Located at the crossroads between Bangladesh, China, India, Laos and Thailand, Burma, officially the Union of Myanmar, appears to be coming out of the shadows.
The country remained under the tight control of the military for five decades. In 2010, the environment changed when the former Prime Minister, Lieutenant General Thein Sein, assumed the presidency of Myanmar.
The civilian government led by Sein announced several economic reforms as well as the release of political prisoners, the right to form trade unions, and an easing in media censorship. The government undertook significant legislative reforms including the adoption of the Labor Organizations Law and the Peaceful Demonstration Law and the amendment to the Political Party Registration Law.
Myanmar sits at the crossroads of Asia's great civilizations of India and China, but the country was largely isolated because of four decades of communist rule. Myanmar's recent opening up means that for the first time in more than 50 years foreign government officials, businesses and tourists have an opportunity to visit and explore the country without censorship or restrictions.
In this article, I will discuss the progress made by Myanmar to become a part of the global economy and the challenges that international businesses will face.
Sanctions Imposed and Lifted
For decades, Myanmar, under the military rule and media censorship, demonstrated an appalling human rights record. In 1990, global media reports of a crackdown on pro-democracy protests by the military led many countries to impose a wide range of restrictions and sanctions on Myanmar. These sanctions included bans on certain imports and exports, asset freezes, limits to aid assistance, and foreign travel bans for those connected to the military regime.
The European Union banned investment and trade in Burmese gems, timber and precious stones, while the United States tightened existing economic sanctions on the regime leaders, their families, and supporters including freezing assets and implementing travel restrictions against designated individuals responsible for human rights abuses and public corruption.
In the first part of 2012, encouraged by the fall of the regime and recent reforms, the United States and the European Union suspended economic sanctions, which provide many opportunities for investment and growth.
A government largely composed of retired generals took power in 2011 and began a radical political and economic reform program that they called a transition to disciplined democracy. They ended pro-democracy leader Aung San Suu Kyi's house arrest and began releasing hundreds of political prisoners. As a result, the West suspended or lifted most of their trade and economic sanctions.
In the first part of 2012, encouraged by the fall of the regime and recent reforms, the United States, Australia, Canada and the European Union suspended many of the economic sanctions. With political sanctions easing, American and European companies are showing newfound enthusiasm to explore Myanmar.
Asian Community Eyes Myanmar
During its isolation, Myanmar had been the missing link that prevented ASEAN community from being physically and economically connected. The ASEAN community has been eying Myanmar since 2010 when the country's new government came into power. Road and port building projects are being planned and funded to reconnect Myanmar to this region.
Japan, China, India and South Korea are all jockeying for a position in Myanmar. Large projects funded by investors from China, South Korea and Thailand have been approved in a number of sectors that will require imports of capital goods and construction material.
Japan remained engaged with Myanmar during its years of military rule. It is now revamping its involvement in recognition of the reforms taking place in the country.
To help Myanmar succeed in its transition to a market economy, Japan's public and private sectors have pledged to support Myanmar's efforts to promote the nation's democratization, rule of law, economic reforms, and banking system reforms. It is also helping to improve the country's education system and science and engineering universities via grants and technical cooperation.
China has gained the most from the Western absence from Myanmar in the past 15 years. Chinese companies have poured about $27 billion into the country. China now dominates the oil, gas and mineral industries in the country.
India and Myanmar have signed 12 agreements to strengthen trade and diplomatic ties. India expects to be the economic bridge between South and South-East Asia.
Coming out of the Shadows
Myanmar is located at the crossroads between Bangladesh, China, India and Thailand. These countries are a home to more than 40% of the world population offering a huge potential market for manufacturing and marketing consumer and business products and services.
Myanmar's economy will grow an estimated 6.5% next year, placing it among Southeast Asia's fastest growing economies. According to World Bank reports, the country's economic growth will be driven by energy and commodities exports, foreign investment, services, and construction.
Myanmar is coming out of the shadows with regulatory and legislative reforms and privatization. The country is gearing up to claim its rightful place by creating a value proposition based on legislative reforms, natural resources, extensive low cost labor, and a large consuming population with pent-up demand for products and services.
Since five decades of military rule ended in 2010, Myanmar has introduced new laws to promote domestic and foreign investment. These laws include Special Economic Zones, reforms in tax laws, ratification of new tax treaties, and new foreign investment law.
The country's foreign investment law allows 100% ownership by private enterprises. Since 1989, the country has privatized a series of industries including a large-scale privatization effort in 2009-2010 in which more than 300 enterprises including a major airline, ports, mines, factories, hotels, cinemas, gas stations, land and building were privatized.
The country has a set of anti-corruption laws and since as early as 1948, corruption is officially a crime that can carry a jail term.
Myanmar is already a member of the World Trade Organization and the Association of Southeast Asian Nations (ASEAN), which may evolve into a strong economic community in the coming decade.
Myanmar, the second largest Southeast Asian country after Indonesia, is rich in natural resources, the majority of which remain untapped. It has abundant natural gas reserves, oil, precious and semi-precious stones, a large area of arable land, forestry, minerals of many varieties, and freshwater and marine resources. It accounts for 90% of the world's jade production and is among the top producers of rubies and sapphires.
With a population of approximately 60 million, the country offers an easy availability of low labor costs. It has a large working age population available at a cost of about $3 a day compared to $4 in Indonesia, $5 in Vietnam, and $18 in China and Thailand.
Multinational Corporations Reenter Myanmar
Myanmar is open for business and offers opportunities in multiple industry sectors including infrastructure development, construction, information and communications technology, education, healthcare, tourism, banking, and retailing. Global marketers are eyeing new growth in this Southeast Asian nation since it ended authoritarian policies that had led to sanctions from western countries.
Myanmar's post-2011 economic liberalization has left many salivating over potential business opportunities in the Land of the Golden Pagoda. With projected GDP growth of 6.5% in 2013, and projected GDP growth of 6.8% in 2014, Myanmar has one of the fastest growing economies in the world.
As per World Bank reports, foreign direct investment in Myanmar had risen to US$2.7 billion in 2012-13 from $1.9 billion in 2011-12. Most of that investment went into the country's energy, garment, information technology, and food and beverages sectors.
Many well recognized multinational corporations that exited Myanmar when sanctions were imposed have reentered Myanmar:
- Coca-Cola was the first to announce its intention to reenter Myanmar and Pepsi-Cola soon followed. In fast moving consumer goods (FMCG) category, Unilever unveiled plans to establish a local company in this market.
- Heineken N.V. reentered Myanmar after a 17 year absence. It plans to build a $60 million brewery near the capital city of Yangon that will begin making and selling beer brands including Heineken by the end of 2014.
- WPP Plc, the world's largest communication services company, has restarted its Myanmar operations after exiting the Southeast Asian country in 2003 because of sanctions.
- ABD, which has not had operations for more than 20 years, opened an office in the country.
- Seventeen foreign banks have already established representative offices in Myanmar. Credit companies, Visa and MasterCard, have formal joint ventures with Myanmar banks. Many international banks are in the process of establishing a foothold in Myanmar. For example, ANZ, Standard Charter, Bank of Tokyo-Mitsubishi, Japan's Mizuho and Sumitomo Mitsui Banking Corporation (SMBC) are entering Myanmar.
- Professional services firms including Price-Waterhouse-Coopers and KPMG have already opened offices in the country. Ernst & Young also plans to open them.
- Large multinationals including General Electric and Caterpillar as well as many large companies from Japan, Korea, Europe and other markets have begun selling their products in Myanmar.
Issues and Challenges
Myanmar is a very unusual case of a large country with a rich history that remains an underdeveloped economy in the heart of the world's fastest growing regional economy.
Endowed with a wealth of natural assets, this country is well positioned to engage a multi-pronged development strategy. However, the country will need to address important, long-standing issues related to the economy due to an environment that is still not very conducive to business.
Myanmar's economy, often described as the least open economy in Asia, suffers from pervasive government controls, inefficient economic policy, fiscal instability, corruption, human rights violations, and extensive poverty.
Its major economic imbalances include rising inflation rates, financial deficits, multiple official exchange rates, a distorted national interest rate regime, unreliable statistics and indicators, and an inability to reconcile national accounts to determine a realistic Gross Domestic Product (GDP) figure. Key issues and challenges for global investors are discussed below.
Role of Military
Myanmar's military remains economically dominant since few major business deals take place in this country without military involvement. According to Bertelsmann Stiftung (BTI) reports, the government's privatization initiatives have transferred most of the formerly state owned enterprises directly to regime cronies or the military conglomerates that continue to monopolize the economy.
Many sectors are reserved for state enterprises. These include telecommunications, air and rail transport, broadcast and television, and exploration and production of petroleum. The government administers electricity prices, subsidizes fuel, sets public and some private wages, and imposes price controls. The military-run Trade Commission controls import-export licenses and approvals for foreign investment.
Most imports and exports in Myanmar require licenses, which in many sectors are restricted. Import and export taxes are high. Import quotas are imposed on product categories including trucks, buses and certain types of cars. Other safeguards exist to protect the domestic industries such as food and plastics.
Inconsistent enforcement of laws and bureaucratic red tape hinder the development of a critically needed private sector. The formal labor market remains distorted by state intervention that sets public-sector wages and influences wage setting in the market.
The country has consistently ranked among the world's most corrupt countries in the Transparency International Corruption Perceptions Index. The 2013 Corruption Perceptions Index measured the perceived levels of public sector corruption in 177 countries/territories around the world. Myanmar was ranked 157 out of 177 countries in the 2013 Corruption Perception Index.
A Heritage Foundation 2012 report outlined the major areas where investors may face corruption including (a) when seeking permission for investment in the country, (b) in the taxation process, (c) when applying for import and export licenses, and (d) when negotiating land and real estate leases.
Myanmar is among the 10 most difficult places to do business. The World Bank included Myanmar in its Doing Business 2014 report for the first time. Myanmar ranked 182 out of 189 in ease of doing business. It is trailed by countries like Eritrea, Congo, Libya, Chad and Sudan.
Intellectual Property (IP) Rights
The business environment in Myanmar is risky in terms of IP rights. Decades of political and economic isolation have left Burma with intellectual property rights legislation that is at best outdated and in some cases non-existent. Legal protection of brands, trademarks and patents is virtually non-existent.
Soft and hardware piracy is a real issue since many products ranging from fashion products to watches and pharmaceuticals are widely counterfeited without any intervention from the authorities. The piracy of music CDs, video CDs, CD-ROMS, DVDs, books, software, and product designs is evident nationwide, especially in border regions and in the two major urban centers of Rangoon and Mandalay. The software piracy rate is approximately 91%.
Myanmar's financial sector is extremely underdeveloped. Most currency is held outside the formal banking sector. Exchange rates are rigged. The official rate is six kyat to a dollar, but the black market rate is about 800 to 1000 kyat to a dollar.
Regulation of financial institutions is relatively weak. State-owned banks dominate the banking system. Access to credit remains poor, and the state often requires banks to channel loans to preferred sectors.
Myanmar infrastructure is not sufficient to support the higher growth and future demand driven by developing industry sectors. The transport infrastructure including roads, railways, ports and most other public infrastructures are inefficient, outdated and poorly maintained. Only three of Myanmar's 33 airports are international.
Residential and commercial real estate, power plants, water treatment plants, and road networks will require major improvement. Inconsistent power supplies also lead to interruptions in economic activities such as production and sales. Inconsistent water and phone service and slow internet also hamper production, sales and communications.
Skilled Labor Shortage
Myanmar's lack of skilled labor is among the topics spotlighted in the 2013 World Economic Forum. The country's early education is in poor shape. More than one in five children in Myanmar is not educated beyond the primary level.
Skilled technical and service professionals such as lawyers and accountants are especially scarce. Many of the universities and colleges for higher education were closed during military rule and have yet to open up.
Although some international organizations have estimated Myanmar's Gross Domestic Product (GDP) growth rate at an average of more than 10% over the past few years, these rates do not reflect reality.
According to the Central Intelligence Agency's The World Factbook, official statistics are inaccurate and published statistics on foreign trade are greatly understated because of the volume of off-book transactions, the size of the black market, and illicit and unrecorded border trade, which is estimated to be as large as the official economy.
Even basic indicators such as population size and historical economic growth are unreliable. It is difficult to quantify economy's potential given the paucity of reliable data.
While Myanmar is the largest Southeast Asian country, it is also one of the most impoverished. Around a third of Myanmar population lives below the poverty line, with income levels well behind those of neighboring countries Cambodia, Laos and Bangladesh. Only 13% of the population in Myanmar has access to electricity, although major urban centers have higher levels of electrification.
A strict censorship law is in place and is enforced widely and consistently against the private media. Journalists are imprisoned for exposing state secrets and discrediting the state. In April 2011, there were more than 2,000 political prisoners in Myanmar. Outside of the prisons, people of Myanmar face limits on their freedoms of movement both domestically and internationally.
Myanmar also struggles with sectarian violence. The end of the Myanmar's military’s total control has led to eruption of Buddhist-Muslim tensions. There are more than 135 heterogeneous ethnic groups with their own language and cultural practices. Conflicts between armed ethnic-minority groups and the military pose threats to the export infrastructure.
The country is plagued by traffic in narcotics, people, wildlife, gems, timber and other forms of contraband that flow through Burma’s permeable borders. Burma’s border regions are indeed difficult to control. In some remote regions active in smuggling, continual ethnic tensions with armed rebel groups hamper government control.
Myanmar is a very unusual case of a large country with a rich history that remains an underdeveloped economy in the heart of the world's fastest growing regional economy. Endowed with a wealth of natural assets, this country is well positioned to engage a multi-pronged development strategy that draws on agriculture, mining and extraction, manufacturing, and services.
Myanmar has already undertaken some major reforms and the political will to take them even further appears strong. Improvements in judicial independence, equal treatment of foreign and domestic firms, and the government's popular accountability are signs of optimism.
Although long-term prospects for Myanmar are good, investors must recognize that significant challenges exist. Key issues discussed in this series of articles include lack of a functioning legal system, bureaucracy and corruption, and political and security risks.
Foreign companies must plan for the long haul and need to invest in building local assets such as schools, roads, ports, brands, distribution networks and supply chains.