New Light in #Myanmar—White Elephant or New Tiger? EIU Webinar


These are my notes from an Economist Intelligence Unit webinar that was given this morning by Sumana Rajarethnam, Senior Analyst from Singapore.  The Economist Intelligence Unit gives regular webinars on various key areas that represent a combination of global risk and opportunity.

Move towards political reforms in Myanmar have led to a call for the removal of international sanctions. The removal of these sanctions in turn could lead to greater foreign direct investment (FDI), higher economic growth, and a greater integration of Myanmar in the economy of Southeast Asia. The purpose of the webinar was to talk about the impact and the likelihood of this optimistic scenario.

A. IMPACT OF ECONOMIC REFORMS

Before talking about the likelihood of the scenario, what is the impact of this scenario if it takes place? Myanmar has the potential to become the following:

1) A new energy and food source for Asia

Myanmar could become a source of food for Asia because it has twice the amount of arable land as Vietnam (11M hectares). However, the agricultural sector is very poorly capitalized, with little equipment such as tractors, and low fertilizer consumption. Therefore the potential for capital efficiency gains are huge. It is most likely that the agricultural sector will be developed first, to be followed by the development of manufacturing and mining.

The energy sector is also very promising—the natural gas resources are 22 Tcf (Trillion cubic feet) and there are still surveys of additional coastline and offshore sources being conducted.

2) A new consumer market

There are 60 million people in Myanmar, and it has the third largest population in Southeast Asia after Indonesia and Vietnam. The data on current income levels does not give you a good picture of the purchasing power of consumers in Myanmar because there is a large informal economy. If transportation infrastructure could be developed and supply chains established, markets will grow rapidly.

3) A regional transport hub

There is an ambitious $50B project to create transport linkages that is being spearheaded by China. This could bypass the current shipping bottleneck of the Straits of Malacca (between Singapore and Indonesia).

4) A low-cost manufacturing and export base

The labor market has a lot of potential for growth. 65% of the population is under 35 years old. In 1990, Myanmar had hundreds of companies in the state sector which were mostly in the garment industry. Growth here was curtailed by the ban of imports from Myanmar by the US in 2003.

The largest opportunities for investment are in the telecommunication, agri-business, and tourism sectors. It will take more investment on a longer-term scale to take on the construction sector; but this investment in infrastructure is essential for a take-off in the manufacturing sectors. However, if manufacturing sectors, this would lead to the next wave of investment opportunities, which is health care, retail sales for the domestic market, and the banking sector. This is the longest-term investment opportunity, but one with the largest potential return if reforms to take hold and the economic growth creates a burgeoning middle class.

5) Good news for the world

An emerging economy and potentially emerging democratic movement in Myanmar would be a welcome relief to the world which is hungry for good news after the current slate of problems, particularly those in the Eurozone.

B. LINKS BETWEEN ECONOMIC AND POLITICAL REFORMS

Of course, this economic impact can only occur if the political reforms are successful. These reforms hinge on the following factors:

1) Is there real hope for change in the political order?
The President Thein Sein is moving for reform, but the success of this movement depends on the military. At the present, it holds veto power over any changes to the constitution. It is entirely possible that the current reforms are being orchestrated by the military as a form of window dressing in order to lure foreign investment. However, the people in Myanmar would not be fooled by this and opposition to the current form of military rule would continue.

2) Will structural reforms be introduced?

This would happen only if the military agreed to these changes. If the government came under civilian control, the military could be tried for past atrocities. If there were a reconciliation and amnesty movement similar to that which occurred in South Africa, this might give the military the incentive to relinquish control.

3) How will the West respond to changes on the ground?

The lifting of sanctions by the European Union is one thing, but the REAL “green light” for foreign investors will be the lifting of sanctions by the US. These sanctions can be done through the executive branch and do not require congressional approval, which is fortunate because that branch of the government is paralyzed by the fact that this is an election year. The fact that Myanmar is promising to stop buying weapons from North Korea will be helpful in convincing the US that it is serious about ending its international isolation.

4) Can the military resolve long-standing ethnic conflicts?

Although these ethnic conflicts are in outlying areas of Myanmar, they effect the entire country because the military has in the past used the suppression of these conflicts as an excuse for why it needs an iron fist and why democratic reforms needed to be postponed. If these conflicts, especially those in the Kachin state, can be resolved, then the military would have no excuse and pressure for democratic reforms in the rest of the country would increase.

The analogy here is with India: India has several local insurgency movements. Those regions with these movements are also those with the least developed economies, which tends to give impetus to the insurgency movements. Myanmar has a chance to break that vicious cycle.

C. LIKELIHOOD OF POLITICAL & ECONOMIC REFORMS

Now that Sumana Rajarethnam has had a chance to discuss the impact of economic reforms, and what political roadblocks need to be removed to empower these economic reforms, what is the likelihood of these actually taking place? He envisions three scenarios, the most likely scenario, the optimistic scenario, and the pessimistic scenario, which are summarized in this chart below.

Scenario Economic Political GDP Growth Likelihood
1) Most likely Investment occurs, but reform lagging
Military in control, democracy does not take firm root, NDL reform party still marginal 7% 60%
2) Optimistic Breakup of state monopolies, reforms implemented Multi-party democracy, NDL not majority but very influential 8.5% 25%
3) Pessimistic Only growth in extractive industries Military cracks down on reforms, sanctions reinstated 5% (current baseline) 15%

The reason why there is hope for Myanmar is that sum of  the moderate and rapid growth scenarios above (the most likely and the optimistic) together represent an 85% probability. The reason why there is hype in the press at the moment is because the optimistic scenario which would lead to the positive outcomes mentioned in part A above has only a 25% probability of occurring.  There needs to be continue international pressure and monitoring of the situation so that the military has an incentive to help make that scenario happen, and to avoid the pessimistic scenario, which would be a backslide to where the country was before this reform movement started.

D. EVENTS TO WATCH

The key events to watch for in the coming months are:

  1. Aung San Suu Kyi’s upcoming visit to Britain in Norway in June
  2. US’s re-engagement with Myanmar which is being directed by State Department
  3. Myanmar’s progress in reaching reconciliation with Kachin, Karen, Rohinga and other ethnic minorities

I thought this seminar was an excellent presentation on the risks involved in that it laid out the potential that a positive economic scenario would have, it linked that scenario to other risks such as those in the political and societal (infrastructure) arena, and it then laid out the likelihood of three different scenarios.   I appreciated the in-depth analysis provided by the Economist Intelligence Unit, particularly in comparison to the mainstream press which has concentrated on the hype (sole mention of the optimistic scenario without any analysis of its likelihood or the roadblocks to its implementation).

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