Free-market myths

As Myanmar opens up to the world, the issue of foreign investment has come to the fore. In the following piece published in one of the country's leading newspapers, Rick Rowden warns the people and policymakers against hasty amendments to their foreign investment laws based on popular misconceptions and myths about the nature of such investments.  

THE foreign investment law amendments have dominated debate in Myanmar in recent months. But Myanmar should take all the time it needs to introduce amendments that can best serve its long-term economic development needs and should not allow itself to be rushed into sub-optimal arrangements because of its desire to distance itself from China or commercial pressure from Western investors.

When it comes to assessing its long-term developmental needs, Myanmar should not be swayed by foreign advisers advocating the laissez-faire approach to foreign direct investment (FDI) policy, but instead should beware of some of the most popular mythologies in the dominant free-market school of thought in economics.

Types of foreign investment

The first myth is that any FDI is good FDI. However, there are at least three main types of FDI: greenfield, brownfield and short-term speculative investment. Greenfield is the best type because it usually involves creating new businesses, building new factories and creating new jobs, and tends to be longer-term in nature.

Brownfield investment, also known as mergers and acquisitions, in which foreign investors come and buy up existing firms, can be helpful in restructuring some firms to become more efficient and expose workers to improved management skills, but such investments can also destroy jobs, reduce the number of domestic companies, and extract quickly generated wealth from the country. Foreign investments should not act as mere substitution for domestic companies but should result in additional net capital formation.

Portfolio, short-term or speculative investment can be helpful in providing short-term capital, but such speculative investments can also be very dangerous, leading to risky asset price bubbles (such as in real estate) and destabilising rapid capital inflows and outflows.

Myanmar's amendments to its foreign investment law should recognise these differences and structure its FDI incentives and tax breaks accordingly, prioritising incentives for greenfield investments and using disincentives and effective regulation on FDI in brownfield and portfolio investments.

A second popular myth in the orthodox school of laissez-faire economics is that 'a level playing field' and 'national treatment' are very good and policies or rules that favour domestic firms over foreign investors are 'discriminatory' and 'unfair' and very bad.

The widespread popularity of these misconceptions is unfortunate because Myanmar absolutely must retain policies that treat foreign investors unfairly, that tilt the playing field in favour of its domestic firms and that proactively discriminate against foreign investors. It must do so for all of the same reasons that each of the industrialised countries adopted the same policies when they were first industrialising.

Beginning with the UK in the 1500s all the way through to Korea in the 1960s, the rich countries figured out a very important lesson early on: foreign investment policies should be used primarily to support and build up the manufacturing value-added capacity of their own domestic firms; if foreign investment did not do this, it did not get in.

This important lesson has been wholly unlearned in recent decades. Today, adopting 'national treatment' for multinational corporations which enter Myanmar to compete with its domestic firms is exactly like having Manchester United play a football game against an opposing team made up of schoolgirls. It might be a 'level' playing field but we can easily guess what the outcome will be - and we've seen it all over sub-Saharan Africa for three decades. Today's advocates of free-market capitalism and many Western investors are hoping that Myanmar will be unaware of this fundamental lesson.

A third popular myth is that FDI is only attracted to countries that have low wages, weak labour laws and non-existent environmental regulation. Such mythology is reinforced by the World Bank's annual 'Doing Business' indicators. In fact, the data shows that most FDI is attracted to countries with good transportation infrastructure, and a healthy, literate and well-skilled labour force. That is why it will be important for Myanmar to scale up its long-term public investment as a percentage of gross domestic product (GDP) in the underlying public transportation, public health and public education systems and make the big, upfront investments needed to eventually realise increased worker productivity and higher GDP growth in the future.

However, in order to make such big, upfront public investments, the country will need to categorically reject the policy advice to come from the International Monetary Fund (IMF), which will likely insist that Myanmar maintain a 'prudent' restrictive fiscal policy in the constant short term - to the point where the country ends up chronically underfunding its public investment as a percentage of GDP over decades.

Myanmar should invite educators and health workers from any of dozens of sub-Saharan African countries that have dilapidated and collapsing health and education infrastructures and ask them about their experience with IMF fiscal policy restraint.

One of the troubling aspects of the recent discussions about amendments to Myanmar's foreign investment law is the backwards timing of it all. It seems almost impossible to figure out what a good foreign investment policy is for Myanmar without first having some clarity on the long-term roadmap for future national economic development. Myanmar's current 30-year Industrial Development Plan for the period 2000-30 sets out some ambitious targets but offers very little detail on policy strategies for establishing an orderly, efficient and competitive industrial sector. The government is revising and updating the plan but such a process would ideally precede the changes in the foreign investment law.

A fourth myth of laissez-faire economics that Myanmar would do well to reject is the binary discourse that supposes a 'private sector' that is good and a 'public sector' that is bad. In fact, the far more important binary for Myanmar to consider is the fundamental differences between its 'domestic' companies and 'international' companies. It should make a long list of all the ways in which the capabilities, needs and interests of its domestic firms are different from those of foreign investors, and then adopt policies to adequately address these differences with support for the domestic firms. Making such clear distinctions is a first step in developing a new and more detailed 30-year development strategy, and should be an essential prerequisite for informing any amendments to the foreign investment law.

A fifth myth of free-market economics is that FDI will always produce a happy 'win-win' situation in which both foreign investors and host countries equally benefit. While it is important to incentivise the right types of FDI to achieve such win-win situations, Myanmar must acknowledge there are also other cases when benefits are too asymmetrical in favour of the investor, and indeed, when the investor's benefits are in direct opposition to the development of domestic firms and industries.

While Myanmar must have the proper incentives for attracting beneficial FDI, it must reject the happy mythology of 'win-win' and also have in place policies to address the other scenarios as well. That will likely require an investment policy that clearly sets out rights and obligations for the country and investors that are explicitly designed to further national economic development goals - even if this means policies and regulations that treat foreign investors unfairly, tilt the playing field in favour of domestic firms and proactively discriminate against foreign investors.

Recipe for disaster

A sixth popular myth in laissez-faire economics supports the idea that liberalising the financial sector will bring new international sources of needed finance capital. This myth is enthusiastically supported by large international banks eager to enter Myanmar. But allowing too many foreign banks to enter without adequate regulations and incentives and disincentives to steer capital towards supporting domestic commercial lending could be a recipe for disaster.

Myanmar may want to ask the small and medium-sized enterprises (SMEs) and domestic firms from across sub-Saharan Africa how well such advice on financial liberalisation has enabled them to access long-term, low-interest commercial credit. In many cases, the foreign banks have out-competed the small domestic banks but now will not lend to domestic firms because of the perceived high risk, and because of better returns in more speculative activities. Furthermore, African SMEs are left with nowhere to turn, because the laissez-faire advice of Western donors also had them abolish their public development banks.

Myanmar should reject this mythology and instead focus on the strong advantages of mobilising domestic savings, as distinct from relying on foreign borrowing. Myanmar should also learn from countries such as Brazil, which have successfully used public development banks to channel long-term, low-interest finance capital for helping to build up their domestic industries, and take steps to strengthen and expand the Myanmar Industrial Development Bank.

A seventh myth of the free-market school of thought suggests that Myanmar should just stick to producing what it is already good at or endowed with in terms of natural resources. This is referred to as specialising in its areas of 'comparative advantage'. But Myanmar must distinguish between its current 'static' comparative advantages and possibilities for its future 'dynamic' comparative advantages in 10, 20 and 30 years from now.

For example, when South Korea decided to begin supporting the slow development of a shipbuilding industry in the 1960s, the World Bank advised the country to stick to its comparative advantage in primary agricultural commodities. Instead, South Korea 'defied' its static comparative advantage at the time and used industrial policies to build the industries necessary for it to become a world-class shipbuilder by the 1990s. For Myanmar to set its sights no farther than small-scale agricultural processing and light manufacturing would be to undermine its possible long-term industrialisation trajectory, and such short-sightedness should be rejected in Myanmar for the same reasons as it was in South Korea.

This myth is related to another misconception in free-market orthodoxy that says economic activities do not matter, but rather efficiency, competitiveness and the unhindered realm of market exchange are the only things to focus on. By this logic, it is perfectly acceptable for Myanmar to specialise in agriculture and gems forever, rather than moving on to producing automobiles or airplanes, as long as it does so more efficiently than its market competitors. This myth papers over previously long-understood important distinctions between economic activities that provide diminishing and increasing returns over time and, if adopted, would lock in Myanmar to dead-end, low-productivity activities.

Instead, Myanmar should exploit its static comparative advantages as short-term steps but it should also be just as vigorous in defying them with industrial policy strategies to build future comparative advantages in manufacturing, with clear strategies to increase the manufacturing value added in its exports over time. Rather than buying into the mythology, the rich countries figured out a long time ago the importance of manufacturing to wealth creation, and the importance of public investment in research and development, technology and innovation policies to further advance the manufacturing capacities of their domestic firms.

This gets back to why a clear national development strategy should be formulated before Myanmar engages in amendments to its foreign investment law. If Myanmar carefully assessed its domestic manufacturers and observed where they are currently on the 'ladder' of value-added production, and what skills and technology they need to get onto the next few rungs of the ladder, this could go much farther than free-market mythology in informing how best to incentivise the most helpful types of greenfield FDI in manufacturing.

At the end of the day FDI is like trade in that it is only a tool: it can either be wasted or used strategically to support national economic development. As to whether Myanmar looks more like South Korea or Nigeria 30 years from now, the answer will be determined by the people of Myanmar, not foreign investors.   

Rick Rowden is a development consultant and doctoral candidate in economic studies and planning at Jawaharlal Nehru University in New Delhi who recently visited Myanmar. Previously he worked as an inter-regional adviser for the United Nations Conference on Trade and Development (UNCTAD) in Geneva and a senior policy analyst for the non-governmental organisation ActionAid. This article was first published in the Myanmar Times (24 September 2012).

*Third World Resurgence No. 263, July 2012, pp 9-11