How Not to Invest in Myanmar

The Risks for the World's Newest Frontier Market

Aung San Suu Kyi in June at the World Economic Forum on East Asia (World Economic Forum / flickr)

Since Aung San Suu Kyi's parliamentary election victory last April, Asian and Western businesspeople have flocked to Myanmar (also known as Burma), eager to take part in the re-emergence of a regional economic power. Over the last several months, Australia, Canada, the United Kingdom, and, as of May, the United States, have reopened some economic ties with Rangoon. U.S. sanctions that had long prohibited direct investment, development funding, and visas for military leaders have now been largely suspended.

Coca-Cola, GE, and oil and gas companies have already expressed strong interest in entering Myanmar. Hotels are filling fast, and rooms that rented for $60 six months ago go for $400 today. After several decades of isolation, Myanmar has moved to the center of frontier markets' maps. But Myanmar's potentially fractious political climate and dangerously fragile economy mean that a rapid opening may bring unsettling results along with sudden wealth.

Vast reserves of natural resources, including oil and gas, rice, timber, and precious gems, most of which are now exported unrefined, offer many opportunities to build up production capacity. Finished lumber, polished rubies, and even higher quality rice will attract investment opportunities in addition to tourism, energy, construction equipment, and manufacturing. Last year, more than $20 billion in foreign investment, mostly from China, Hong Kong, and Thailand, flowed into the country -- more than all the foreign direct investment from the previous two decades combined.

Some have counseled caution, however, and rightly so. Aung San Suu Kyi, who spent most of the last two decades under house arrest before she was freed in 2010, recently issued a warning to eager investors. At a World Economic Forum event in Bangkok in June, she warned of "reckless optimism," highlighting the need for transparency in the new government reforms that were making all the new economic activity possible. Otherwise, she said, the Burmese public would continue to lose out to the few in power.

There are many other reasons to heed her advice. With the global economy weakening, and even juggernauts such as India and China creaking, the lure of rapid growth will be hard for investors to resist. But waves of foreign direct investment chasing high returns have overwhelmed fragile, newly opened economies in the past. In these countries, which usually lack fiscal discipline and strong monetary policy controls, often times there are wild swings in exchange rates, money supply, and inflation. A lack of standards increases the likelihood of creating financial bubbles as banks race to lend. A raft of questionable real estate projects, a familiar problem for Thailand in the late 1990s, often follows. The sudden inflow of foreign direct investment may recede just as quickly at the first sign of instability. 

The financial sector is only one problem area. Without adequate customs and border controls, imports -- especially agricultural and low-end manufactured goods -- can easily flood markets and outcompete domestic producers. More generally, without strong oversight, counterfeit products can also infect supply chains, leading to health and safety risks. Flows of arms, drugs, and people often increase with unmanaged economic growth, a problem Myanmar would share with Cambodia, Laos, and Vietnam. 

Worse, newly exploited raw materials can throw an economy off balance. Rapid development financed from abroad can widen wealth gaps and enrich vested interests unchecked by governmental authority. Ignoring the development of government institutions has been a well-trod path in the developing world. Consider resource-rich African states, including Nigeria and Sudan, which have never approached middle-income status because oil wealth benefitted only a few, depriving the economy of a robust middle class. 

Strengthening courts, tax collection, border control, and transparency could form the basis of broad-based economic growth serving the greater needs of the entire country. But these concerns often take a back seat as the government continues to sell off national assets in ways that benefit the few, something Aung San Suu Kyi has mentioned repeatedly in her recent speeches. Mongolia faces similar challenges, with double-digit growth, mining resources that may reach $1 trillion, and rampant corruption that threatens stability and social equity.

In a positive step, Thein Sein announced additional reforms in June, including increasing openness to foreign aid and technical assistance. He also introduced an investment law to parliament (the details of which have yet to be released), expected to be passed by the end of July, that would relax land lease restrictions and provide tax incentives for foreign businesses. Although paper reforms are necessary, implementation, including adequate funding for new government mandates, remains key.

Also important will be some clarity on the broader development path that Myanmar might take. The export-led model that many of its neighbors followed half a century ago, when Western and Japanese markets were growing, no longer exists. Myanmar has a rare opportunity to create an economy driven by domestic demand rather than on manufacturing for export. With a large population, vast natural resources, and increasing capital inflows, the country already has the basic foundation needed for an economic renaissance. Now it needs to improve access to capital for small and medium-sized enterprises and to develop legal protections to really succeed.

Yet for all those cautions, it is with good reason that international executives are booking rooms in Rangoon into next year. The winding-down of sanctions didn't come out of nowhere: Myanmar complied with many of the West's preconditions for normalizing relations. Free and generally fair elections were held for a limited number of open parliamentary seats this April (the majority are still reserved for the military and military-backed parties). The government released many political prisoners (though their sentences were technically suspended, not commuted). 

Rangoon also revalued its currency. In April, the kyat, which had formerly traded at six to the dollar, was trading at 800, near the previous black market rate. The currency reached 840 by early June. The jump raised potential investor confidence in the currency, and now the Tokyo Stock Exchange and Japan's Daiwa Institute are helping to develop a Burmese bond market. India announced a $500 million credit line in May. But the value of high finance in a fledgling economy remains questionable. Cambodia created a functioning stock market last year; there are only a few listed government companies, and share prices have fluctuated wildly. It operates more like a casino than an exchange. One may write off the problem as a risk of investing in a frontier market, but more time and resources spent building key infrastructure and effective rule of law would attract far more beneficial capital.

Unless the transition from pariah state to fledgling, albeit limited, democracy is well managed, Myanmar may end up dominated by oligarchs. A host of hard-to-control problems that only exacerbate social and economic inequality would follow. Myanmar has arrived at the crossroads where fast growth and balanced growth diverge. If the former military leaders who dominate the government, many in their fifties and early sixties, have their country's future in mind, then policies focusing on supporting a vibrant middle class will help Myanmar far more than a short-term race to riches.

 

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