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Premature rush for Myanmar riches

Asia Times - January 30, 2012

Brian McCartan The rapid pace of reforms in Myanmar is raising speculation about when, not if, United States- and European Union-imposed economic sanctions will be lifted. While Myanmar's various untapped markets are generating immense interest from foreign investors, until more economic and financial reforms are implemented actual capital inflows will likely be mitigated.

While part of President Thein Sein's wider reform drive, economic reforms are also being fueled by a crisis in the domestic financial system, dissatisfaction with China's growing economic influence and recognition that Western sanctions have greatly inhibited the economy. Another spur is the need to comply with Association of Southeast Asian Nations (ASEAN) Economic Community regulations scheduled to take effect in 2015.

As the US and European Union (EU) make concessions in response to Thein Sein's reform signals, it seems increasingly likely that all economic and financial sanctions could be rolled back later this year. Those prospects will improve if Naypyidaw can show that by-elections scheduled for April 1, the first to be contested by pro-democracy icon Aung San Suu Kyi and her National League for Democracy (NLD) party since 1990, are free and fair.

Myanmar has seen a number of senior Western diplomats visit the country in recent months, beginning with US Secretary of State Hillary Clinton's visit in December. Since then, Britain's Foreign Secretary William Hague, Australia's Foreign Minister Kevin Rudd and France's Foreign Minister Alain Juppe have all made official trips to the traditionally military-run country. The positive rhetoric after their visits and wider praise for Naypyidaw's reform efforts have added momentum to the gathering drive in the West to repeal sanctions. The EU is considering a US$197 million aid package focused on health, education, agriculture and institutional capacity-building. EU foreign ministers agreed at a meeting on January 23 to lift immediately a travel ban it had imposed on certain Myanmar leaders and is considering relaxing other restrictions after the April 1 by-elections.

French Foreign Minister Juppe announced at the end of his official trip that France independent of the EU would triple its development aid to Myanmar to about $3.85 million a year. Denmark has announced it will increase its bilateral aid to $17 million in 2012. Australia announced in early January that it would begin relaxing some financial and travel sanctions against government tourism representatives and members of the former ruling junta.

Although Washington has been coy on the sanctions issue, it took a major step towards normalizing diplomatic relations this month when it announced it would soon name an ambassador to Myanmar only hours after Thein Sein released an estimated 300 political prisoners.

The US downgraded its mission in 1990 after pro-democracy protests were brutally crushed by the military and the ruling junta nullified election results that indicated a clear win for Suu Kyi and NLD-led opposition.

Repealing American sanctions would require an act of congress, something that seemed unlikely just a few months ago. Now there are signs that many of Myanmar's strongest critics in congress are beginning to shift their views towards greater accommodation with Thein Sein's nominally civilian, military-backed regime.

Senator Mitch McConnell recently told senate colleagues that he felt the reforms were real following a two-day trip to the country earlier in the month where he met with government officials and Suu Kyi. McConnell, a long-time opponent of the military regime and a backer of sanctions legislation, said more must be done. Senator John McCain said this month that free and fair by-elections would encourage the relaxation of sanctions.

Many long-time Myanmar observers maintain reservations about the sincerity of Naypyidaw's moves. They caution that repealing sanctions outright would be too much, too soon since the government has not proven the reforms are sustainable or amended various controversial laws. Myanmar's military rulers are notorious for reversing seemingly conciliatory gestures to the opposition and then re-arresting political opponents once international attention shifted away from its abuses.

At the same time, economic analysts say investment opportunities abound in Myanmar, especially in the energy, agriculture, manufacturing and infrastructure sectors. The tourism industry, too, is expected to see major growth due to the country's historical pagodas, natural beauty and colonial architecture, among other attractions.

The International Monetary Fund (IMF) recently referred to Myanmar as the "next economic frontier in Asia" with "high growth potential", following a two-week assessment trip. The IMF is currently working with the government to overhaul its financial system, including a distorted dual exchange rate that has long discouraged foreign investment.

Myanmar occupies a strategic crossroads between the growing economies of India and China and Southeast Asia. A port under construction at Kyaukpyu on Myanmar's west coast is aimed at opening up China's remote southwestern province of Yunnan to trade and investment. It is also part of a project to build a dual oil and gas pipeline from a terminal at the port to southwestern China.

An even larger multi-billion dollar port project at Dawei on the southern coast aims to connect Myanmar with Thailand, the rest of Southeast Asia and southern China. It will offer a potentially faster, cost-saving alternative to the Malacca Strait and Singapore for the transportation of goods and energy. Investment in these port projects will be encouraged through their associated infrastructure development and planned integrated special economic and industrial zones.

Legal exposure

The Ministry of National Planning and Economic Development has recently revised the investment law to attract more foreign capital through providing better legal protections for potential investors. Deputy Railways Minister Lwin Thaung recently told reporters that foreign consultants had been hired to "draw up the law so as to be more attractive to our neighbors".

The new bill was submitted to parliament in September but so far has not been signed into law. According to Lwin Thaung, the bill, which is expected to make it easier for foreigners to control local companies and provide stronger legal protections for land leases, will be enacted into law at the end of February.

The new parliament's latest third session began on January 26 with a focus on the budget and anti-corruption measures.

The new investment law is also expected to provide investors with more clout by removing the past necessity of working through influential businessmen with ties to the government and military. Naypyidaw announced on Saturday a plan to offer eight-year tax exemptions for foreign investors as part of the new law.

As the country's international image improves, so too will the image of its most high-profile business figures as foreign companies look for local partners. Prominent businessmen such as Tay Za, Zaw Zaw and others have long been derided as cronies of the former junta. Other businessmen are also allegedly linked to narcotics trafficking. Recent positive international news coverage has helped to soften several of their images.

Even if the new investment law is promulgated, there remain concerns over the weak legal system, frequently cited for its incompetence and lack of independence. Endemic corruption is also a major issue in Myanmar, which was listed last year as the third-most corrupt in the world after North Korea and Somalia in Transparency International's Corruption Perceptions Index.

The relationship between the still all-powerful military and an opening investment climate remains obscure, especially in the countryside. Military commanders have long behaved as warlords in their areas of responsibility and many have established their own economic interests, including commercial plantations and other agribusiness projects.

Away from Naypyidaw and other major population centers, the power of military and civil officials will likely trump any investment law for the foreseeable future.

Of concern to some potential investors is the possibility of a link between their projects and human-rights abuses, particularly forced labor and poor working conditions. Agribusiness projects in Shan state have been linked to evictions of villagers, forced labor has been used on road construction and to support troops guarding projects.

Work conditions at the Hpakant jade mines are notoriously miserable with low wages, long hours, inadequate tools and high levels of HIV/AIDS infections due to rampant drug use.

Investors will also take a hard look at Myanmar's poor infrastructure before investing in manufacturing or businesses that require the efficient transportation of goods. Electricity supplies are erratic across the country, roads and railways are in poor repair and port facilities are woefully inadequate.

Without extensive development of the energy and transportation infrastructure, investors will find it difficult to establish profitable manufacturing enterprises, much less get their products to market in a timely manner.

Much of the investment to date in Myanmar, including Chinese ventures, is concentrated in energy and resource extraction. While such activities promise huge profits for certain businessmen, unless properly managed and efficiently taxed they do not provide the type of inclusive economic development that both the government and opposition now claim to prioritize.

Investors seeking opportunities in the seven ethnic states, where the need for economic development is most acute, will likely run into problems of resource ownership between the central government and ethnic minorities some of whom have only recently stopped fighting the government but remain armed.

Some of these groups have become very aware of the risks of development on the environment, but also see investment as a way to provide much-needed growth in their areas after decades of debilitating civil war.

While Western business interests look towards Myanmar's vast untapped potential, many Asian companies are moving pre-emptively before Western sanctions are lifted and US and European companies join the competition for contracts and projects.

Thein Sein is now on a three-day trip to Singapore, where on Monday he signed an agreement under which the city-state is offering help in economic planning, urban development and technical and vocational training.

Already a number of US and European firms are known to have quietly sent representatives to explore opportunities should sanctions soon be repealed.

Even without legal protections and basic infrastructure, and with a dubious cast of potential business partners, Myanmar is fast becoming Asia's next big thing.

[Brian McCartan is a freelance journalist. He may be reached at bpmccartan1@gmail.com.]

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