ARTICLE
Waiting for an Industrial Revolution
By MIN ZIN |
AUG, 2003 - VOLUME 11 NO.7
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Industry in Burma lags well behind that of its neighbors largely because of double standards, military meddling, and now, stiffer US economic sanctions.
Small may be beautiful but it is also vulnerable. And as increased US sanctions on Burma halt imports to American markets, all but the largest private garment factories in Burma are falling like dominoes.
On the outskirts of Rangoon, several private garment firms with fewer than 100 employees are shutting down, explains the editor of a business journal in the capital. Signed into law on July 29, America’s severe sanctions will likely eliminate hundreds of thousands of jobs. The ban on imports threatens to cripple Burma’s entire labor-intensive garment industry.
Even the big manufacturers are buckling under the weight of US pressure. "We are almost dying. The future for our business looks so bleak," says a South Korean manager from Myanmar Daewoo International in Rangoon, speaking to The Irrawaddy on the condition of anonymity.
Myanmar Daewoo operates the largest garment factory in Burma. It began in 1991 as a joint venture between the junta’s Union of Myanmar Economic Holdings (UMEH) and Daewoo, the massive Seoul-based manufacturer of automobiles and electronics. Daewoo invested US $1.25 million in its Burmese operations and now employs 2,600 workers to produce shirts, blouses, pajamas and jackets. Myanmar Daewoo still has orders from Europe to fill, but the American sanctions will soon cause demand to evaporate.
"The company is still figuring out if it should shut down the Rangoon factory. But at the moment we don’t have any plans," adds the Daewoo manager.
About 80 percent of garments made in Burma go to US retailers via traders in Singapore, Malaysia, Taiwan, Hong Kong and South Korea.
Other recently booming industries aren’t quite as skittish. Food and beverage manufacturing, for example, represents an estimated 85 percent of gross manufacturing output. But Burma’s food industry supplies mainly the local market and will not be affected by US trade bans. The rest of Burma’s industrialists primarily process raw materials for farming, forestry and fishing.
"Burma’s industry sector is extremely underdeveloped," says Dr Khin Maung Kyi, a senior economist based in Singapore. "Burma has to depend on imports of even the most elementary manufactured products, which could easily be produced in the country."
Industry as a share of Burma’s Gross Domestic Product (GDP) stagnated after the military took power in 1962, and has remained the lowest in Southeast Asia, according to the Asian Development Bank.
In 1962 industrial production accounted for 10 percent of GDP, a figure almost identical to that of neighboring Thailand. But in the decades that followed, Thailand’s industrialization accelerated. By the time of the Asian economic crisis in 1997, industry represented 39 percent of the country’s GDP. But in the same year the figure for Burma was only nine percent. Meanwhile, the Rangoon-based business magazine Living Color estimated industry as percentage of GDP fell even further, to 7.6 percent in 2000-2001.
There have been only a few attempts to develop Burmese industry. The economy was only nominally liberalized in 1988. A large-scale privatization program was launched shortly thereafter, but only a small number of firms were allowed free rein.
"Privatization is still insignificant. Only a few state-owned economic enterprises like cinema halls and sawmills have been privatized," says Khin Maung Nyo, a well-known economist in Rangoon. "The system still rests on state monopoly and intervention."
So the state still largely owns and controls modern industry—including firms involved in the production of machinery, equipment and transportation. And despite their relatively small contribution to economic growth, state-run initiatives are favored heavily by the government.
Toshihiro Kudo of the Tokyo-based Institute of Developing Economies says that state-owned economic enterprises in Burma receive better treatment than private firms. "They get better access to inputs [raw materials, electricity, petroleum], finance, foreign exchange, as well as to the bureaucracy," he observes.
Experts say that the biggest underhanded support for state firms comes in the form of distorted official exchange rates—implicit subsidies, in effect. In its most recent assistance plan for Burma, the Manila-based Asian Development Bank concluded that inequitable exchange procedures have contributed to inefficiency in economic management and have undermined incentives in the private sector.
Though the number of private factories increased in the 1990s, and private investment as a percentage of total capital peaked at 65 percent in 1993, the level of private investment in the industrial sector has since declined with government neglect. Experts cite unnecessary government expenditure on public works projects like bridges, roads and buildings as the cause of a widening budget deficit and unbalanced growth.
"Many infrastructure projects are for political and security purposes, not for enhancing business," notes an economics lecturer at Rangoon University. Consequently the government has been unable to support local entrepreneurs and private industries.
In fact, the Myanmar Industrial Development Bank is the only financial institution established to assist private industry. But as Burma’s private banking crisis continues, factory owners have increasingly found themselves without needed capital.
"We can’t withdraw our own money from the banks and pay wages to our employees, much less ask for bigger loans to expand our operations," explains Myo Thein, the owner of a Mandalay confectionery factory employing 16 workers. "All the money that I’ve invested in my business is from what I inherited from my parents," he adds.
The bulk of private manufacturing firms are small- and medium-sized light industrial operations. Using labor-intensive methods, they provide products for the domestic market. "There is considerable domestic purchasing power," the business journal editor explains. "Burma’s industry is not able to meet domestic demands for soap and medicine."
Shortages of capital and the lack of foreign currency are two obstacles to the development of industry. Low production standards are also affecting industrial growth and the development of new export markets.
The owner of an electrical equipment factory in Rangoon explains: "We don’t have any processes for quality standards on our products. Because we produce cable wires for the domestic market, we don’t have to worry about meeting standards."
The factory owner knows that shoddy wires can be dangerous for customers, but he argues that testing procedures at the government’s Electric Inspection Department are obsolete. "For some products, they don’t even have testing equipment. We could never export our products," he adds.
Lack of technology is a significant factor in Burma’s stunted industrial growth. Observers point out that Burma’s technological level is poised at the mechanical stage, and that the country has yet to enter the electronic age.
Dr Nu Nu Yin, a specialist on business and industrial economics, conducted a survey of 132 manufacturing firms in Burma in 1997. She cites low-level technology, insufficient machinery, shortages of spare parts and neglect of maintenance procedures as reasons for poor rates of production.
Inefficiency is further compounded by the regime’s failure to nurture human resources through education, training and basic research.
The government’s solution has been to establish 18 industrial zones across the country, and provide those areas with the infrastructure that factories need. But tenants say the zones are a failure. Drainage and sewerage systems are inadequate, transportation is slow, telecommunications are antiquated, and there is not enough water or gas.
Factory owners say the biggest problem is constant power shortages. A Rangoon plastic manufacturer describes his frustration at running a machine for extruding plastic. "When the power is cut off suddenly, the machine stops and we lose everything—money, time, raw material—and we waste labor." He says that while the government claims to be providing enough electricity for the whole country, capacities are far too low for heavy machinery.
Given such obstacles, the industrial zones have succeeded only in enriching property developers and those close to Burma’s military rulers.
"By exerting their connections, some of the relatives of military leaders and their cronies have bought land in industrial zones at special prices and then sold them to make a profit," explains an industrialist and member of the Myanmar Industries Association.
When money is involved, there are always double standards in Burma. Intended for local and private use, the industrial zones are like wastelands. But the sites for joint venture projects and foreign companies have been touted as "international-standard industrial parks."
"Since foreign investors pay dollars to rent the land, these sites have relatively better infrastructure," says the business journal editor. And in their book Economic Development of Burma—A Vision and A Strategy, a group of Burmese economists suggest that locally-owned industry has floundered because it does not enjoy the same privileges as foreign investors, despite the local potential for foundries and workshops.
But even some foreign investors are crying foul. In particular, they complain about renewable leases that last only one year. "This worries us since the lease could be stopped within the 12-month period. Longer rental contracts of three to five years would be more convenient," a Malaysian industrialist told Rangoon’s Dana business magazine.
Since the Foreign Investment Law passed in 1988, the military regime has offered incentives such as tax exemptions and lowered duties. The government has also guaranteed that enterprises would not be nationalized.
But observers are cautious about what they see as "on-paper" incentives and guarantees. Economist Khin Maung Nyo says that the provision of actual incentives or "pull factors" is the quickest way to foster industrialization.
"But actual implementation must not be contrary to the law. In Burma, bureaucracy appears to be an apolitical push factor against foreign direct investment (FDI)," explains Khin Maung Nyo. Corruption in Burma is so widespread that most companies calculate bribes as part of their overhead. Business owners can also count on meddling by the military government, because in Burma foreign firms are always coupled with the government in joint ventures.
"The generals want to attach their name as shared partners to an enterprise that has potential for profit. But they just offer their name, not capital," says Khin Maung Kyi. "Rather than being able to save and reinvest their profits, enterprises have to give shares to the most unproductive force of the country—the generals."
According to a report by Burma Economic Watch, published by economists at Sydney’s Macquarie University, foreign companies tend to appoint local managers that have good relations with the government and can avoid bureaucratic delays. As long as this remains normal practice, there is little chance that Burma will be able to generate its own entrepreneurs.
The Defense Ministry has its own enterprises and a 40 percent stake in the massive UMEH, Burma’s largest state-controlled firm. The UMEH is a key player in more than a dozen foreign joint ventures. It also manages the army’s pension fund and operates Myawaddy Bank.
The Myanmar Economic Corporation (MEC) is another firm founded entirely on capital gained from the regime’s sale of state-owned enterprises. MEC is expanding, and in recent years it has swallowed several private domestic firms and signed joint venture agreements with foreign companies.
"All major investments have to deal with the UMEH and MEC. The military’s monopoly frustrates FDI potential. It’s an all-in-all exploitative economy," Khin Maung Kyi adds.
As long as the military extracts high dues and keeps a stranglehold on the market, big foreign firms are reluctant to make serious investments.
But the real problem may be the lack of cooperation between firms. Experts agree that isolated firms need to be willing to forge links in supply and ordering contracts. Only then can they stimulate each other and contribute to cumulative industrial growth.
Other analysts have noted weak links between industry and the main productive sector, agriculture. Economic Development of Burma concluded that there was no cooperation in the food industry between farmers, value-added industries and the final consumer product.
If Burmese industry is ever to compete globally, firms need to forge links not just within the country but with buyers and suppliers abroad. Nu Nu Yin suggests that Burmese firms need to improve their relations with partners in other Southeast Asian countries through subcontracts. "If the country’s small- and medium-sized firms can provide manufacturing parts for large firms in those countries, the assurance of their survival is promising," she writes.
But with increasing economic pressure from the West and brittle relations with the Association of Southeast Asian Nations (Asean) since the violent attack on the opposition on May 30, improved ties now look like an impossible prospect.
Moreover, the regime is notorious for ignoring advice on political or economic matters. "We can’t ask the government to facilitate alternative options for us to overcome the impact of US trade sanctions," says the manager at Myanmar Daewoo. "All we can do is pray for an improvement."
The manager says he hopes that one day Burma will prosper. And when asked how Burma could improve its dire economic situation he answered: "Of course, it will depend on political change."
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