Burma may have to match the incentives that neighboring countries offer, including tax breaks.  But the focus of Burma’s policy attention to attract FDI should be on bolstering the doing-business climate, improving infrastructure, and providing access to well-trained workers, managers, and engineers.

Looking to the future, Burma will want to have an efficient one-stop-shop Investment Promotion Agency that facilitates foreign investment in the domestic economy.  For now, it is most important that the FDI law and approval process be rapid and transparent.

Over time one of the greatest benefits from FDI in manufacturing and assembly derives from the growth of backward linkages and local supplier networks as Malaysia and Thailand have managed to accomplish.  The most important ingredient here is to offer indigenous firms the same favorable business conditions, reliable infrastructure, and access to trained labor as is available to foreign firms.  Within this setting, then, Burma can experiment with talent-scout programs and vendor-development initiatives – including but not limited to support for small enterprises – that draw directly upon the experiences of Malaysia and Thailand.

Foreign direct investment is not a panacea for development.  But FDI in the extractive sector can provide large revenue streams to be used for broad economic and social welfare in Burma. Foreign manufacturing investors can help upgrade and diversity the country’s production base, providing above-average jobs and growing penetration of international markets.

-Theodore H. Moran is a Senior Fellow at the Peterson Institute for International Economics

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