Features | Economy | Southeast Asia

Burma’s Business Revolution

Burma won’t be making iPads anytime soon. But the country’s size and location mean that international businesses are still circling in hopes the current reforms stick.

It’s difficult to judge which of the reforms underway in Burma will ultimately come to matter the most.

The freeing of Aung San Suu Kyi and the regime’s decision to let her contest a seat in April’s upcoming parliamentary elections were certainly critical in terms of persuading the international community that Burma might be a candidate for rehabilitation. The release of hundreds of political prisoners – including people like 88 Generation Students Group leader Min Ko Naing and former Prime Minister Khin Nyunt, whom few expected to ever see or hear from again – was a similar watershed. The government ceasefire with the Karen will also be of ground-breaking importance, if it holds.

However, the opening of the new session of parliament this week (on January 26) could usher in the most profound change of all, namely the opening up of the country to foreign business and investment through a series of keystone legislative reforms. And these changes, perhaps more than any others, have the potential to remake Burma.

Two pieces of legislation in particular could transform the country into a viable destination for foreign enterprise, the first being a new foreign investment law. Special laws put in place for the Dawei Special Economic Zone, which is being built by Italian-Thai Development, are being seen as a possible template for the rest of the country. “This is the big thing we’re waiting for,” explains Sean Turnell, an expert in the Burmese economy at Macquarie University. “The new foreign investment law will be critical. It will set out parameters for whether foreigners can buy land, and invest in banks, telecommunications companies, and so on.”

However, Turnell points out that the investment law encountered opposition when it was first introduced to parliament last year, and its passage during the upcoming session is therefore not a certainty. This is hardly surprising: just as some parliamentarians will view the arrival of foreign enterprise as a money-making opportunity, others are bound to interpret it as a challenge to cumbersome vested interests that will most likely wilt in the face of foreign competition.

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The second is a foreign exchange law, due to be introduced for the first time in the new parliamentary session. Representatives of the International Monetary Fund, the World Bank and the Asian Development Bank have been in Burma this month to advise on financial sector reforms, with the purpose of helping the government to unify the country’s chaotic exchange rate regime. But from the perspective of foreign investors, financial reform would mean the ability to remit money electronically at the proper market rate, and thus do business there legitimately.

These measures alone won’t open the investment floodgates, and there are some important caveats. First, the country’s political reforms are still nascent and reversible. Hundreds of political prisoners still await release. Government forces continue to wage war on the Kachin, while their ceasefires with other ethnic armies are still new and fragile. And it remains to be seen how the passage of Aung San Suu Kyi and the National League for Democracy into Burma’s political mainstream will sit with the cast of old-regime figures who warm the seats of parliament. So while the EU and the United States appear likely to drop their sanctions against Burma in the months ahead in response to the progress being made, the Thein Sein government must still face many stern tests of its reformist credentials.

Second, there are serious questions about the extent to which Burma’s dilapidated economy can be reintegrated into the global system. As Joshua Kurlantzick has argued elsewhere on The Diplomat, when a country lacks infrastructure and its population is poorly educated, it becomes a dubious proposition for foreign firms.

This argument is best applied to specific sectors of the economy. Foxconn won’t be building iPads in Burma any time soon, for example, because Burmese workers lack the necessary skills and because substandard technology and infrastructure would make it hard to integrate Burmese factories into the international supply chain. There are simply better places for this kind of venture and, clearly, it will take Burma many years to start competing in manufacturing at anything more than its most basic – if indeed it ever manages to compete at all. It’s worth noting that this didn’t stop a high-level Japanese trade delegation that included the likes of Toshiba and Hitachi from visiting Yangon earlier this month, though it’s unlikely that Japan’s hi-tech industry leaders saw much to inspire them.

However, international business is now circling Burma because opportunities do exist in the right areas. “There’s been a wave of interest since the visits of [U.S. Secretary of State Hillary] Clinton and then [U.K. Foreign Secretary William] Hague,” says Douglas Clayton, CEO of Leopard Capital, a private equity investor in frontier markets. “Myanmar (Burma) has reached the imagination of the investment community.” Clayton stresses that most companies are in the “research phase,” not the “investment phase,” as they await key legislative reforms. Yet he believes the investment phase could be just one or two years away, provided the anticipated reforms are indeed implemented.

Many companies are naturally conservative, and will stay away from Burma for all the reasons described above. But other companies target frontier economies for their potential, rather than spurn them for their riskiness – and for some of those companies, Burma is the great hope. “There aren’t many countries of Myanmar’s size where there’s almost no involvement by multinationals,” Clayton explains. “It’s an outlier: a country of that size that has the potential to grow tenfold. There aren’t many investment stories like this around – and it’s between India and China, the two biggest investment stories of all. It’s a unique location in the frontier market universe.”

Resource extraction and power generation are the two sectors that have attracted the most foreign interest so far, accounting for almost all of the $20 billion in foreign investment pledges received in the year to March 2011, as Jared Bissinger has already discussed elsewhere on The Diplomat. These sectors will continue to be the main draws for foreign firms thanks to Burma’s rich natural resources, especially while the legislative changes remain in doubt. “These sectors don’t require much interaction with Burmese labor and finance,” says Turnell; however, he expects interest in other sectors to start growing, especially if parliament passes the new laws. The tourism sector has great potential; the infrastructure that the country so badly needs can, and probably will, be built in the coming decades by foreign companies; the fledgling finance sector needs foreign involvement; low-end industry has possibilities; and the property sector can also expect to see an influx of overseas businesses. In Burma, then, one man’s obstacle will be another man’s opportunity.

Global real estate firm Colliers International produced its first Yangon Property Market Report in October 2011 in recognition of growing international interest in this area of Burma’s economy. The property sector has been hopelessly underserved by domestic construction companies, resulting in a property bubble in Yangon that has inflated land prices to Bangkok levels. “At the moment [in Yangon] there’s very limited [real estate] capacity and growing demand: hotels, offices, apartments are all near full capacity,” says the company’s associate director for research, Tony Picon. “One of the keys [for foreign entrants] will be hotels and the serviced apartment sector,” he predicts, pointing out that the demand is already there. “We are seeing a surge in tourism, but also in the number of business visitors who are coming to check out the market.”

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Some foreign companies, notably from Singapore, have already started exploiting this situation, despite the regulatory barriers. “Some Asian companies have proved very adept and flexible, taking on Burmese front people or using silent partners,” Turnell says. The early presence of companies from China, Thailand, Malaysia, Singapore and elsewhere in Asia has created an impression that Western companies may already have left it too late to take advantage of the country’s opening. However, Clayton disagrees with this reading of the situation.

“There are too many opportunities in Myanmar for one or two countries to take them all,” he says. “So while there’ll certainly be Chinese and Thai companies coming in, there’ll be opportunities for Western countries too.”

Turnell adds that the government is keen to encourage Western involvement: “Their attitude is that they would very much like Western investment if they can get it, especially in areas like financial services.” For the Burmese government, this isn’t just about business. It wants the international acceptability that the arrival of respectable Western companies would bring and, from a strategic perspective, it wants to dilute the growing influence of China in particular.

The toughest question of all is whether ordinary Burmese citizens will benefit from the anticipated influx of foreign enterprise. There is an obvious risk that they will fall victim to the “resource curse” and watch foreign investors and the Burmese elite trouser the profits of their country’s forthcoming boom. In the final analysis, this could be the true litmus test for the Thein Sein government and for the foreign companies that decide to do business with it: whether Burma starts to get rich, as well as themselves.