New kids on the ASEAN block: Myanmar SMEs and regional economic integration.

• Jurisdiction: Singapore
• Date: 01 April 2017
• Author: Bernhardt, Thomas

For decades, Myanmar's economic system has been characterized by central planning and international isolation. Today, as the country undergoes a far-reaching political and economic transition, it is leaving this past behind. For Myanmar's enterprises, and SMEs in particular, the opening of the country's economy and the intensification of regional economic integration through the ASEAN Economic Community brings both opportunities and challenges. It is in this context that the present study investigates the extent of Myanmar SME participation in ASEAN and East Asian regional economic relations as well as the challenges they face and the policy support they need for deeper integration. More specifically, this paper addresses the following four questions: What is the state of Myanmar SMEs' participation in regional trade, production networks, and investment activities? What are the enabling factors and obstacles to SME participation in regional economic activities? How are regional and preferential trade agreements affecting SMEs' activities and performance? And what are the policy imperatives to promote active participation of Myanmar SMEs in regional economic integration? To find answers to these questions, this study not only analyses existing secondary data but also draws on a new dataset collected by the Centre for Economic and Social Development (CESD) through a survey among Myanmar enterprises which focuses on the food-processing and garment sectors. It is found that, at present, Myanmar SMEs hardly participate in regional economic activities. They face numerous challenges such as: constrained access to capital and skills; limited investment in technology, innovation and human capital; minimal usage of ICT; and low awareness of regional integration dynamics. To overcome these challenges and reap the benefits of regional economic integration, enhanced firm-level efforts are needed while the government can provide support on various fronts.

Keywords: Myanmar, SMEs, regional economic integration, ASEAN Economic Community, trade, foreign direct investment.

1. Introduction

   For decades, Myanmar's economic system has been characterized by international isolation and central planning while private sector activity was muted. Today, however, Myanmar is in the middle of a profound political and economic transformation towards an open, market-oriented economic system. In this time of transition, the context and conditions within which Myanmar enterprises operate are changing quickly. Of particular importance is the intensification of regional economic integration, most notably within the Association of Southeast Asian Nations (ASEAN). The launch of the ASEAN Economic Community (AEC) at the end of 2015 generates both opportunities and challenges for Myanmar's businesses. On the one hand, they will have easier access to inputs and markets in the ASEAN region. On the other hand, they will likely face increased competition in both domestic and regional markets. This will also be true for Myanmar's small and medium-sized enterprises (SMEs) which make up the vast majority of businesses in the country. However, knowledge and research on Myanmar's SMEs is scarce.

   It is in this context that the present paper undertakes an investigation into the extent of the participation of Myanmar's SMEs in ASEAN and East Asian regional economic relations as well as into the challenges they face and the policy support they need for deeper integration. More specifically, the paper addresses the following four questions:

   * What is the state of Myanmar SMEs' participation in regional trade, production networks, and investment activities?

   * What are the enabling factors and obstacles to SME participation in such regional economic activities?

   * How are regional and preferential trade agreements affecting SMEs' activities and performance?

   * What are the policy imperatives to promote the active participation of Myanmar's SMEs in regional economic integration?

   The remainder of this paper is structured as follows. Section 2 provides a macro-perspective on Myanmar's trade and investment relations with the world, ASEAN and East Asia. In section 3, the paper starts to shift from an economy-wide perspective towards a firm-level perspective, providing a quick snapshot of what is known about SMEs in Myanmar. Section 4 presents the methodological approach chosen for the present study, in particular the enterprise survey conducted by the authors. Section 5 summarizes the characteristics of the survey sample. Drawing on our own survey and additional business survey data, section 6 investigates the current state of Myanmar SMEs' participation in regional economic activities. Section 7 discusses various enabling factors and obstacles to SME participation in regional trade, production networks, and investment. Section 8 gives insights into SMEs' perceptions of regional economic integration and what they expect to be its impact. Finally, section 9 concludes and presents some policy implications emerging from the preceding analyses.

2. The Macro Perspective: Myanmar's Foreign Trade and Investment Relations

   2.1 Myanmar's Global Trade Performance in the Recent Past

   Due to its political regime, Myanmar has been relatively isolated and its overall level of integration in the world economy has been very low for several decades. Before the United States started to impose economic sanctions in 1997 and many European countries followed suit, Myanmar also had relevant trade linkages with Western countries. However, in the face of Western sanctions, Myanmar's external trade saw a reorientation towards Asia (see Kudo 2008; Martin 2012). Two of the main reasons for this reorientation were, first, the fact that Asian countries largely did not follow the United States in imposing sanctions and, second, that many of them (most notably China) were experiencing high levels of economic dynamism and growth. Since 2013, however, Myanmar is re-engaging with Western markets in Europe and the United States.

   In any case, Myanmar's external trade has expanded rapidly over the last decade. In several years, exports and, in particular, imports have grown at two-digit rates. After taking a dip in 2003, when U.S. trade sanctions were tightened, total exports have continuously grown from US$2.4 billion in 2003 to US$13.8 billion in 2015. Similarly, Myanmar's imports from the world, which had been on a slight downward trend since the mid-1990s, expanded more than eightfold from roughly US$2 billion in 2003 to US$16.2 billion in 2015. In fact, imports first surpassed exports in 2011. Since then, Myanmar's trade deficit has widened further. In relation to total economic activity, exports correspond to around 20.8 per cent of GDP and imports to 26.5 per cent of GDP. This is (often significantly) lower than in most other Southeast Asian countries, reflecting Myanmar's still comparatively low degree of integration into the world trading system. (1)

   2.2 Myanmar's Trade with ASEAN

   Myanmar joined ASEAN as a member state in July 1997. ASEAN is an important market for Myanmar's exports. As can be seen in Figure 1, over 40 per cent of Myanmar's exports are destined for other ASEAN countries. This is the second highest share among all ASEAN member states, only topped by Laos. Likewise, Myanmar sources about 40 per cent of all its imports from other ASEAN countries. Only Laos and Brunei get a higher share of their imports from within ASEAN. This shows Myanmar's trade has a strong regional focus. Moreover, Myanmar's ASEAN exports more than doubled over the last decade while its ASEAN imports even more than quadrupled. As a result, though, Myanmar's ASEAN trade balance turned from a surplus of US$446 million in 2005 to a deficit of US$2,269 million in 2013 (see also Tables 1 and 3).

   Overall, however, Myanmar is still a very small player within ASEAN. Its share in total intra-ASEAN exports (i.e. of total exports by ASEAN countries to other ASEAN member states) is a slim 1.4 per cent and, thus, only somewhat higher than Brunei's, Cambodia's and Lao's. This reflects that, despite recent liberalization policies, Myanmar is not only a newcomer to world trade but also to ASEAN trade.

   When Myanmar's trade with ASEAN is decomposed, Thailand shows up as the country's most important export market by far, accounting for 87 per cent, or US$4 billion, of total exports to ASEAN in 2013 (Table 1). Looking at Myanmar's regional exports beyond ASEAN reveals that Japan, Korea and particularly China are important markets in the East Asian region. In 2013, Myanmar's exports to China amounted to almost US$3 billion, which makes it the second largest regional export market after Thailand.

   Table 2 shows that Myanmar's exports to ASEAN are dominated by raw materials and resource-based products. Actually, gas and crude oil account for over 80 per cent of all exports. Myanmar's top-20 export products also include agricultural, food, fishery, and forestry products as well as metals and minerals. Manufactured products are almost entirely absent from this top-20 list.

   Similar to exports, Thailand is also Myanmar's most important source of imports in ASEAN. However, Thailand is much less dominant as a source of imports to Myanmar than it is as market for the country's exports. In 2013, Myanmar purchased goods and services worth US$3.8 billion from Thailand, corresponding to roughly half of Myanmar's total ASEAN imports, while Singapore accounted for about 30 per cent of the country's imports from ASEAN. However, Myanmar's most important source of imports in the region is China (see Table 3).

   The composition of Myanmar's imports from ASEAN is quite different from the structure of its exports. First and foremost, it is much more diversified and much less concentrated in a few products. Table 4 reveals that petroleum oils again top the ranking of imports (accounting for 19 per cent of Myanmar's total ASEAN imports), but unlike...