Courtesy of the Financial Times, a look at Myanmar’s economic growth:

Following his “flipping the switch” on political reform, Thein Sein, Myanmar’s president, has embraced the international donor community – of bilateral and multilateral agencies led by the Asian Development Bank, the World Bank and the IMF – in an agenda of good governance and economic liberalisation. Early reforms have spurred economic growth to around 8 per cent and both government and donors have extrapolated this trend out to 2030 and the attainment of middle income status almost as if it is already in the bag. Not wanting to be seen as a spoiler, neither side has an interest in deviating from this new economic narrative.

But economic liberalisation can perpetuate the political and economic dynamics of the resource curse. Foreign direct investment can fall into resource enclaves while the elite benefit from increased resource rents and their recycling into real estate and consumer import booms. Under this dynamic, the elite’s power is enhanced, allowing them to adapt to and exploit Myanmar’s nascent democracy.

Much FDI is targeting the oil and gas sector and will target mining once a new law is enacted. Some is targeting real estate, although this sector is cyclical and currently booming due to a once-off increase in demand from foreigners. Foreigners are also interested in the domestic consumer market, although it is still small. Few foreign investors are interested in Myanmar as a base for export manufacturing, an area with the potential to drive rapid and inclusive growth and job creation.

For investment in export manufacturing to be feasible, there has to be a structural change in the economy to improve competitiveness. The sudden $2.6bn trade deficit recorded in 2013/14 should be a red flag to policy makers – but donors feel that trade deficits can be financed by FDI and official development assistance for years to come. That doesn’t sound much like the export growth model that has served so many Asian countries so well.

Myanmar’s currency has appreciated on the back of resource exports, particularly gas; it would need to depreciate by 20-25 per cent to ensure the competitiveness of exports of agricultural commodities and labour-intensive manufactured goods.

Myanmar also needs infrastructure development to support competitiveness. Here, the politically correct agenda of the donors may be a challenge for policy makers.

The donor-led good governance agenda emphasizes “process”, which includes transparency and best international practice, and the use of environmental and social impact assessments and international competitive tenders. This creates opportunities for international companies who can work to such standards; in telecommunications, where industry fundamentals are well understood and compelling, it has worked quite well.

But in other important infrastructure sectors such as power and transportation, foreign investors struggle. Economic parameters are less well defined and ministries must be navigated, putting local knowledge at a premium. There have only been a handful of approvals for FDI in small scale power generation so far. In transportation, development has been hard going. The special economic zone at Thilawa has made little progress while those at Kyauk Phyu and Dawei have stalled completely.

The donor emphasis on good governance and exemplary process means that mainly public sector agencies, domestic and international, tend to be involved in early stage infrastructure project development, as private companies will be less inclined to contribute if they are later subject to competitive tender for the concession. And these public sector agencies are challenged by issues of coordination, bureaucracy and staff incentive. To speed things up, the government must work closely with big local conglomerates to identify the major infrastructure projects that are “bankable” and grant the concessions that empower Myanmar’s most capable entrepreneurs to engage foreign capital and technical resources.

To support local conglomerates as promoters of infrastructure projects, the government must stimulate the international funding environment. Myanmar’s “special relationship” with Beijing should be resurrected, but with the message that the old government-to-government FDI approach doesn’t work any more, that it now generates too much political heat. Beijing has to understand that Myanmar’s politicians must be responsive to citizens’ concerns over China’s rapid rise, a situation that pervades the region following its posturing in the South China Sea.

Since Chinese companies benefit from the existence of good infrastructure in Myanmar and in the wider region, they can best facilitate it by moving towards a portfolio investment approach, underwriting and investing in project bond issues, some of which might be denominated in renminbi. With Beijing back in Myanmar’s infrastructure development game, with a fresh approach, donors like the IFC might respond to some healthy competition and be galvanized into proper infrastructure lending, rather than just real estate.

With an infrastructure boom under way, the government will need to formulate a nuanced industrial policy. It can learn from the successful economies in the region. Exports should serve as the objective performance standard for companies to receive subsidies in certain industries, and the government should cull losers rather than try to pick winners. Some form of infant industry protection may also be desirable.

Myanmar is no doubt emerging into the regional and global economy at a very challenging time. There is no room for donor complacency over whether it makes a successful transition from a resource-dependent economy to one based on labour-intensive manufacturing exports and a climbing of the technology ladder. Ultimately, whether Myanmar hews closer to economic miracle or myth will depend on the vision and quality of its political leadership.