In Myanmar, avoiding the traps of foreign investment; Aung San Suu Kyi warned against “reckless optimism” by investors

In Myanmar, avoiding the traps of foreign investment

As potential investors converge on the Golden Land from all over, Opposition leader Aung San Suu Kyi voiced her desire for “democracy-friendly investment”, in particular, foreign direct investment (FDI) that creates jobs Myanmar’s unemployed youth. She warned against “reckless optimism” by investors.

BY HTWE HTWE THEIN –

1 HOUR 32 MIN AGO

As potential investors converge on the Golden Land from all over, Opposition leader Aung San Suu Kyi voiced her desire for “democracy-friendly investment”, in particular, foreign direct investment (FDI) that creates jobs Myanmar’s unemployed youth. She warned against “reckless optimism” by investors. Western governments indeed are encouraging their businesses to act as role models in terms of setting labour standards, looking after the environment, giving back to society and so on. Meanwhile, Asian governments and businesses wrangle over Myanmar’s natural resources and infrastructure projects.Foreign non-governmental organisations (NGOs) have found themselves with a mountain of work to do and a role in nation-building. How should Myanmar continue to develop as a nation, as it grapples with the potential and pitfalls of FDI?

Having researched international business participation in Myanmar since it was slapped with Western sanctions more than 15 years ago. I discussed this and other questions with my research partner, Professor Klaus Meyer – a leading management scholar with the China Europe International Business School in Shanghai and Vice President of the Academy of International Business.

THEIN: What are your thoughts on the impact of FDI on emerging economies, both positive and negative?

MEYER: It has been said many times that some FDI projects are probably bad for the host country while many others generate substantial positive effects. I would argue that many of the projects considered ‘bad’ are actually the outcome of not just the actions of multinationals, but also the interaction between the MNCs and the local rules/regulations. If you have good laws, and impartial and effective enforcement, most FDI projects will probably generate more good than harm.

THEIN: That’s what Daw Aung San Suu Kyi is calling for: To establish rule of law in Myanmar, ahead of the FDI rush.

MEYER: Let’s take the oil and gas sector, or any big infrastructure project. The multinationals need to put down a lot of money to build infrastructure and the pay-back period is long. If the contractual agreement (with the government) is drawn up badly, a lot of undesirable things can happen — from destruction of wildlife or poor working conditions, to exorbitant user fees.

The reasons for a bad contract can be twofold: Corruption or inexperience. To minimise corruption, the government of Myanmar would be well advised to commit to a maximum of transparency. To minimise the chance of falling over its own inexperience, bring in independent experts to help negotiate contracts.

THEIN: The contracts for the dam projects for hydro power and oil/gas pipelines were all drawn up (by the previous military government) largely in favour of the investors or investing governments. These contracts are cause for grave concern and popular protests in Myanmar today. The Opposition and the government are looking into these and learning from past mistakes — hopefully, the new contracts will prioritise domestic needs above foreign investors’ profits.

How about textiles? Many believe this would be a good industry for Myanmar to invest in. Yet recent events in Bangladesh raise considerable concern! Will pressure from NGOs prevent similar tragedies here?

MEYER: I don’t think Myanmar should expect too much from NGOs. They make a lot of noise and, at the margin, that helps a bit. However, how many consumers really care? Students in America and Britain probably do, as do consumers of premium brands that made “social responsibility” a core element of their brand image. But that is only a small share of the people buying clothes every day. So, Myanmar cannot rely on international NGOs or standard associations alone.

THEIN: Myanmar is definitely new to the idea of activism and civil society — two years ago, none existed. Their voices are very prominent and get the attention of politicians. They are the props for authorities to take action. So I am all for it!

MEYER: You are right. They push the issues forward. But to be effective and sustainable, a different approach is needed.

I believe that the textile industry has potential because of Myanmar’s large labour force, and the fact that wages in China are rising sharply. However, Myanmar needs to avoid being trapped by buyers for foreign brands and retailers putting pressure on prices (and hence costs) that pressure factory owners to exploit their workforce.

THEIN: Leading brands are raising their standards and supporting international initiatives to secure minimum standards. That should help, shouldn’t it?

MEYER: I wouldn’t be too optimistic about that. First, such initiatives involve only the leading brands; the volume of products sold comes from cheap and cheerful brands. Secondly, the purchasing strategies, even of the leading brands, are inconsistent.

Take this example: A friend of mine is a sales manager for an electronics manufacturer operating in China. Her company was suddenly in the news in the US because some labour association made claims about their abusive labour standards.

She said: “For several days, our buyers were calling me to ask what was going on, expecting reassurance that we are not using excessive overtime and all that. In some cases it was the same guy that, only the week before, asked to rush our order and to increase volume at short notice – of course at no extra cost and without hiring additional labour.”

So, all those NGO initiatives are well-intended and those corporate social initiatives help a bit. But from the perspective of a host country like Bangladesh or Myanmar, you cannot rely on that. The price pressure will always be there because the purchasing managers’ job depends on getting a low price.

To counter those pressures, the country needs to build its own legal and social infrastructure, including transparency, independent trade unions and journalists and, of course, non-corrupt enforcement of the laws. Only if laws are enforced, and the same standards apply to everyone, will the honest factory owner be able to prosper.

THEIN: Investment in Myanmar increased by nearly five times in the fiscal year 2012-13 compared to the previous year. Investment in the manufacturing sector was mainly for garment manufacturing. To my mind, this sector is opening up too fast, before laws and enforcement measures have been properly developed. What type of FDI would actually be good for Myanmar?

MEYER: At this point in time Myanmar can’t be too choosy because it does not really have much to offer. Nowadays multinationals are, first and foremost, looking for human capital, and to the best of my knowledge that is still not well developed (in Myanmar). You can’t attract R&D labs until you have strong local universities, specialised scientists, first-class education and all that.

So, to climb the ladder of industrial development starting with low to medium-skilled jobs like textiles, is not all that bad.

However, there also needs to be some strategic thinking in industrial policy to identify a handful of sectors where, perhaps, Myanmar might be competitive internationally in five to ten years’ time. The question is: What does Myanmar have that not many others can offer?

My intuition is that there could be considerable potential in tourism and in certain food sectors such as seafood, or the growing of fruit and vegetables in demand across East Asia. Another option might be to link into the car cluster in Thailand and produce labour-intensive parts for cars made by Japanese brands in Thailand.

ABOUT THE AUTHOR:

Htwe Htwe Thein is a Senior Lecturer with Curtin Business School with an ongoing research interest in international trade and business investment in Myanmar. This is an edited transcript of the dialogue, and a longer version of the article in the print version of TODAY.