Tuesday, 27 December 2011 12:26 Stuart Larkin
(Commentary) – The following is a study titled “Myanmar at the Crossroads: Rapid Industrial Development or De-Industrialization,” which looks at Burma’s historical background to provide context for where the country is now and where it might be headed.
Burmese President Thein Sein, shown here addressing Parliament in traditional dress, is leading the government effort to push forward democratic reforms and achieve national reconciliation. Photo: MRTV
Burmese President Thein Sein, shown here addressing Parliament in traditional dress, is leading the government effort to push forward democratic reforms and achieve national reconciliation. Photo: MRTV
The purpose of this study is to identify potential agents of change in Burmese society that can facilitate rapid industrialization and recommend ways the international community can support private sector development by aiding such groups.
Burma’s lack of success in industrialization is largely due to an inward looking political elite with a predisposition towards State-led development rooted in nationalism stemming from the colonial period. The introduction of laissez-faire economic principles during the British Colonial Era 1885-1942 exposed Burma’s self-sufficient economy to the full force of global market forces and the power of capital. Soon most of the trading and industrial businesses were owned and managed by foreigners – British, Indian and Chinese – and the indigenous inhabitants were usually employed as laborers. Rice exports soared but the problems of landlessness and absentee landlordism increased. Economically marginalized and subject to the humiliation of occupation by an alien power, a strong Myanmar nationalist movement emerged which rejected the “laissez-faire” economic philosophy of the foreign imperialists and was drawn to the teachings of Karl Marx and the idea of socialism and State-led industrial development.
In the Early Independence Period 1948-62, government economic policies were quite successful and a diversified mixed economy with much higher indigenous ownership was established. Even as State-owned industries were set up, the private sector, including foreign investors, was permitted to play an active role. If the independence government had been about mild socialism and nationalism then General Ne Win’s solution after the military coup in 1962 was to massively increase the doses of each. New State-owned factories were set up under import substitution industry (ISI) but production soon became constrained by shortages of raw materials and spare parts which could not be imported because of shortages of foreign exchange. Another serious setback was the wholesale nationalization of private industries. As no new resources, raw materials or capital were injected, many of these factories went bankrupt and the surviving ones were amalgamated as nationalized industries. The high degree of isolation of the country from the rest of the world that resulted from implementation of policies for autarkic development severely restricted the extent of the market, and domestic industries were denied the economies of large-scale production and qualitative improvement through competition.
The deteriorating economic conditions in the country, and in particular acute shortages of foreign exchange, came to a head in the mid-1970s (to be saved by ODA), and again in the late 1980s when the political elite had to abandon their mentor Ne Win and take steps to allow a greater role for the private sector in the economy. SLORC introduced a number of economic reforms 1988-92 such as permitting retention of foreign exchange earnings by exporters; promoting FDI under the Foreign Investment Law (1988); liberalization of agriculture, timber extraction and fisheries; and issuing licenses for private sector domestic banks under the Financial Institutions of Myanmar Law (1990). Inward investment occurred, private sector activity increased, agricultural production grew faster than GDP, and both exports and imports grew rapidly. But no wholesale embrace of outward orientation was made, multiple exchange rates were not unified, State monopolies on key export commodities remained, little privatization occurred, the bureaucracy was not reformed and rapid expansion of the armed services was undertaken.
After the onset of the regional financial crisis in 1997 the liberalization trend was reversed and a renewed program of expanding SEEs was undertaken. The partial economic reform and reversals since 1988 created a hybrid economy that is not socialist, a neither mixed economy nor market oriented.
Clear demarcation lines between State and non-State actors are absent and there is a wide array of players involved in industrial activities: these include SEEs, military holding companies, other semi-government organizations such as semi-government banks, rent seekers in the ministries (including inside the MOD), three ministries directly involved in industry (Ministries of Industry I and II and the Ministry of Myanmar Industrial Development), the business leaders who head up the largest family-run conglomerates who enjoy privileged access to the ruling class (the „Biz-15‟), small and medium sized enterprises (SMEs), and foreign investors.
The existence of this hybrid economy has two implications for the current situation. First, the new president in his promotion of the economic reform agenda is not constrained by policy formulation capacity: economists have had many years to consider ways to re-establish transition to market oriented economy. Second, the very existence of a hybrid economy reveals the presence of powerful interests vested in the status quo. Implementation capacity is the main issue and two prospective scenarios exist: de-industrialization should the president fail in his mission and the initiation of rapid industrial development should he succeeds.
Neighboring China and Thailand are undertaking major transportation infrastructure investments in the country to facilitate the extraction of primary resources and to transship finished goods from their vibrant manufacturing exports sectors to the rich country markets. Deep-sea ports are being constructed at Kyaukpyu on the Rakhine coast and at Dawei in Tanintharyi Division. From the former, two pipelines – one for gas and the other for oil – are being built to Kunming in Yunnan Province in Southwest China along with a service road and rail link to the border at Muse. At Dawei, road and rail links are planned to Kanchanaburi to link up with Bangkok. Another gas pipeline to Thailand (Zawtika) is also under construction. Special Economic Zones (SEZs) are also planned at Dawei and Kyaukpyu and at least at four other locations including Thilawa close to Yangon. These projects occur under both of the prospective scenarios mentioned above but two very different development outcomes are nonetheless possible.
Under the de-industrialization scenario, the "resource curse‟ plays out with the establishment of a renter State and where the State and business sectors focus on extracting primary resources rather than on developing a manufacturing exports sector. Modest fees are collected from Burma's booming neighbors for transshipment services. Kyat strength is unaddressed by the government and there are factory closures. In the absence of a realistic and competitive exchange rate and with the persistence of a hostile business environment private sector investment in industry, either domestically or from abroad, proves elusive. The focus on primary sector activity leads to “enclave” development where returns are concentrated into the hands of the few and the spoils from the expansion of gas, hydroelectric, timber, minerals and precious stones exports are carved up in the grand new capital of Naypyitaw while the general population are condemned to eke out a meager living on a couple of dollars a day, festering in their discontent.
However, if the new president succeeds in his mission – with adoption of outward orientation‟ and private sector-led‟ development supported by macroeconomic stabilization and successful implementation of the appropriate monetary, fiscal, trade and industrial policies – he will initiate rapid industrial development and illuminate the path for Burma to follow for the next several decades. The country still exploits its primary resources and fosters the development of transportation infrastructure with neighboring countries as valued partners but many other initiatives are taken as well.
The government concentrates on improving the business environment for SMEs whose role in the expansion of manufacturing exports is given center stage in the country’s future. Export processing and commodity processing sectors, and private sector businesses established under ISI in the 1990s, are all encouraged to exploit their full export market potential. The country’s infrastructure is critically reviewed in the light of the new focus on export promotion.
Rapid industrial development hinges on the Biz-15 aligning their interests with SMEs since they stand to vastly increase their fortunes by building and operating the modern infrastructure essential for a competitive and dynamic SME-populated manufacturing exports sector, and also by facilitating “anchor” FDI from MNCs. Such fortunes, commensurate with those in the region, would be justified if the Biz-15 can raise the rate of progressive change acceptable to their political patrons so Burma’s 60 million population can all prosper.
Burma can learn valuable lessons from studying the development paths of the successful economies in the region but it must also take cognizance of the changes in the world economy that have occurred since these countries first embarked on rapid industrialization, in particular the two unbundlings. ‟ The first is the end of the necessity to produce goods close to consumers due to rapidly declining transport costs. The second unbundling is the end of the need to perform most manufacturing stages near each other because of rapidly falling costs of telecommunications and the possibility of codifying and digitalizing tasks. So both production and services are being off-shored to countries with lower labor costs. The major beneficiary of the first unbundling is China and for the second it is India. Myanmar should orientate itself to take advantage of the two great unbundlings and leverage its strategic location between China and India, and Asean, to integrate itself into global supply chains to become a product assembly center of international importance while developing backward linkages into local component supply capability and into its natural resource base.
Recommendations
Civil society is an important source of pluralism in society and arguably a critical element of democracy. The international community should therefore support civil society development in Burma. Civil society can monitor for harmful collusion in State business relations (SBR) that create wealth only for the few and advocate for developmental outcomes. Civil society also has a critical role to play in developing corporate social responsibility (CSR), for example, in business ethics and environmental responsibility. Civil society should also work for an improvement in the enabling environment for SMEs. One way of doing this with potential for a major impact is to commission a study by a major firm of supply chain managers (SCM) to inform on the policies and investments necessary for Burma to integrate into the China-centric Asian supply chain to the rich country markets. Biz-15 members with the ability to influence power holders can be encouraged by civil society organizations to support the SCM study. The government which has declared an interest in industrial development should articulate a new vision that emphasizes, “outward orientation” and “private sector-led” development, on which all other policy reform measures should hang.
Stuart Larkin, a former fund manager who has been a resident in Rangoon since the mid-1990s, studies the country’s economy and society, generating numerous investment and policy studies as a country analyst and consulting economist.
(Commentary) – The following is a study titled “Myanmar at the Crossroads: Rapid Industrial Development or De-Industrialization,” which looks at Burma’s historical background to provide context for where the country is now and where it might be headed.
Burmese President Thein Sein, shown here addressing Parliament in traditional dress, is leading the government effort to push forward democratic reforms and achieve national reconciliation. Photo: MRTV
Burmese President Thein Sein, shown here addressing Parliament in traditional dress, is leading the government effort to push forward democratic reforms and achieve national reconciliation. Photo: MRTV
The purpose of this study is to identify potential agents of change in Burmese society that can facilitate rapid industrialization and recommend ways the international community can support private sector development by aiding such groups.
Burma’s lack of success in industrialization is largely due to an inward looking political elite with a predisposition towards State-led development rooted in nationalism stemming from the colonial period. The introduction of laissez-faire economic principles during the British Colonial Era 1885-1942 exposed Burma’s self-sufficient economy to the full force of global market forces and the power of capital. Soon most of the trading and industrial businesses were owned and managed by foreigners – British, Indian and Chinese – and the indigenous inhabitants were usually employed as laborers. Rice exports soared but the problems of landlessness and absentee landlordism increased. Economically marginalized and subject to the humiliation of occupation by an alien power, a strong Myanmar nationalist movement emerged which rejected the “laissez-faire” economic philosophy of the foreign imperialists and was drawn to the teachings of Karl Marx and the idea of socialism and State-led industrial development.
In the Early Independence Period 1948-62, government economic policies were quite successful and a diversified mixed economy with much higher indigenous ownership was established. Even as State-owned industries were set up, the private sector, including foreign investors, was permitted to play an active role. If the independence government had been about mild socialism and nationalism then General Ne Win’s solution after the military coup in 1962 was to massively increase the doses of each. New State-owned factories were set up under import substitution industry (ISI) but production soon became constrained by shortages of raw materials and spare parts which could not be imported because of shortages of foreign exchange. Another serious setback was the wholesale nationalization of private industries. As no new resources, raw materials or capital were injected, many of these factories went bankrupt and the surviving ones were amalgamated as nationalized industries. The high degree of isolation of the country from the rest of the world that resulted from implementation of policies for autarkic development severely restricted the extent of the market, and domestic industries were denied the economies of large-scale production and qualitative improvement through competition.
The deteriorating economic conditions in the country, and in particular acute shortages of foreign exchange, came to a head in the mid-1970s (to be saved by ODA), and again in the late 1980s when the political elite had to abandon their mentor Ne Win and take steps to allow a greater role for the private sector in the economy. SLORC introduced a number of economic reforms 1988-92 such as permitting retention of foreign exchange earnings by exporters; promoting FDI under the Foreign Investment Law (1988); liberalization of agriculture, timber extraction and fisheries; and issuing licenses for private sector domestic banks under the Financial Institutions of Myanmar Law (1990). Inward investment occurred, private sector activity increased, agricultural production grew faster than GDP, and both exports and imports grew rapidly. But no wholesale embrace of outward orientation was made, multiple exchange rates were not unified, State monopolies on key export commodities remained, little privatization occurred, the bureaucracy was not reformed and rapid expansion of the armed services was undertaken.
After the onset of the regional financial crisis in 1997 the liberalization trend was reversed and a renewed program of expanding SEEs was undertaken. The partial economic reform and reversals since 1988 created a hybrid economy that is not socialist, a neither mixed economy nor market oriented.
Clear demarcation lines between State and non-State actors are absent and there is a wide array of players involved in industrial activities: these include SEEs, military holding companies, other semi-government organizations such as semi-government banks, rent seekers in the ministries (including inside the MOD), three ministries directly involved in industry (Ministries of Industry I and II and the Ministry of Myanmar Industrial Development), the business leaders who head up the largest family-run conglomerates who enjoy privileged access to the ruling class (the „Biz-15‟), small and medium sized enterprises (SMEs), and foreign investors.
The existence of this hybrid economy has two implications for the current situation. First, the new president in his promotion of the economic reform agenda is not constrained by policy formulation capacity: economists have had many years to consider ways to re-establish transition to market oriented economy. Second, the very existence of a hybrid economy reveals the presence of powerful interests vested in the status quo. Implementation capacity is the main issue and two prospective scenarios exist: de-industrialization should the president fail in his mission and the initiation of rapid industrial development should he succeeds.
Neighboring China and Thailand are undertaking major transportation infrastructure investments in the country to facilitate the extraction of primary resources and to transship finished goods from their vibrant manufacturing exports sectors to the rich country markets. Deep-sea ports are being constructed at Kyaukpyu on the Rakhine coast and at Dawei in Tanintharyi Division. From the former, two pipelines – one for gas and the other for oil – are being built to Kunming in Yunnan Province in Southwest China along with a service road and rail link to the border at Muse. At Dawei, road and rail links are planned to Kanchanaburi to link up with Bangkok. Another gas pipeline to Thailand (Zawtika) is also under construction. Special Economic Zones (SEZs) are also planned at Dawei and Kyaukpyu and at least at four other locations including Thilawa close to Yangon. These projects occur under both of the prospective scenarios mentioned above but two very different development outcomes are nonetheless possible.
Under the de-industrialization scenario, the "resource curse‟ plays out with the establishment of a renter State and where the State and business sectors focus on extracting primary resources rather than on developing a manufacturing exports sector. Modest fees are collected from Burma's booming neighbors for transshipment services. Kyat strength is unaddressed by the government and there are factory closures. In the absence of a realistic and competitive exchange rate and with the persistence of a hostile business environment private sector investment in industry, either domestically or from abroad, proves elusive. The focus on primary sector activity leads to “enclave” development where returns are concentrated into the hands of the few and the spoils from the expansion of gas, hydroelectric, timber, minerals and precious stones exports are carved up in the grand new capital of Naypyitaw while the general population are condemned to eke out a meager living on a couple of dollars a day, festering in their discontent.
However, if the new president succeeds in his mission – with adoption of outward orientation‟ and private sector-led‟ development supported by macroeconomic stabilization and successful implementation of the appropriate monetary, fiscal, trade and industrial policies – he will initiate rapid industrial development and illuminate the path for Burma to follow for the next several decades. The country still exploits its primary resources and fosters the development of transportation infrastructure with neighboring countries as valued partners but many other initiatives are taken as well.
The government concentrates on improving the business environment for SMEs whose role in the expansion of manufacturing exports is given center stage in the country’s future. Export processing and commodity processing sectors, and private sector businesses established under ISI in the 1990s, are all encouraged to exploit their full export market potential. The country’s infrastructure is critically reviewed in the light of the new focus on export promotion.
Rapid industrial development hinges on the Biz-15 aligning their interests with SMEs since they stand to vastly increase their fortunes by building and operating the modern infrastructure essential for a competitive and dynamic SME-populated manufacturing exports sector, and also by facilitating “anchor” FDI from MNCs. Such fortunes, commensurate with those in the region, would be justified if the Biz-15 can raise the rate of progressive change acceptable to their political patrons so Burma’s 60 million population can all prosper.
Burma can learn valuable lessons from studying the development paths of the successful economies in the region but it must also take cognizance of the changes in the world economy that have occurred since these countries first embarked on rapid industrialization, in particular the two unbundlings. ‟ The first is the end of the necessity to produce goods close to consumers due to rapidly declining transport costs. The second unbundling is the end of the need to perform most manufacturing stages near each other because of rapidly falling costs of telecommunications and the possibility of codifying and digitalizing tasks. So both production and services are being off-shored to countries with lower labor costs. The major beneficiary of the first unbundling is China and for the second it is India. Myanmar should orientate itself to take advantage of the two great unbundlings and leverage its strategic location between China and India, and Asean, to integrate itself into global supply chains to become a product assembly center of international importance while developing backward linkages into local component supply capability and into its natural resource base.
Recommendations
Civil society is an important source of pluralism in society and arguably a critical element of democracy. The international community should therefore support civil society development in Burma. Civil society can monitor for harmful collusion in State business relations (SBR) that create wealth only for the few and advocate for developmental outcomes. Civil society also has a critical role to play in developing corporate social responsibility (CSR), for example, in business ethics and environmental responsibility. Civil society should also work for an improvement in the enabling environment for SMEs. One way of doing this with potential for a major impact is to commission a study by a major firm of supply chain managers (SCM) to inform on the policies and investments necessary for Burma to integrate into the China-centric Asian supply chain to the rich country markets. Biz-15 members with the ability to influence power holders can be encouraged by civil society organizations to support the SCM study. The government which has declared an interest in industrial development should articulate a new vision that emphasizes, “outward orientation” and “private sector-led” development, on which all other policy reform measures should hang.
Stuart Larkin, a former fund manager who has been a resident in Rangoon since the mid-1990s, studies the country’s economy and society, generating numerous investment and policy studies as a country analyst and consulting economist.
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