Burma is at a crossroads, politically and
economically. Will it become Asia’s new economic tiger or remain isolated from
the global economy?
All
eyes are on Burma’s elections on April 1, a test of its commitment to
democratic reform. The quicker the government can reform, the quicker the U.S.
and EU sanctions might ease and the quicker its growth will accelerate.
These
are the first elections for more than twenty years to include opposition party
the National League for Democracy, led by Aung Sang Suu Kyi. The U.S. has
already started restoring full diplomatic relations with Burma, in recognition
of its ongoing political reforms. As U.N. Secretary General Ban Ki-moon said
last week, Burmais giving “a strong sense of hope and expectation for the
international community.”
The
unleashing of Burma’s economy could boost regional growth and intra-ASEAN trade
and investment. As it is, Burma’s GDP growth rate is projected to average
around 6 per cent per year until 2020, with GDP doubling to $124 billion by
2020, according to IHS Global Insight forecasts.
The
domestic consumer market is expected to grow rapidly, creating a fast-growing
market for exports of goods and services from other ASEAN countries. Burma’s
population is, after all, the fourth largest in ASEAN, at around 50 million
people.
But the
pace of Burma’s economic growth could be even faster if driven by more rapid
economic reforms. A key risk to this more rapid growth would be rising
inflationary pressures, as rapid growth and investment creates supply
bottlenecks and wage pressures. Inflation is already estimated to have averaged
around 9 percent in 2011, and is forecast to average around 10 percent in 2012.
Burma,
like other ASEAN countries, has agreed to the tariff liberalization timetable
under the ASEAN Free Trade Area agreement. From an economic perspective,
Burma’s economic reforms and tariff liberalization will be important to ASEAN’s
objective to create a single market for trade in goods by 2015.
Still,
there are several important steps ahead for Burma.
A key
macroeconomic reform will be the planned implementation of a unified exchange
rate from April 1, as Burma moves to a managed float that will help to reduce
market distortions and boost export competitiveness.
Burma’s
draft investment bill could accelerate investment, with provisions for a
five-year tax holiday for foreign investors, 100 percent profit repatriation
allowances, and government guarantees against nationalization.Other key
features include foreigners having the right to lease land; foreigners no
longer needing a local partner to set up businesses; and joint ventures could
be set up with at least 35 percent foreign capital participation. Unskilled
labour employed by foreign companies would have to be 100 percent local, while
domestic skilled workers would have to make up at least 25 percent of a firm’s
operations after the first 5 years, 50 percent after 10 years, and 75 percent
after 15 years.
The oil
and gas resources of Burma have significant potential for future development,
with Burma currently producing oil, condensate and natural gas. There’s ongoing
exploration and development both onshore and offshore, with both an oil
pipeline and a natural gas pipeline currently under construction from Burma’s
Arakan coast to southern China at a total cost of $2.5 billion. A number of oil
companies from Asian countries are currently exploring for oil and gas in
Burma. Recent Burma government estimates of natural gas reserves are 22.5
trillion cubic feet, indicating substantial future development potential.
The
agricultural sector has considerable potential for further development with the
potential for Burma to significantly improve rice export earnings over the
medium-term, through agricultural technology such as improving rice yields,
better cropping techniques, as well as the impact of market liberalization
measures.
Tourism
flows, meanwhile, have already picked up, while business-related foreign visits
have increased sharply due to heightened investor interest.
Burma
remains heavily dependent on imported manufactures from China, yet economic
reforms, rapid growth in domestic demand and increased foreign investment could
result in the rapid growth of the low-value added manufacturing sector, helped
by relatively low wage costs.
Transition
towards a more market-driven economy will itself create challenges, as Vietnam
and others would no doubt agree. Some of the key challenges facing Burma are
the need to improve the business climate, reform the state-owned enterprises,
develop the financial sector, and undertake vital corporate governance and
anti-corruption initiatives.
One of
the immediate priorities is the need to accelerate the development of the
financial sector, in order to provide intermediation for economic development.
This will require significant liberalization of the financial sector, so as to
allow foreign financial institutions to rapidly play a role in providing
financial services for the economic development of Burma.
This
goes hand in hand with closer co-operation with the IMF, World Bank and the
Asian Development Bank in Burma’s economic development planning, with positive
signs already in this area following Burma’s co-operation with the IMF on its
exchange rate reform process.
Burma’s
economy could emerge as the next ASEAN Tiger economy, despite the political and
economic challenges, if the Burmese government continues to pursue its reform
agenda. This will be a significant positive boost to the ASEAN region and to
realizing the long-term objectives of the ASEAN Economic Community.
After
decades of economic isolation, the reforms being introduced are set to bring
significant improvements in the living standards of the people of Burma – the
government just needs to make sure it can keep up the rapid pace of reforms
that it has embarked upon.
Rajiv
Biswas
The
Diplomat
Business & Investment Opportunities
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