Via Asia News Network, a look at the potential of Myanmar to follow China’s development path:

China has been praised for its successful economic development after adopting a market economy.

It has overtaken Japan to become the world’s second-largest economy. Now Myanmar has started to open up to the world. It will be interesting to see how the country performs.

The challenge for Myanmar is to create strong institutions that can accommodate a market economy, said Sompop Manarungsan, president of Panyapiwat Institute of Technology. These include the central bank, the stock market and financial institutions.

He noted that it took China about 15 years to unify its exchange rate. So the market was quite surprised when the Myanmar government introduced a managed float on April 1, with a reference exchange rate of 818 kyat per US dollar. Previously, there were multiple exchange rates with sharp differences between the black-market and official rates. For example, the official rate was 5.4 kyat per $1 last year, compared with the black-market rate of 800 kyat to the greenback.

Prasarn Trairatvorakul, governor of the Bank of Thailand, said the Kingdom’s central bank might help train staff at its Myanmar counterpart, allowing them to work at the BOT. “The monetary-policy matter cannot be learned quickly via chalk and blackboard. They have to gain experience at work,” he said.

Sompop has suggested that Myanmar’s government should learn from Russia’s initial failure in economic development after it abandoned communism and adopted a market economy. With the collapse of the Soviet Union, there were no institutions to handle the transition. In contrast, China opened its market carefully, and even now it has not yet liberalised its capital account, so the yuan is not freely convertible.

“Myanmar’s policy-makers are racing against time, but they have to look at the quality of their policies, not only their quantity,” Sompop noted. Myanmar cannot leapfrog into a successful market economy; establishing macroeconomic stability is the prerequisite.

Teerana Bhongmakapat, professor of economics at Chulalongkorn University, said Myanmar would face the problem of rapid appreciation of the kyat due to capital inflows under foreign direct investment in the early stages. It will face more serious trouble after it sets up a stock market that can accommodate capital flows for speculation on its assets, he said.

The country has already witnessed a strengthening of the kyat. On the unofficial market, the currency appreciated to about 800 per dollar in 2011 from 1,000 in 2009, according to a report by the Asian Development Bank.

The bright side of a strong currency is that it lessens inflationary pressure, but the flip side is that it can hurt exports. One outcome of the stronger kyat was to reduce rice exports, which created a surplus in the domestic market and brought down rice prices, the ADB said.

Appreciation of the kyat helped slow inflation to 4.2 per cent on average last year, from 7.3 per cent in 2010, the bank said.

Trouble may also come from a widening current-account deficit. The ADB projects that the deficit will be 4.8 per cent this year and 5 per cent next year. An upwardly spiralling current-account deficit partly triggered the Thai economic crisis in 1997.

However, Teerana plays down the fear of a widening current-account deficit in Myanmar. The negative effects of the deficit will be offset when the country increases its exports in later years after lifting trade and investment sanctions, he said. And Myanmar is a resource-rich country that will be able to export more gas.

Some Thai investors have expressed interest in relocating their labour-intensive industries to Myanmar as they face rising labour costs, especially after the government raised the minimum wage to Bt300 per day in some provinces. Those that suffered from the massive floods last year also want to diversify their risks by looking for new locations.

However, though Myanmar may offer cheap labour, logistics costs could be much higher than in Thailand because of poor road, rail and sea port infrastructure.

Teerana said the country might not need much funding to improve its logistics infrastructure, but its greatest need is for power-generation projects, and these will require heavy investment. Currently, investors must have their own generating facilities at their plants or hotels for standby power, as blackouts often occur in the electricity grid.

Some Thai business leaders are confident that Myanmar will serve their business expansion better than Laos or Cambodia, since it has a large population estimated to be about 60 million.

The country also has a geographical advantage, as it bridges Asia’s two giants, China and India. This leads the Thai business community and policy-makers to see the Dawei project for a deep-sea port and industrial park as a promising one. The deep south of Myanmar – predominately populated by Mon people – will also greatly benefit from this project, some observers believe.

However, there are others who are concerned about the environmental impact of the Dawei project. This may slow its progress, or even seriously constrain it.

Optimists paint a rosy picture of Myanmar joining Asia’s production chain, and its economy taking off after a half-century of stagnation. The ADB projects 6-per-cent growth in gross domestic product this year and 6.3 per cent in 2013.

“But as the country has come in late, it may face fierce competition in the global market,” Teerana warned.