Economic reform in Myanmar: Light at the end of a long tunnel

Yangon [source: Wikimedia]Yangon [source: Wikimedia]

Maya, a domestic maid from Myanmar (modern day Burma) has been living in the neighbouring country of Thailand for the last eight years. Finding work without proper legal documents has never been easy. But she didn’t have many options. There was almost no hope of a decent livelihood back home.

Of late, she has been noticing an exodus of compatriots. “Why do you want to slog here for a pittance, when you can earn equivalent wages at home?” her friends enquire. Things have changed, they say.

Maya doesn’t quite understand what has changed. But she knows that the price of land back home has been rising. Now she wants to go and sell her plot of land while it can still fetch her good money.

It has been three years since Myanmar’s economy started to open up: Asia’s last frontier. Just a few years ago, Myanmar was grouped with the likes of Cuba and Iran – closed to the world economy. Economic sanctions kept foreign investors out, whilst poverty and unemployment prevailed domestically.

All of this started to change in 2010, when the military junta put in place a military backed civilian government and released the pro-democracy leader Aung San Suu Kyi from house arrest. This was followed by further gestures in 2011, as other political prisoners were released, ceasefire agreements were signed with ethnic rebel groups and Suu Kyi was allowed to run for election to parliament.

In 2012, the EU and US reciprocated by easing sanctions on Myanmar. Since then, economic reform has led to rapid changes, thus, transforming the country. Investors have poured in, offering diverse opportunities for the local population. As a result, Myanmar has become a prime focus for economists and investors alike. Now, reforms have set the country on an annual growth trajectory of 7.8%.

Economic reform has had transformative effect on job creation. Investment in areas such as infrastructure, telecommunications and banking has been crucial to this end. Some commentators have speculated that Myanmar may be Asia’s next ‘economic miracle’, due to its geographic significance; situated at the heart of Southeast Asia and with a substantial natural resource endowment of oil, natural gas, and agricultural products.

Myanmar is also well positioned within the ASEAN Economic Community, due to be launched in 2015, to enjoy the benefits of a large single market. At the 2014 ASEAN Summit in Naypidaw, President Thein Sein commented how, “Despite the uncertainties in the global economy, ASEAN’s domestic demand is growing and economic growth remains strong at 5% with positive projections in coming years.” A single market would attract investors to operate from Myanmar at competitive costs whilst gaining access to other dynamic Southeast Asian markets.

From telecommunications to infrastructure – growth is definitely visible. But is it sustainable? Many, including Suu Kyi, have warned that the West has “been overly optimistic about the reform process.” With an upcoming general election in 2015, what does the country’s future have in store?

Economic growth for ‘all’?

The Economist estimates that economic reform in Myanmar has led to the return of nearly 3-5 million migrants working abroad to fill new vacancies. A stark example of rapid job creation is the planned Thilawa Special Economic Zone, which will employ approximately 70,000 workers when operating at maximum capacity. The rise in labour-intensive urban job opportunities will also impact the current workforce division, as a result of transmigration from rural to urban areas.

Job creation is a positive sign in a country with a poverty rate of 25.6%, often classified as one of the poorest in Asia. Poverty is particularly severe amongst ethnic minorities in rural areas. This is the result of years of ethnic and religious factionalism. Conflict between the state and various ethnic minorities such as the Kachin, Karen and Shan communities means that economic prosperity has agglomerated in particular areas of Naypidaw where most military and government officials live.

This remains a challenge for the government today, and is especially true given the ongoing persecution of the Rohingya, a predominantly Muslim minority community, who are indigenous to Myanmar’s Rakhine state. Reuters estimates approximately 100,000 Rohingya people have fled from Rakhine state since 2012 due to communal violence. This throws the inclusivity of the economic project into question. Various sections of society continue to feel left out of Myanmar’s new found economic prosperity.

Disparity is also seen between urban and rural populations. There lies a huge difference between the urban centres, Naypidaw and Yangon, and the rest of the country. Barack Obama said in an interview recently that, “in some areas there has been a slowdown in reforms, and even some steps backward”. If the government fails to intervene, weak economic regulation may starkly increase inequality between rich urban city dwellers and poor rural ethnic minorities. This would create fertile ground for further social tension within the country.

Moreover, ethnic clashes and divisions lead to questions being raised about the government’s commitment to political reform – which is essential to maintain business and consumer confidence. Inclusive economic growth continues to be an elusive concept in Myanmar.

The surge of foreign investment

Economically, the key reform leading to a surge of capital flows has been replacing the country’s official currency peg with a formal managed float system. Growing business confidence has led to increased Foreign Direct Investment; which has increased capital allocation per worker and should provide a welcome boost to productivity.

Greater foreign investment is primarily seen in infrastructure, as a result of reforms such as liberalizing the company registration process. Property and infrastructural development includes real estate in Yangon and the planned establishment of transport networks, such as roads and ports, which link the country to its neighbours.

Major infrastructure gaps in transport networks, energy provision and technology infrastructure require as much as $80 billion worth of investment by 2030, as estimated in a new study by the Asian Development Bank.

Evidently, the void needs to be filled by the collaboration of the private and public sectors. This was recently seen in the completion of a road link between the city of Dawei and Thailand’s Kanchanaburi province by Italian-Thai Development Plc. Nonetheless, infrastructure development remains inadequate given Myanmar’s growing requirements.

Nonetheless, FDI is putting a strong upward pressure on the price of real estate. Yangon’s overheating property market has contributed to an environment which the World Bank describes as “ripe for high inflation.” FDI is also strengthening the currency, which reduces export competitiveness. This will particularly hurt poor rural producers relying on agricultural and forest products like rice and rubber.

Thus the sustainability of investment pouring in and its future implications for trade must be reconsidered. Trade is largely based on resource-based and extractive industries, such as natural gas, mining and forest products. The country’s lack of diversification may pose further challenges, such as highly volatile prices and exposure to natural disasters.

SIM cards and ATMs

Unlike the infrastructural reforms, which may take a long time, mobile and banking reforms have already started affecting individuals directly.

When someone executes the land sale on Maya’s behalf, she can now access money deposited in her Myanmar account while in Thailand. Moreover, someone from Myanmar can send an SMS to inform Maya when the money is transferred.

The telecommunications sector has rapidly transformed with licenses given to foreign firms, such as Norway’s Telenor and Qatar’s Ooredoo, to replace the traditional state monopoly. This has led to a drastic fall in SIM card prices from the exorbitant $2000 in 2009 to $1.50 today. Nonetheless, only 9% of the population has access to a mobile device. Given current trends towards greater economic liberalization this may change fast as prices continue to fall further, and according to the BBC, the government aims to increase mobile access to 80% by 2016.

Telecommunications connectivity is essential to facilitate economic activity and compete with other counterparts in the ASEAN region who rely on dense communication networks.

Similar reform has taken place in terms of banking. Once a highly inaccessible sector with only 10% of the population using formal banking services, circumstances in the country have since changed greatly for the better. ATMs that would have been unheard of a few years are now present in Yangon, and credit cards are more widely accepted.  Nine foreign banks have been invited to operate in the country, although their services will be limited to foreign currency and will mainly service large foreign businesses.

These gradual reforms mark the preliminary steps to further integrate the wider population into the country’s banking sector. For now, banking reform is more investor-friendly than inclusive of the wider population. Encouraging integration is essential to support local small and medium scale enterprises.

Challenges ahead

Despite the upward trends in Myanmar’s economic trajectory, various challenges lie ahead.  The outward economic miracle has various shortcomings; not least that the reform process may be running out of steam.

In order for growth to be sustainable, business confidence must be maintained. The initial wave of positive responses seems to have since dwindled. The most recent World Economic Forum’s Global Competitiveness Survey ranked Myanmar poorly due to problems in “access to financing, policy instability, corruption and an inadequately educated workforce”. This is corroborated by the recent World Bank’s annual report on the ease of doing business, which ranks Myanmar 182 out of 189 countries.

Thus, stronger institutional frameworks must be established to retain business and investor confidence. Political transparency must be maintained in order to promote economic efficiency, and this would provide better conditions for foreign investment and business activity. There also is a need for an enabling and active state to provide citizens with skills and opportunities. This entails the government’s less discussed commitment to human capital, by improvement to education and health provision.

Building human capital

Investment in human capital is essential if the country is to address its poor performance in human development indicators. Despite minor improvements, expenditure on health and education as a percentage of total annual budget remain just 2% and 4% respectively.

Myanmar’s workforce is uncompetitive when compared to other Asian counterparts. For example, Myanmar has a teacher-pupil ratio of 1: 30 compared with 1: 13 in Malaysia. Moreover, life expectancy remains nine years lower than the Asia and Pacific average.

Greater reform in these two domains is required to build a strong human capital base. This would address the prevalent poverty in the country by providing access to primary services. Moreover, equipping the population with skills will positively contribute to the economy by improving workforce productivity.

A lack of environmental regulation

Lastly, rapid economic growth requires walking a tightrope in terms of maintaining sustainable environmental outcomes. The suspension of the Myitsone Dam project was a step in the right direction. It demonstrates the government’s commitment to prioritizing environmental regulation at the potential expense of infuriating the project’s Chinese investors.

This emphasizes the government’s need to consider potential long term environmental degradation at the expense of short term economic growth.  The problem can be addressed through environmental impact assessments, regulation, and policy planning by the government. Environmental institutions must be strengthened to prevent rapid depletion of natural resources and rapid economic growth must not be allowed to result in a decline in the quality of life of the population.

Light at the end of the tunnel

Given the various challenges that lie ahead for Myanmar, the implications of reform look uncertain.

The opening up of the country has definitely provided a glimmer of hope. However, this may be the light at the end of a long tunnel. In view of the upcoming elections next year, it is feared that the reform process may stall as political agendas take precedence.

In light of the continued prevalence of human rights abuses, increasing inequality, low diversification, poor investment in essential services and lack of environmental regulation – a more critical view must be established. Despite superficial signs of economic development, the underlying reality remains pessimistic.

Maya needs the reassurance that if she returns home, she will not have to return to Thailand in search for work again. A reformed Myanmar signals a great opportunity but calls for cautious optimism as opposed to the complacent perceptions instilled today.