If the headlines are any indication, Burma had a banner year for foreign direct investment (FDI) in 2010-11. It approved investments of almost $20 billion – more than the previous two decades combined, and even more than Southeast Asia’s latest investment darling, Vietnam, approved the same year. Investment came exclusively from Asia, not a surprise given that sanctions and a strong social stigma effectively prevent Western companies from investing. But while the headlines tell a story that seems wholly positive, the details should give rise to a more cautious optimism.
The first thing to note is that the figure of $20 billion is for approved investments – in other words, investors have gotten the OK, but almost none of these projects have actually invested any money yet. Real investment inflows from last year, according to the United Nations Conference on Trade and Development (UNCTAD), were a more modest $756 million, on par with Cambodia’s $783 million and not even a tenth of Vietnam’s $8.2 billion. The figure was also largely in line with Burma’s FDI inflows in the last few years.
In addition, Burma’s approved investments came from a very small number of host countries – seven to be precise. The biggest of these, China, has seen its investment in Burma grow markedly. In the 1990s, Chinese investment was a modest $8.3 million, but the country became the largest investor in the late 2000s, with almost $350 million per year in the last two years with data available, FY2007-08 and FY2008-09 (Burma’s fiscal year runs from April 1 to March 31). The other major sources of investment were South Korea, Thailand and Hong Kong, though most companies investing from Hong Kong are owned by mainlanders. For comparisons sake, Vietnam attracted almost as much approved investment as Burma last year (about $19.5 billion for Vietnam and $20 billion for Burma) but it came from 51 different countries as opposed to seven.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Notably absent from the list of investors was India. As much as New Delhi is vaunted as being China’s strategic rival in Burma, the investment numbers tell a different story – through September 2009, India’s cumulative investment came to just $200,000. While India seems to finally be ramping up its flagship project in the country, the $137 million Kaladan Project, it is, at least in terms of FDI, nowhere near China’s investment in Burma.
So, while approved investment can’t tell us much about FDI in the past, it’s very useful in indicating trends in future investment. If Burma’s approvals from this year are any indication, the country is slated for a number of large, high-profile investments in the extractive and power sector. Of the $20 billion, almost all of it was devoted to projects in these sectors – 58 percent for the extractive industries and 41 percent to power, mostly for a few large dams. The remaining 1 percent was in agriculture and manufacturing. Neither real estate nor hotels and tourism – nor any other sector for that matter – received any approved investments. And while the total amount of approved investments from last year was an aberration, their sectoral distribution wasn’t – over the last decade, 98.7 percent of the FDI went to the extractive and power sectors.
While last year’s heavy concentration of investment in the extractive and power sectors is normal for modern Burma, it’s significantly different from FDI worldwide. Figures from UNCTAD show that last year, only 9.6 percent of FDI was in the extractive sector and only 4.1 percent in power, yet these two sectors practically monopolized Burma’s investment approvals. Manufacturing, which accounts for almost one out of every four dollars of FDI worldwide, was only 0.3 percent of Burma’s totals, while finance, which takes one in five dollars of worldwide investment, received nothing in Burma.
What does this tell us about Burma? Well, the extractive and power sectors (at least the dams) share an important and telling attribute – they’re both ‘globally scarce and geographically concentrated’ resources, according to Prof. Andreea Mihalache-O’Keef. To build a copper mine or a dam, you must go where there is a copper deposit or a suitable river valley. It is, in essence, a seller’s market.
Manufacturers, on the other hand, can invest almost anywhere they’d like, normally choosing a location that offers the lowest costs and greatest benefits – they search for comparative advantage. Countries often compete for manufacturing FDI by trying to offer the most competitive business environment, including reasonable tax and export regimes, efficient infrastructure, and a general ease of doing business. So why aren’t investors in these industries, especially those from Asian countries who don’t have investment sanctions, investing in Burma?
The answer is that Burma isn’t a competitive destination for most kinds of FDI. There are a number of problems, including poor infrastructure, high port costs, intermittent power supplies, currency convertibility issues, and a number of political obstacles to doing business. These challenges are only complicated by the recent and significant appreciation of the kyat, which has gone from around 1000k/USD to less than 700k/USD in the last year, exacerbating an already tough investment climate.
It’s fairly unlikely, then, that investment sanctions by Western countries have significantly hindered Burma’s economic development. Asian countries don’t restrict investment in Burma, yet there are almost no investments from these countries in manufacturing, real estate, or any other sector that is internationally competitive. Instead, investors in these sectors look elsewhere in Southeast Asia, to places like Vietnam, and only venture to Burma for resources and dams. There’s no reason that Western investors would act differently, and, therefore, even without investment sanctions, it’s unlikely that many Western companies would choose to do business there.
Yet the new government gives rise to cautious optimism, with its acknowledgement of economic distresses and very real talk of reforms. With improved accountability and governance, there’s at least the chance that some of the revenue from the looming resource boom will be used for much needed infrastructure and other public investments. These investments could pay important dividends if they improve the country’s ability to attract other types of FDI, especially in labour intensive industries. But a long history of the ‘resource curse’ elsewhere has shown that it may be better to be cautious than optimistic about Burma’s chances of using new resource revenues to promote real economic development.
Jared Bissinger is a PhD candidate at Macquarie University and former fellow at the National Bureau of Asian Research