Foreign investment in Myanmar: a resource boom but a development bust?

• Author: Bissinger, Jared
• Position: Report

In February 2011 media outlets worldwide reported that China had surpassed Thailand as the largest foreign investor in Myanmar. (1) China had US$8.25 billion of approved investment in fiscal year 2010-11 (which in Myanmar runs April to March), all for projects in the extractive and power sectors. It was the biggest investor in Myanmar's FY2010-11 Foreign Direct Investment (FDI) windfall of almost $20 billion--more than the previous twenty years combined. (2) This was just slightly higher than Vietnam's approved investments for the corresponding fiscal year, which totalled $19.9 billion. (3) Yet the 2010-11 FDI figures exemplified a decade long trend of investment being overwhelmingly concentrated in the extractive (mining and oil and gas) and power sectors. Only 1 per cent of the FDI from FY2010-11 was outside these sectors, evidence that foreign investors saw few other viable investment opportunities in Myanmar's challenging business climate. The majority of these investments came from neighbouring countries, most notably China, but also Thailand and South Korea. This is partly the result of Beijing's often overstated but still sizable influence in Naypyidaw, as well as its desire to secure natural resources from abroad and bypass the strategic chokepoint that is the Straits of Malacca. (4) But the source of Myanmar's FDI is also shaped by other factors, including different home country investment patterns. China, for example, is historically a major investor in resource projects. Singapore and Japan tend to invest more in sectors such as real estate and manufacturing, yet because these projects were less viable in Myanmar for the last decade, investors from these countries have often turned elsewhere. Despite oft-cited competition for resource investment in Myanmar, India's actual investment in the country has been miniscule, though Indian investors have in recent years spent approximately 80 per cent of their FDI on mergers and acquisitions, which are rare in Myanmar. (5)

The concentration of FDI has important implications for Myanmar's economic development, as contrary to common perceptions FDI is not inherently or uniformly beneficial for a host country. Instead, the positives vary depending on the source and sector of investments, the forward and backward linkages they create with other parts of the economy, the number and types of jobs created, and the host country's economic policies. Most of the FDI that has come into Myanmar in the last decade has created little direct employment and few linkages with existing industries, limiting their positive benefits. Despite this, FDI is still rightly viewed as an important part of Myanmar's economic development.

This paper reviews changes in the source country and economic sector of FDI in Myanmar using actual and approved investment data from 1989 until 2011. The data has been disaggregated by country, sector, and for select years both. It looks at FDI in two periods: the first from the passage of the Foreign Investment Law in November 1988 to the end of FY1999-2000, and the second from FY2000-01 to the present. This division was selected because it falls at the end of a decade, during a lull in both approved and actual investment (after most of the projects approved before the 1997-98 Asian Financial Crisis had been fulfilled), and around the time when the changing trends in Myanmar's FDI were first becoming evident. The paper starts by noting some caveats of FDI figures in Myanmar. It then reviews recent literature on FDI in Myanmar, before examining the major trends in the country's investment data. The next section compares these trends with those of Myanmar's neighbours, Vietnam and Laos. The paper then engages with the theoretical literature on FDI to explore what these investment patterns reveal about the macro economy, and how they are shaped by geopolitics, sanctions, commercial concerns and the specific investment patterns of each home country. The paper closes with a brief examination of whether these FDI projects can contribute to broad-based economic development in Myanmar.

The Data and Its Caveats

Constructing narratives about Myanmar based on economic data is fraught with difficulties: often figures are not available, and when they are, their accuracy is suspect. Figures on FDI are no different, and therefore merit a few caveats before further examination. Myanmar's FDI statistics come in two varieties: approved, the figures published by the Central Statistics Office (CSO) and commonly cited in the media, and actual. Approved investment figures come directly from the Myanmar Investment Commission (MIC), which is tasked with scrutinizing foreign investment proposals and approving those which it determines "promote the interests of the state". (6) Approved investment is the total number of projects and amount of foreign investment that the commission approves in any given year, and is disaggregated by source country and sector. It does not represent foreign funds that have already entered the country.

Actual investment is the total amount of foreign funds which enter the country. These figures are collected by Myanmar's CSO and released indirectly through the Association of Southeast Asian Nations (ASEAN), the United Nations Conference on Trade and Development (UNCTAD), the World Bank and the International Monetary Fund (IMF). Approved and actual investments in any given year tend not to be highly correlated, as investors may need months or years from the time of approval to complete all logistical and financial arrangements for their projects. This creates a time lag in the data for any given year. However this paper contains a complete set of approved and actual investment figures since 1988, which helps minimize this problem. During the time between approval and actual investment, changes on the ground could lead investors to increase or decrease the size of their investment or drop it completely. This partly explains the difference between the approved and actual figures, a problem not unique to, but certainly exemplified by Myanmar. It can also shed light on the likelihood that recently approved investments come to fruition. (7)

Neither actual nor approved figures capture one of the country's most thriving avenues of investment--informal inflows. These could result from some sensitive deals (especially those involving the military) being kept from the MIC. Other investors may have chosen to bypass the MIC for other reasons including convenience, while small investors may have done so because the MIC's mandate only covers investments over $500,000. (8) Together, informal and small inflows constitute an important component of Myanmar's large and thriving shadow economy, which the United Nations Development Programme (UNDP) recently estimated to constitute fully 47.8 per cent of the country's GDP in 2005. (9) Yet because of a lack of data, these investments fall outside the scope of this paper. These caveats aside, however, the figures illustrate a number of trends that anecdotal evidence and alternative sources support. Their reliability may be enhanced because they come from one source instead of broad nationwide surveys. (10) They also correspond surprisingly well with external political and economic events.

FDI in Myanmar: By the Numbers

FDI in Myanmar has been addressed before in a number of publications. In 2001, Burma Economic Watch produced a report entitled "Foreign Direct Investment and the Garments Industry in Burma", written when shifting trends in Myanmar's FDI were first surfacing. (11) Among these was the significant drop in investment in hotels and tourism--mostly because of the Asian Financial Crisis (AFC). The crisis, combined with what the authors argue was an only moderately successful tourist industry with a glut of capacity, presaged a "lost decade" for FDI in Myanmar's tourist industry. The authors also highlight one of the successful sectors for FDI in the early 2000s, garment manufacturing. By the mid 2000s this sector would also be met with a fierce decline. Another recent publication examining FDI in Myanmar is Thandar Khine's examination of FDI from ASEAN. This paper highlighted the important historic role that Thailand has played as an economic partner of Myanmar, though the timing of the paper, in early 2008, came just at the beginning of the rapid rise of China's investment in Myanmar. (12)

From the passage of the November 1988 Foreign Investment Law, which signalled Myanmar's renewed opening to FDI, to July 2011, the country attracted more than $36 billion in approved investment from 455 projects. Almost $20 billion of this was in FY2010-11 alone, though it came from only 25 projects. Prior to FY2010-11, the country had only approved about $16 billion of investment. Much of this--about $6 billion--was for the Tasang Dam, which has yet to progress beyond the planning stage. (13) Most of the remaining investments came in the mid to late 1990s, including Myanmar's first major natural gas project, the Yadana offshore field. This period saw a wide range of comparatively small investments. In FY1996-97 alone, Myanmar approved 78 different investments, compared to under 12 for an average year since the start of FY2000-01.

Actual investment has been less subject to the dramatic spikes and slumps of approved investments, though the two correspond relatively well when factoring in a time lag. Data on actual investments is available in disaggregated form through September 2009, leaving some uncertainty about recent inflows. However, of the approximately $16 billion in approved investments received before FY2010-11, around $8 billion has actually entered the country, with most of the remainder tied to the Tasang Dam project.

Both approved and actual investments correspond well with major political and economic events. The initial burst of FDI following the 1988 foreign investment law was followed by a lull...