Tuesday, July 25, 2017

Foreign direct investment: clearing the infrastructure bottlenecks

A worker walks home on the outskirts of Yangon. (AFP)A worker walks home on the outskirts of Yangon. (AFP)

The Pyidaungsu Hluttaw’s expected approval of amendments to the foreign investment law in the coming weeks will mark a new milestone in the opening up of the Myanmar economy.

If there is one clear message from the experiences of the East Asian economies over the past few decades, it is that foreign investment can be a strong catalyst both for economic growth and social development – if the process of investment inflows is well managed.

Foreign investment should not only be seen as a way to create employment, although this objective is important. It should also be viewed as a means of helping to promote a more holistic development of the economy and society. A well thought out strategy to attract and support the right kinds of foreign investment and to manage their impact is needed to help achieve these broader objectives.

Importantly, such a strategy does not require intrusive planning and direction on the part of the bureaucrats. Other East Asian economies have shown that it is possible for such a strategy to be market-based without distorting the incentives for foreign investors. A certain amount of tradeoff between short-term and long-term gains is necessary for the government and the foreign investors in order to realise the government’s broader objectives and to achieve a win-win outcome for both the government and foreign investors. Other East Asian economies have demonstrated that with the right strategy and the right policy incentives, such tradeoffs are possible without compromising the commercial principles of foreign investors.

A key role for the government in engaging foreign investors is to be an effective facilitator of investment flows. Transparency of policy, both in terms of policy intents and execution, could greatly help to facilitate investment flows at this stage of Myanmar’s development. For example, foreign investors want clarity over the amendments to the foreign investment law. More than that, they are looking for a clear roadmap for sustainable economic development in the medium term and the long term, and a better understanding of how they can be a meaningful participant in the process.

The roadmap should spell out the development vision of the government. It could spell out the government’s broad economic objectives, such as per capita gross domestic product (GDP) growth, along with other objectives, such as social and political well-being and technological advancement. To be effective, the process should be guided by specific goals to be achieved within stated time frames: for example, long term (10-20 years), medium term (5-10 years) and short term (3-5 years) goals. At each stage of the process there should be a meaningful role for foreign investment.

An area where policy clarity is urgently needed is how the Myanmar government intends to tackle the challenges arising from the lack of adequate infrastructure – both soft and hard, physical infrastructure. Bottlenecks to investment are painfully evident in areas such as low agriculture productivity, unpredictable electricity supply, poor telecommunication and information facilities, poor transportation, inefficient distribution networks for producers and consumers, an inefficient banking and financial sector, and inadequate human resources capacity in both the public and private sectors to manage economic growth and development.

Unless there are active efforts to remove these infrastructure bottlenecks, foreign investment inflows may not accelerate. A clear statement on how the government intends to tackle this issue and how foreign investors could help in this process will go a long way in assuring the latter of the soundness of their investment decisions.