Sunday, August 20, 2017

Free market myths

A worksite for the Myanmar-China oil and gas pipeline in Kyaukpyu township, Rakhine State.  Juliet Shwe Gaung / The Myanmar TimesA worksite for the Myanmar-China oil and gas pipeline in Kyaukpyu township, Rakhine State.  Juliet Shwe Gaung / The Myanmar Times

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 advisors 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.

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 pro-actively 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 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.