Myanmar should focus on industrialisation, export strategy for better value

Dr Vilem Semerak, researcher and lecturer at the Institute of Economic Studies of Charles University in the Czech Republic, reckons Myanmar should abandon its import substitution policies and start thinking ahead. Â Import substitution advocates replacing foreign imports with domestic production.

During his presentation on trade, industrialisation and growth in Myanmar for 2018 at the Mandalay University last Saturday, Dr Semerak, whose current research focuses on economic reforms and trade in Myanmar, suggested the country should instead aim for industrialisation and export growth for better value across the economy over the long term.

Dr Semerak’s views come after the Myanmar Investment Commission (MIC) on December 22 invited companies to submit proposals for investments in 13 import substitution industries, including auto and auto parts, tractors and trailers, telephone and telecom equipment, machines and machine parts, power distribution and installation, iron and steel construction materials, fertilisers, plastic raw materials, paper, chemicals, edible oil, medical products and beauty products.

The move is aimed at lowering Myanmar’s widening trade deficit, which is currently over $3.1 billion, with imports amounting to $12.86 billion compared to exports of $0.75 billion, according to the Ministry of Commerce Ministry.

“I would recommend that Myanmar focus more on industrialisation and perhaps forget about import substitution,” Dr Semerak told The Myanmar Times during an interview in Mandalay on Monday. Here are some excerpts from that interview, which have been edited for clarity.

How will Myanmar benefit from abandoning import substitution?

Import substitution can play a positive role in the economy but it has to lead to the industralisation of the country. Industrialisation can help Myanmar develop its export market and steer it towards leveraging on its comparative advantages in production rather than simply replacing import products.

The Myanmar market is very fragmented so focusing on producing domestically for local consumption can be a waste of money if not well-managed. If there is a plan to transform short term import substitution policies into a longer term industrialisation strategy, it can also help to deter the Dutch Disease, which refers to the currency risks associated with the country’s high dependence on natural resource exports.

The Myanmar government should definitely also focus on improving the institutional, infrastructure and educational environment to help export-oriented sectors build competitive advantages for the future development of the economy.

What measures should the government take to raise Myanmar’s attractiveness to other markets and help ease trade dependence on China?Â

Myanmar has access to most other markets. It has, for instance, almost completely open access to EU markets within the European Banking Authority’s system of trade preferences. The government can therefore attempt to support export diversification by improving information services for exporters, but also by working with them on quality and assisting with complicated certification issues.  Support for deeper ASEAN integration as a regional counter-balance to China can be also useful.

At the same time, it is very probable that this effort will have relatively small macroeconomic impact on Myanmar, especially in the short run. The economic logic of trade relations and the features of Chinese markets suggest that China will remain the dominant partner for Myanmar in the foreseeable future. Currently, China is the destination for about 41 percent of Myanmar’s merchandise exports

The MIC invited companies to submit proposals for investments in 13 import substitution industries, including beauty products, last year. The Myanmar TimesThe MIC invited companies to submit proposals for investments in 13 import substitution industries, including beauty products, last year. The Myanmar Times

Some have pointed out that the Myanmar economy is on a downward trend. To what extent is our poor economic performance undermined by the pace of political reform? 

The recent downward trend in the economy has led people to deduce that the problems stem from disappointing political and economic reforms. But when we look at the data for Myanmar, growth in the economy is actually forecast to accelerate in 2017. Recent forecasts by the Economic Intelligence Unit (EIU), Asia Development Bank (ADB) and International Monetary Fund (IMF) show expected growth for Myanmar coming in as high as 7.7pc in 2017.

This suggests that perhaps there are some discrepancies between the official data and the public’s perception of growth. From my perspective, the macroeconomic performance in Myanmar is definitely quite positive from my perspective. Actual political problems during the reforms are almost always much more complicated than anticipated at the beginning of the reforms.

What is the best solution to remedy the economic setbacks and which sectors should the government focus on? 

Surveys among business people and comparisons with other economies suggest that Myanmar is facing multiple problems, including underdeveloped infrastructure, bureaucracy and lack of experience among entrepreneurs and a weak financial system and education system overall. As such, it is difficult to choose one particular sector or one particular type of reform which Myanmar must focus on.

However, it is necessary to achieve gradual progress in many sectors simultaneously and it is vital to ensure that the reforms continue and that they are not hijacked by specific interest groups.

At the general level it is important to preserve the motivation for reforms and sufficient flexibility of the domestic economy, for instance by means of emphasis on competition policy and sound banking which prevents large players from abusing their position.

Also, to not forget about sectors which are often relatively silent and which often do not attract immediate attention, but which are likely to be crucial for the future economic growth and development such as education.

How will the Rakhine crisis affect the economy in 2018? 

Available forecasts by the ADB and EIU state that Myanmar will continue growing in 2018. The real GDP rate of growth estimates range from 6.7pc from the EIU to 8pc from the ADB. Therefore if a peaceful and stable solution is found soon the overall effects on the whole economy can still remain relatively small. However, it will be different at the regional level; the directly afflicted regions may need additional assistance which can lead to additional pressures on public budgets.

If an acceptable solution is not found fast, Myanmar’s reputation and attractiveness for investors may suffer and Myanmar can even face additional sanctions. This will result in fewer investments and deter funding for international projects in Myanmar.

It will also pose a direct threat to reforms and especially for attempts to diversify the economy and its exports. That can also mean Myanmar is forced to focus even more on China because EU and US investors are discouraged by political effects of the crisis.