Burma’s capital and labour market challenges

“Although the argument can be made that foreign investment creates efficiency in the market due to increased competition, the long-run result may simply be the monopolisation of the market by the foreign investor due to deep financial resources.”

By DVB | 5 October 2014

Just a little more than a generation ago, many countries in Asia, with the exception of Japan, were associated with endemic poverty, hardline ideological regimes, and state-controlled economies that barely met the needs of the people. The people power uprising in Burma, now Myanmar, in 1988 was quickly crushed by military regimes intolerant of political change as was the movement pushing for democracy which occurred in China’s Tiananmen Square in 1989.

Fast forward to 2014, and, with apologies to Bob Dylan, it can definitely be concluded that The Times They Are A-Changin. Or perhaps more appropriately – The Times They Have A-Changed.

“Although the argument can be made that foreign investment creates efficiency in the market due to increased competition, the long-run result may simply be the monopolisation of the market by the foreign investor due to deep financial resources.”

One of the major reasons for this reversal of fortunes has been the opening of markets in this region and the associated massive flow of capital that followed. Financial consultants, business executive and central bankers have come a-calling preaching the gospel of the market economy with pockets full of money for foreign investment that may create business and employment opportunities or exploit a country’s resources for the benefit of a few.

For a country like Burma the benefits and cost to these new developments are far from certain. Economics by nature is not a generous science. The best of all world scenarios are usually exceptions to the rule, with a number of trade-offs being the norm. Growth often is accompanied by the negative effect of income equality, inflation and environmental degradation. The adage that economic growth is an essential condition for economic development it is not necessarily sufficient. And there is no guarantee the opening of the market will improve human rights, though proponents at least give lip service to this goal.

Capital Markets

While Burma has become a population destination of choice for foreign investment, investors face both substantial opportunities and threats. Burma’s challenge is to ensure the investment benefits the nation. The inflow of capital provides less developed countries with much needed funds for development that cannot be generated in the domestic market due to a lack of savings. Foreign investment, for example, serves to foster the creation of the infrastructure and industrial base deemed necessary for a market economy to develop. This capital can also fund local entrepreneurs willing to take the risk of starting business ventures. As growth begins, the allure of profits and the desire of firms and individuals to improve their economic standing provide the catalyst for even further investment. This puts the country on the development path and, theoretically, these benefits of the market should significantly contribute to economic growth and in the long-run spread to all sectors of the economy.

At the same time, however, forces are at work that may negate some of the investment benefits. Foreign investment, for example, may mainly drive out local producers. Although the argument can be made that foreign investment creates efficiency in the market due to increased competition, the long-run result may simply be the monopolisation of the market by the foreign investor due to deep financial resources. If most of the profits of the foreign investor are repatriated, the positive effects on the domestic market may be negligible and generate fear of exploitation of a country’s resources.

“Cheap labour – the comparative advantage of a nation –turns out to be its worst enemy.”

In addition, the foreign investments, which tend to flow to those areas with the highest expected rate of return, are often not necessarily the types of investment the population at large needs most. The construction of five-star hotels, office space and golf courses receive investment priority and tend to continue even if a glut occurs. Overseas development aid has too often placed emphasis on providing opportunities for companies associated with the aid-provider rather than the recipient with the end result harmful real estate speculative bubbles.

The phenomenon can be found particularly in Burma which has become the new darling of both donors and foreign investors despite significant human right violations against ethnic and religious minorities. Although criticism of this opening up has come from some sources, perhaps the best way of understanding the change in philosophy is to quote British economist Joan Robinson, who postulated that “The misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all.”

It is also somewhat easier for the leaders in Burma to allow such “exploitation” since much of the present wealth is concentrated in the hands of the ruling military, who despite their claims of promoting democracy and market economics, maintain firm control over the economy. Investors desiring to enter the market in Burma realise they have to deal with these people; the pursuit of profits is rarely hindered by moral concerns.

International organisations such as the World Bank and the International Finance Corporation, for example, still subscribe to the belief that increasing profits of the private sector (and mainly the high income sector) will in the long run benefit the poor. This is just a version of the controversial and frequently discredited trickle-down economic policy of free-market economists. Yes, the benefits may trickle down, but often the amount is a drop of water to the poor for every bucket of water given to the rich. Yes, the luxury hotel will have to hire staff which one can argue benefits the lower income groups.

Granted, over the long run, the growth of the country’s economy may have positive effects for the nation as a whole, while the poor (mostly rural sector) may see marginal improvement in their standard of living. However, quite often their relative position declines as prices rise and environment degradation of these areas occurs due to an attitude of “develop at all costs”.

Labour Markets

The opening of the Burmese economy will no doubt benefit the labour market. The market economy will provide the incentive for workers to improve their productive capacity in order to receive higher wages. Higher wages, or the ability to purchase more goods, should in turn foster business and job creation – a.k.a. economic growth. And observing the economy standing of most workers in newly developed economies makes it hard to dispute the advantages of the market economy.

However, in many less developed countries, Burma as a good example, the influx of foreign firms also serves to exploit the excess supply of unskilled workers. These firms, relying on the low-cost worker for labour-intensive production, have no incentive to teach these workers more than the rudimentary skills necessary to work on a crude production line. This translates into a long-run situation where the productive ability of the workers does not improve, thus placing the country in a low wage equilibrium trap. Cheap labour – the comparative advantage of a nation –turns out to be its worst enemy.

The benefits of opening the economy of Burma will depend on the extent to which market failures are recognized. Addressing the many issues that come up will take time and investors, international agencies, and the Burmese government must be cognisant of the often opposing factors which are unleashed. Politico-economic skills must be fully harnessed to avoid instability, disruption, and a return to the violent past. It would be naive in the extreme to assume that historically massive capital inflows and changing labour markets will not create a mixed bag of cost and benefits. The challenge of Burma is to create a framework which benefits the economy and society.

Dr. Dennis C. McCornac teaches economics at Loyola University Maryland USA specializing in economic development and the economies or East Asia.

Dr. Anne Cullen is an Associate Dean at the American University in the Emirates with a specialty in Asian Politics.

dcmccornac@loyola.edu, http://www.loyola.edu/sellinger

SOURCE www.dvb.no