Burma: Asia’s Next Tiger Economy?

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Burma: Asia’s Next Tiger Economy?

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 is the Asia-Pacific Chief Economist for IHS Global Insight. The macroeconomic data cited here is sourced from research and reports from IHS.com.