Can Myanmar’s Economy Cope With Sudden Influx Of Foreign Investment?

Via Radio Australia, an interview examining Myanmar’s ability to cope with sudden influx of foreign investment:

Presenter: Richard Ewart

Speaker: Brian Klein, former American diplomat and trade official

KLEIN: There’s a lot of opportunity in Myanmar so money is chasing that opportunity.  But in Myanmar,  government is very new and the economy is still quite fragile and part of the concern is as money flows in very quickly to an economy that promises fast growth, especially since there’s not much growth around the world these days, especially not in the US, Europe or Japan and even China and India are starting to slow, but when there’s money starts flooding into an economy that’s not really that prepared to handle it, there are some serious problems that can occur and as fast as money goes in, money can leave. The Myanmar government is starting to make changes to handle this  inflow, but the question is whether or not they’re going to make enough of an effort to build a strong, functioning government before the money gets there or after.
EWART: But presumably this is a two-way street, because surely investors are not going to want to go into the country if they feel that there’s a risk their investment will fall down?
KLEIN: Right, I think mostly frontier market investors accept that there’s a lot of risk in countries like Myanmar, in Laos, in Cambodia, at least within South East Asia. Vietnam is becoming slightly more mature. China’s very mature by now, countries like Thailand are very mature. Even the Philippines and Indonesia have a reasonable amount of security that if you put your money in, you can bring it out pretty easily. But part of the problem going into Myanmar is that the government and a lot of economic activity over the last decade or so has been completely controlled by military interests and when, at least on the US side when you needed due diligence and you had significant reporting requirements to the US government, especially for human rights issues and Myanmar has in the past dealt with North Korea, there are serious concerns. So investors have reporting requirements, so even you do due diligence, it can be very challenging to figure out who owns what and what have they done in the past. Other investors don’t take that as seriously and they just want to be the first in, so for example, the mining sector, people generally jump in very quickly, because they want to be the first to start pulling out those resources and I think that’s why Aung San Suu Kyi very wisely cautioned investors about that reckless optimism and she was referring to some deals that were starting to happen where there was absolutely no transparency at all and a part of her concern I think is that the money is going to flow to the top people. The average Myanmar citizen is not going to enjoy any of the benefits and a lot of is state resources especially mining and timber. I mean she has some serious concerns and they’re well warranted.
EWART: You mentioned mining there. I mean are there lessons to be learnt, say, for example, what’s happened in Mongolia, where suddenly, of course, they find themselves sitting on enormous mineral wealth?
KLEIN: From the government perspective, especially in Mongolia, there’s so much money that’s poured into that economy and some people have gotten very wealthy and that’s fine, but now there are concerns of whether that wealth will spread out to the general population. Even the Mongolian government now has decided they want a bigger piece of some of those deals, that they negotiated deals, they are state-held resources and now they realise, well we didn’t get such a good deal first time around, so we’re just going to seize some of it, where going to make it so we get a better percentage of the profits out of these deals. So from the investor perspective, yes  , they’ve been a bit surprised, because there is so much wealth there, over a trillion dollars potential,  that  they thought they were going to get everything they could and they brought in all the equipment and they brought in the resources and they helped build the roads and now the Mongolian government decides no, it’s not going to happen exactly as everyone thought. So there’s a risk there in Myanmar as well that the early deals may not turn out as good for the investors as they initially thought.
EWART: There’s been a recent change of government in Mongolia which as I understand it has led to them imposing restrictions on particularly Chinese investment and I would presume we’re unlikely to see similar restrictions in Burma?
KLEIN: Well, the interesting thing on Burma and China relations is that China’s been one of the biggest investors and they had a very large dam project and most of that electricity was going to flow back into China and Burma would get a lot of the money from the project, but none of the electricity and they’re somewhat electricity starved and there was a popular movement against that investment and the project had already started and it was cancelled. Now China’s leaning very heavily on Burma to restart that project, but there has been a shift, not only in the public’s view but also among government officials that may be it wasn’t the best idea to sell off all these resources. A lot of its  timber also goes into China, there is an endless appetite there in China. So now that part of this shift to opening to Japan, the US, the UK and the rest of Europe, even Australia, that they see that  leaning too much on Chinese investment might not be in their best interests. And of course, part of that is they get more people bidding on projects which means potentially more investment and more profit, but also they have a certain wariness of being overly dependent on China. So similar Mongolia has the same concerns and that has the same concerns. They have very limited options unfortunately, but Burma’s definitely has much more investor interest at the moment.
EWART: Does that not therefore tend to suggest that the country is better placed to deal with foreign investment coming in than perhaps some are suggesting, that they do have a bit of a handle on this situation?
KLEIN: Well, I think strategically they see that they need more countries involved and that’s part of the reason why they had elections and granted they weren’t by international standards of democracy….they were free and fair but they were very limited. The number of people in parliament are heavily weighed towards the military or military-backed parties. So Aung San Suu Kyi’s party while she won the vast majority of the seats that were available, it was a minority number of seats. So at that level they understand they need more countries involved, but when it comes to actually strengthening the rule of law, for example, so that contracts will be honoured or that there’s some recourse of contracts if they are not honoured.  Securing the borders, there’s a lot of minority groups that have been oppressed for a very long time, there are military campaigns against them throughout the north and the east, that situation is not totally resolved and a lot of the resources are there and I think many of these ethnic tribes worry that they’re just going to get run over and they’re going to lose all of the benefits that will come from these concessions.
But I would have to say they’re certainly trying. Now Burma they are  starting to negotiate an investment treaty with Japan and Japan has agreed to dialogue agreed to go in and help develop a bond market. So they’re definitely forward leaning and many of the leaders are in their 50s and 60s and they are real breaks from  the past, 70 and 80 year-old generation of military rulers. So there is reason to hope that they’re going to turn this around and prepare themselves for the money that starts rolling in.

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