Trade and Investment in Myanmar's
National Reform and Development
Trade and Investment liberalisation and externally-oriented reform
1 Background
The world economy is becoming increasingly integrated. World exports have grown at an average
rate of 16 percent per year over the last 20 years. Over the same period sales by foreign affiliates of
multinational enterprises have increased at a rate of 27 percent per year. The value of sales of
foreign affiliates of multinationals in 2010 was nearly double that of world exports.
This changing environment has played a significant role in shaping the make-up of individual
economies. Countries with competitive factors of production, favourable geography, and a stable
domestic economy open to external engagement have tended to become part of vast international
value-chains. Within these value chains, individual components of final goods and services are
typically produced across a number of countries in order to minimise supply costs. Countries
participating in international supply chains gain from additional demand for domestic factors of
production (mostly in the form of labour demand), multiplier effects of additional economic activity
throughout the domestic economy, and technological spillovers.
Countries that have low levels of participation in international value chains tend to specialise in the
production of goods and services that are characterised by a low degree of complexity or valueadded, such as natural resources or bulk agricultural commodities. Many of these countries are
characterised by abundant natural resources giving rise to Dutch-disease, which reduces the
competitiveness of traditional manufacturing in the domestic economy, and potentially "resource
curse" problems of low institutional quality and wide-spread corruption. While the standard of living
in these countries can be high, such as in Australia and some Gulf states, typically they are not and
they are subject to the boom bust cycles of world demand associated with the products they
produce.
Against this background Myanmar finds itself in a unique situation. On one hand, Myanmar's
decades of international isolation together with its poorly performing institutions, low levels of
infrastructure, potential macroeconomic instability and an abundance of natural resources tend to
suggest that the country has a limited potential to participate in the global economy beyond the
production of bulk commodities. Yet Myanmar has many other attributes that suggest a great
potential to develop into a sophisticated economy, providing its population with a much higher
standard of living relative to current levels. These attributes include its central geographic location,
linking South and East Asia, abundance of low cost labour, and proximity to other South-East Asian
countries which are highly integrated into the world economy. Whether Myanmar is able to take
advantage of these attributes depends not just on the government's effort to liberalise trade and
undertake externally-oriented reform but whether reforms that target the domestic economy are
succesful.
2 Trends in trade and investment outcomes in Myanmar
The following figures highlight the challenge that Myanmar faces in regards to catching up to the
level of integration to the global economy achieved by its peers. Myanmar's export earnings are a
fraction of the earnings of Thailand and Vietnam, and the low shares of exports and imports out of
GDP in Myanmar indicate that the economy is not oriented towards engagement with the global
economy. The trends indicate that Myanmar is becoming less integrated with the world economy,
although this result may be influenced by poor data quality and that the recent economic reforms
have not yet impacted on these measures.
Figure X: Exports (Current $US million)
250000
200000
Myanmar
150000
Thailand
100000
Viet Nam
Cambodia
50000
2012
2009
2006
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
0
Figure X: Exports as a share of GDP
0.9
0.8
0.7
0.6
Cambodia
0.5
Myanmar
0.4
Thailand
0.3
Viet Nam
0.2
0.1
2012
2009
2006
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
0
Figure X: Imports as a share of GDP
1
0.9
0.8
0.7
0.6
Cambodia
0.5
Myanmar
0.4
Thailand
0.3
Viet Nam
0.2
0.1
2012
2009
2006
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
0
Despite relatively small increases in Myanmar's exports over time, the mix of exports has become
oriented away from manufacturing towards bulk commodities, for example the share of apparel and
clothing in total exports fell from over 40% in 2000 to less than 10% in 2011 (ESCAP, 2012). This
change reflects a strong world demand for bulk commodities, a likely deterioration in
competitiveness of Myanmar's manufacturing base, and export restrictions imposed on Myanmar
because of international sanctions.
In 2000, around 27 percent of Myanmar's exports were to the United States with Thailand
commanding the next highest share at around 14 percent. In 2011, Thailand accounted for around
40 percent of Myanmar's exports with China taking the next largest share at around 21 percent.
These changes reflect in large part the trade sanctions imposed on Myanmar by United States as
well as a general increase in trade amongst regional partners.
Figure X: Inward FDI (Current $US million)
12000
10000
8000
Cambodia
6000
Myanmar
4000
Thailand
Viet Nam
2000
2012
2009
2006
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
-2000
1970
0
Foreign direct investment in Myanmar has increased rapidly in recent years but is still small relative
to neighbouring countries. The increase in FDI in Myanmar has centred on oil and gas as well as
mining sectors rather than manufacturing and infrastructure related sectors. The trends in FDI and
trade for Myanmar taken as a whole indicate that the country faces many challenges engaging the
global economy beyond its role as a supplier of natural resources.
Table X: Inward FDI to Myanmar by sector (ADB, 2012)
3 National initiatives in trade and investment liberalisation
The economic and political reforms of President U Thein Sein are important first steps to building a
stable and sustainable market-oriented economy. The Framework for Economic and Social Reforms
(FESR) outlines the policy priorities of the Myanmar Government from 2012 to 2015, many of which
are focused on trade and investment liberalisation. However, the gains from increased engagement
with the world economy can only realised through complementary reforms to the domestic
economy. This section highlights recent policy initiatives aimed at trade and investment
liberalisation in Myanmar.
3.1 Monetary and financial sector reforms
One of the most important reforms regarding Myanmar's engagement with the world economy has
been the unification of its multiple foreign exchange rates. The Central Bank of Myanmar has
introduced a managed floating exchange rate for the kyat which allows market forces to determine
its value, albeit subject to interventions by CBM. The exchange rate reform appears to have been
successful so far although the depth of the market is constrained by government restrictions, limited
financial market infrastructure, and financial market and banking regulation that is not at
international best practice standards. The amount of foreign currency reserves held by CBM (around
US$ 4 billion?) appear to be at a healthy level.
Two major monetary and financial sector reforms that are yet to be implemented are the
independence of CBM and deregulation of the financial sector. The FESR states the importance of
autonomy for CBM to effectively manage inflation thereby contributing to macroeconomic stability
in the country. Independence of CBM would be an important step in ensuring that the Government
of Myanmar is not able to print money to meet its budget deficits as it has done in the past.
Implementing this reform would provide a credible signal to the people of Myanmar and the
international community of the government's commitment to genuine reform.
The capacity of the financial sector to source low cost capital and supply capital to the economy is
currently poor. The financial sector is subject to a myriad of government controls. Innovation and
risk taking are central to a thriving private sector and these activities are best supported by a
financial sector that is appropriately incentivised to facilitate these investments.
3.2 Import liberalisation
The FESR acknowledges the need to remove or reduce restrictions on imports. These restrictions
include tariff and non-tariff barriers. While tariffs applied to imports entering Myanmar are generally
high, ESCAP (2012) provides evidence that the effective tariff on imports is not substantially different
to other countries in the immediate region. One factor that may not have been accounted for in this
comparison is the likelihood that as economic activity increases in Myanmar there will be new
demand for imports of goods that are subject to high tariff levels thereby raising the effective tariff
rate beyond that estimated in ESCAP (2012).
Non-tariff barriers include quotas and a myriad of other government controls such as the import
licensing system. Under this system the right to import quotas are tied to earning export receipts.
This practice is highly distortionary in at least two ways. First, the system limits imports in a way that
is much more restrictive than tariffs; tariffs add to the cost of importing goods but do not physically
restrict the amount that may be imported. In contrast, the quota system imposes hard constraints
on the level of imports no matter the willingness of potential importers to pay a duty for the right to
import those goods. Second, the linkage between export earning and importation rights removes the
ability of firms to specialise in either activity and the gains from specialisation – which are likely to be
substantial – are lost.
A major impetus for trade liberalisation is the government's commitment to join the ASEAN
Economic Community (AEC) which is expected to be established in 2015. The AEC will be an
integrated and common market across ASEAN countries which promotes the free flow of goods and
services, investment, skilled labour, enhanced infrastructure and connectivity within the AEC.
3.3 Investment liberalisation
Foreign investment in Myanmar was first allowed under the 1988 Foreign Investment Law and has
since then been substantially revised under the 2012 Foreign Investment Law. The 2012 Law
removes or relaxes a number of restrictions on foreign investment such as limits on the foreign
ownership of joint ventures operating in Myanmar, land-use rights, and rights to remit profits
overseas. The 2012 Law establishes the Myanmar Investment Commission which is tasked with
providing permits for foreign investment and overseeing the implementation of the Law.
The Law provides for substantial tax concessions for investors but also places substantial restrictions
on the appointment of employees. The government requires that foreign investors appoint
Myanmar Nationals to skilled positions in the business at a rate of at least 25 percent in the first
two-year period, at least 50% within the second two-year period, and at least 75 percent within the
third two-year period. All non-skilled positions are reserved for Myanmar citizens.
The Foreign Investment Law is expected to be harmonised with the Citizens Investment Law (2013)
in the coming years. The Citizens Investment Law is similar in nature to the Foreign Investment Law
(2012) and represents an important step towards facilitating investment from domestic sources in
the economy.
3.4 Special economic zones
The Special Economic Zone law was first introduced in 2011 but has now been superseded by the
Special Economic Zone Law of 2014. The Law sets out the rules, regulations, and responsibilities of
those investing or operating in SEZs. The Law is aimed at facilitating externally oriented economic
activity within the physical bounds of defined SEZs through the provision of relief from import
duties. Currently there are three SEZ projects in development: Thilawa, Kyank Phyu and Dawei SEZ.
However, there are reports of a number of other new SEZ proposals. Thilawa SEZ is the most
progressed and is likely to be operational in the near future.
SEZ provide a number of benefits to firms operating in the SEZ but this can come at the expense of
economic activity elsewhere in the economy. SEZ are a good first step but should be seen as a
transitory strategy. SEZs create a dual track process of development. The problem is that this dual
track strategy can create harmful distortions in the rest of the economy, such as through poor
resource allocation due to unequal playing fields. The experience in China seems to indicate that
along the development path the importance of SEZs declines.
Similar to the Foreign Investment Law (2012), the laws governing SEZs provide substantial tax
concessions to investors in SEZs and those that operate in SEZ. Furthermore, the 2014 Law on SEZ
also requires minimum ratios of skilled labour positions reserved for Myanmar nationals.
3.5 Agricultural reform
Farmland law (2012)
Virgin and Fallow Land Law (2012)
All land belongs to the State. Rights to farming can be traded to other nationals but restrictions
apply to land rights acquisitions by foreign people or organisations. Applications can be made to
acquire land use rights over vacant land even if there are existing land use rights held by others.
There is an incentive for holders of land use rights to undertake economically productive activities
on that land.
Government still exerts substantial control over crop production decisions.
Liberalisation of rice export activities.
4 Integrating externally-oriented reforms with domestic reforms
In order to assess Myanmar's externally-oriented reforms it is helpful to understand how these
reforms interact with the domestic economy and the suite of reforms that are taking place at the
domestic level.
Recipe for growth:

A need to develop or facilitate access to factors of production (human capital, physical
capital, public infrastructure, land, technology)
o
o

rising labour costs in China provides Myanmar with a competitive position
The 15–28 age cohort currently has 13 million young people. 25% of the population
is below working age. ADB (2012)
o fiscal constraints on government funding of basic services and infrastructure
o Myanmar is ranked 129th (with a score of 2.37) in terms of Logistics Performance
Index, and 133rd (with a score of 2.10) in terms of quality of infrastructure. Source:
World Bank 2012.
o In 2011 only 26% of people in Myanmar had access to electricity
o many of these factors of production can be most efficiently sourced internationally.
o government provision of basic services is highly constrained by the government's
fiscal position. This impacts on the quality and quantity of the labour force.
appropriate incentives / market based mechanisms / policy / institutional environment that
facilitate productive economic activity
Macroeconomic stability - prudent financial management of the economy ie national budget and
national debt



Sustainable fiscal position is needed
Myanmar has one of the lowest ratios of government revenues and tax collection to GDP
Low levels of personal and commercial income tax collection can be explained by factors
including weak institutions, a relatively small tax net, and substantial tax concessions for
companies. ADB 2012
The reform strategy (Foreign and Citizens Investment Law, and SEZ Law) provides for
substantial tax concessions to businesses. While these concessions do promote economic
activity, they also come at a cost. The opportunity cost of the concessions is that the
government has fewer resources to provide complementary infrastructure, governance,
monitoring and oversight activities, and provision of basic services. Further research is
needed to understand whether the strategy of providing tax concessions is appropriate.
Investment



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

Restrictions on expropriation
SMEs
tax treatment
access to finance
o The number of commercial bank branches per 1,000 square kilometers was only
0.85 in 2010 and some areas had no bank branches. In comparison, the branch
density ratio was 2.2 in Cambodia, 27.2 in the Philippines, 11.6 in Thailand, and 7.0
in Viet Nam (IMF–FAS 2012).
o large interest rate spread of around 5.5% (ADB 2012)
equal playing field
o remove favourable treatment of SOEs
o remove government's control over production activities more broadly
Infrastructure development
Strengthening Government institutions

There is a lack of experience and understanding of the role of market mechanisms in the
economy and how these mechanisms promote efficient resource allocation.
Tourism



large earning potential
In 2010, tourist arrivals reached 791,500, whereas the Lao PDR—a much smaller country—
received 2.5 million visitors and Thailand received nearly 16 million (ADB, 2012)
complementary to private sector development
Agriculture


Agriculture is a key sector of Myanmar’s economy, accounting for 36% of output (UNDP
2011a), a majority of the country’s employment (ADB 2011b), and 25%–30% of exports by
value (WB–WDI 2012).
There are substantial restrictions on entrepreneurial activity in the agricultural sector.
5 Lessons from international experience and directions for future reform
Focus on building productive and competitive firms in the domestic economy
o
o
o
o
export promotion rather than import substitution
A good first step to promoting the competitiveness of SMEs is to focus on the provision of
non-tradable goods and services. This sector is particularly complementary with a resources
oriented economy.
Competitive firms are generated from the process of innovation and risk taking in a
competitive environment
o A thriving private sector is characterised by firm creation and destruction
o Policy makers should allow firms to make their own decisions, take risks, and fail if
risk taking is ultimately unsuccessful.
o Firms need to be exposed to the full force of the market (both domestic and
international) in order for the low potential firms to be weeded out thereby
releasing valuable factors of production for remaining high potential firms.
o Competitive firms need access to factors of production, some of which are typically
domestically sourced, such as labour, but others are often best internationally
sourced given Myanmar's lack of development and openness to the global economy.
Examples of potentially internationally sourced factors of production are financial
capital, equipment and machinery, production technology, certain human capital,
and access to international value chains. In many cases, these international factors
of production are best accessed through foreign controlled affiliates of multinational
enterprises.
Agricultural businesses should have equal or similar rights to non-agricultural firms. The
agricultural sector represents a large and productive part of the Myanmar economy but the
sector is severely disadvantaged in terms of economic freedom relative to other sectors.
International experience has generally showed a rural to urban migration trend which needs
to be managed carefully in order to avoid economic and social problems. Restrictions placed
on the agricultural sector are likely to contribute to these problems.
What should the role of government be if Myanmar is to become a dynamic, high growth, and
externally oriented economy?
o Government needs strong public institutions that provide
o a stable economic and political environment
o an ability to efficiently and effectively enter into contracts with both private sector
and government counterparts, and a well functioning dispute resolution system,
including the judicial system.
o Certainty needs to be provided to firms and individuals on Government should facilitate
competitive markets (and appropriate regulation where competition is limited) with price
signals that are informative to market participants who in turn are able to respond to those
price signals.
o There is a need to focus on creating a level playing field in the economy. The government's
direct involvement in production in the economy is in many cases based on favourable
treatment of SOE or firms closely related to government. This uneven playing field tends to
crowd out the competitive provision of goods and services by the private sector which are
more efficient and require less public funding.
o There is a role for government to facilitate the provision of basic services (education, health,
transport, law and order) which are building blocks for a competitive economic base and a
society that is able to equitably distribute the gains from increased economic activity,
particularly activity related to resource extraction.