Thursday, October 27, 2016
The Myanmar Times
The Myanmar Times

Caution urged over a sovereign wealth fund

Sweeping reforms have increased the opportunity for foreign investors to develop Myanmar’s 11.8 trillion cubic feet of natural gas and 50 million barrels of crude oil, potentially worth more than US$60 billion over the next 30 years. This anticipated influx of investment in the petroleum sector raises concerns that Myanmar should implement resource management strategies to mitigate problems generally associated with the “resource curse”.

The resource curse is a paradox that refers to countries with an abundance of natural resources counterintuitively experiencing negative economic growth for a variety of reasons, including government mismanagement and declining economic competitiveness.

Among leading proposed resource management strategies is a suggestion by former World Bank Chief Economist and Nobel Prize in Economics winner Joseph Stiglitz that Myanmar should establish a sovereign wealth fund (SWF) to manage petroleum revenues.

Sovereign wealth funds are special state-owned investment funds, separate from normal national budgets, which generally use foreign exchange reserves, such as a country’s petroleum profits, to achieve a variety of economic or strategic goals.  

Multiple countries have established resource-funded SWFs with mixed results; however Myanmar’s current political and economic landscape cannot support the creation of a responsibly managed SWF at this stage in the country’s national development for three primary reasons.

Myanmar lacks basic prerequisites for establishing a well-managed SWF

According to Martin Skancke, the Director General of the Norwegian Ministry of Finance, SWFs must be funded with actual budget surpluses, otherwise assets in a SWF will not represent actual savings. 

Myanmar currently maintains a budget deficit and investing in a SWF would detract from the country’s ability to meet existing financial obligations. Put simpler, investing in a SWF without existing savings would be like someone borrowing from a bank to gamble at a casino. 

Aside from budget surpluses, after decades of isolation, Myanmar also has very little international financial or legal management experience applicable toward creating a well-managed SWF.

Sean Turnell, an Australia-based expert on Myanmar’s economy, commented in a 2012 research report that the country’s economic governance is limited “to a handful of individuals skilled in policy formulation, and fewer still schooled in the attributes necessary for institution building”.

Mr Turnell added that “the International Monetary Fund and World Bank have found few, if any, legally qualified … counterparties in the Myanmar government” that can assist the drafting of laws, like SWF guiding legislation, without the potential bias of foreign consultants.  

Myanmar can diversify its economy to prevent resource curse concerns without a SWF.

Resource-dependent countries that fail to diversify their economies can suffer a range of negative economic conditions, including exchange rate and commodity price stability problems. As a result, multiple petroleum-rich states aim to create economic diversification by using SWFs to make wide-ranging international investments.  

Nonetheless, there is wide consensus that countries should prioritise establishing domestic economic diversification over creating a financial safety net to protect against economic volatility caused by not diversifying.

Myanmar has existing options for economic diversification, including significant teak, hardwood, gemstone, beans, pulses and garment industries.  In addition, tourism grew by 40 percent from 2011 to 2012 and Myanmar is currently working on a master tourism plan with the Asian Development Bank and the German-based Hans Seidel Foundation to further expand tourism infrastructure and services.

Myanmar was formerly known as the “rice bowl of the world”. According to the International Rice Research Institute, the country can improve and regain its agricultural sector’s former status by expanding access to credit for farmers, increasing storage and production facilities, and improving transportation systems.

Lastly, SWF experts Ashby Monk and Adam Dixon have argued that funds, “do not offer an alternative to developing a capable and active workforce”, and establishing a SWF would not increase the human capital required to build a sustainable, vibrant economy.

Myanmar lacks anti-corruption safeguards necessary to protect a SWF.

Contrary to theories that SWFs can safeguard wealth with foreign assistance, a report by Quartz said SWFs do not consistently lead to reductions of corruption in petroleum states and SWFs can serve as slush funds for additional corruption.

In fact, a survey of 2,662 investments by 29 SWFs made between 1984 and 2007 by a team of Harvard Business School (HBS) researchers found that the “political process can introduce short-run pressures on SWFs to accommodate public demands for job creation and economic stabilisation within the country” and lead to political intervention that sharply deviates from a SWF’s originally stated objectives”. The HBS team also found that each point of additional national corruption, rated by the International Country Risk Guide, a widely accepted metric of state corruption, creates a 10.8pc greater likelihood that countries will direct investments domestically, and perhaps away from initial fund objectives. 

Given Myanmar’s history of corruption, if Myanmar’s leaders could successfully bias fund objectives to make domestic investments, as described above, a Myanmar SWF could be used as a seemingly legitimate way for corrupt leaders to redirect SWF “investments” towards illegitimate crony interests under the guise of domestic economic development.

Ultimately it is important for Myanmar to develop safeguards to guide the use of its petroleum wealth and maximise economic growth. However, Myanmar currently lacks the basic inputs, needs or governance to responsibly manage a SWF.

This article is an abridged version of, “Global Analytical Lessons for Evaluating a Myanmar Sovereign Wealth Fund”, published in the University of Washington’s Pacific Rim Law and Policy Journal.