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Date: 2016-08-12

Ready Or Not, Myanmar Enters The Global Arena—Part 3: Issues & Challenges

Ready-or-Not,-Myanmar-enters-the-Global-Arena—Part-2-Coming-Out-of-the-ShadowsMyanmar 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 the first two articles of this series, I provided a brief background on the changes in Myanmar that opened the country to much of the rest of the world and discussed the opportunities available in the country. In this final article, I will examine the issues and challenges that still remain.

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.

Business Climate

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%.

Financial Sector

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.

Commercial Infrastructure

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.

Flawed Statistics

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.

Other Issues

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.

Final Words

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.


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