M YA N M A R DIAGNOSTIC TRADE INTEGRATION STUDY (DTIS): OPENING BUSINESS FOR Something glorious and majestic. With people. Something positive Door opening? Market? Photo credit © Nick Fox / Shutterstock.com CONTENTS ABBREVIATIONS AND ACRONYMS xi ACKNOWLEDGEMENTS xiv FOREWORD xvi OVERVIEW xviii EXECUTIVE SUMMARY xxiv 1. Following through on reforms to encourage trade openness is xxvii critical for poverty reduction 2. Diversification into light manufacturing, services and sustainable xxix agri-business would be a powerful way of reducing poverty, while also rebalancing the economy away from its over-dependence on natural resources 3. Infrastructure development and regulatory reforms can occur in xxxi tandem POLICY PRIORITIES xxxvi 1. TRADE POLICY REFORMS xli 2. ENSURING INCLUSIVE EXPORT-LED GROWTH xlv 3. BUILDING CAPACITY IN A QUALITY INFRASTRUCTURE xlix 4. ENCOURAGING GROWTH IN TRADE IN SERVICES liii 5. DEVELOPING EFFICIENT TRADE CORRIDORS lvi 6. ACILITATING TRADE THROUGH BETTER LOGISTICS lxi AND FINANCE ACTION MATRIX lxvi TRADE POLICY lxvi INCLUSIVENESS lxx QUALITY INFRASTRUCTURE lxxii TRADE IN SERVICES lxxiv CORRIDORS lxxvi TRADE FACILITATION AND LOGISTICS lxxvii CHAPTER 1 OPENNESS AND MYANMAR’S STRUCTURAL 1 TRANSFORMATION 1.1 Can Myanmar achieve its targeted growth? International 3 experience 1.1.1 What are the precedents? 3 1.1.2 Structural transformation: What are the drivers? 4 1.2 How strong is Myanmar’s starting point? 6 1.2.1 Macroeconomic policy has shifted after reopening up to global 6 trade 1.2.2 ... but with remaining challenges and renewed external risks 8 1.2.3 Allowing flexibility of the exchange rate is important 9 CONTENTS CHAPTER 2 MYANMAR’S AGE OF OPPORTUNITY 11 2.1 A potential waiting to be tapped 13 2.1.1 Myanmar trades less than its potential but is opening up 13 rapidly 2.1.2 Imports are critical for investment and growth 14 2.1.3 Myanmar’s export destinations: Redeployment and 15 diversification 2.1.4 A sectoral structure with strong diversification potential 17 2.1.5 Making garments a catalyst for manufacturing-led 19 development 2.2 Myanmar’s opportunities are huge 23 2.2.1 Dynamic markets are around the corner 24 2.2.2 Global opportunities opening up 30 2.3 Leveraging the opportunities 30 2.3.1 A moderate tariff structure that could be streamlined 30 2.3.2 NTMs: Myanmar’s licensing reform is well under way 32 2.3.3 Regional engagement and commitments 34 2.4 Summing up: Recommendations 38 CHAPTER 3 REDUCING POVERTY THROUGH TRADE 39 3.1 Poverty is prevalent, although its incidence varies 41 3.2 Deprived and vulnerable 43 3.2.1 Poverty relates to gender, limited access to of land, and 43 limited supply of of skills 3.2.2 …all of which feed back into low productivity 47 3.2.3 The poor are also vulnerable to price shocks 49 3.3 Trade can reduce poverty and vulnerability 49 3.3.1 Export-led growth can improve outcomes for many 49 3.3.2 …provided that key bottlenecks on factor markets are 50 addressed 3.4 Policy Options 53 3.4.1 Education 53 3.4.2 Active labor-market policies 54 3.4.3 Closing the data gap 54 CONTENTS CHAPTER 4 OPENING UP FOR PEACE 55 4.1 Shaking off a legacy of conflict 58 4.2 Trade can help peace in Myanmar 60 4.2.1 Trade can provide opportunities for border regions… 60 4.2.2 …provided that it is inclusive 62 4.3 Developing opportunities in ceasefire Areas 65 4.3.1 Agriculture 65 4.3.2 Tourism 66 4.3.3 Timber 66 4.3.4 Mining 68 4.3.5 Manufacturing 68 4.4 Implications for Policies and Projects 69 4.4.1 Positive list 70 4.4.2 Negative list 70 CHAPTER 5 TOWARD AN EFFECTIVE SPS/QUALITY INFRASTRUCTURE 71 5.1 Today’s markets require complex quality infrastructures 73 5.1.1 Myanmar is opening up to a different world 73 5.1.2 What is a quality infrastructure? 73 5.1.4 Avoiding the rent-seeking trap 79 5.2. A regulatory framework in need of modernization 80 5.2.1 Technical regulations and SPS regulatory framework 80 5.2.2 Standards 82 5.2.3 Conformity assessment 84 5.2.4 Accreditation 85 5.2.5 Metrology 85 5.3 Case studies 86 5.3.1 Garments 86 5.3.2 Fishery products 88 5.3.3 Rice 89 5.3.4 Beans and Pulses 90 5.3.5 Timber 92 CONTENTS CHAPTER 6 TRADE IN SERVICES 93 6.1 A relatively open overall regime 95 6.2 ... but a fragmented policy-making framework 96 6.3 A relatively open regime but lingering restrictions 98 6.3.1 Regulatory regimes have been modernized 98 6.4 Sectoral policies 104 6.4.1 Telecom services 104 CHAPTER 7 IMPROVING MYANMAR’S MAIN CORRIDORS 111 7.1 Myanmar’s key trade corridors need upgrading 113 7.1.1 Yangon-Mandalay: Myanmar’s backbone 114 7.1.2 Mandalay-Lashio-Muse/Chin Shwe Haw corridor: China’s 115 overland gateway 7.1.3 Yangon-Myawaddy: Myanmar’s gateway to ASEAN 116 7.1.4 Mandalay-Kalay-Tamu/Rih corridor: Huge long-term potential 117 7.1.5 Other than roads, other logistics infrastructure also needs to 119 be developed and upgraded CONTENTS CHAPTER 8 FACILITATING TRADE THROUGH SMOOTH LOGISTICS 123 8.1 Leveraging Myanmar’s location through powerful logistics 126 8.1.1 The demand for logistics services will grow 126 8.1.2 Port congestion and low productivity would have 127 to be addressed 8.1.3 Making Myanmar’s trucking industry competitive 129 8.2 Streamlining the bureaucracy in trade facilitation 130 8.2.1 The burden of heavy procedures penalizes Myanmar’s ratings 130 8.2.2 Building momentum on the on-going Customs modernization 134 8.3 Improving access to trade finance 137 REFERENCES 141 INTERVIEWS AND FIELDWORK LIST OF TABLES Table 2.1 Myanmar’s trade with China expanded rapidly, while 15 stagnating with other partners Table 2.2 Ad-valorem equivalent of ASEAN’s ROO 28 Table 2.3 Too many tariff rates invite fraud and bureaucracy 31 Table 5.1 Illustrative quality and safety issues for Myanmar’s exports 77 Table 6.1 SOEs in the services sector 99 Table 6.2 Myanmar’s MRAs on professional services 105 Table 8.1 Requirements for export or import processing and verification 132 by Customs Table 8.2 Moving towards modern trade facilitation and logistics: 136 incorporating a new focus LIST OF FIGURES LIST OF FIGURES Figure 1.1 How Myanmar’s target growth compares with historical 3 precedents Figure 1.2 Average growth as a function of initial year 4 Figure 1.3 Structural transformation in Indonesia and Thailand 4 Figure 1.4 Manufacturing is an engine of convergence 6 Figure 1.5 Inflation rates (% YoY) 7 Figure 1.6 Real effective exchange rate 7 Figure 1.7 Balance of payments (US$ million) 8 Figure 1.8 Contribution to import growth (% YoY) 8 Figure 1.9 Nominal exchange rate (US$ vs. local currency) (% change, 9 YoY) Figure 1.10 Official and parallel exchange rates 9 Figure 1.11 Real effective exchange rates 10 Figure 1.12 Gross reserves (US$ billion, cumulative change) 10 Figure 2.1 Myanmar’s trade openness is still below benchmark… 13 Figure 2.2 …but already catching up 14 Figure 2.3 Myanmar’s imports are dominated by capital equipment and 14 intermediates (US$ million) Figure 2.4 Thailand weighs heavily in Myanmar’s export portfolio, but 15 China is rising rapidly (US$ million) Figure 2.5 Myanmar’s trade was massively rebalanced by sanctions 16 Figure 2.6 Myanmar’s exports are still concentrated like those of other 17 LDCs Figure 2.7 Myanmar’s exports remain dominated by primary products 18 Figure 2.8 International gas prices are volatile 18 Figure 2.9 Similar to Cambodia, Myanmar’s comparative advantage lies 21 in the downstream, labor-intensive segment of the textile value chain Figure 2.10 China’s comparative advantage in garments is starting to 21 fade, creating opportunities for relocation Figure 2.11 Myanmar’s trade is developing rapidly with key partners 23 Figure 2.12 Night lights show large population and activity centers around 25 Myanmar, suggesting potential trade increases Figure 2.13 Myanmar trades substantially through overland border posts 24 Figure 2.14 Myanmar is developing trade complementarity with key 26 partners Figure 2.15 ASEAN’s tariff preferential margins are substantial 26 Figure 2.16 …but so is the use of NTMs 27 Figure 2.17 Myanmar’s MFN tariffs are moderate 30 Figure 2.18 Myanmar’s tariff escalation avoids penalizing imports of 31 capital equipment and intermediates Figure 2.19 ASEAN schedule for tariff reductions under ATIGA 36 LIST OF FIGURES Figure 3.1 Increase in night lights shows rising spatial agglomeration 41 Figure 3.2 Households in remote regions face higher prices 42 Figure 3.3 Poverty correlates with landlessness in rural Myanmar 45 Figure 3.4 Workers’ employment status 45 Figure 3.5 Women face fewer income-earning opportunities 45 Figure 3.6 Women are also have few educational opportunities 46 Figure 3.7 Share of employment, labor productivity and share of sector 47 in the economy Figure 3.8 Food staples dominate the poor’s budgets 48 Figure 4.1 Many areas were still controlled by EAGs in 2014 57 Figure 4.2 The locus of armed conflict areas has shifted 58 Figure 4.3 Average distance between villages to the closest markets (in 60 hours) Figure 4.4 Natural resources concessions and conflict areas 61 Figure 4.5 Foreigners’ arrivals, border vs. other entries 65 Figure 5.1 Organization of the NSQD within Myanmar’s quality 80 infrastructure Figure 6.1 Myanmar’s STRI is broadly in line with comparators (2012) 95 Figure 6.2 Several ministries involved 97 Figure 6.3 Myanmar’s governance indicators are lagging its peers 103 Figure 6.4 Myanmar’s telecom sector has been booming 104 Figure 6.5 IT-enabled services suffer lagging infrastructure 106 Figure 6.6 Dynamic tourism indicators highlight Myanmar’s potential 107 Figure 6.7 Despite a lack of infrastructure, tourism has great potential 107 Figure 7.1 Myanmar’s highway network (’000 km) 113 Figure 7.2 Myanmar’s major trade corridors 113 Figure 7.3 Capacity and traffic along the Yangon-NPT axis 114 Figure 7.4 Transport options between Central China and Myanmar/India 115 Figure 8.1 The need to improve logistics and trade facilitation in 126 Myanmar Figure 8.2 Container throughput at the Port of Yangon 127 Figure 8.3 Number of registered vehicles in Myanmar (’000) 129 Figure 8.4 Trading across borders – time to trade sub-indicators 130 Figure 8.5 Number of registered vehicles in Myanmar 131 Photo credit © Zzvet / Shutterstock.com LIST OF BOXES LIST OF BOXES Box 1.1 Recent policy changes in foreign exchange management 7 Box 2.1 How the lack of a support infrastructure hurts Myanmar’s bean 20 and mango exporters Box 2.2 Minimum wages as a safeguard to protect workers 22 Box 2.3 Market access and the EU’s GSP 28 Box 2.4 Capacity-building: It’s about more than just training 29 Box 2.5 ASEAN Trade in Goods Agreement (ATIGA) 35 Box 3.1 Better understanding the role of gender in formulating trade 46 policy Box 3.2 Labor shortages and migration 51 Box 4.1 The precedent of Kachin State 63 Box 5.1 Changing market requirements 73 Box 5.2 What is a quality infrastructure? 74 Box 5.3 Questions to ask before investing in a quality infrastructure to 79 promote exports Box 5.4 Rice quality parameters 86 Box 6.1 Policymaking benefits from effective intra-governmental 96 coordination Box 7.1 Protocol for Myanmar-India border trade 118 Box 8.1 The mango export supply chain 125 Box 8.2 Why a bonded-warehouse system? 128 Box 8.3 The “gate” system in Myanmar’s trucking industry 130 Box 8.4 The bureaucratic burden of licensing 131 Box 8.5 Women face special obstacles at border checkpoints 135 Box 8.6 Off-shore trade financing by Myanmar’s importers and 139 exporters JUNE 2016 ABBREVIATIONS AND ACRONYMS ACIA ASEAN Comprehensive Investment Agreement ACLED Armed Conflict Location Events Dataset AEC ASEAN economic Community AFAS ASEAN Framework Agreement on Services AFTA ASEAN Free Trade Area ADB Asian Development Bank AML Anti-Money Laundering Rules ASEAN Association of South East Asian Nations ASW ASEAN Single Window ATIGA ASEAN Trade in Goods Agreement CBM Central Bank of Myanmar CIF Cost Insurance and Freight CIS Customs Intelligence Database System CLMV Cambodia, Lao PDR, Myanmar and Vietnam CMT Cut Make Trim CSIS Centre for Strategic and International Studies (Indonesia) CSO Central Statistical Organization CSR Corporate Social Responsibility DFAT Department of Foreign Affairs and Trade (Australia) DFID Department for International Development (UK) DICA Directorate of Investment and Company Administration DNSQ Department of National Standards and Quality DTIS Diagnostic Trade Integration Study EAG Ethnic Armed Group EBA Everything-But-Arms Initiative EIF Enhanced Integration Framework EITI Extractive Industries Transparency Initiative EPZ Export Processing Zone EU European Union EUTR European Union Timber Regulation FDA Food and Drug Administration FDI Foreign Direct Investment FIQCD Fish Inspection and Quality Control Division FLEGT EU Forest Law Enforcement, Governance and Trade FOB Free On Board FSC Forest Stewardship Council FVO Food and Veterinary Office GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit (German International Development Organization) ) GSP Generalized System of Preferences GVC Global value Chain HACCP Guidelines for ASEAN Audit and Certification of Food Hygiene and Hazard Analysis and Critical Control Points ICD Inland Container Depot ABBREVIATIONS AND ACRONYMS IMF International Monetary Fund IMF DOTS International Monetary Fund Direction of Trade Statistics INGO International Non-Governmental Organization IOM International Organization for Migration ISO International Standardization Organization ITES Information Technology-Enabled Services IWT Inland Waterway Transport JICA Japan International Cooperation Agency KIA Kachin Independence Army KIO Kachin Independence Organization KNU Karen National Union KOICA Korea International Cooperation Agency KYC Know-Your-Customer Rules L/C Letter of Credit LDC Least-Developed Country LPI Logistics Performance Index MACCS Myanmar Automatic Cargo Clearance System MAFPEA Myanmar Agro-Based Food Processors and Exporters Association MAST Multi-Agency Support Team MFN Most Favored Nation MGMA Myanmar Garment Manufacturers Association MIC Myanmar Investment Commission MITS Myanmar Inspection and Testing Services MNDAA Myanmar National Democratic Alliance Army MoPF Ministry of Planning and Finance MNSQ Myanmar National Standards and Quality Department MALI Ministry of Agriculture, Livestock and Irrigation MoC Ministry of Commerce MoHT Ministry of Hotels and Tourism MREC Ministry of Natural Resources and Environmental Conservation MLIP Ministry of Labor, Immigration and Population MoTC Ministry of Transport and Communications MPA Myanmar Port Authority MRA Mutual Recognition Agreement NACCS Nippon Automated Cargo and Port Consolidation System NAFTA North American Free Trade Agreement NES National Export Strategy NCA National Ceasefire Agreement NDS National Development Strategy NSW National Single Window NTM Non-Tariff Measures ABBREVIATIONS AND ACRONYMS NTMC Non-Tariff Measures Committee OECD Organisation for Economic Co-operation and Development PTB Physikalisch-Technische Bundesanstalt (German National Metrology Institute) RCEP Regional Comprehensive Economic Partnership REER Real Effective Exchange Rate ROO Rules of Origin SDR Special Drawing Rights Special Economic Zone SMEs Small and Medium-Sized Enterprises SOE State-Owned Enterprise SPS Sanitary and Phytosanitary Measures TBT Technical barriers to Trade TEU Twenty-Foot Equivalent TFA Trade Facilitation Agreement TTSC Textile Training and Support Centre TVET Technical and Vocational Training UMFCCI Republic of the Union of Myanmar Federation of Chambers of Commerce and Industry UNCTAD United Nations Conference on Trade and Development UNIDO United Nations Industrial Development Organization UNSD United Nations Statistics Division USAID United States Agency for International Development WFP World Food Programme WTO World Trade Organization WTTC World Travel and Tourism Council This report was prepared by World Bank Group team led by Sjamsu Rahardja ACKNOWLEDGEMENTS with the assistance from Fabio Artuso, Min Ye Paing Hein, and Olivier Cadot, under the guidance of Aide for Trade Coordination Unit and Department of Trade of the Ministry of Commerce of Myanmar. The team consisted of Alina Antoci, Diep Nguyen Van-Houtte, Massimiliano Cali, Elizabeth Ruppert-Bulmer, Maria Monica Wihardja, Daniel van Tuijl, Sebastian Saez, Martin Moluninuevo, Habib Rab and May Thet Zin. The team also received background notes from Marc Auboin (WTO), Michael Jensen, Christian Ksoll, Denis Audet and Jared Bissinger (ILO). Overall supervision and guidence for the preparation of this report is provided by Mona Haddad (Program Manager), Abdoulaye Seck (Country Manager), and Ulrich Zachau (Country Director). Inputs were also received from Charles Schneider, Thitsar, and administrative support was provided by Ei Yin Yin Phyu and Tin Hninn. The team received feedback from Declan Magee (DFID), Paul Brenton, Mari Pangestu (Columbia University and CSIS), and Sanjay Kathuria provided useful feedback. Report editing was done by Peter Milne. The team is especially grateful to the Ministry of Commerce (MoC) for providing strategic guidance, providing data and coordinating meetings with the other ministries . The team also thank Myanmar’s Customs, the Central Statistical Organization, the Central Bank of Myanmar, Myanmar Port Authority, Inland Water Transport, the Ministry of Hotel and Tourism, the Ministry of Labors, Immigration and Population, the Ministry of Construction, the Ministry of Transportation and Communications, Plant Quarantine, the state governments (in Shan and Kayin), and border posts in Muse, Myawaddy, and Tamu, for sharing data and information. Enhanced Integrated Framework (EIF) Secretariat also provided inputs and guidance to the team. The team also thank various organizations that were consulted/interviewed: Republic of the Union of Myanmar Federation of Chambers of Commerce (UMFCCI), Mandalay Regional Chamber of Commerce, Myanmar Association of Freight Forwarding, Myanmar Garment Manufacturers Association, Global Witness. Also Development Partners members of Trade Sector Working Group: Asian Development Bank, Australia-Aid, European Union, ITC, JICA, UK-Aid, UNIDO, and USAID . This DTIS report funded by Enhanced Integrated Framework (EIF) Trust Fund with additional support from Australia DFAT and UK-Aid As part of the Enhanced Integrated Framework (EIF) program for Trade-Related FOREWORD Assistance to Least Developed Countries (LCDs), which Myanmar joined in April 2013, the Government of Myanmar has asked the World Bank Group (WBG) to be the implementing agency for a Diagnostic Trade Integration Study (DTIS). The general objectives of a DTIS are: (i) to assist the government in mainstreaming trade and competitiveness in the country’s overall development strategy; (ii) to provide a diagnostic and analytical tool to prioritize and sequence key reforms in the area of trade and competitiveness; and (iii) to provide a platform for development partners to coordinate action and align trade-related assistance with government priorities. This DTIS has identified a number of domestic and external constraints facing Myanmar as it strives to leverage regional and global integration for inclusive, export-led growth. Based on this, the current report provides analytical input on the linkages between trade and poverty, and highlights key steps to remove bottlenecks in terms of trade policy and trade facilitation. EXECUTIVE SUMMARY xviii Photo credit © Zzvet / Shutterstock.com EXECUTIVE SUMMARY OVERVIEW After waiting in isolation for almost four decades, its re-integration into the global economy has presented Myanmar with a unique opportunity to leverage growth in trade to reduce poverty, promote shared prosperity and sustain the nationwide peace process. Following Myanmar’s dramatic decision to change its trajectory in recent years, the boom in trade and investment has boosted average economic growth beyond 7 percent per year as the country starts to catch up with its neighbors. With significant natural and agricultural resources, and comparative advantages from its resources, pool of labor and location as a natural hub to 40 percent of the world’s population, Myanmar has great potential. What is crucial now is that this potential is not squandered, but used to achieve transformational development gains that will improve the lives of its citizens by reducing poverty, spreading wealth, and helping to reduce social and ethnic tensions. All of this is within Myanmar’s grasp if it can seize the moment to design and apply appropriate policies to encourage trade and economic openness, and ensure that all stakeholders in the country’s future can share in the benefits, especially those in the most vulnerable and marginalized groups. in the benefits, especially those in the most vulnerable and marginalized groups. xix EXECUTIVE SUMMARY While growing fast, Myanmar’s trade still has enormous potential for further growth. But it is crucial that the benefits from greater trade are also shared more equally and help to sustain the ongoing political transformation. While the challenges are daunting, with strong Myanmar’s trade started from a relatively low base political will to maintain the momentum of reform but is growing fast and moving towards the country’s and support in applying the right policies, the comparative advantages. government’s goals can be achieved. The challenges may be daunting but the Government of Myanmar Myanmar has a comparative advantage in its pool is nonetheless ambitious in its plans for the future. of untapped labor, natural resources and location, Myanmar’s goal is for sustained GDP growth of 7.7 wedged as it is between China, India and Thailand, percent per year which, if achieved, would double the and especially as China’s cost advantages start to fade. country’s GDP in about 9 to 10 years. Such growth Indeed, it shares borders with markets that account for is almost unheard of outside of China. However, with 40 percent of the world’s population. After Western the right policy options to drive growth, including a countries removed economic sanctions imposed on focus on sustainability, poverty reduction and equal Myanmar, garment exports grew threefold between opportunities for all, and with the political will to 2005 and 2014, while cargo handled by the ports of maintain the reform momentum, such levels of growth Yangon increased fourfold in the nine years to 2014. is not beyond reach. This report aims to provide such Meanwhile, tourism, which has never been fully policy options based on a thorough diagnostics analysis developed in Myanmar, posted average annual growth, of the current situation regarding trade in Myanmar, as measured by annual tourist arrivals, of about 35 including the country’s strengths and weaknesses. This percent between 2009 and 2015. toolkit of policy options will help Myanmar to achieve Some of the key challenges that Myanmar faces. these goals, and provide the citizens of Myanmar with The country is still constrained by weak institutions a new future—one they could only have dreamt of just (underdeveloped regulatory framework, cumbersome a few years ago. procedures for investment), high costs of trade (the lowest ranking in ASEAN in the Logistics Performance Index for customs clearance, poor quality of logistics services, lack of logistics infrastructure), underdeveloped quality and standards infrastructure, and a lack of trade financing, among many others. xx 3 main EXECUTIVE SUMMARY drivers can ensure that greater trade helps to both reduce poverty & share prosperity in Myanmar Understanding these drivers and SOFT INFRASTRUCTURE WILL BE JUST AS IMPORTANT AS HARD designing policies to promote INFRASTRUCTURE them is the focus of this report. Developing not only hard infrastructure but also the soft infrastructure that is crucial to make the economy work efficiently. This includes simplifying procedures and licensing for trade and investment, building institutional capacity in trade-related government PUSHING AHEAD WITH REFORMS agencies, and ensuring broader ownership of reforms across society, including disadvantaged groups. Maintaining the momentum of the reform agenda towards greater trade openness and ensuring Figure A: Trade-related activities in Myanmar are rapidly that there is a fair distribution of gains from picking up trade, especially for the poor and vulnerable, and those living in conflict-affected areas. Index 2010 = 100 300 400 DIVERSIFICATION AWAY FROM 250 300 OVER-RELIANCE ON NATURAL 200 150 200 RESOURCES 100 100 50 Diversifying away from the current over-dependence 0 0 on natural resources towards other sectors with 2006 2007 2008 2009 2010 2011 2012 2013 2014 high potential, such as light manufacturing, Value of garment exports services and sustainable agri-business. Only Cargo handled by Yangon Port (TEUs) through such a diversification can the economy Annual Tourist Arrivals (Right Axis) provide the employment and sources of rural income to share the benefits of increased trade. Source: UN Comtrade, Myanmar Port Authority, CSO xxi EXECUTIVE SUMMARY The policies suggested in this report have the potential not only to transform Myanmar’s economy through greater trade, but also to transform the lives of all of Myanmar’s citizens. Trade can be honed by policymakers into a tool for wealth distribution and poverty reduction. Myanmar is at a historic juncture when it could transform its economy into one that addresses these issues through improved trade openness. xxii EXECUTIVE SUMMARY This report recommends the following policies OVERHAUL OF TRADE POLICY and mandatory standards. hub and at the same time also transform poor local communities in border areas. REGULATIONS AND BUILD CAPACITY IN TRADE POLICY AND ENCOURAGE GROWTH OF TRADE PROMOTION IN SERVICES The import tariff structure could be simplified, while Myanmar still has administrative and regulatory non-tariff measures could be further rationalized to barriers that constrain further development of trade render them simplified and more transparent. Trade- in services, such as discretion in approving foreign related data could be harmonized for better informed direct investment (FDI) and restrictions on FDI in trade policies and promotion strategies. This would the tourism sector. Cross-cutting and also sectoral allow trade policies to further facilitate and sustain the reforms would help to unleash the full potential of process of industrialization in Myanmar. trade in services. Awareness and greater capacity among government ministries to coordinate policies ENSURE INCLUSIVE EXPORT-LED in trade in services could also be further developed. GROWTH Trade in Myanmar has huge potential but, without DEVELOP EFFICIENT TRADE the necessary policies and safeguards, it risks creating CORRIDORS tensions by benefitting elites and undermining Improving efficiency in Yangon’s port terminals and vulnerable groups through expropriation, their connectivity with hinterland (via roads, railways environmental degradation and poor working and inland waterways) and facilitating investments in conditions. Myanmar could avoid this situation by logistics infrastructure (private bonded warehouses, addressing skills shortages, improving access to finance logistics parks and container depots) would help and providing support to drive local economic activities. to leverage Myanmar’s position as a trade hub. Local communities could also be consulted in the Connecting lagging regions to markets through better design of trade-related projects. Another opportunity logistics infrastructure at the same time will also help to is in the potential sharing of Myanmar’s huge benefit poor local communities, particularly in border wealth from jade mining exports, which would also areas, but only if done with input from and support of benefit from more transparency in data, community conflict-affected communities and ethnic armed groups. consultations and a greater sense of ownership. . FACILITATE TRADE THROUGH ESTABLISH A ROBUST QUALITY BETTER LOGISTICS AND FINANCE INFRASTRUCTURE FOR MYANMAR Improving cargo turnaround times is key for PRODUCTS Myanmar’s competitiveness. It will therefore be Meeting demand for quality products from local important to modernize trade logistics if supply consumers and international buyers is important for chains are to be competitive. Myanmar could Myanmar if it is to compete successfully. The focus also consider phasing out restrictions on foreign could be on narrowing regulatory and institutional companies in logistics, reforming Customs procedures gaps by adopting international quality standards (e.g. valuation, risk management and coordination (e.g., for rice exports), establishing guidelines for SPS across trade-related departments), and improving management according to international practices, and access to trade finance through the financial system. develop a national accreditation body, while avoiding conflicts of interest with the potential for rent-seeking opportunities when introducing technical regulations xxiii EXECUTIVE SUMMARY EXECUTIVE SUMMARY Myanmar’s elections in 2015 marked another historic milestone in the country’s political and economic transition that began in 2011. In November 2015, the people of Myanmar voted overwhelmingly for change and reform. It is now up to Myanmar’s policymakers to deliver on the people’s hopes and aspirations for a more prosperous, equitable and peaceful Myanmar, with support from development partners, including the World Bank Group. Leveraging trade to underpin inclusive growth and poverty reduction is within reach. While growing rapidly in recent years, Myanmar’s trade is still modest as a proportion of its GDP compared with its neighbors. It still has huge potential to grow. Developing into a major trading partner with its ASEAN neighbors and beyond offers Myanmar a unique opportunity to empower the private sector to drive its economic opening, and spread the benefits of increasing trade more equitably throughout society and across regions. After all, Myanmar shares borders with countries that account for some 20 percent of global GDP and 40 percent of the world’s population. Expanding trade can help Myanmar to rebalance its economy away from over-reliance on natural-resource industries that very often offer little in the way of employment to ordinary people, and have a history of provoking social tensions and unrest in Myanmar’s more remote ethnic-minority regions. xxiv EXECUTIVE SUMMARY xxv 3 EXECUTIVE SUMMARY A new paradigm for private-sector driven growth. Based on its diagnostic analysis of Myanmar’s current trade environment, this report offers suggestions for fostering competitiveness and a dynamic environment for private sector growth to drive trade. Myanmar is poised to take off on a new and ambitious trajectory going forward. The challenges are daunting and success cannot be guaranteed, but our hope is that the findings in this report can provide important guidance and policy options that can help to ensure success. Figure A: Myanmar’s trade has room to grow more 9 8 Adjusted openness 7 6 5 4 4.0 6.0 8.0 10.0 12.0 ln GDP per capita, PPP dollars Other countries ASEAN Myanmar Fitted values Source: World Bank Group team calculations. Figures are adjusted according to size of population and share of natural resources in the economy. xxvi 3 EXECUTIVE SUMMARY key messages emerge from the analysis as follows 1. Following through on reforms to encourage trade openness is critical for poverty reduction Unleashing Myanmar’s trade potential has only But for trade to grow it will be important for just begun. Non-gas exports grew at 11 percent Myanmar to continue to reform in order to stay per year between 2011 and 2014, despite weak competitive and share the gains equitably. Looking commodity prices and softening global demand. And forward, continuing to reduce costs for the private yet Myanmar’s trade (exports and imports) as a share sector to conduct trade will be key if Myanmar is to of GDP is still below average for ASEAN countries remain competitive, while just as important is the need (Figure A). These numbers partly reflect catching up to ensure a fairer distribution of the gains from trade. after decades of isolation, with Myanmar starting its Decades of economic isolation and armed conflict have growth surge roughly at the same export/GDP ratio as left Myanmar with widespread poverty, informality Vietnam in 1989, and Indonesia and Thailand in the and lingering fragility. Thus, it will be important to early 1980s. sequence reforms carefully, while also implementing complementary policies for the poor and vulnerable, both men and women, particularly those who live in conflict-affected areas, so they can also benefit from greater trade. xxvii 2 EXECUTIVE SUMMARY Myanmar exports $million 12'000 10'000 8'000 6'000 4'000 2'000 - 2007 2008 2009 2010 2011 2012 2013 Other products Gas & derivatives Jade Beans & pulses Apparel products Fish & crustaceans Wood products Cambodia 3.5 2.5 East Asia & Pacific Myanmar (developing only) 1.5 0.5 -0.5 Enabling environment Thailand Lao PDR Indonesia Bangladesh Quality of infrastructure Customs clearance process Ease of arranging shipment Competence and quality xxviii 2 EXECUTIVE SUMMARY Diversification into light manufacturing, services and sustainable agri-business would be a powerful way of reducing poverty, while also rebalancing the economy away from its over-dependence on natural resources Tourism in Myanmar has never been fully explored Crossing-cutting reforms can be introduced and developed. Myanmar has huge potential in simultaneously to attract FDI. A successful industrial tourism, making the sector an obvious “quick- policy aimed at attracting FDI will benefit from win” development priority. Developing the tourism upgrading infrastructure, improving the business sector would build on existing strengths (tourism environment, and implementing social regulations receipts tripled between 2007 and 2012) and provide through coherent sectoral and cross-cutting plans employment and sources of income in rural areas, designed in collaboration with all stakeholders. provided that key infrastructure constraints are International experience also shows that international addressed. Meanwhile, leveraging the potential for buyers are increasingly demanding environmental export-oriented manufacturing could be a key poverty- and labor regulations consistent with international reduction engine. International experience suggests standards. that every US$1.00 of value-added is two to six times more powerful in reducing poverty in manufacturing Reforms can also help to bring a transformation in than in other sectors, while mining has very little agriculture. In an agriculture-based transformation, impact on poverty (Cadot et al., 2015). Myanmar can also seize opportunities to raise the market value of farming products, providing a rapid and Over-dependence on natural resources could direct impact on poverty reduction. The government’s undermine manufacturing competitiveness. initiatives on conflict-affected land-tenure reform and Continued over-reliance on non-manufacturing systematic land registration are perquisites for the sectors exposes Myanmar to macroeconomic risks success and sustainability of the agricultural-based from volatile commodities prices, together with poverty reduction strategy. Once again, it will be chronic currency overvaluation (Dutch disease) that important for the government to provide integrated would also undermine the manufacturing sector’s and coherent farm support to both men and women competitiveness. Export-led manufacturing would also from farming households (agricultural research and help formalize employment (61 percent of Myanmar’s extension services, rural roads, irrigation, and seed, workforce is currently self-employed, or in casual or as well as access to product and agri-processing informal domestic labor) and raise productivity and knowledge), and complement this support by wages, provided that Myanmar’s educational system upgrading of the national quality infrastructure based can improve on its ability to deliver skills demanded on demand from exporters and regulators to safeguard by the market. consumer health and safety. xxix EXECUTIVE SUMMARY POPULATION with access to ELECTRICITY 33% 60% 99% MYANMAR BANGLADESH VIETNAM xxx 3 EXECUTIVE SUMMARY Infrastructure development and regulatory reforms can occur in tandem Only one-third of homes have electricity in Myanmar. Only 33 percent of Myanmar households have access to electricity, compared with 60 percent in Bangladesh and 99 percent in Vietnam. Myanmar’s logistics infrastructure (ports and their hinterland connections) ranked 137th out of 160 countries in the 2014 Logistics Performance Indicator (LPI), the lowest among ASEAN countries. It is also less connected with global shipping-liner networks than Bangladesh or Vietnam. Both Yangon’s seaport terminals and highways along the country’s main economic corridors (i.e., Yangon-Mandalay-Muse) will soon reach their capacity limits, while the road along the Mandalay- Tamu corridor has been severely damaged by flooding. The business environment remains challenging for the private sector. While securing electricity and starting a business in Myanmar have become much easier and boosted its ranking in the World Bank Group’s 2016 Doing Business survey from 177 in 2015 to 167, the business environment in Myanmar remains challenging for the private sector. International experience has shown time and again that in order to reap the benefits of hard infrastructure investments, it is also vital for the government to work in parallel on “soft” infrastructure reforms, including, in Myanmar’s case, (i) reforming procedures and regulations; (ii) strengthening institutional capacity; and (iii) ensuring broad ownership of the reforms. xxxi EXECUTIVE SUMMARY Why these Myanmar has embarked upon a high- stakes transition and major challenges remain. Myanmar is going through reforms matters a critical triple transitions in its development path — from isolation and fragmentation to openness and for Myanmar’s integration; and from pervasive state control, exclusion, and individual disengagement, to inclusion, development participation, and empowerment. These reforms have the power to agenda bring back international investors and unleash the transformational power of local entrepreneurship. However, the challenges and risks are considerable. xxxii EXECUTIVE SUMMARY Lifting sanctions Accelerating growth does not guarantee does not guarantee accelerating peace growth Second, even if an acceleration in growth does materialize, Myanmar’s own experience shows that this is not enough to ensure the viability of First, while the transition has set the stage for peace agreements. Growth benefitting only large an end to sanctions and the re-engagement of natural-resource investors could prove corrosive crucial international trade partners, international for the transition; only inclusive growth, bringing experience and recent research show that, income, empowerment and employment gains to all of itself, lifting sanctions does not guarantee stakeholders, in particular the most vulnerable, can be acceleration of growth the basis for a lasting peace. While private sector export- led growth has a key role to play in achieving this, (Freund and Jaud, 2013) success cannot be entrusted to market forces alone. For instance, inclusive rural development cannot take place without well-defined land titles and the protection of vulnerable groups, who may be unable to assert their claims, including women, against expropriation. It will also be important that investment is forthcoming in sectors that open up employment opportunities for men, women and youth as enterprise owners and formal workers. xxxiii EXECUTIVE SUMMARY Wealth will not automatically trickle down. Third, be greatly supported by the establishment of land trade integration could have an impact on income rights for farmers (improving their access to credit), distribution: there will be winners and losers from including recognition and promotion of women’s trade. Export-led private sector development will joint title claims, as well as a rise in productivity generate a trickle-down of wages to the local economy through better farming practices, improved access only with social protection, rules to safeguard the to agricultural inputs, and better access to domestic mostly low-skilled workforce from exploitation, and and international markets. Poverty also arises where improvements in workers’ skills. there is exclusion from economic opportunities, and so reforms could be used to offer economic entry The economic and political transitions are taking points for men and women, in urban and rural areas, place against a legacy of widespread poverty... and youth and ethnic groups. Urban poverty rates are Notwithstanding the difficulties involved in measuring also high and often relate to informality and the lack and comparing it, poverty appears to be high in of stable jobs. Export-led growth will be crucial to Myanmar, with a relatively high proportion of the enable the generation of stable jobs in manufacturing population living below the national poverty line and services. Finally, poverty is multidimensional, (World Bank, 2014a). Poverty rates are particularly involving not just low incomes but also lack of access high for certain ethnic groups, highlighting the need to basic services (e.g., water, sanitation, electricity and to promote conflict-sensitive economic opportunities public transportation), lack of education, and poor among them which can also help to consolidate the health. Regardless of the rate of economic growth, it peace process. Related to this, poverty rates are likely to is only through deliberate, planned improvements in be high in border and remote provinces. With the right the state’s delivery of these basic public goods that trade policy and infrastructure investments, cross-border poverty will gradually recede. While such efforts are trade could play a key role in providing much needed not directly part of a trade competitiveness strategy, opportunities. Poverty is also overwhelmingly rural, they are highly complementary to it and necessary to and within rural areas is often linked to landlessness ensure that the benefits of increased openness are felt or quasi-landlessness. Reducing rural poverty would across all segments of the population. … and an ongoing but vulnerable peace process Despite recent progress, the peace process remains there are natural resources in many of the conflict areas, fragile and fragmented. Some ethnic armed groups with flashpoints and grievances relating to exploitation (EAGs) signed a Nationwide Ceasefire Agreement (aggravated by the lack of established land rights) and/ (NCA) in October 2015, which provides the space or large windfalls going to elites.1 Expanded resource- for cooperation with the government on economic based trade, when controlled by the parties in conflict, development. Other groups have bilateral ceasefires can even fuel future conflict by financing it. This may that are holding, while still others are in active conflict. have happened, for instance, with logging in Kayin and Kachin states. More generally, opening up will be International experience shows that the development accompanied by large-scale upheaval in occupational of agricultural cash crops for export can provide and locational choices, as well as the distribution of individuals with better earning opportunities and raise income, with accompanying adjustment costs. In the opportunity cost of conflicts. Regional trade and making these choices acceptable it will be important for cooperation can also reduce the incentives for other the government and other actors to keep a constant and countries to interfere with the peace process—a common vigilant eye on dialogue and fairness, with consultation cause of internal instability in fragile states. However, followed by effective follow-up, and working checks trade can also be a destabilizing force, especially when and balances. it comes to natural resources. As in many countries, 1 An example is a clash over a copper mining site http:// www.wsj.com/articles/protesters-clash-with-police-in-central-myan- mar-over-copper-mine-1419251063 xxxiv EXECUTIVE SUMMARY The government’s transition objectives are ambitious The National Development Strategy’s (NDS) target is to sustain economic growth at 7.7% annually for at least the next five years. Given the limited purchasing power of Myanmar’s diffuse, causing the formation of blocking coalitions. domestic market at current poverty levels, faster-than- Even a seemingly harmless reform, such as improving GDP export growth is the only way to fuel growth at the performance of a border post, can erode the rents this level. Trade as a percentage of GDP is currently at a of local groups controlling informal cross-border low 30 percent, about half the international benchmark trade, inducing resistance. Attenuating such resistance for Myanmar’s level of income. Combining the NDS’s involves careful on-the-ground assessments of the kind target growth rate with a doubling of the trade-to- of compensation and inclusion needed (e.g., local GDP ratio up to its normal level (consistent with the reinvestment of some of the collected border taxes, or government’s openness strategy), exports will need encouragement of local employment in border posts). to grow at 20 percent a year. This is very ambitious, On a larger scale, improving the import regime (e.g., especially in a period of weak external demand and through the abolition of licensing) may be perceived a weakening link between global GDP growth and as a threat by politically-connected firms selling trade (Constantinescu et al., 2014). But doubling on the domestic market. Complementary policies the trade-to-GDP ratio is not impossible if Myanmar could involve targeted pro-competitive infrastructure can attract a substantial share of the coming massive investments that are public inputs (e.g., energy or relocation of garments manufacturing out of China’s transport), which would spill over to other players. high-wage area. Success in such an export-led growth One of the challenges is that reform and compensation strategy will provide an intimate two-way relationship mechanisms typically do not fall under the authority of with the political transition. First, reputable investors the same ministry. Coordination is therefore key and will not commit large sunken costs in the country may benefit from a specific mechanism (see below). without assurances of political stability. Second, they are likely to demand international standards …and remain manageable by a government with in key areas including governance, labor rights and limited policy-formulation and implementation environmental sustainability. Failing to meet these capabilities. While the transition’s challenges are standards would lock Myanmar into a market segment daunting enough, the government is also challenged dominated by fly-by-night investors contributing little in carrying out large, multi-dimensional reform to the country’s development. Conversely, export-led programs, and is already flooded with outside advice. growth holds the key to the country’s diversification It is therefore crucial to remain focused and to into manufacturing, market-oriented agriculture and identify simple, quick wins on which to build reform trade in services, which have all been shown elsewhere momentum. This DTIS report aims to contribute to be powerful engines of inclusiveness and poverty by identifying such quick wins in terms of trade reduction. policy and facilitation. Beyond the identification of priority reforms, implementing them, and keeping To succeed, it will be important for reform the momentum going year after year in the face of to overcome resistance through adequate difficulties and resistance, is a formidable challenge complementary policies... Deep reform programs against which many a reform program has stalled. In cannot avoid displacing established interests. The this regard, the experience of successful reformers and experience of successful reformers, such as in Chile in recent theories of “change management” suggest that the 1980s, shows that designing efficient compensation the government might consider appointing a team of policies is key to success (Edwards and Edwards, 2000). highly competent technocrats to be in charge of the The costs of reforms that eliminate inefficient rents are reform process’s overall drive and coherence, with often perceived most clearly by the losers, while the top-level political support and a mandate to overrule distribution of the benefits to the winners is more resistance and enforce inter-ministerial cooperation.1 1 An example of such a team is the Task Force for Private Sector Reform spearheaded by the MoC. xxxv EXECUTIVE SUMMARY Policy PRIORITIES I Against this background, Establish “lighthouses” to the DTIS proposes a limited showcase the positive impact of and focused program of reforms in reducing trade costs and alleviating poverty. sequenced reforms in the area of trade policy, This includes: (i) simplifying the processes for trade facilitation and infrastructure, licensing and automating procedures whenever possible; (ii) removing practices that add costs for as summarized in a synthetic trade (e.g., advance income-tax payment for exports, way in Table A below. restrictions on foreign companies importing by themselves); (iii) highlighting the employment or income dividends of certain reforms for both men and women; (iv) rolling out automation, proper valuation of customs procedures; (v) improving hard and soft infrastructure at border check-points and for cargo The reform sequence is handling in Yangon river ports; harmonizing the tariff based on three immediate structure to reduce “nuisance”; and (vi) harmonizing trade data collection by Customs and the Ministry of priorities: Commerce (MoC), including in Special Economic Zones (SEZ). xxxvi EXECUTIVE SUMMARY II III Build institutional capabilities. Engage relevant stakeholders with a view to developing a common It is important for institutional capabilities to be rolled out immediately in order for the MoC and strategic vision and inter- other relevant ministries to coordinate and take full ministerial cooperation. ownership of the trade policy reform agenda. The priorities here are to build momentum from reform While conditions for such a vision may take time in customs procedures by: (i) implementing risk to create, they can be used to set the longer-term management in cargo inspection; (ii) establishing a goals. These might include: (i) the development of a “data dashboard” for trade-related data enabling the realistic and demand-driven quality infrastructure; (ii) government to implement or advocate evidence-based implementation of a trade sector strategy to promote policy decisions; (iii) building up capabilities in policy firms’ participation in global value chains (GVCs); (iii) analysis and understanding of trade in services and identify and roll out an economic-corridor program trade remedies; and (iv) setting up a committee to to link the development of transport infrastructure design and implement trade facilitation reform with a and logistics services with trade development projects; regulatory-overview mandate and capabilities to review (iv) address concerns over negative externalities from NTMs. The capacity of the financial sector could also trade in extractive products (e.g., precious stones); and be strengthened to meet increasing demand for trade (v) engage with women- and youth-led enterprises to finance (e.g., pre-shipment and post-shipment credits, address their niche barriers to trade and growth. Given export insurance). To ensure trade development projects the interest in using SEZs to concentrate efforts in the are inclusive for local communities, it will be important provision of hard and soft infrastructure to facilitate to establish a proper protocol for consultations with trade and investment, Myanmar could also consider local ethnic communities in the design of trade-related reviewing the recent experiences from developing projects and complementary policies. SEZs in Thilawa and identifying areas of potential improvement, such as the governance of SEZs, provision of services and facilities for investors, and linkages with local economic activities. xxxvii 3 EXECUTIVE SUMMARY 2 Synthetic view of DTIS proposed priorities TABLE A 1 ESTABLISH “LIGHTHOUSES” Streamlining procedures trade licensing and automate them whenever for possible START BUILDING INSTITUTIONAL CAPABILITIES Harmonize data collection, improve capacity in policy analysis, trade negotiation, services trade, trade remedies and trade promotion DEAL WITH COMPLEX REFORMS Map out and implement reforms and capacity-building for Myanmar firms to participate in GVCs (e.g., garments, agribusiness, tourism, light manufacturing) Review practice in trade of extractive products to reduce Consult new trade regulations negative externalities, promote Eliminate costly practices with with private sector and publish all transparency and inclusivity little value (e.g., advance income trade regulations in Trade Portal tax payments for export, trade Map out and implement pilot for Implement ASEAN Trade economic corridor development licensing, roadblocks and payments) in Goods Agreement and which integrates development Roll out Customs automated WTO TFA, implement risk in logistics infrastructure system and rationalize management for cargo inspection and logistics services with import tariff structure Build acceptable quality trade development projects Review and amend legislations in infrastructure for Myanmar products Engage with women and youth- logistics and trade facilitation to Develop capacity of financial led enterprises to address their further facilitate development of sector to meet demand for niche barriers to trade and growth logistics infrastructures by private trade finance instruments sector (e.g. warehouse, inland Review experiences from Thilawa SEZ countainer depot, river barges) Establish a precedent for consultations with ethnic Improving night navigation along minorities in the design of trade Yangon river and align practices development projects especially to increase capacity of cargo in conflict-sensitive areas handling and logistics efficiency. Pass new Investment Law to promote certainty and level playing field for investment in Myanmar xxxviii EXECUTIVE SUMMARY Given Myanmar’s political transition, the overall development objectives of trade reform can only be sustained by a properly designed local trade development program A set of cross-cutting reforms are outlined in the Action thorough consultation of local communities on how Matrix at the end of this Executive Summary. However, to implement the Action Matrix locally. The output further analytical work could be undertaken at the of the local workshops could become the basis for a subnational level in order to craft accompanying policy concept note to be used to mobilize resources and measures and make sure the benefits of national trade to start project appraisals. The diagram below shows development can trickle down to local populations one option for local consultation. The analysis of nationwide. The definition of local policy targets and the local dimension of poverty, conflict and gender the description of local specific constraints could focus across the DTIS thematic areas (trade facilitation and on three dimensions, namely: (i) the state/regional logistics; trade regulations; standards; and private sector poverty profile; (ii) the local conflict situation; and development) could include a mix of qualitative and (iii) gender. The government could consider using the quantitative assessments, leading to the formulation opportunity offered by the DTIS dissemination at of specific project proposals for the benefit of the local the subnational level to start a structured diagnostic population. of local needs and opportunities by carrying out a Figure B: The thematic areas of the DTIS and cross-cutting issues DTIS Workshop in provinces POVERTY CONFLICT GENDER DIMENSION DIMENSION DIMENSION Enhancing trade facilitation logistics Improving trade regulations Local reforms Implementation prioritization Improving standards Pilot initiatives for private sector development Local project Concept Note appraisal/funding development xxxix EXECUTIVE SUMMARY xl 1 POLICY REFORMS Changes in procedures and TRADE incentives could be considered to reduce trade costs and stimulate the provision of services. xli 1. On top of the steps already taken to reduce import and export licenses, a number of other procedures could also be considered for removal, and whose objectives can be better addressed through other means. Changes in procedures and incentives could be considered to reduce trade costs and stimulate the provision of services. On top of the steps already taken to reduce import and export licenses, a number of other procedures could also be considered for removal, and whose objectives can be better addressed through other means. Examples include: (i) the requirement for exporters to pay 2 percent income tax in advance; (ii) limits on how much banks can charge traders to process L/Cs; and (iii) requirements to demonstrate that foreign buyers have already paid for exports (or have used L/Cs). Another example is the flat and relatively low charges levied for storing containers in port (of just US$2/day), creating port congestion. The Ministry of Commerce (MoC) could consider reviewing these practices and consulting stakeholders, including the Myanmar Business Forum, with a view to removing them. • Availability of reliable trade-related data (action A2 in the Action Matrix). Myanmar’s trade statistics are inadequate, while plenty of technical assistance from the World Bank Group, the WTO, the International Trade Center (ITC) and the UN Statistics Division (UNSD) is on hand to help build up the necessary know-how. In the interim, the MoC could start working with the Ministry of Finance, in particular with Customs, to put in place a reliable trade-statistics tool and forward the data to the UNSD for inclusion in the UN Comtrade database. • Capacity to analyse data and develop policy briefs (action A3). The MoC could consider working with other ministries (e.g., Labor, Planning and Finance, and Central Statistical Organization) and think-tank organizations to build up the statistical capabilities needed to inform policy through data collection and sharing protocols, together with the hiring of competent professionals. It could also consider creating and strengthening the capacity of specialist teams with capabilities in data analysis and report writing. Although training is important it does not necessarily address a lack of effective organizational structure—human resource capacity, incentive structure and organizational arrangements—to ensure that the demand for quality policy analysis can be met. • Organizational capabilities to effectively respond to the needs of reforms (action A5). Building capacity through training is important but does not necessarily address the lack of effective organizational structure—human resource capacity, incentive structure, and organizational arrangements—to ensure that the demand for quality policy analysis can be met. Myanmar’s tariff structure could be streamlined and simplified, with the role of protection against market disruptions being devoted to safeguards. This implies tariff reform, as well as continued efforts to improve capabilities to use the WTO’s Agreement on Safeguards through training of MoC officials, for which Myanmar has been receiving technical assistance from UNESCAP. Appropriate but non- excessive use of trade defense measures could both shield domestic employment from temporary market disruptions and facilitate the phasing-out of licenses by alleviating concerns about exposure (action A4). Diversifying exports requires reducing distortions in the allocation of resources, particularly from the burdensome use of non-tariff measures (NTMs). Countries can legitimately make use of NTMs to safeguard consumers’ health and safety, protect the environment, and meet other norms. But NTMs xlii EXECUTIVE SUMMARY with onerous administrative requirements can also While constraints on Myanmar’s attractiveness in be misused to impose costs on the private sector agri-business, light-manufacturing and tourism that are equivalent to import tariffs. For this, the are largely cross-cutting, sectoral plans would MoC could work with other ministries to set up help to encourage thinking about them in context. an NTM Committee (NTMC) with a mandate to Given current limitations on government and review existing and new regulations (action A5), and administrative resources to simultaneously address recommend simplifying and automating the process issues, an industry focus may help. For instance, the whenever necessary. It will be important for the MoC and the Ministry of Industry could work with NTMC to be endowed with a technical secretariat other agencies to build on the Myanmar Garment to conduct reviews and benefit from technical Manufacturers Association’s (MGMA) 10-year strategic assistance from development partners, for instance development plan, to work out a well-sequenced plan the World Bank Group, which is supporting similar in all its relevant aspects, which may, from a societal bodies in Cambodia and Lao PDR. The NTMC perspective, be broader in scope than the MGMA’s and the Trade Facilitation Committee mandated plan. Such a strategic development plan would include, by the WTO could be located in one single body. among others: Regulatory transparency is key during a transition • Trade logistics and customs clearance: This period with rapid changes in the legal and would cover addressing constraints in the value regulatory environment and the entry of new chain, from fabric supplier to factory, and from investors. The MoC could consider undertaking a factory to buyer, including customs clearance, systematic inventory of all trade-relevant regulations road and port infrastructure, maritime freight, and and NTMs, creating a trade portal, and populating ship rotations. For agri-business, this would cover the portal with the inventory of regulations in both micro-financing for farmers, access to quality seed, Burmese and English, with codes corresponding to certification, quality processing, and marketing UNCTAD’s MAST classification (action A6). This is channels. an action that all ASEAN members have committed • Targeted capacity-building: Working with to and will require support from trade-related agencies. industry associations, Myanmar can help firms to comply with labor/environmental regulations to Continuing reforms on the investment climate meet buyers’ requirements, increase workers’ skills will help Myanmar to increase and diversify its and improve the capacity of entrepreneurs, both export base. The adoption and implementation of men and women, in modern business practices several fundamental pieces of legislation would help (accounting, use of ICT, standards and quality, to establish the foundations of a strong business- supply chain management, etc.). enabling environment. The Investment Law is a key law, which unifies the Foreign Investment Law and the • Export promotion and market access: This Myanmar Citizens Investment Law to provide a level would involve supporting the promotion of playing field for all investors, ensure adequate investor Myanmar products abroad, or domestically protection, and provide mechanisms for the settlement through tourism. Promoting linkages between of disputes between investors and the government, Myanmar suppliers with firms in the SEZs and should they occur. The government could streamline regional value chains (e.g., access to intermediates procedures related to the investment approval process from Thailand) and tariff preferences in final and minimize the discretionary role of the Myanmar markets (“Everything-But-Arms” program in the Investment Commission (MIC) in approving EU and possibly preferential treatment in US and investments (action A7). large Asian markets as well) could be supported by the Ministry of Foreign Affairs. If well-designed, such a plan could then be replicated in other sectors, such as automotive parts, or light electronics/electrical equipment. xliii EXECUTIVE SUMMARY xliv 2. EXECUTIVE SUMMARY INCLUSIVE ENSURING EXPORT LED GROWTH While trade opens new economic opportunities, it also carries the risk of increased tensions if its benefits are not perceived as being shared fairly, or if proper safeguards are not in place to protect vulnerable populations from expropriation, environmental degradation, or poor working conditions. xlv 2. Ensuring that trade development works to reinforce rather than undermine the peace process will require a number of steps to be adopted (a positive list) and mistakes to be avoided (a negative list). Trade expansion and an influx of investment may also aggravate employment, skills development and wage disparities between men and women, and women may not be able to access economic opportunities if their interests as enterprise owners, traders and workers are not taken into account. Myanmar has an opportunity to raise its share of the gains from mining, in particular in jade mining. Jade is currently exported raw and the current system fails to provide local communities with a sense of ownership or any of the gains from Myanmar’s huge scale on the world jade market. In this regard, economic theory suggests that a small export tax would raise government revenue without any offsetting economic loss.1 Such a tax would generate revenue that could then be used with the advice of local communities to fund local development programs, such as vocational training, poverty reduction and health programs, and other basic infrastructure in Kachin State (the source of most of the country’s jade). (action B1). For the mining sector to support greater development objective in Myanmar, transparency in data could be improved. This issue has contributed to the generation of social discontent and frustration. The Secretariat for Extractive Industry Transparency Initiative (EITI) could work 1 With monopoly power over international jade market, export tax on jade can create a positive wedge between interna- tional price and domestic price. Theoretically this means Myanmar government revenue generated from tax will be greater than loss together with the Ministry of Natural Resources and Environmental Conservation to advocate improved transparency in terms of the identity of the key players, license allocation mechanisms and concession terms. In particular, it could consider ensuring that EITI principles are fully applied to the jade mining sector. There is currently very little knowledge of the rate at which Myanmar is depleting its natural- resource wealth. Exhaustion of natural resources, including subsoil wealth and environmental resources, contributes to making economic growth non-inclusive by depriving future generations of the benefits of a country’s natural capital. The government could consider commissioning a natural wealth study, based on a proven methodology, such as a study undertaken for Mauritania, which gives estimates of net national savings adjusted for the depletion of the natural capital stock (action B2).2 Such a study would be a first step towards a broader assessment of the environmental and social impact of mining in affected areas. 2 http://documents.worldbank.org/curated/ in revenue of miners which is “terms of trade gains” that can be en/2014/05/19553476/mauritania-counting-natural-wealth-sustain- distributed locally. able-future xlvi EXECUTIVE SUMMARY It will be important to ensure that the roll-out of knowledge of the local context are extremely important selected trade-related and infrastructure projects for the successful implementation of such projects. in ceasefire areas is carefully sequenced to align Anecdotal evidence suggests that development partners with the ongoing peace process (action B3). This are sometimes limited from working in some areas by would help to prevent the trade-development strategy government or EAG restrictions. Such restrictions in conflict areas from moving ahead of the peace imply that projects may not reach the most remote process. Trade-related infrastructure could be deployed and impoverished areas, which negatively impacts the only after the parties had agreed on the protocol for distribution of benefits. How development partners military and ethnic armed group (EAG) activity in implement projects in ceasefire areas, not just what ceasefire areas, in accordance with the NCA or bilateral they implement, can determine the success or failure of ceasefires. In contrast, development plans would those projects and, even more importantly, the future have to avoid a number of traps that could re-ignite trajectory of social and ethnic relations in the areas hostilities and undermine trust. The government concerned. could consider postponing trade-related activities and infrastructure development in areas close to existing Myanmar could avoid tying its industrialization conflicts, including the corridors from Lashio-Muse, strategy to social or environmental “dumping” Lashio-Chin Shwe Haw and throughout Kachin State. m(action B6). Wage compression to rock-bottom Risks associated with current conflicts in these and levels not only alienates the best buyers; it is also self- other areas could include increased grievances; project defeating economically, preventing the trickle-down of stoppages and trade patterns shifting quickly and salary gains to the population at large. Industrial salaries dramatically. Work on other trade corridors in NCA set at fair levels (i.e., equal to the value of the marginal areas would need good consultation with EAGs and product of labor rather than the subsistence level) can communities to eliminate the conflict issues that have have positive spillovers beyond the workers themselves, already affected, for example, the Kachin corridor. for example through remittances to farm households that are then better able to invest in productive assets Over the longer term, more labor-intensive and inputs. While minimum wages that are equal economic activities could be promoted in conflict- for men and women should not be set at levels that affected areas. These might include, in particular, jeopardize competitiveness, they should ensure that horticulture, tourism, manufacturing, and certain the gains from trade trickle down and become “growth agro-industrial production. For this, development enablers”. In order to do this, Myanmar could share plans could be designed to improve the functioning the experience of other countries and put in place an of all markets, including the labor market, through adequate social/labor regulation environment at the investment in training and vocational education as outset; experience from Cambodia’s “Better Work” part of a broader, longer-term plan to improve labor- factories program could be useful in this regard. force employability. The need for investment in basic Similarly, market access for logging products will be education and improvements in the education sector’s enhanced by adherence to international standards performance is universal in Myanmar and benefit from (e.g., the Forest Stewardship Council (FSC) and the swift action (action B4). This need is even more acute European Union Timber Regulation (EUTR)) in in conflict and remote areas. terms of legality and sustainability. The MoC could also include these issues in sectoral plans early on Similar concerns apply to the distribution of and adopt a broad, multidimensional approach to benefits from development partner-funded trade- competitiveness rather than a narrow, price-based one related interventions. Ethnic representation and that could end up serving special interests. xlvii EXECUTIVE SUMMARY xlviii 3 INFRASTRUCTURE IN QUALITY CAPACITY BUILDING The need for a quality infrastructure in Myanmar is gradually rising. xlix 3. In Myanmar today, most export-oriented production struggles to comply with important technical regulations and voluntary standards. However, the quality requirements are largely informal and few producers demand the full array of services offered by a modern quality infrastructure. Global reintegration will only reinforce this trend, but change will be slow. Therefore, commercial demand for quality infrastructure services will be specific. Likewise, the demand for quality services that is derived from the regulators needing to enforce regulations to protect consumer safety and health will be specific to particular health threats. Even in the best of cases, the supply will be slow to come forward, in particular the public supply of quality infrastructure services, because the capacity of the government within quality infrastructure is very limited and a rapid expansion of services cannot be realistically expected. In order to compete successfully in export markets, Myanmar might consider adapting its quality infrastructure to meet the demands of buyers with their various levels of demands in terms of quality and SPS certification. This could be achieved with both a legislative/regulatory modernization effort and a capacity-building effort in ministries involved in setting and enforcing standards. However, it will be important for the process to be driven by the demand of the market and from regulators seeking to protect consumer health and safety. Furthermore, it will also be important for Myanmar to avoid rushing to build a quality infrastructure disproportionate to the enforcement capabilities. The regulatory framework will benefit from being carefully designed to avoid conflicts of interest and rent-seeking by the ministries However, it will be important for the process to be driven by the demand of the market and from regulators seeking to protect consumer health and safety. Furthermore, it will also be important for Myanmar to avoid rushing to build a quality infrastructure disproportionate to the enforcement capabilities. The regulatory framework will benefit from being carefully designed to avoid conflicts of interest and rent-seeking by the ministries involved. The key issue is how to balance the present and future demand for quality infrastructure services with current design and enforcement capabilities based on consultations and value-chain analyses (action C1). Current capacity-building plans and projects aim at closing Myanmar’s standards and conformity assessment gap with the international best practice model, while tailoring it to the Myanmar context. The initiatives proposed in the National Export Strategy (NES) and others could be strengthened by making them less supply-driven and more tuned into demand. The key challenge is to ensure the availability of reliable and recognized services that are used by the private sector and the regulators, and thus sustainable in the longer term. It is important that NES and recently- designed development partner-funded capacity- building projects avoid estimating capacity-building needs by comparing Myanmar’s current system with the international best practice model. But, the experiences of other LDCs in rapidly establishing a local variant of the international best practice model are not very encouraging. Few if any LDCs have a strong quality involved. infrastructure and even fewer have a strong quality infrastructure of the kind that the NES and recent projects support most, namely a government-run quality infrastructure. l EXECUTIVE SUMMARY The crucial element for a demand-driven needed, such as promoting better rice varieties and modernization of Myanmar’s SPS/TBT environment improving cultivation practices. More studies of value is to rely on private-sector requests for reviews chains, including men and women’s productive roles, channeled through the NTMC (action C2). Once along the lines of the World Bank Group rice study the NTMC has been established with compOnce would help to the NTMC has been established with competent analytical capabilities, the private sector is likely to Investment in upgrading testing laboratories use it to request reviews and promote useful reforms could be calibrated to the demand of business of the most problematic regulations. With technical and regulators (action C4). The extensive laboratory assistance from development partners, the NTMC investment program suggested by the NES can be could work in collaboration with similar bodies set up viewed as a long-term strategy. Short term, focus in the sub-region to ensure the convergence of SPS/ could be on investments selected based on demand TBT environments. from business and regulators. It will be important not to crowd out potential private sector investment Focusing on exports can help drive capacity- in conformity assessment. Both the knowledge of building and generate positive spillovers for the demand and the capacity of the major government management of domestic safety and quality issues. quality institutions are weak. Thus, legal reforms and In seafood exports, for example, the implementation of laboratory capacity-building could be accompanied by stringent food safety management to comply with EU research into how best to develop a demand-oriented import demands could be used to increase awareness of quality infrastructure and build capacity at the main food safety issues at home, such as the use of antibiotics institutions to act strategically and plan. in shrimp farming. In this example, satisfying the commercial demand for a quality infrastructure would Finally, the authorities could implement the help to satisfy the demand from regulators to manage roadmap to establish a Myanmar accreditation domestic food-safety problems. body agreed between the Accreditation Division, UNIDO and PTB (action C5). There is currently no The transition strategy could start with quick wins, accreditation body, but the government has agreed to for example in rice. A recent World Bank Group select the Singapore Accreditation Council as a partner study of the rice sector identified the colonial-era in setting up a future Myanmar accreditation body. Beale rice classification system as a major constraint on Myanmar’s competitiveness. This classification system could be abandoned (action C3). This report also found that improving the quality of Myanmar’s rice is about much more than improving the quality infrastructure. Basic supply chain interventions are li EXECUTIVE SUMMARY lii 4. EXECUTIVE SUMMARY ENCOURAGING IN SERVICES IN TRADE GROWTH As part of the country’s broad- ranging economic and regulatory reform process, Myanmar’s general policies for trade in services are increasingly open and non-discriminatory to foreign participation. Nevertheless, lingering restrictions remain in the governance and administrative framework, as well as in laws and regulations. These barriers introduce high costs in the operation of services firms in Myanmar, limiting the benefits of market opening. liii 4. EXECUTIVE SUMMARY Myanmar could raise awareness and strengthen the • The telecommunications sector: strengthening institutional set-up for trade in services regulation regulatory capacity to ensure competition and policy. Trade in services remains a new area for and quality telecom services. Myanmar policymaking for Myanmar’s institutions and policy could consider capacity-building efforts in the formulation would benefit from a skilled coordinator telecommunications regulatory regime, which and efficient procedures to share information and currently suffers from analytical weakness. determine policy directions. While Myanmar, as a Telecommunications regulations, in particular WTO and ASEAN member, is involved in various license-allocation rules, could be streamlined and trade negotiations, including trade and investment published in both English and Burmese on the in the services sector, the government does not have a trade portal. specific department taking the leading in formulating • The tourism sector: coordination to manage a comprehensive policy on trade in services. destinations and improve the capacity of Consequently, strategy on trade in services policy and services providers. Developing tourism in negotiations are carried out in an ad-hoc manner, Myanmar would help to reduce poverty, as often trying to keep pace with more advanced regional potential tourist destinations are often in rural partners and without bringing a strategic view to the areas where poverty is high. Coordinated efforts negotiations. could help various ministries to improve the management of heritage sites and the provision A number of cross-cutting reforms would also be of public services, such as infrastructure, access to beneficial in the area of services-trade regulations. information, etc. in tourist destinations. Myanmar Small-scale services providers face regulatory obstacles can also strengthen the links between tourism and that could be easily removed (action D2). Transparency local economies by engaging in public-private in licensing procedures could be improved and initiatives to increase the capacity of local workers, streamlined. More importantly, significant gaps are hotels and restaurants. observed between rules and administrative practice, while many rules are conflicting or unclear. The MoC, • The distribution sector: phasing out restrictions through a Task Force for Private Sector Reform, on import licensing for foreign firms and could spearhead dialogue to streamline regulations allowing them to engage in distribution relevant to trade in services for review and reform services. Allowing FDI in the distribution recommendations. subsector would facilitate knowledge transfers and help to modernize Myanmar’s antiquated A sectoral approach could be used to identify logistics network. With fragmentation of the priorities and quick wins that are expected to manufacturing process in different locations, bring major economy-wide gains. The objective of allowing foreign distribution companies to this approach is not to have sectoral silos but instead become established in Myanmar in order to trade to coordinate policies and open up potential for the intermediate products would help to strengthen various trade subsectors to have a major impact on Myanmar’s attractiveness as a destination for economic development (action D3). This DTIS manufacturing investment in the region. identifies three such subsectors: liv EXECUTIVE SUMMARY lv 5. DEVELOPING EFFICIENT TRADE CORRIDORS EXECUTIVE SUMMARY lvi EXECUTIVE SUMMARY lvii 5. Located on the ancient Silk Road, Myanmar holds a strategic position to facilitate trade, which is key to unlocking its economic potential. Myanmar shares land borders with China, India, Lao PDR and Thailand, together accounting for about US$15 trillion, or one-fifth, of global GDP. As poverty tends to be higher isolated and remote areas, while industrial agglomeration occurs in cities, a coherent approach would help to link infrastructure development with local economic potential, particularly in mountainous and western coastal areas, and link these areas to industrial agglomerations and nearby international markets. Such an approach would benefit from a coordinated effort to reduce hard and soft bottlenecks in logistics infrastructure, which could generate huge competitive gains for local economic development. Planned upgrades of the country’s infrastructure offer opportunities for transformational change. Both inclusive development and the needs of international investors point towards the need to build infrastructure to international standards. Myanmar’s highway network is around 36,000 km, of which only two-thirds are paved. Moreover, the overall design is inadequate for the needs of an efficient market- based economy. Port capacity in Yangon, a river port 32 km inland currently handling 80 percent of the country’s trade, is likely to reach saturation soon. Cargo throughput has grown fourfold over the past decade and is slated to grow even faster going forward, The Yangon-Mandalay road corridor is the country’s main logistics backbone and could be prioritized for upgrading. According to traffic projections by JICA (2014), by 2017 heavy traffic along the AH1 will surpass the highway’s capacity. This could be temporarily alleviated by allowing container trucks to use the National Expressway between Yangon and Mandalay with certain tariff rates, before the combined capacity itself will become insufficient by around 2028. Therefore, opening the National Expressway to container trucks seems inevitable (action E1). In order to control road damage from heavy vehicles, axle weights could be limited as a first step. Simultaneously, the highway would benefit from major upgrading, as it will deteriorate rapidly once heavy traffic is allowed; such upgrading would be closer to a total reconstruction, including ballast and widening. It will be important for this work to commence soon, as today’s low traffic will be easier to divert onto the AH14 than the increased traffic in a few years’ time. The road link with the Yunnan province in China could be made more logistics friendly. Eighty-six percent of Myanmar’s border trade is with China, and most of that trade uses the road link from Mandalay suggesting the need to consider a new deep-sea port. to Muse via Lashio. Traffic on this corridor will lviii EXECUTIVE SUMMARY continue to grow over the next few years, fueled by trade can promote peace by increasing the opportunity economic growth in the two countries, as well as cost of communities engaging in conflict. To this end, Chinese government efforts to develop its hinterland. Myanmar can review and simplify procedures for local Facilitating private investment in inland logistics park communities to engage in cross-border trade with and container depots will help consolidate cargo and neighboring communities (action E4). Improving improve logistics efficiency (action E2) connectivity to border checkpoints (e.g., in Tamu) can be done rapidly. Inspection and testing facilities can Freight rail and inland waterway transport could also be improved to facilitate trade of more types of be developed to relieve pressure on roads for bulk products. transport (action E3). The rail network has 5,992 km of track, of which only 705 km are double-track. Myanmar could leverage its current transport plan The tracks are one-meter gauge and not electrified. into an economic-corridor development strategy. Myanmar Railway, a state-owned enterprise, is the only Myanmar has developed a National Transport operator providing transport services for passengers and Development Plan (with JICA support) and a Road freight. Railway reform and investment may be one Development Plan (with KOICA support). It will be way of addressing highway congestion as the country important to ensure that these transport infrastructure industrializes. Inland waterways also suffer from a lack development plans are well linked with local economic of basic infrastructure for proper loading-unloading of potential and connect this potential to the nearest freight. growth poles. In this regard, a coherent, multi- stakeholder effort could help to remove bottlenecks to Facilitating local communities to engage in cross- private investment in transport infrastructure, freight border trade could be a powerful means of raising logistics services and productive capacity at the local income and reducing poverty. Greater trade can level (e.g., in agribusiness, manufacturing and tourism). bring convergence in prices and job opportunities, both Developing an economic corridor plan and identifying important for the livelihoods of poor households in an institutional framework for implementation could border areas. International evidence also suggests that be prioritized (action E5). lix EXECUTIVE SUMMARY lx 6. EXECUTIVE SUMMARY & LOGISTICS FACILITATING TRADE THROUGH BETTER FINANCE Improving port efficiency and cargo turnaround times are key for logistics efficiency in Myanmar and improvements can be made in a relatively short timeframe. lxi 6. Around 80 percent of Myanmar’s trade is handled by river ports in Yangon and Thilawa situated 32 km in-land. Cargo throughput (measured in TEU) grew from 155,000 TEU in 2004/05 to more than 617,000 in 2013/14, a fourfold increase. While extending the berthing area for vessels is one option, this may not be an optimal strategy given that berth productivity of Myanmar’s main port in Yangon is still relatively low due to constraints on vessels navigating the channel at night. Port congestion due to the stacking of containers and local traffic in Yangon city is contributing to a lack of reliability of logistics services. Developing a deep-sea port with smooth links to industrial zones and a transport network to hinterland and border areas is desirable. However, such a major investment will take time and the following options may be considered in the interim: • Upgrade/revamp night navigation on the Yangon River. In order to allow vessels to call at ports at night and help to increase utilization of the available capacity at Yangon’s ports, night navigation on the Yangon River needs to be upgraded. This action should also be accompanied by reviewing the tariff structure, including the low and flat fee for storing containers in port, to allow higher cargo turnaround (action F1). • Facilitate the transport of containers from port to Yangon’s industrial areas using river barges (action F2). Increased traffic congestion around Yangon will increase time and reduce reliability for cargo arrivals. Myanmar’s authorities (MPA, Customs and the Ministry of Transport and Communications) could consider facilitating the transport of containers from ports to industrial areas around Yangon by using river barges as an alternative. Thilawa Port has this option already but in order to make it cost effective handling will have to be minimized and customs procedures • Facilitate discussion between Customs and the private sector in the Myanmar Business Forum on investment in private bonded warehouses (action F3). Customs has recently issued regulations on bonded warehouses. It is important for the private sector to become familiar with the procedures and discuss any remaining issues with Customs that might prevent investment in, and operation of, private bonded warehouses. The quality of logistics services could be improved by capacity-building in the supply chain, phasing out restrictions on foreign companies in domestic distribution services and facilitating the development of cargo insurance. Myanmar’s “competence and logistics quality” in the 2014 World Bank Group’s Logistics Performance Index (LPI) was ranked 150th out of 160 countries. As Myanmar’s economy grows, demand for quality logistics services from manufacturers and retailers will also grow. Interviews suggest that the supply of quality logistics services in Myanmar is still constrained by skills capacity, access to finance and technology. Addressing these issues will require coherent effort and time. Those in the industry, such as the Myanmar Association of Freight Forwarders (MAFF), working together with the Ministry of Transport and Communications can start by facilitating training programs in logistics/ supply chains for workers seeking jobs in logistics services providers and supply chain management/ procurement (action F4). Establishment of a Trade Facilitation Committee is a key step for Myanmar in implementing the WTO accommodative. Trade Facilitation Agreement (TFA). (action F5). lxii EXECUTIVE SUMMARY Myanmar can build on the momentum of customs • Embracing the use of IT more thoroughly. modernization to push for further reforms in trade Myanmar could leverage its engagement in facilitation. Myanmar has started to operate an SEZ regional and multilateral fora of economic in Thilawa with a one-stop customs clearance process. integration to sustain reform momentum on trade It is also moving ahead with customs modernization facilitation. It can use ASEAN’s commitment to and the Myanmar Automated Customs Clearance implement a National Single Window (NSW) as System (MACCS) is expected to be operational by late impetus for further simplification of procedures 2016. However, while this is an important start, it is for trade facilitation, including aligning business inadequate to meet growing demand from Myanmar’s processes of separate border agencies, to allow private sector for efficient and reliable supply chains. traders to submit electronic forms to relevant Trade facilitation can be made more efficient by border agencies and obtain rapid responses. Such improving procedures. changes in border agencies would allow them to provide one-day turnaround in approvals No single agency can resolve the cross-cutting compared with the current 8 days. and inter-agency nature of problems in logistics • Phasing in risk management to replace physical and trade facilitation. Important stepping-stones inspections. At present, there is no effective risk would include the establishment of a coordinating management system that Customs can use to mechanism, a Trade Facilitation Committee and the decide which containers or shipments to fully development of a clear action plan to improve current inspect. The decision process for Customs to practices. decide whether containers of non-green channel It will be important for Customs reform to proceed importers should go to the red channel (for full with a broad agenda to align cargo clearance inspection) or the yellow channel (for inspection procedures with international best practice. While by X-Ray machine), or the green channel the ongoing customs modernization is important, it (documents inspection only), is based on a “lucky will not be exhaustive in covering the wide-ranging draw”. needs and problems in logistics and trade facilitation • Implementing a vigorous administration in Myanmar. Logistics and trade facilitation are key training effort. The problems created by to the efficiency and reliability of the supply chain. cumbersome procedures are compounded by a Therefore, a comprehensive reform agenda—going frequent lack of knowledge in the administration beyond customs automation—could be considered of which rules apply. In a transition period and implemented (action F6): when many of those rules are evolving and new economic actors appear, vigorous training would help to ensure that the new rules are effectively understood and applied on the ground, while the old rules are phased out. lxiii 6. EXECUTIVE SUMMARY Having an enabling regulatory environment would help Customs and other trade-related departments to align their procedures with international standard.To date Myanmar has been amending the 1878 Sea Customs Act to accommodate modernization of customs and trade facilitation practices. Myanmar may want to consider reviewing existing Customs and other trade-related legislations and assist with writing a new National Customs Code (action F7). Making it easier to issue certificates of origin. One of the key aspects for Myanmar’s exporters in utilizing preferential tariffs in ASEAN is to use Form-D to establish “origins of the product” according the rules of origin (ROO). Currently, Myanmar is the ASEAN member that least utilizes Form-D, so it may be important to review current practices and encourage automation in the issuance of certificates of origin (action F8). Finally, although sanctions have been largely lifted, access to trade finance remains a key issue for Myanmar’s traders. Many players in Myanmar have little awareness of the potential benefits of trade-finance instruments, and a communication and training effort would help to raise awareness among business players and in the banking sector (action F9). Domestic banks have little capacity to process or provide trade finance instruments, such as receivable financing or letters of credit. They could be encouraged to make trade finance available through the adoption of an appropriate legal framework, technical assistance, and guarantee for risk and liquidity. Finally, capacity-building could be facilitated for more banks to open access to receivable financing for Myanmar’s exporters. lxiv EXECUTIVE SUMMARY lxv EXECUTIVE SUMMARY ACTION MATRIX ON TRADE POLICY REFORM ACTION CONSTRAINT TO BE ADDRESSED INTERVENTION TIME LINE AREA CODE A1 Cumbersome procedures that add Remove unnecessary practices through 2016 – 2018 trade costs (e.g. advance income tax consultations with stakeholders Procedures for export, restrictions for foreign companies to import) A2 Lack of foreign-trade statistics and Capacity-building on recording and On going other relevant data for policy making classifying trade data on HS-system and consolidation of data for normal and Data border trade and in SEZs Conduct firm-level and labor surveys A3 Limited capacity in analyzing impact Capacity building for government 2017– 2021 of trade policy changes on growth, departments and think tank organizations Capacity-building prices, trade in services, trade on data and policy analysis, safeguard agreements, and trade negotiations measures Review incentives, mandate and organizational structure of trade-relevant departments A4 MFN tariff structure is too complex Conduct tariff rationalization 2017– 2019 Tariffs & safe- guard A5 Reform in trade licenses and Assign NTM/Trade-facilitation committee 2016 – 2019 certificates is underway but not (NTMC) to review selected NTMs have completed clear objectives around protecting safety, social norm, environment, and public health and procedures Streamline and simplify procedures NTMs in trade licenses and encouraging automation whenever possible A6 Lack of updated information on Set up Trade Portal and amend legislation 2016 – 2019 NTMs including permits & Customs to require trade-related departments procedures in a single platform report NTMs + procedural information √ : High priority and high impact actions; HM: high impact actions that require longer time frame for implementation lxvi EXECUTIVE SUMMARY EXPECTED IMPACT SOURCE OF RESPONSIBLE ONGOING/ PRIORITY INFORMATION FOR AGENCIES PLANNED AND HIGH VERIFICATION SUPPORT BY IMPACT ACTIONS DEV’ PARTNERS Cutting red tapes Legislation MoC WBG √ Reliable trade data UN Comtrade, MOC, CSO, MoC, TDP √ regularly published in UN Central Statistical Customs, Min. Comtrade for informed Organization (CSO) of Transport & trade-policy making Comm (MoTC) Better analytical input for Workshops, trade MoC, CSO, TDP, WBG, HM decision-making, better data analysis in policy Ministry ESCAP coordination, better documents of Planning ability to use safeguards &Finance (MoPF as temporary protection Streamlined tariff Tariff schedule, WTO Customs, MoC, TDP, WBG √ structure notifications MoPF Improved trade MOC, % of tariff subject MoC, FDA WBG facilitation while meeting to licenses objectives of NTMs MoC, MoPF Improved predictability Trade portal accessible MoC, NTMC USAID √ and transparency in online, exhaustive NTM procedure for Customs inventory clearance lxvii EXECUTIVE SUMMARY ACTION MATRIX ON TRADE POLICY (CONTINUED) REFORM ACTION CONSTRAINT TO BE ADDRESSED INTERVENTION TIME LINE AREA CODE A7 Improve certainty in rules for private Pass a new investment law, company Ongoing investments registration, consider having negative list to limit discretion of line departments to restrict investment via ad-hoc decision Private- sector develop. A8 Limited capacity in modern business Introduce capacity building program with 2018 – 2021 practices among SMEs with export rigorous impact-evaluation structure in potential place Build on NES plan to elaborate a broad-based industrial policy in light- manufacturing, starting with garment, agribusiness and tourism lxviii EXECUTIVE SUMMARY EXPECTED IMPACT SOURCE OF RESPONSIBLE ONGOING/ PRIORITY INFORMATION FOR AGENCIES PLANNED AND HIGH VERIFICATION SUPPORT BY IMPACT ACTIONS DEV’ PARTNERS Certainty and clarity for Legislation DICA WBG, ADB √ private sector investment Best-practices are Program evaluation Private WBG HM identified and made report operators, available to firms MOC, Ministry of business willing to engage in Industry (MOI) associations, international trade MoC and Proper sequencing of Ministry of key competitiveness- Industry (MOI) UNIDO, WBG, enhancing measures ITC MOC, MOI lxix EXECUTIVE SUMMARY INCLUSIVENESS REFORM ACTION CONSTRAINT TO BE ADDRESSED INTERVENTION TIME LINE AREA CODE B1 Limited benefits from mining-based Review/streamline jade taxation regime 2017 – 2020 Strengthening of the peace process through trade for local communities, limited to benefit local communities and transparency in trade-related mining encourage local processing, e.g. through activities a small export tax on raw gems trade-led development Through EITI mprove transparency on mining operators’ identity and terms of their licenses B2 Limited information on rate of Commission a report on Myanmar’s 2017 – 2020 natural-resource depletion & natural wealth: carry out environmental environmental degradation audit of jade mining B3 Risk of heightened tensions if trade- Coordinate overall sequencing of trade- 2016 – 2021 related projects (infrastructure, related investments in conflict areas with Inclusive development extractive) deployed too quickly progress of peace process B4 Underdeveloped labor-force skills & Vocational training and basic education On going employability programs, in particular for women & vulnerable groups √ : High priority and high impact actions; HM: high impact actions that require longer time frame for implementation lxx EXECUTIVE SUMMARY EXPECTED IMPACT SOURCE OF RESPONSIBLE ONGOING/ PRIORITY INFORMATION FOR AGENCIES PLANNED AND HIGH VERIFICATION SUPPORT BY IMPACT ACTIONS DEV’ PARTNERS Development of local NGOs MoC, MoPF, √ jade processing, leading EITI Ministry of Natural to the development of Resources and jewelry manufacturing Environmental Conservation (MNREC) Improved transparency EITI Secretariat, MNREC Improved sustainability MNREC MNREC HM of extractive activities Better buy-in of NGOs Regional HM development projects by Governments, LEGs MoHA Employment gains in Labor-force survey Ministry of Labor, ILO, GIZ HM particular for vulnerable Immigration and groups Population lxxi EXECUTIVE SUMMARY QUALITY INFRASTRUCTURE REFORM ACTION CONSTRAINT TO BE ADDRESSED INTERVENTION TIME LINE AREA CODE C1 Capacity and awareness of demand Assess demand for standards and quality 2017 – 2021 Private-public dialogue for quality infrastructures is low infrastructure through value chain studies and targeted capacity building program for government quality infrastructure and other methodologies. Initiatives can be built by refining existing studies to ensure that they are tuned into demand. Increase awareness of and capacity of applying good practice on technical regulation and quality infrastructure C2 Underdeveloped SPS/TBT Review and issue legislations On going Regulatory framework regulations for technical regulation and quality infrastructure C3 Export quality for rice is based on TA to abandon the Beale rice 2017 – 2018 a system that is not internationally classification system and replace it with a recognized system allowing rice to be sold for export by variety C4 Limited capacity in laboratory Support to selected public and On going testing (conformity assessment) accredited private laboratories Institution building C5 Underdeveloped accreditation Body Implement the roadmap to establish On going the Myanmar accreditation body agreed between the Accreditation Division, UNIDO and PTBA √ : High priority and high impact actions; HM: high impact actions that require longer time frame for implementation lxxii EXECUTIVE SUMMARY EXPECTED IMPACT SOURCE OF RESPONSIBLE ONGOING/ PRIORITY INFORMATION FOR AGENCIES PLANNED AND HIGH VERIFICATION SUPPORT BY IMPACT ACTIONS DEV’ PARTNERS Increased strategic Policy note, workshops DNSQ TDP, ADB HM capacity in public quality and infrastructure. More knowledge on Proposed laws and Department USAID, WBG, √ modern legal framework regulations including of National TDP for quality infrastructure framework for technical Standard and regulation Quality (DNSQ) Improvement in buyers’ Policy change, workshop Ministry of √ confidence of quality Agriculture system of Myanmar rice ,Livestock and Irrigation (MALI) Better access to # of upgraded MALI, MoC, TDP HM authorized laboratory laboratories DNSQ, FDA, testing facilities Increased capacity to Roadmap completed DNSQ UNIDO HM undertake accreditation lxxiii EXECUTIVE SUMMARY TRADE IN SERVICES REFORM ACTION CONSTRAINT TO BE ADDRESSED INTERVENTION TIME LINE AREA CODE D1 Lack of coordination across Re-design instit. framework for 2017 – 2019 formulation capabilities departments handling services trade coordination and oversight in service Institutional & policy- trade to one department and align mandates of other sectoral departments D2 Limited information in gaps in Request regulatory reviews and reform 2017 – 2019 Cross-cutting regulatory regulation and practices, regulatory regulations based on recommendations obstacles faced by small service providers licensed at MIC and DICA reforms Establish services portal 2018 – 2021 D3 Underdeveloped institutional Training & capacity-building 2017 – 2020 capabilities of regulatory agency in telecom Sectoral interventions Lack of coordination across multiple Review license process for hotels and 2017 – 2018 departments and cumbersome establish coordination on policies and licensing process for hotel infrastructures in certain destinations investments Limitation for foreign firms to Gradually phase out restrictions 2017 – 2020 directly import and distribute products √ : High priority and high impact actions; HM: high impact actions that require longer time frame for implementation lxxiv EXECUTIVE SUMMARY EXPECTED IMPACT SOURCE OF RESPONSIBLE ONGOING/ PRIORITY INFORMATION FOR AGENCIES PLANNED AND HIGH VERIFICATION SUPPORT BY IMPACT ACTIONS DEV’ PARTNERS Enhanced services policy MoC and departments MoC, MoPF, WBG √ formulation conducting trade in CBM, MoTC, services negotiations. Ministry of Hotels and Tourism, Ministry of Labor, Immigration and Population (MLIP) Expansion of small- Publication of new texts DICA HM service provider activity on services portal Better transparency and Services portal DICA, MoC HM certainty of rules Better oversight Workshops MoTC √ Sustainable tourism Legislations Ministry of Hotel WBG, JICA and Tourism Improved access Legislations MoC to imported intermediates, enhanced competitiveness lxxv EXECUTIVE SUMMARY CORRIDORS REFORM ACTION CONSTRAINT TO BE ADDRESSED INTERVENTION TIME LINE AREA CODE E1 Trucks carrying containers are not Improve Yangon-Mandalay Expressway 2017 – 2021 permitted to use the National to allow containerized trucks to pass with Expressway certain tariff E2 Limited access to inland logistics Conduct feasibility study with PPP options 2018 – 2020 infrastructure for investment in logistics park and island Hard infra-structure container depot E3 Railway and inland waterways can be Conduct feasibility studies and 2018 – 2020 alternatives to road transport which implement infrastructure development is increasingly congested E4 Underdeveloped infrastructure in Review practices in in-land border trade, 2017 – 2018 border check points, constraints for and invest in infrastructures at border border trade check points E5 Lagging regions can be better Develop and implement corridors 2017 – 2021 linked with markets development strategy Soft infra-structure √ : High priority and high impact actions; HM: high impact actions that require longer time frame for implementation lxxvi EXECUTIVE SUMMARY EXPECTED IMPACT SOURCE OF RESPONSIBLE ONGOING/ PRIORITY INFORMATION FOR AGENCIES PLANNED AND HIGH VERIFICATION SUPPORT BY IMPACT ACTIONS DEV’ PARTNERS Faster shipments of Corridor Assessment MoC, MoTC JICA √ containerized trucks Study Greater cargo/container Traffic data MoTC, HM movement Customs, Regional Governments Reduced congestion on Strategic investment MoTC, Customs JICA HM highways, reduced inland plan developed and transport costs discussed Decreased clearance Trade data MoC, MoTC ADB √ time, greater volume for inland border trade Wage and employment Household survey MoC, MoTC, WBG HM growth, generation of MoPF, Regional local purchasing power Governments lxxvii EXECUTIVE SUMMARY TRADE FACILITATION AND LOGISTICS REFORM ACTION CONSTRAINT TO BE ADDRESSED INTERVENTION TIME LINE AREA CODE F1 Low berth utilization at port and Upgrade night navigation in Yangon river 2017 – 2019 congestion between port and inland to allow ship to call ports past midnight and review tariff structure to increase container turn-around F2 Road congestions in transporting Facilitate transport of containers from 2017 – 2019 goods inland port to Yangon industrial areas through river barges Logistics F3 High demand for private logistics Adapt enabling regulation to facilitate 2017 – 2018 park and bonded warehouses private investment and improve capacity outside port to supervise F4 Underdeveloped capacity in Capacity building TA and review 2017 – 2021 delivering quality logistics services constraints for development of quality logistics services F5 Irregular coordination across trade Establish National Trade Facilitation 2016 – 2018 Border procedures/ related departments form reforms in Committee with a Secretariat and cargo clearance and trade logistics mandate to coordinate reforms in WTO- TFA and cargo clearance procedures NTM F6 Cumbersome processes for customs Streamlining/harmonization, use of 2016 – 2018 clearance and inspections IT, implementation of WTO Customs Valuation Agreement, risk management F7 Existing Customs and other trade Reviewing existing Customs and other 2017 – 2019 department legislations are old trade department legislation and Border procedures/ and requires constant amendments assisting in writing a new National to address new technologies and Customs Code. NTM processes. F8 Low utilization of ASEAN’s Form Capacity building on ASEAN ROO and 2017 – 2019 D and manual processing for review process and propose automation Certificates of Origins and on-line application of such process F9 Limited capacity of financial sector Training for traders and bank staff 2017 – 2019 to deliver trade finance instruments Trade finance Review of legislations and practices for banks to provide trade finance instruments at market prices √ : High priority and high impact actions; HM: high impact actions that require longer time frame for implementation lxxviii EXECUTIVE SUMMARY EXPECTED IMPACT SOURCE OF RESPONSIBLE ONGOING/ PRIORITY INFORMATION FOR AGENCIES PLANNED AND HIGH VERIFICATION SUPPORT BY IMPACT ACTIONS DEV’ PARTNERS Greater capacity to handle # container throughputs MPA WBG √ increase in freight and more efficiency in logistics More efficiency in logistics # of containers MPA, MoTC, √ transported Customs Cargo consolidation # of private bonded Customs, MBF WBG, ADB, √ outside ports, Improved warehouses with on-site ESCAP competitiveness for export- inspections processing activities Improved services & LPI MoTC, WBG, ADB HM competition Associations Smoother process in Guidelines and MoC, MoPF, WBG, TDP √ implementing regulations legislation Customs Lower congestion at port, LPI, Doing Business Customs and JICA, TDP,WBG, √ lower transaction costs, other border ADB improved lead time departments Improved efficiency in border Existing Legislation Customs, MoPF WBG HM management Review Increased use of forms such Trade data MoC, WBG HM as Certificate of Origin Quarantine, FDA Expanding use of TF Number of workshops Central Bank of instruments and trainings Myanmar (CBM) Commercial banks make Number of L/C CBM HM trade finance services processed, receivable available to their clients financing offered by domestic banks i & TRANSFORMATION OPENNESS CHAPTER 1 STRUCTURAL MYANMAR’S Myanmar’s decision to reintegrate with the global economy is a major policy choice that transforms its development trajectory. In particular, openness to trade and investment is expected to accelerate industrialization and diversify the economy through private sector-led investment and productivity improvements. But the process also carries risks, such as losing out to regional competitors, stoking resistance to reform and increasing social tensions. Therefore, key infrastructure and structural reforms will be required to address the high transaction costs of trade, increase competitiveness and inclusiveness in the private sector, and strengthen institutional capacity to implement better trade-related regulations. 1 OPENNESS AND MYANMAR’S STRUCTURAL TRANSFORMATION 2 CHAPTER 1 1.1 Can Myanmar achieve its targeted growth? International experience Myanmar has set itself an ambitious growth target that is as high as any achieved by any other developing countries to date, with the sole exception of China. In order to achieve it, the economy will have to undergo an extremely rapid structural transformation. New opportunities do exist that were not available to other countries at a similar stage of growth, but it will be important to shed Myanmar’s unfavorable political legacy very rapidly. 1.1.1 What are the precedents? by growth above 7 percent.1 Thus, sustaining GDP growth at 7.7 percent per year (6.9 percent on a Myanmar’s objective of sustained 7.7 percent annual population-adjusted basis), Myanmar is aiming for growth (implying a doubling of GDP by 2023) is very an exceptional performance by historical standards. ambitious and will require particular conditions in order to succeed and, most importantly, to be sustainable. Myanmar’s projection is not out of line with the historical experience of its regional peers, but is Figure 1.1 How Myanmar’s target growth compares with nevertheless above all of them except China, which historical precedents underwent massive reforms during its own take- off period. In order to put Myanmar’s challenge into GDP/capita, constant USD 250 perspective, its current level of income, in constant US dollars, is comparable to that of Thailand in 1973, 200 Indonesia in 1983, China in 1993, Vietnam in 2001, and Cambodia in 2011. Each of these countries subsequently 150 underwent rapid growth, as illustrated in comparison with the current projection for Myanmar in Figure 1.1. 100 0 2 4 6 8 10 Putting aside the particular case of China, recent Years from initial point growth accelerations have tended to be, on average, China (1993) Indonesia (1983) faster than older ones. On average, in the group of Cambodia (2011) Lao PDR (2010) Thailand (1973) Vietnam (2003) Myanmar’s comparators in Figure 1.2, every passing Myanmar (projected) decade is associated with a 0.36 percent growth “bonus” during the take-off phase. Adjusting for this trend, 6.9 percent per capita growth during take-off (7.7 percent At 7.7 percent per year (6.9 percent on a growth without population adjustment) today is roughly population-adjusted basis), the growth rate in line with Thailand’s 4.4 percent per capita growth envisaged in the Government of Myanmar’s growth in the 10 years starting its 1973 take-off (Figure 1.2). strategy for the next five years is a very ambitious target; making it sustainable will an even greater Growth accelerations can help to put countries challenge. Although growth accelerations are on a permanently higher growth trajectory only if relatively common among developing countries, they are accompanied by sound policies. Growth historically only 19 of these spurts were characterized 1 Hausmann, Pritchett and Rodrik (2005) identified 83 of them, albeit with a much less demanding criterion (3.5 percent per year on average over eight years), between 1957 and 1992. 3 OPENNESS AND MYANMAR’S STRUCTURAL TRANSFORMATION accelerations do not necessarily put countries on a permanently higher growth trajectory. Hausmann et 1.1.2 Structural al. (2005) found that, globally, only half of the growth accelerations studied were followed by higher-than- transformation: What average growth; and only six were characterized by a permanent shift to a high-growth trajectory. Among are the drivers? the key determinants of the persistence of high growth, Experience suggests that the primary their analysis highlighted a competitive exchange rate (a substantial depreciation of the home currency growth driver across the world has relative to a basket of trade partners), and a major and always been, and still is, manufacturing, sustained reform drive. These two policy ingredients have certainly been key factors in the performance but will be important for other growth of most high-growth Asian economies and could be engines to be ignited in services and key elements of Myanmar’s development strategy. agricultural modernization too. Figure 1.2: Average growth as a function of initial year Growth results from three factors. These three 9.00 8.00 factors are: (i) investment within each sector of 7.00 activity (accumulation); (ii) improved efficiency 6.00 leading to total factor productivity growth 5.00 4.00 (TFPG), also within each sector; and (iii) the shift 3.00 of resources from low-productivity agriculture to 2.00 1.00 industry, then services (structural transformation). - All three factors are directly affected by openness to capital movements, goods and services. Openness a) ) ar ) di sia R) ) ) am nm nd bo PD to foreign capital is key to accumulation, especially ne ) ila na tn ya am do ao ha ie hi (M (C (V (In (C (L (T in a context of limited savings capabilities; 13 11 03 10 93 73 83 20 20 20 20 19 19 19 openness to imported inputs is key to improved Source: World Bank Group team calculations based on efficiency; and openness to trade in general is WDI. a major driver of structural transformation. Figure 1.3: Structural transformation in Indonesia and Thailand (a) Indonesia post-1983 (b) Thailand post-1973 100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Services Mining Services Mining Manufacturing Agriculture Manufacturing Agriculture Source: World Bank Group team calculations using GGDC data. 4 CHAPTER 1 Manufacturing activities have a greater impact on poverty. 5 OPENNESS AND MYANMAR’S STRUCTURAL TRANSFORMATION There are two reasons why manufacturing has a key role to play in Myanmar’s take-off. Growth 1.2 How strong is of manufacturing’s share of GDP is a key measure of structural transformation. This is illustrated for Myanmar’s starting Indonesia and Thailand during their respective take- off periods in Figure 1.3. Evidence also suggests that point? manufacturing productivity growth is the engine of “convergence”, i.e., the catching-up of high- income countries by low-income ones (Figure 1.4). 1.2.1 Macroeconomic policy has Figure 1.4: Manufacturing is an engine of convergence Figure 4: Manufacturing is an engine of convergence shifted after reopening up to global trade… -1 Macroeconomic policies prior to 2011 were highly Subsequent growth a/ -2 distortionary and impacted very negatively on external competitiveness. Key among these was -3 the prevailing foreign exchange regime. The official exchange rate was pegged at K 8.5 to Special Drawing -4 Rights (SDR) through to March 2012. At this rate, the kyat traded at a highly over-valued rate of K 6 -5 per US$1. This fueled a dual exchange rate system, 7 8 9 10 11 12 whereby in the parallel market the kyat traded at Log of initial labor productivity anywhere between K 800 and K 1,100 per US$1. These Source: Rodrik (2013) policies not only hampered external competitiveness but also led to the misallocation of resources. State economic enterprises (SEE) used the official rate to import inputs at a steep discount, assemble them, Manufacturing activities have a greater impact and market the resulting goods at controlled prices on poverty. Recent research shows that the poverty- that the private sector could not compete with. reduction effect of growth is higher for manufacturing activities than for any other activities, in particular External competitiveness was further hampered extractive ones. This is because manufacturing by monetary financing of the government’s budget activities in low-income countries tend to be labor- deficit, which led to very high rates of inflation. intensive, generating substantial employment and wage These inflationary pressures were compounded by a income. For instance, in Cambodia, manufacturing 500 percent fuel price increase in August 2007, the wage-earners, often female, send remittances to rural Saffron Revolution in September/October 2007, and households (their families), raising consumption and Cyclone Nargis in May 2008. During these periods, potentially enabling them to invest in productive Myanmar experienced far higher inflation rates than assets (animals, ploughs, fertilizers, etc.), thereby its main trading partners, including Japan, Singapore indirectly affecting agricultural productivity growth. and Thailand (Figure 1.5). This, together with the The trickle-down effect of manufacturing employment maintenance of a highly over-valued exchange rate, in Cambodia has been magnified by agreements with led to a very sharp appreciation in Myanmar’s real companies to provide quality jobs and remuneration effective exchange rate (REER) (Figure 1.6). While under the ILO’s “better-factories” program. Myanmar’s resources boom did contribute to this appreciation, foreign exchange rate controls and import controls further aggravated it (Kubo, 2013). Global integration through foreign trade and investment has prompted important reforms to macroeconomic management in Myanmar since 2011. Key among these was unification of the over- valued official exchange rate under a managed float 6 CHAPTER 1 RECENT POLICY CHANGES IN FOREIGN Figure 1.5: Inflation rates (% YoY) BOX 1.1 Fig 7: Inflation rates (% yoy) EXCHANGE MANAGEMENT 45 40 35 • April 2012: The CBM changed the foreign 30 exchange regime to a managed floating regime, in 25 which the official rate (the CBM reference rate) 20 15 was determined by authorized deals in daily, two- 10 way, foreign exchange auctions at the CBM. 5 0 • May 2012: Some exchange restrictions were -5 Jan 135 May 06 May 07 May 08 May 09 May 10 May 11 May 12 May 13 May 14 May 15 Sep 06 Sep 07 Sep 08 Sep 09 Sep 10 Sep 11 Sep 12 Sep 14 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Sep13 lifted, such as the “export first” requirement -10 to use export earnings to fund imports. This Myanmar Singapore was done in conjunction with the removal of Japan Thailand restrictions on forex account transfers between Source: IFS, World Bank Group estimates. individuals, which had the effect of unifying the non-cash account transfer market with the market-determined Thein Phyu cash market. Private commercial banks were issued licenses Figure 1.6: Real effective exchange rate to engage in international transactions and open foreign currency accounts. As a result of these 200 measures, the reference and informal markets 180 rates have converged and now move broadly 160 140 together. 120 100 • • August 2012: A new Foreign Exchange 80 Management Law removed almost all current 60 account exchange rate restrictions. Among other 40 things, the law lifted all restrictions on current May 08 May 13 Mar 09 Apri 11 Mar 14 Nov 05 Nov 10 Aug 09 Aug 14 Dec 07 Dec 12 July 12 Sep 06 Feb 07 Sep 11 Feb 12 Apr 06 Oct 08 Oct 13 Jun 10 Jan 05 Jan 10 Jan 15 Jun05 Jul 07 payments and transfers abroad. This included all services transactions being permitted through the Source: World Bank Group estimates. SWIFT system, and general restrictions on the holding and use of foreign exchange. (Box 1.1). On April 1, 2012, the government devalued • July 2013: The newly enacted Central Bank of the official exchange rate and implemented a system of Myanmar Law provides for CBM autonomy daily sealed bids from domestic banks to the Central and empowers it to set and implement monetary Bank of Myanmar (CBM) for specific quantities of policy, and makes it the supervisory body foreign currency. This reference rate is used to set the responsible for the monetary market and foreign Thein Phyu (TP) midrate in the retail market, in the exchange market. This makes it possible for the wholesale/interbank market for authorized dealers and first time to use a coordinated approach to foreign for foreign exchange transactions with the government. exchange management, including through the The TP midrate generally remains within 0.8% of the use of official foreign exchange reserves. reference rate but occasionally may differ by more than 2% from the other rates (Annual Report on Exchange • August 2013: The Yangon Interbank Foreign Arrangements and Exchange Restrictions, 2015). For all Exchange Market was established to help deepen practical purposes, this eliminated the gap between the the formal exchange rate market. official and market exchange rates. In August 2012, a new Foreign Exchange Management Law removed most • October 2014: The CBM issued nine foreign exchange rate restrictions and multi-currency practices.2 banks licenses to operate in Myanmar. Retail banking for foreign banks is still not yet permitted but these foreign banks can nonetheless provide banking services for foreign corporates and local 2 Under the IMF Article VIII, Myanmar is formally designated as maintaining a multiple currency practice because the multiple price banks. foreign currency auction allows exchange rates of accepted bids that deviate by more than 2 percent. Sources: Central Bank of Myanmar, IMF, and World Bank Group. 7 OPENNESS AND MYANMAR’S STRUCTURAL TRANSFORMATION This largely completed the merger of the two exchange Recent external developments have put pressure rate systems into one single, market-determined, on Myanmar’s exchange rate reforms. Myanmar’s managed float.The exchange rate reforms had a positive current account deficit in 2014/15 widened on the impact on government receipts, which have helped back of rapidly growing FDI-related capital imports. to reduce monetary financing of the fiscal deficit. In The current account deficit is estimated to have particular, the devaluation of the currency led to a big increased from 5.6 percent of GDP in 2013/14 to 6.1 step increase in the kyat-denominated receipts from gas percent of GDP in 2014/15, driven by a growing trade exports. There were other factors also. For example, the deficit, which is estimated to have increased from 4.6 liberalization of the telecommunications market and percent of GDP in 2013/14 to 8.2 percent in 2014/15 the entry of two new operators led to one-off license (Figure 1.7). The services account is estimated to have fee payments, and tax administration reforms have led posted a small surplus in 2014/15 thanks to fees and to an increase in the tax base. royalties from the telecommunications and gas sectors, respectively; a 35 percent increase in foreign visitor The government is also working on diversifying arrivals linked to both tourism and business; and an its sources of deficit financing. This includes, first, associated jump in domestic air travel by non-residents. rebalancing the financing mix away from short-term Treasury bill subscriptions by the CBM towards The general strengthening of the US dollar since medium-term Treasury bond sales to institutional mid-2014 has put downward pressure on the kyat- investors. Second, starting in January 2015, the US dollar exchange rate (Figure 1.9). The US dollar government conducted its first Treasury bill auction, has appreciated significantly against most currencies and is expected to conduct Treasury bond auctions in (Figure 1.10). The general rise in the US dollar is 2016/17 Fiscal Year. Third, the government is gradually attributable to the approaching normalization of US accessing more external debt on concessional terms. monetary policy, including an increase in interest rates CBM financing is estimated to have declined from 3.5 (the first such increase came in December 2015), which percent of GDP in 2010/11 to 1.8 percent of GDP in are weighing on capital inflows to emerging markets in 2011/12 because of some of these measures. Although Asia. This is in contrast to continued easing in major this is expected to gradually reduce monetization, economies such as the Euro area and Japan, as well as eliminating it completely is likely to take some time. structural trends, including reduced US oil imports. 1.2.2 …but with remaining In Myanmar, the situation has been compounded by a growing current account deficit and slowing challenges and renewed external foreign investment inflows in recent months. The risks excess demand for foreign exchange in the auctions in November 2014 and CBM’s attempts in slowing the depreciation led to a widening of the gap between the Figure 1.7: Balance of payments (US$ million) Figure 1.8: Contribution to import growth (% YoY) 3,000 100% Percentage point contribution 2,000 1,000 Us$ Million 60% 10% -40% 2/2014 3/2014 4/2014 5/2014 6/2014 7/2014 8/2014 9/2014 10/2014 11/2014 12/2014 1/2015 2/2015 2010/11 2011/12 2012/13 2013/14 2014/15 Machinery Food & Beverage Intermediaries Base metals Light manufactures Refined oil Trade Balance Non factor services Fabric Others Import Growth (%YOY) Income Transfers Source: IMF. Source: GoM, World Bank Group estimates 8 CHAPTER 1 reference and parallel exchange rates. Importers were terms against the currencies of its major trading willing to pay 1 to 1.5 percent above the reference partners, including Japan, Malaysia, the Rep. of Korea, rate, which was adjusting only gradually to growing Indonesia and Singapore. It was also around this time demand. Although the gap narrowed in January and that relative prices between Myanmar and its trading February 2015, it picked up again, reaching 4 percent in partners began to diverge (Figure 1.12). Between March 2015. This led the CBM to make an important March and May 2015, the REER for Myanmar adjustment to the reference rate from K 1,030/US$ depreciated slightly, which as noted above is around in February to K 1,080/US$ by the end of April, K the time when the CBM adjusted the kyat-US dollar 1,090/US$ by the end of May and closer to K 1,120/ reference rate. Similar to the examples of Indonesia US$ by the end of June. The kyat therefore depreciated and Malaysia above, this adjustment was important by nearly 12 percent in nominal terms against the US in maintaining Myanmar’s external competitiveness. dollar between June 2014 and June 2015. Despite the depreciation of the kyat and other 1.2.3 Allowing flexibility of the Asian currencies against the US dollar, external exchange rate is important competitiveness was hampered by appreciating Monetary authorities in the region have generally real effective exchange rates (REER) (Figure 1.11). maintained exchange rate flexibility against the The REER is an index of the domestic currency with US dollar’s appreciating trend since 2014. Official currencies of all trading partners, adjusted for trade gross reserves of the ASEAN-5 were 4.9 percent weights and relative inflation. When considering lower in May 2015 than at the start of the US the REER, Malaysia’s ringgit depreciated by only dollar’s appreciation trend in June 2014. This decline 1.4 percent in the year to May (compared with 16 is comparatively modest, demonstrating that Asian percent nominal depreciation against the US dollar central banks have tended to avoid selling reserves in the year to June), while Indonesia’s rupiah actually to prop up their currencies against the US dollar, appreciated in real terms against its trading partners preferring instead to preserve (and where possible over this period by 2.3 percent (compared with a 12 reinforce) reserve buffers (Figure 1.12). Only Thailand percent nominal depreciation against the US dollar and Malaysia seem to have significantly drawn down in the year to June). In such cases, maintaining a on their reserves. Maintaining this flexible stance has fixed exchange rate against the US dollar would have allowed the currencies of other commodity exporters impeded international competitiveness even further. in the region (such as Malaysia and Indonesia) Myanmar also experienced some REER appreciation to absorb some of the shock from lower global between November 2014 and March 2015 (Figure commodity prices and demand, notably including 1.11). Over this period, the kyat appreciated in nominal hydrocarbons, without which the drag on domestic Figure 1.9: Nominal exchange rate (US$ vs. local currency) Figure 1.10: Official and parallel exchange rates (% change, YoY) 1300 17% 1250 12% 1200 YOY % Change 1150 Kyats / US 7% 1100 2% 1050 -4% 1000 2014M06 2014M07 2014M08 2014M09 2014M10 2014M11 2014M12 2015M01 2015M02 2015M03 2015M04 2015M05 2015M06 950 2 JUN 14 2 JUL 14 2 AUG 14 2 SEP 14 2 OCT 14 2 NOV 14 2 DEC 14 2 JAN 14 2 FEB 14 2 MAR 14 2 APR 14 2 MAY 14 2 JUN 14 2 JUL 14 2 AUG 14 2 SEP 14 Indonesia Myanmar Malaysia Philippines Thailand Vietnam Official Rate (Kyat / US$) Parallel Rate (Kyat / US$) Source: CEIC, www.naungmoon.com, World Bank Group Source: CEIC, World Bank Group staff estimates. staff estimates. 9 OPENNESS AND MYANMAR’S STRUCTURAL TRANSFORMATION Figure 1.11: Real effective exchange rates Figure 1.12: Gross reserves (US$ billion, cumulative change) 130.0 60 50 120.0 40 US$ Billion (cumulative change) 110.0 30 20 100.0 10 90.0 0 80.0 -10 Indonesia Malaysia MAY15 MAY 14 JUN 14 JUL 14 AUG 14 SEP14 OCT14 NOV14 DEC14 JAN 15 FEB 15 MAR15 APR15 Philippines Thailand -20 Jan 11 Oct 11 Jul 12 Apr 11 Jan 14 Oct 14 Myanmar China Indonesia Malaysia Philippines Source: BIS, World Bank Group estimates. Source: BIS, World Bank Group estimates. profits, household incomes, public revenues and, as people begin to hoard foreign exchange as a store ultimately, economic growth would have been greater. of wealth; and a harmful impact on investment and growth due to a lack of foreign exchange The CBM’s recent stance to maintain greater for imported capital and intermediate goods. flexibility in the kyat-US dollar exchange rate is a positive move. This helped to close the gap between The CBM would therefore do well in continuing to the official reference rate and the parallel market in maintain flexibility in the kyat In the short term, August and early September 2015 (Figure 1.11). The efforts at defending the currency by drawing on CBM’s instruction in May to ensure that government foreign exchange reserves will not be sustainable. transactions were carried out in kyat was a step in the This would increase external vulnerability and right direction. However, administrative measures Myanmar’s ability to sustainably finance its current introduced in May to impose limits on US dollar account deficit. Allowing the reference rate to be withdrawals have sent worrying signals to the market. determined by the market would be important in The parallel market responded by selling US dollars this regard. Any effort at managing exchange rate at a higher price (i.e., beyond the 0.8 percent limit) volatility needs to be supported by fiscal and monetary due to excess demand at the official rate. Speculation discipline to ensure stability and competitiveness. started as traders purchased US dollars at the official rate and sold at a higher price on the parallel market. The CBM is gradually strengthening its monetary Media reports indicated that households held on to US policy capacity to deal with such challenges. dollars as a store of wealth. There were also indications Liberalization of external accounts has prompted that banks and currency traders were not willing to foreign exchange interventions, which impact money release US dollars, presumably in the expectation that supply. The sale of foreign exchange reserves to prop the kyat would depreciate further, which became a self- up the exchange rate in 2013/14 contracted money fulfilling prophecy. supply. Similarly, downward pressure on the kyat in 2015/16 and concurrent efforts to shore up foreign 20. Administrative measures to control foreign exchange reserves would have required sterilization to exchange transactions can be counterproductive avoid inflationary pressure. To manage these emerging as illustrated by examples from elsewhere. challenges, the government could continue to develop Experience from other countries suggests that and implement the reserve money target regime and administrative controls on foreign exchange can scale back monetary financing of the fiscal deficit, lead to the emergence and/or growth in the parallel while allowing treasury bill interest rates to rise to market; increased speculative trading; overvalued market-clearing levels exchange rates (Myanmar Economic Monitor, 2015) 10 CHAPTER 2 AGE OF MYAN MAR’S CHAPTER 2 OPPORTUNITY Achieving and sustaining Myanmar’s growth target requires it to tap opportunities from greater economic integration. Exports and FDI are closely inter-linked and expected to bring a boost to growth, job creation and product diversification. Achieving this requires supporting policies to unlock the potential in manufacturing exports to drive the structural transformation and enable Myanmar’s income per- capita to catch up with neighboring countries, with a consequent significant impact on poverty reduction. 11 MYANMAR’S AGE OF OPPORTUNITY 12 CHAPTER 2 2.1 A potential waiting billion in 2013,1 trade as a fraction of GDP remains abnormally low relative to a model-based to be tapped “benchmark level”. This benchmark level is defined as a function of the country’s level of income, population size, and resource endowment (13) in order to take into account the fact that countries tend to trade more relative to their GDP, ceteris Myanmar’s trade-growth potential is very large, paribus, when they are richer, smaller, or resource-rich. which should help the country to narrow the wide Figure 2.1: Myanmar’s trade openness is still below gap with its peers following the elimination of benchmark… sanctions and the major shift in the country’s national development strategy. Moreover, opportunities are 9 just around the corner as larger countries in the region 8 start to offshore labor-intensive manufacturing due to Adjusted to openness rising costs at home. 7 Myanmar’s integration with the world economy 6 was stifled for decades by two major policy factors. Between 1962 and 1988, the country followed a self- 5 centered development strategy dubbed the “Burmese way to socialism” based on central planning and self- 4 4.0 6.0 8.0 10.0 12.0 reliance, with industry, services and international ln GDP per capita, PPP dollars trade under state control. In 1987, in response to its Other countries ASEAN growing economic difficulties, the country embarked Myanmar Fitted values upon a limited reform program, but in 1997 it was hit by US sanctions prohibiting investment, Notes: Trade openness is defined by the ratio of imports subsequently extended to trade in 2003 and followed plus exports of goods and services relative to GDP. by similar sanctions from other Western countries. The The relationship shown uses regression to control for combination of sanctions and national policy choices population and the share of resource rents in GDP (not shown). “Adjusted openness” shown on the vertical axis is severely hampered the country’s ability to import and trade openness adjusted for the effect of size and resource export. endowment. Note that WDI data seem to understate Myanmar’s imports; using the higher estimates from UN The recent lifting of sanctions and the shift to a Comtrade or the IMF would reduce the degree of under- resolutely outward-oriented development strategy, as trading. reflected in the National Comprehensive Development Source: Team calculations from WDI and IMF data. Plan (NCDP) and Framework for Economic and Social Reforms (FESR), create an opportunity for Compared with its peers, Myanmar’s under-trading rapid catching up. This chapter reviews the evidence is striking. Countries below the red curve in Figure of under-trading in order to identify future growth 2.1 under-trade, while countries above it over-trade. opportunities in terms of promising sectors and markets, and charts a course to maximize the speed and benefits of the forthcoming transformation. 1 Most trade values used in this chapter are estimates constructed using various partial and fragmentary sources including 2.1.1 Myanmar trades less than its the IMF Direction of Trade Statistics (DOTS), UN Comtrade data potential but is opening up rapidly mirrored (i.e., using data from Myanmar’s partner countries), and the World Development Indicators (WDI). None of these sources While Myanmar’s trade grew in value from almost gives consistent series for all types of statistics needed for a complete trade analysis, and the error margins are sometimes nothing (US$1 billion) in 1990 to over US$25 very large. For instance, for 2012, the WDI report US$9.08 billion in imports of goods and services, UN Comtrade (mirrored) US$15.27 billion in goods only, and the DOTS US$17.03 billion. Remedying the lack of reliable statistical information is a first-order priority for the Government of Myanmar, as no development plan can be real- istic in the absence of a trustworthy statistical tool. This should be taken also as a note of caution for the figures shown and analyzed in this chapter, which comprise substantial error margins. 13 MYANMAR’S AGE OF OPPORTUNITY Myanmar’s under-trading is striking, in particular on the import side between 2004 and 2006 is likely when compared with its ASEAN partners (shown related to the effect of Western sanctions, in particular in blue). Most of them are above the curve, having US trade sanctions put in place in 2003. In the case pursued outward-oriented development policies in of exports, a large chunk of the catching-up is due to recent years, and have largely integrated into regional the expansion of the gas trade. While the gas trade has and global value chains in manufactured products. positive spillovers on the economy in terms of revenue, it generates few jobs and contributes only indirectly Myanmar’s trade is often conducted informally to inclusive growth.Imports are critical for investment and is not reflected in official data. In the case of and growth Myanmar, anecdotal evidence suggests that important trade flows take place on an informal basis and are 2.1.2 Imports are critical for thus not recorded, biasing downwards the country’s openness index. Measures to formalize trade and better investment and growth official recording of trade flows will deliver a more International experience shows that no export- accurate picture. led strategy can be successful without unrestricted access to high-quality intermediates and capital Statistical analysis suggests that Myanmar has equipment. In this regard, the structure of Myanmar’s been trading below its potential, but the gap is imports reflects the needs of a growing economy, with narrowing. Figure 2.2 shows a measure of “under- a substantial share of machinery, electrical machinery trading” obtained from a rigorous, model-based approach consisting of fitting a so-called “gravity Figure 2.3: Myanmar’s imports are dominated by capital equation” (a widely used model in trade economics) equipment and intermediates (US$ million) and retrieving coefficients known as “fixed effects” 20'000 indicating how much Myanmar deviates, up or down, 18'000 from a model-predicted benchmark. Fixed-effect coefficients are negative for all years in Myanmar’s 16'000 case, indicating under-trading, but the curves are 14'000 rising (uninterruptedly for exports, and since 2006 12'000 for imports). The sharp drop in Myanmar’s coefficient 10'000 8'000 Figure 6: …but already catching up 6'000 Figure 2.2: …but already catching up 4'000 -1 2'000 - Gap relative to gravity benchmark -1.5 2007 2008 2009 2010 2011 2012 2013 Hydrocarbons Machinery Plastics Electr. Mach -2 Textiles Transp. Equ. Iron & steel Other -2.5 -3 and transport equipment (Figure 2.3). Together, these 2000 2002 2004 2006 2008 2010 2012 2014 three categories of capital equipment account for close Exports Imports to 35 percent of total imports, highlighting the critical importance of smooth import procedures at the border for investment and growth. While the share of capital Note: The curves show the point estimates of coefficients equipment in overall imports has been roughly stable on country-year fixed effects for Myanmar in a gravity up to now, the FDI and investment boom required to equation. The lower the curve, the more Myanmar under-trades relative to a global benchmark adjusted for boost GDP growth to the target level of 7.7 percent characteristics of countries and their partners. would likely raise it, implying possible pressures on the trade balance (see Chapter 1). Source: Team calculations using UN Comtrade mirrored data. 14 CHAPTER 2 2.1.3 Myanmar’s export The linkages between imports of intermediates destinations: Redeployment and and exports of final products highlight the need for Myanmar to ensure smooth border diversification procedures. Firms in time-sensitive industries, such as garments, need highly predictable and Figure 2.4: Thailand weighs heavily in Myanmar’s export programmable environments, and seamless border portfolio, but China is rising rapidly (US$ million) crossings. Complicated procedures or congestion at 12'000 the border resulting in variable container dwell times act as deterrents in those industries. This issue will be 10'000 further discussed later in this chapter in the context of the textiles/garments cluster. 8'000 Myanmar’s portfolio of export destinations has 6'000 changed radically over time, first under the effect of sanctions and then, more recently, with the rise of 4'000 India and China. Sanctions had the effect of reducing Myanmar’s trade overall, but particularly so with the 2'000 US, the EU and Japan, whose share in Myanmar’s - trade fell from 29 percent in 1990 to 10 percent in 2007 2008 2009 2010 2011 2012 2013 2012. Meanwhile, the share of trade with non-sanction countries rose, with China and ASEAN countries Other Singapore rising from 43 percent of Myanmar’s trade in 1990 to EU Vietnam 71 percent in 2013. Most striking was the rise of India Malaysia Japan and China over the period 2008-2013 (Figure 2.4), Bangladesh China a period during which Myanmar’s heavy dependence India Thailand on the Thai market also shrank substantially (from 67 percent in 2007 to 40 percent in 2013). China’s share rose in the same period from 11 to 28 percent of Note: Total export value in US$ million. Source: Team calculations using UN Comtrade (mirrored). Myanmar’s exports, most rapidly in recent years. MYANMAR’S TRADE WITH CHINA EXPANDED RAPIDLY, WHILE STAGNATING WITH TABLE 2.1 OTHER PARTNERS Share of imports Share of exports Share of trade 1991-93 2011-13 1991-93 2011-13 1991-93 2011-13 ASEAN 46.4 35.7 36.3 12.9 42.3 28.8 Singapore 27.5 7.6 12.5 1.6 21.2 5.9 Thailand 9.6 20.0 20.1 4.4 14.5 15.4 Malaysia 7.4 3.8 2.4 3.6 5.1 3.7 Indonesia 2.2 3.1 1.2 1.2 1.7 2.5 China 26.0 40.5 22.9 32.4 24.3 39.0 Japan 9.8 6.7 6.7 11.8 8.4 8.1 Rep. of Korea 3.6 6.4 1.1 6.5 2.4 6.4 Australia & NZ 0.2 0.8 0.7 0.3 0.4 0.6 India 1.2 4.0 12.6 23.5 6.4 9.7 EU15 8.7 1.9 5.7 4.5 7.3 2.7 United States 1.3 0.5 5.0 0.2 3.0 0.4 15 MYANMAR’S AGE OF OPPORTUNITY MYANMAR’S TRADE WAS MASSIVELY REBALANCED BY SANCTIONS FIGURE 2.5 (a) 2000 Note: The color code corresponds to the value of the residuals from a gravity equation fitted by PPML with country-time fixed effects, with pale coloring for negative residuals and dark coloring for positive ones. Note that the gravity equation was fitted on aggregate trade data, which includes gas exports. (b ) 2013 Source: Team calculations using IMF DOTS. 16 CHAPTER 2 Sanctions had the effect of massively rebalancing 2.1.4 A sectoral structure with Myanmar’s trade towards Asia, creating a “legacy structure” that may change again over time. Figure 2.5 strong diversification potential uses a model-based approach to measuring Myanmar’s Based on an analysis of the strengths and trade intensity by partner in order to highlight both weaknesses of Myanmar’s productive sector, as well the effect of the sanctions and the potential for further as the market opportunities at the regional and rebalancing. In order to take into account the effect of global level, the NES, validated by the national distance, partner size and other natural determinants authorities in 2015, has identified seven sectoral of trade, we once again fitted a gravity equation on priorities, namely: rice; pulses, beans and oilseeds; world trade and retrieved “residuals” (unexplained fish and crustaceans; textiles and garments; rubber; deviations from predicted patterns) between Myanmar tourism; and forestry products. The DTIS builds on and its trading partners. Figure 2.5 shows these this analytical work to help the government identify residuals in various shades of blue, from white/pale priority cross-cutting constraints in terms of policies, blue for partners with which Myanmar under-trades institutions and facilitation that need to be addressed (negative residuals) to dark blue for partners with in order to implement the NES and achieve the target which Myanmar over-trades (positive residuals). In growth rate of 7.7 percent. This section starts with a 2000, before trade sanctions hit (the 1997 wave of brief review of where Myanmar stands today in terms sanctions concerned only investment; trade sanctions of its sectoral export structure. were imposed in 2003), the US and some EU countries were disproportionately large trading partners for Myanmar, as shown by their dark blue coloration; 13 Figure 2.6: Myanmar’s exports are still concentrated like years later, they were replaced by China and, to some those of other LDCs extent, Japan. 8 Export concentration index Myanmar’s non-oil and gas trade with East Asia has been increasingly concentrated on China, with signs 6 of eroding market share in ASEAN countries. While the share of East Asia in Myanmar’s trade rose from 77 percent in 1991-93 to 82 percent in 2011-13, most of 4 those gains have been in trade with China. Myanmar’s non-oil and gas trade with China rose by 33 percent 2 per year over the same period, while Myanmar’s trade 0 20000 40000 60000 80000 with ASEAN countries stagnated (Table 2.1). GDP per capita, PPP The gravity analysis suggests that Myanmar’s trade Other countries Myanmar with Thailand, while still large (40 percent of Fitted values Myanmar’s exports, as noted, but largely accounted Note: The measure of export concentration shown on the for by gas) still has potential for growth, in particular vertical axis is Theil’s index, calculated by country-year. in non-resource sectors. Given the size of the Thai economy and the two countries’ common border, Source: Team calculations using UN Comtrade. the gravity equation predicts even more dependence of Myanmar’s trade on Thailand (similar to Canada’s Developing countries, and particularly least- dependence on the US). This is shown by Thailand’s developed countries (LDCs) such as Myanmar, white coloring in Figure 2.5. Thus, Myanmar’s policy are often characterized by a heavy concentration could be to take advantage of the opportunities of exports on a few primary products. Figure 2.6 offered by trade with Thailand rather than trying to shows Theil’s index, a conventional measure of export diversify away from it. This is particularly important concentration, plotted against income (as measured in the textiles/garments sector, where important by GDP per capita at purchasing-power parity) for all opportunities for intra-industry trade with Thailand countries. As a general rule, countries at a certain range exist, as discussed later in this chapter. It also shows of income—between US$15,000 and US$45,000 per that Myanmar under-trades with its northwestern capita—diversify massively, while countries at high partners, India and Bangladesh, which appear in pale levels of income tend to re-concentrate. Myanmar, blue in Figure 2.5, reflecting the under-development of shown by the red dots, has followed a pattern that the northwestern corridor. 17 MYANMAR’S AGE OF OPPORTUNITY is typical of countries at its level of development. As Figure 2.8: International gas prices are volatile gas exports expanded, it first concentrated (red dots 15 going up), after which it started to diversify (red dots 14 13 going down). The pace of its diversification in recent 12 years appears parallel to the curve showing the global 11 10 trend—suggesting that Myanmar is progressively 9 becoming a more “normal” country in terms of export 8 7 diversification. 6 5 4 To continue the path of export diversification, 3 there is a strong case for the government to have 2 1 Figure 11: Figure 2.7: Myanmar’s exports remain dominated by 0 Myanmar’s exports remain dominated by primary products primary products Jan 2008 April 2010 August 2012 Nov 2014 US dollars per million BTU 12'000 Note: British Thermal Units (BTU) are standard measures of 10'000 energy used as proxies for quantities of natural gas. Source: infomine.com 8'000 Despite the recent trend towards diversification, the commodity structure of Myanmar’s exports 6'000 remains heavily dominated by commodities and 4'000 primary products. Figure 2.7 shows how the sectoral composition of Myanmar’s exports has evolved over 2'000 the past half-decade. Gas exports remain large, at over 37 percent of the total (albeit down from a high - of 59 percent in 2008, at a time when gas prices 2007 2008 2009 2010 2011 2012 2013 were high), while garment products account for a Other products Gas & derivatives paltry 11 percent. Rice exports are subsumed in the Jade Beans & pulses “other products” category. According to mirrored Apparel products Fish & crustaceans international trade data, rice accounts for less than 2 Wood products percent of Myanmar’s exports. However, according to some estimates, informal overland exports to Thailand Note: In US$ million and China could top US$500 million per year, or close Source: UN Comtrade (mirrored) to 5 percent of total exports.3 Myanmar’s export basket is also heavily concentrated supporting policies in place. A continuation of the in a handful of products sold in particular countries. current diversification trend could mean, for instance, Gas is a commodity that currently dominates that 1,000 new export lines (at HS 6-digit), each Myanmar’s export basket, since major production exporting US$1 million per year, would open over started. Over the period 2011-13, 43 percent of gas the next five years.2 But international experience also exports went to Thailand. This concentration of gas shows that new export products tend to suffer from exports may even reinforce itself once a pipeline to high “infant mortality”: many survive only one or two China becomes operational. years and then disappear. In order to achieve sustained diversification while minimizing the failure rate, the government could put in place export-promotion structures that have been shown in other countries to help new exporters reach out to potential buyers. 3 This calculation is based on replacing 1,000 currently inactive HS6 export lines by an export value of US$1 million and recalculating the Theil index. The value obtained is 4.74, which is the value that the Theil index will reach five years from now based on a continuation of the trend observed over the past five years. 2 This calculation is based on replacing 1,000 currently There is great uncertainty not only about the rice trade but even inactive HS6 export lines by an export value of US$1 million and about production levels, with Myanmar’s Ministry of Agriculture and recalculating the Theil index. The value obtained is 4.74, which is Irrigation (FAO-MOAI) providing different estimates from the US the value that the Theil index will reach five years from now based Department of Agriculture (see OECD, 2014, p. 51). on a continuation of the trend observed over the past five years. 18 CHAPTER 2 Diversifying away from the country’s heavy farmers with high potential. It could also address dependence on gas exports could be a long- bottlenecks in specific products’ value chains to increase term priority for the government. While gas is an the competitiveness of Myanmar’s agri-products. important source of revenue, hydrocarbon prices have historically proven volatile (Figure 2.8) and are 2.1.5 Making garments a catalyst for likely to remain so. In countries that are dependent on manufacturing-led development hydrocarbon exports, international experience shows that this volatility tends to translate into volatility in As discussed, international experience suggests that exports, GDP growth, and fiscal revenue, complicating manufacturing growth plays a key role in ensuring the state budget planning process. Moreover, “convergence”, i.e., income catching-up by poor dependence on natural-resource exports has often countries relatively to richer ones. Given Myanmar’s led to chronic currency overvaluation, making other low initial income, ensuring that its national export export-oriented sectors less competitive and retarding strategy bets on an effective growth engine is key, and their growth, a syndrome known as “Dutch disease”. manufacturing is central in this. Only one of the NES’s Thus, dependence on hydrocarbons tends to be self- seven sectoral priorities, namely textiles/garments, is a perpetuating unless government authorities pursue a manufacturing activity. The key question is whether deliberate strategy of diversification, including, at the developing a textiles/garments cluster is an appropriate macro level, smart management of the exchange rate short-term objective for Myanmar given its factor (see Chapter 1). endowment, as fostering activities that mobilize large amounts of capital and/or energy can result in Beans and pulses, largely exported without any “cannibalization” of other sectors and end up being processing, do not show any noticeable growth. counterproductive. However, this may be due to the fact that large flows of overland trade with the Chinese province of Yunnan Myanmar could promote a textiles/garments remain partly unrecorded. The lack of formalization cluster as recommended , by facilitating garment of these trade flows reflects the lack of supportive production while importing textile products infrastructure for Myanmar’s producers, who suffer (fabric). The textiles/garments cluster is composed of discounts and moral hazard in their dealings with two distinct segments with radically different factor foreign buyers, denying them of much of the gains intensities (Figure 2.9). The upstream textile sector, from trade (Box 2.1). The same issues affect several which comprises activities such as spinning cotton products and have prevented investment and growth. fiber to produce yarn, weaving the yarn to produce fabric, and dying and cutting the fabric, is relatively Agri-business can provide the rural poor with capital-intensive, with a capital-labor ratio of typically opportunities for higher incomes. Value addition over US$50,000 per worker. It also requires a steady activities, such as sorting, processing and packaging, electricity supply and a sufficiently good business have great potential in Myanmar, where a large portion environment to convince investors to immobilize costly of the poor population live in rural areas with a strong machinery that cannot be moved out easily. Finally, vocation for agriculture. Currently, significant shares operating the machinery requires skilled workers and of the produce (rice, pulses, fruit, etc.) are exported technicians. Thus, the ideal location for such activities informally across the borders into China and Thailand, is middle-income countries such as Turkey, or lower- where they are processed and marketed, or further middle income ones such as Thailand. exported. This means that Myanmar is losing out both in terms of value addition and job opportunities, which The downstream garments sector, in contrast to are being lost to neighboring countries. fabric, comprises very labor-intensive activities. The downstream garments sector is essentially Specific interventions will be needed, taking into assembling pre-cut pieces into garments, often under account the experience of other countries. Specific subcontracting arrangements known as “cut, make interventions to address market failures and to link and trim” (CMT). These activities can flourish in farmers to markets could be designed to suit local needs less sophisticated business environments and are and take into consideration good practices in other therefore well suited for LDCs where they provide an countries, including in the region. The government entry door to industrialization. Garment production could consider offering tax incentives and other forms provides female jobs that are often critical income of public subsidies to attract investment in agribusiness. sources for rural or urban low-income households. The This could be coupled with training programs targeting predominantly unskilled workforce, combined with 19 MYANMAR’S AGE OF OPPORTUNITY HOW THE LACK OF A SUPPORT INFRASTRUCTURE HURTS BOX 2.1 MYANMAR’S BEAN AND MANGO EXPORTERS Myanmar ships large quantities of peas to India through Yangon, with India accounting for over two-thirds of Myanmar’s recorded exports of beans and pulses. Substantial quantities of beans are also exported overland to China through the Muse border post. Trading takes place at the Mandalay pulse exchange where large traders set prices at the start of the trading day for all remaining transactions. Most of the products exported to China are brewed to produce alcohol. Myanmar’s beans are exported raw as producers have not succeeded in convincing Chinese buyers to buy processed products. As a result, domestic mills are run at less than full capacity and lose money. While there are many reasons for the inability of Myanmar’s producers to squeeze more value-added from their products, the lack of SPS infrastructure does not help, although a few traders in Yangon have managed to obtain certification and export to the EU. The lack of sanitary and phytosanitary (SPS) infrastructure has similarly prevented mango producers from diversifying export destinations and reaching out to higher-end markets. Most OECD countries require fumigation, which itself requires substantial investments in the exporting country. The lack of certification and good logistics makes high-end markets such as Singapore, where quality products can fetch high unit values, largely unattainable. Producers rely on the marketing networks of intermediaries with only weak quality management capabilities and little strategic vision. As a result, they remain largely dependent on informal sales to Chinese buyers with severe moral-hazard problems. For instance, according to Burmese producers, in some cases sales are made in Mandalay over a handshake, but when the product reaches the border the buyer claims that its quality is not what had been agreed and applies a discount. Sometimes the claim is real, reflecting poor logistics and storage conditions, but often it is just a “hold up”, which the producer, having no alternative, is forced to accept. Overcoming moral hazard through the formalization of marketing channels and contracts, encouraging and certifying quality, and providing producers with information on market opportunities, all require a support infrastructure that is currently non-existent in Myanmar. Putting in place such an infrastructure is a first-order priority to ensure that export development translates into income and growth for farmers. 20 CHAPTER 2 Figure 2.9: Similar to Cambodia, Myanmar’s comparative advantage lies in the downstream, labor-intensive segment of the textile value chain Thailand 4'000 3'000 PRODUCTION STAGE 2'000 IS INTENSIVE IN: Cambodia 1'000 8'000 - 6'000 Irrigated Cotton Textile Garment Textile Garment land production Import side Export side 4'000 Spinning 2'000 Capital , Weaving - energy Textile Garment Textile Garment Dying, Import side Export side cutting Unskilled Assembling labor T EXTILE G ARMENTS Notes: All trade flows refer to 2013, are measured in US$ (million), and are mirrored; therefore, import flows are FOB, while export flows are CIF. Source: Team calculations using UN Comtrade. supply chain pressure on garment factory working Garment Manufacturer Association (MGMA), exports conditions, means that it will be important for income have already grown by a factor of five in five years, and labor protections to be integral to the framework from US$350 million in 2010 to 1.6 billion today; the for garment industry growth. Figure 16: … and China’s comparative advantage in garments is starting to fade, Figure 2.10: China’s comparative advantage in garments is creating opportunities for relocation Myanmar shares many of the fundamentals of v starting to fade, creating opportunities for relocation Cambodia and can follow its lead. Figure 2.9 shows 200'000 how trade patterns in the textiles/garments sector reflect 180'000 the fundamentals of producing countries. Cambodia, a poor country with scarce capital and energy but a 160'000 large supply of labor, is a natural location for garment 140'000 manufacturing. This is reflected in trade patterns, with 120'000 large imports of textiles and large exports of garments. 100'000 The wide difference between garment exports (red 80'000 bar) and textile imports (hashed blue bar) reflects the 60'000 combination of domestic value addition and transport 40'000 costs, as textile imports are measured in FOB by the 20'000 exporting country, while garment imports are measured - in CIF by the importing country.4 2007 2009 2011 2013 Myanmar’s garments sector is entering into a new Garment exports Garment imports boom and it is important to think how the sector Textile exports Textile imports can move up its value chain. According to Myanmar’s Note: Trade flows are measured in US$ millions, and are mirrored; therefore, import flows are FOB, while import flows are CIF. 4 This is unusual and is due to the use of mirrored trade data because of the lack of direct trade data for Myanmar. Source: Team calculations using UN Comtrade. 21 MYANMAR’S AGE OF OPPORTUNITY MINIMUM WAGES AS A SAFEGUARD TO PROTECT WORKERS BOX 2.2 The setting of a minimum wage is one the most widely used labor policy instruments in the world, with varying types of design and implementation. The primary objective in setting a minimum wage is to establish an acceptable wage floor to protect low-income workers and to correct labor market distortions whereby employers keep workers’ wages artificially well below market levels. However, countries may have other objectives in setting a minimum wage, such as reducing poverty, narrowing inequality, or incentivizing workers’ productivity as better paid workers can lead to higher consumption spending. Empirical evidence is mixed on the impact of minimum wages on demand for labor and unemployment. For developing countries with dual labor markets (formal and informal workers), it is possible that increases in minimum wages will have limited impact on unemployment, as workers can shift from formal to informal jobs. But in a situation where most jobs are informal jobs, raising minimum wages can displace informal workers as formal workers become informal job seekers. The impact of raising minimum wages on formal workers also depends on compliance with minimum wage regulations. In Honduras and Nicaragua, strict compliance with minimum wages caused job losses in large corporations, while smaller firms were less formal and could absorb the relocation of formal workers. However, in Indonesia, where compliance with the minimum wage is less strict, raising the minimum wage in the late 1990s had more impact on labor absorption among small firms as they faced higher labor costs. For industries that rely more on the size of domestic demand, minimum wage increases in the late 1990s are associated with increasing formal employment in firms producing goods for local consumption or non-tradeable goods (Macgruder, 2013). • Myanmar already has minimum wage legislation. The first minimum wage policy was introduced in 1949 and in 2013 the government passed a Law on Minimum Wage Rules. To strengthen institutional arrangements and capacity in setting minimum wages that are equal for men and women but at levels that do not jeopardize trade competitiveness, below are several key issues that Myanmar may want to consider: • Setting (single) clear objectives for the minimum wage that aim to address imperfections in the labor market. Minimum wage is quite an appropriate tool for use in correcting labor market inefficiencies, which cause discrepancies between wages and economic productivity. But the empirical evidence shown in the Del Carpio and Pabon Study (2014) in ASEAN, reveals that the relationship between minimum wage and poverty is far from compelling. In some cases, the poor benefit with better wages; however, much of the evidence suggests that the poor are more disadvantaged in that they are more likely to lose their jobs and/or leave the formal labor market • Keep the minimum wage structure simple: A complex minimum wage structure may appear desirable but can be difficult to enforce. • Agree on the key principles and comprehensive criteria for setting the minimum wage level: It is important to agree on a comprehensive list of criteria and indicators. These typically include: cost of living/consumer prices, productivity, enterprise capacity to pay, producer prices, competitiveness, income inequality, immigration, the informal economy, unemployment and GDP growth, among others. It is also important for the law to take into account wage structures. For instance, in Myanmar, the notified minimum wage is for a standard eight-hour working day and there is no mention of overtime compensation, which forms the bulk of take-home wages in many sectors, including garments. • Determine the policy tool and process for future adjustments of the minimum wage: It is important for Myanmar’s National Minimum Wage Committee to derive a suitable range of minimum wages, which can serve as a basis for negotiations between parties. It is crucial that the relevant information is available to support the negotiations. It is important that the process is time-bound and involves all the negotiating parties, including independent technical experts to represent the public interest. • Strengthen enforcement and monitoring capacity: Although only a small fraction of the labor force in Myanmar will be covered by the new minimum wage, it is important to strengthen enforcement and monitoring capacity to ensure compliance with the regulations. 22 CHAPTER 2 association projects that employment could reach 1.5 wage legislation and a process for setting minimum million people within a decade. FDI are leading the wage level be strengthened to ensure that male and establishment of new garment factories in Myanmar and female workers are equally protected, but at wage they have benefitted from access to offshore financial levels that do not jeopardize competitiveness (see Box services and a network of suppliers of intermediate 2.2 for a discussion on minimum wages). However, inputs. In contrast, local companies are facing higher setting a minimum wage is not necessarily the best transaction costs from the underdeveloped financial tool for reducing poverty and therefore improving sector at home (see section on trade finance below) and access to basic social services (e.g., health, education), import clearance procedures that make it difficult for particularly for poor families, remains important. them to expand away from CMT garments. Similarly, market access for logging products would be enhanced by adherence to international standards Opportunities for attracting offshored garment (e.g., the Forest Stewardship Council (FSC) and the activities are substantial. Thai textiles/garments European Union Timber Regulation (EUTR)) in investors looking for alternative locations for garment terms of legality of woods and sustainability in forest manufacturing could view Myanmar as an attractive management. platform given its pool of labor at relatively competitive wage costs. For Myanmar’s investment-promotion authority, this suggests a strategy of identifying and approaching possible Thai investors in the garments 2.2 Myanmar’s sector and putting in place a coherent strategy to attract them in terms of business environment, logistics, and opportunities are huge dialogue with the national authorities. Myanmar is located at the heart of A similar pattern is observable in China (Figure the world’s most dynamic trading 2.10). As wages rise, in particular in the eastern part of the country, garment production is increasingly area. New trading opportunities arise suffering from competition from countries with lower with both existing and new partners, wage costs. Wages in China’s main EPZs are said to range between US$300 and US$1,000 per month, or including Vietnam, Malaysia and India. roughly three times their level in Myanmar. Myanmar’s strategy could be geared to While productivity is high in Chinese factories, developing in parallel export-oriented the scope for further productivity increases in manufacturing and attractive market- garment activities is limited by the lack of scope for mechanization and the already breakneck pace of access conditions in key partner countries. operations in many factories. Against this background, the choice for Chinese garments manufacturers is either to relocate further inland or to go offshore. The downside of relocating inland is to lose the advantage Figure 2.11: Myanmar’s trade is developing rapidly with of powerful logistics of the coastal regions, a crucial key partners loss in a time-sensitive sector like garments. This makes (a) with China locations such as Myanmar, with pool of labor and access to the sea, potentially attractive, provided that Myanmar can offer improved logistics and a more 20 favorable and predictable business environment. But Myanmar may want to avoid tying its industrialization strategy to social or environmental dumping. Industrial salaries set at fair levels (i.e., -20 equal to the value of the marginal product of labor) can have positive spillovers beyond the workers themselves, -40 for example through remittances to farm households that can then be invested in education, health and -60 productive assets. Myanmar already has minimum 2000 2005 2010 2015 Years Sources: Del-Caprio and Pabon (2015), Macgruder (2013), World Bank (2015). 23 MYANMAR’S AGE OF OPPORTUNITY (b) with Thailand (China, Thailand and India) relative to the benchmark 40 provided by a gravity model (Figure 2.11). Myanmar can play a pivotal role in facilitating trade between South and Southeast Asia. Figure 2.12 shows economic activity reflected by night lights 20 captured by satellites in 2013. Agglomeration of population and activity is visible over Thailand and 0 Bangladesh. The gravity model of international trade predicts that these two regions would normally engage -20 in significant trade. However, realized trade values are currently very small: US$63 million from Bangladesh -40 to Thailand, and US$830 million from Thailand to 2000 2005 2010 2015 Years Bangladesh, according to the IMF’s DOTS statistics. Estimations based on the gravity model are that these Source: The vertical axis measures the discrepancy, trade values would rise to US$2.2 billion and US$7.4 in percent between Myanmar’s actual trade and the billion, respectively, if logistics bottlenecks were to be predicted value from a gravity model estimated by PPML removed. with country-time fixed effects over 2000-13. Source: Team calculations using IMF DOTS. One-fifth of Myanmar’s international trade is across overland borders. While sea ports remain important for Myanmar’s international trade flows, at least one- (c) with India fifth of Myanmar’s international trade is across overland borders (Figure 2.13), highlighting the importance of 40 20 0 Figure 2.13: Myanmar trades substantially through overland border posts -20 (a) with China -40 2000 2005 2010 2015 Years $2500 Source: See above. Source: Team calculations using IMF DOTS $2000 $1500 2.1 Dynamic markets are just around the corner $1000 Myanmar can use its location to advantage being at the crossroads of potentially important trade $500 routes to develop logistics-related services. The 12 2 13 3 14 4 01 01 01 20 20 20 country is surrounded by three populated and growing /2 /2 /2 6/ 6/ 6/ 12 12 12 regions (albeit at unequal levels of development): Sea and air Cross border (right axis) Thailand; China’s Yunnan province; and Bangladesh/ eastern India. Gravity estimates suggest that under Note: Traffic is measured in US$ million, 3-month moving the combined effect of the rebalancing of its trade average) during the sanctions period and of its rapid opening Source: Team calculations from CEIC. up, Myanmar trades intensively with key partners 24 CHAPTER 2 Figure 2.12: Night lights show large population and activity centers around Myanmar, suggesting potential trade increases NEPAL BHUTAN BANGLADESH INDIA MYANMAR VIETNAM LAOS THAILAND CAMBODIA 6.6 2.16 0.83 0.06 Current Potential Current Potential Source: Team calculations based on OLS estimation of a gravity equation with country-time fixed effects. Trade increases based on bilateral residuals for 2013, in US$ billion. Night lights are from ArcGIS software. corridor projects (e.g., east-west and southern economic A land route through Myanmar would be a natural corridors under the GMS program). Between 2013 way for goods to transit, as it would reduce and 2014, the value of cross-border trade officially transit times substantially (see Chapter 3).5 While recorded by Myanmar authorities through 15 border heavy truck traffic can be, in general, a nuisance, posts increased by 25 percent compared with the trade under the right conditions it can also be a source of taking place via sea ports and the airport (normal development of logistics-related service activities. channels) of 14.9 percent. The Muse border post Myanmar could benefit from truck transport with an handles the largest traffic for trade with China, while appropriate strategy based on the modernization of Myawaddy is the main gate for cross-border trade with its truck fleet, better infrastructure, and cross-hauling Thailand. Cross-border trade with India is handled arrangements with its neighbors. Such arrangements through Tamu, around 400 km west of Mandalay. could be obtained as a quid pro quo for investment in The Tachilek border post also connects China with infrastructure, for which development partners could Thailand through Myanmar. Outbound cargo from provide financing. Myanmar mainly consists of agriculture products, frozen fisheries products, woods and minerals, while 5 Part of India’s trade with its eastern province goes inbound cargo from China and Thailand is mostly through Myanmar’s Kaladan port, near Sittwe, from which goods machinery, clothing and various consumer products. are loaded onto trucks or barges. This avoids transit through Ban- gladesh but implies using equally bad inland logistics. 25 MYANMAR’S AGE OF OPPORTUNITY Figure 2.14: Myanmar is developing trade Figure 2.15: ASEAN’s tariff preferential margins are complementarity with key partners substantial… 7 14.00 6 12.00 5 10.00 4 8.00 3 6.00 2 4.00 1 2.00 0 - 2007 2008 2009 2010 2011 2012 2013 es sia m sia a e ar R nd di or la PD in nm ay ne bo ap sa Cambodia la pp Vietnam al do o ai ya us am ng M ili La Th M In as Ph Si C Thailand Lao PDR D ei un MFN AFTA Br Source: Cadot and Ing (2014). Myanmar’s exports are becoming progressively 7 more complementary with the sourcing needs of 6 key partners, including Vietnam, Malaysia and India. Bilateral “trade complementarities” between 5 two countries arise when the sectoral structure of one 4 country’s exports (here, Myanmar) broadly fits that of its partner, suggesting that its comparative advantages 3 match its partner’s comparative disadvantages. In such 2 a situation, there is scope for profitable trade. Figure 2.14 shows that trade complementarity indices have 1 been rising over the past five years with Vietnam, India 0 and Malaysia, three large and growing markets. This 2007 2008 2009 2010 2011 2012 2013 rise in trade complementarities offers opportunities India Bangladesh that Myanmar’s NES could leverage through trade promotion and priority facilitation projects. The rise of trade complementarities with Vietnam and Malaysia highlights the benefits that Myanmar can derive from its membership of ASEAN, provided 7 that lingering trade barriers are lifted. Under the 6 2009 ASEAN Trade in Goods Agreement (ATIGA), 5 ASEAN has set as its objective the elimination of 4 all barriers to regional trade and the creation of the 3 ASEAN Economic Community (AEC) by the end 2 of 2015. So far, ASEAN has been fairly successful at the elimination of intra-bloc tariffs (Figure 2.15). The 1 tariff-preference margins thus created are substantial, 0 2007 2008 2009 2010 2011 2012 2013 generating a competitive advantage for regional producers. Malaysia Indonesia However, the use of regional tariff preferences in ASEAN is hampered by the offsetting influence of Note: See Appendix A1 for calculation details. non-tariff barriers and rules of origin. Figure 2.16 Source: Team calculations using UN Comtrade. average) shows the proportion of ASEAN members’ imports covered by one or more non-tariff measures (NTMs), Source: Team calculations from CEIC. 26 CHAPTER 2 Figure 2.16: …but so is the use of NTMs transformation. They are used in free-trade areas to prevent extending preferences to outside producers Cambodia importing products in kits for superficial assembly Thailand in a member state, then re-exporting them tariff-free Lao PDR to the whole area. This is called a “trade deflection” Singapore Vietnam and can be profitable when one member state has low Malaysia external tariffs while others have high ones. Brunei Although ASEAN’s ROO are in general more Philippines inclusive than those of NAFTA, nevertheless, they Myanmar Indonesia create costs for ASEAN’s regional trade estimated to be equivalent to an average 3.4 percent tariff 0 0.2 0.4 0.6 0.8 10 across the board (2.09 percent if calculated on a Note: The horizontal axis measures the proportion of imports trade-weighted basis—see Table 2.2). While this may affected by one or more non-tariff measure. not look much, in some sectors of potential interest to Myanmar the tariff equivalent (also called “ad- Source: Adapted from Ando and Obashi (2010). valorem equivalent”) is much higher. For instance, for textiles and apparel it is 8.29 percent, and for footwear it is 12.67 percent.6 an indicator known as the NTM coverage ratio, for the last year when data were available, typically 2011 The government could be mindful of the or 2012. For some countries such as the Philippines, constraints that ROO impose on its producers. Myanmar, or Indonesia, the coverage ratio was 100 Even though, as said, ROO have not proven, so far, percent, reflecting the widespread use of licensing to be fraught with special-interest politics in ASEAN (licensing reform, currently under way in Myanmar, is as much as they were in NAFTA or the EU’s Southern discussed in detail in the following section). For other agreements, there are reasons for policymakers and countries, NTMs were essentially sanitary (SPS) and trade negotiators to worry about the potential costs technical (TBT) regulations, whose main purpose of ROO. First, Myanmar’s exporters seem to make no was not trade-related. However, in some cases, these use of ASEAN preferences, as the use of “Form D” regulations can constitute disproportionate obstacles certificates concerned less than 1 percent of Myanmar’s to trade because they are complex, overly burdensome, exports (against 47.1 percent of Cambodia’s exports.)7 or not harmonized. For instance, Indonesia’s regulation Second, as some countries in the region see their labor of steel imports involves not only licensing but also a costs rise and garments jobs dwindle, pressures may complex and largely unnecessary certification process rise to deny the benefit of preferential tariffs to low- for the producer. cost entrants such as Myanmar, by either renegotiating ROO to make them more stringent (the textile rule The problem is not always with the design of is already proving the most restrictive of ASEAN’s the regulations but the way in which they are ROO), or enforcing them at the border in a way that administered. For instance, in many cases border makes them de facto restrictive. This can be done for controls involve physical inspections of all shipments instance by making the acceptance of certificates of where randomization and risk management could origin a hassle, a ploy widely used by middle-income achieve the same results in terms of safety while and high-income countries against low-income ones. allowing much speedier clearance. Issues of this type are discussed in detail in Chapter 4. Also, Myanmar’s Finally, the government might consider how to traders are unaware of the use and benefits of ASEAN support Myanmar’s traders confronted with moral Form D (certificate of origin), resulting in much trade hazard. When trading overland with Chinese buyers, being exported to Thailand at extremely high costs or Myanmar’s traders face an uneven distribution of exported informally to by-pass duty and tax payments. The expansion of regional trade is also conditioned 6 We use here simple averages rather than and, to a certain extent, constrained by rules of trade-weighted averages. While the latter have the advantage origin (ROO). ROO are rules agreed on regionally to of not over-emphasizing small items, they are biased downward determine the eligibility of products to preferential because restrictive ROO reduce trade and thus reduce treatment, depending on the degree of local 7 Source: ASEAN Secretariat statistics on Form D utili- zation, based on national customs reports. 27 MYANMAR’S AGE OF OPPORTUNITY AD-VALOREM EQUIVALENT OF ASEAN’S ROO TABLE 2.2 Section Summary Description Average Trade AVE (%) weights a 1 Live animals; animal products - 2 Vegetable products 1.91 2.61 3 Animals or vegetable fats 6.67 0.58 4 Food, beverages and tobacco 1.73 3.05 5 Mineral products 1.52 19.59 6 Products of the chemical or alied industries 3.5 9.7 7 Plastics and articles thereof; rubber and articles thereof 1.87 4.63 8 Leather and leather products 0.05 0.60 9 Wood and articles of wood -3.2 0.77 10 Pupl and paper 4.98 1.75 11 Textiles and apparel 8.29 4.05 12 Footwear 12.67 0.77 13 Cement, glass and stone 2.42 0.93 14 Precious metals and stones 3.81 2.97 15 Base metals and articles of base metal -0.46 7.77 16 Machinery and electrical equipment -0.36 25.89 17 Vehicles 6.89 8.99 18 Precision instruments, optics, watchmking 3.34 3.33 19 Arms and ammunition, parts and accessories thereof - - 20 Miscellaneous manufactured articles -3.37 1.99 21 Works of art, collector’s pieces and antiques - Average (%) Simple 3.4 Trade weighted 2.09 Note: AVE stands for ad-valorem equivalent; an AVE of, say, 7 percent means that the ROO is as restrictive as a 7 percent ad-valorem tariff would be. Negative AVE are measurement Source: Cadot and Ing (2014). 28 CHAPTER 2 MARKET ACCESS AND THE EU’S GSP BOX 2.3 The Generalized System of Preferences (GSP) is a WTO-sanctioned system of non-reciprocal preferences offered by the EU to developing countries in order to assist them to overcome obstacles to market access in the EU. There are three main variants (arrangements) of the system: The standard GSP scheme, which offers limited tariff reductions to developing countries, in the form of partial or entire removal of tariffs on two-thirds of all product categories. The “GSP+”, a system of enhanced preferences involving the full elimination of tariffs on essentially the same product categories as those covered by the general arrangement for countries that have ratified and implemented international conventions on labor rights, environment and good governance. The “Everything–But-Arms” (EBA) scheme for least-developed countries (LDCs), which grants duty-free quota-free access to all products except arms and ammunitions. There are two basic problems with trade preferences such as the GSP. The first is called “preference erosion”—the fact that preferences granted to a large number of beneficiary countries may end up being of little benefit for anyone of them because competition between beneficiaries pushes down producer prices to a level where the incentive effect of preferences is all but eliminated. The second problem is with rules of origin (ROO), particularly in the garments sector. The EU’s EBA initiative in its original form did not relax rules of origin mandating that, in order to qualify for preferences, garment products had to be produced out of locally-made fabric, a rule called “double transformation” (from yarn to fabric and from fabric to garment). As weaving is a capital-intensive activity that is typically not profitable in LDCs, this requirement severely undermined the usefulness of the EBA scheme. The problem was particularly apparent when compared with the US’s AGOA, which relaxed the double transformation requirement for African countries. Recognizing these two limitations of the EBA initiative, the EU introduced phased reforms to improve its effectiveness. In 2010, the double-transformation rule was relaxed, making garments made out of imported fabric eligible for tariff-free import into the EU. Moreover, in January 2014, the EU introduced a reform of its GSP system, reducing the number of beneficiaries. Thus, Myanmar is today joining an EBA initiative that is poised to be substantially better designed and more useful than the original version. This is of crucial importance for Chinese investors looking for advantageous locations for offshored garment production. 29 MYANMAR’S AGE OF OPPORTUNITY risks. There are no contracts, and sellers face payment default risk, exchange rate risk and failure to accept 2.3 Leveraging the the cargo at the agreed time. For instance, if the cargo deteriorates because the buyer fails to accept the cargo opportunities on time, the buyers often demand discounts (see box in paragraph 2.1.4). Since the cargo is already on Chinese soil, the seller is left with no choice but to accept. At the same time, Myanmar’s sellers become subject to price speculation whereby Chinese traders pay a lower price/ In order to successfully implement its demand a discount when market prices fall (between national export strategy, it will be initial purchase and delivery), or only pay the agreed amount when prices soar. In addition, a lack of cold- important for Myanmar to consider chain infrastructure and equipment leads to frequent implementing radical improvements cargo spoilage. on two priority fronts: access to credit 2.2.2 Global opportunities opening and the business environment. Reforms up in trade finance, a critical area, will Beyond its potential to generate opportunities for be required for improved clarity, trade growth in particular markets, the lifting of sanctions opens up opportunities for Myanmar consistency and predictability of rules. to benefit from all the advantages offered by the multilateral trading system. As a member of the WTO, the country is entitled to nondiscriminatory 2.3.1 A moderate tariff structure treatment by all its partners and to all the resources that could be streamlined (special agreements, technical assistance, etc.) that WTO membership offers. As a developing country, Figure 2.17: Myanmar’s MFN tariffs are moderate Myanmar is eligible for tariff reductions in most .15 industrialized countries. Since 2013, Myanmar has also been eligible for Frequenxy .1 the EU’s “Everything-But-Arms” (EBA) initiative, opening critical opportunities for the garments sector in EU markets. This could have potentially .05 huge implications in terms of job creation. Following the ILO’s June 2012 statement recognizing progress in the labor-rights situation in Myanmar, EU preferences, which had been withdrawn in 1997 as part of 0 0.0 10.0 20.0 30.0 40.0 international sanctions, were formally reinstated on Rate band July 19, 2013. This meant that Myanmar became not Source: Team calculations, Ministry of Commerce. only eligible for the Generalized System of Preferences (GSP), but also, as a least-developed country (LDC), to the EBA initiative. The EBA initiative offers tariff- free, quota-free access to the EU (Box 2.3). It will be important for Myanmar’s policy stand to be fully consistent with its new outward-oriented development strategy, providing the right incentives for operators and serving as a signal of government commitment for potential investors. Tariffs are not a major impediment but could be simplified; in contrast, licensing will require a vigorous effort to bring the reforms currently under way to completion and ensure that they go deep in the simplification of import procedures. 30 CHAPTER 2 Figure 23: Myanmar’s MFN tariffs are moderate TOO MANY TARIFF RATES INVITE FRAUD Figure 2.18: Myanmar’s tariff escalation avoids penalizing TABLE 2.3 imports of capital equipment and intermediates AND BUREAUCRACY 14 12 Rate Number Percentage Cumulative 10 of HS8 of all lines percentage 8 lines 6 0 379 4.0 4.0 4 0.1 2 0.0 4.0 2 0.5 123 1.3 5.3 0 1 2,917 30.5 35.8 Capital Intermediates Consumer goods equipment Average tariff 1.5 1,219 12.8 48.6 Source: Team calculations, Ministry of Commerce. 2 219 2.3 50.9 Myanmar’s MFN tariff (that applies only on non- 3 813 8.5 59.4 ASEAN imports) is relatively low, with a simple average of 5.6 percent and an imported-weighted 4 101 1.1 60.4 average of 8.49 percent,8 is not a major impediment to trade. Tariff peaks at 30 and 40 percent concern 5 877 9.2 69.6 essentially spirits (HS 2208) and four-wheel drive 7.5 625 6.5 76.2 vehicles (HS 8703). In both cases, there is a legitimate argument concerning the negative externalities (in the 10 626 6.6 82.7 case of four-wheel drive vehicles, this is about pollution and the safety of other road users, as these heavy 15 1,150 12.0 94.7 vehicles tend to cause damage and casualties in other vehicles in accidents). 20 333 3.5 98.2 There is scope for simplification of Myanmar’s tariff 30 112 1.2 99.4 structure. Figure 2.17 shows Myanmar’s tariff structure 40 58 0.6 100.0 distribution simplified into bands of 5 percentage points each. However, actual tariffs vary far more and many are described as “nuisance tariffs”, as they are Total 9,554 100 too small to make a difference in terms of either tariff revenue or protection of domestic industries, while forcing importers and Customs to devote time to the Source: Team calculations from Ministry of Commerce monitoring of small payments. For instance, close to data. 3,000 lines have rates of 1 percent and more than 1,000 have rates of 1.5 percent (Table 2.3). So many rates create an unnecessary monitoring burden for Customs and invite fraud, as importers are tempted to negotiate the reclassification of products in categories with lower rates. It will be important to consider the full fiscal implications of any reform in this area carefully as part of the intervention to streamline tariffs. 8 Weights are calculated using mirrored imports for 2013. 31 MYANMAR’S AGE OF OPPORTUNITY Higher tariff rates on consumer goods serve to create automatic licensing. In April 2013, import licensing deep preferential margins for Myanmar’s ASEAN requirements were abolished for 166 products, partners. In terms of incentives, the escalating structure representing over 1,928 tariff lines at the HS 8-digit of Myanmar’s MFN tariffs encourages the domestic level out of a total of about 9,500 (WTO, 2014). In production of consumer goods, which fetch typically July 2015, the Ministry of Commerce issued Minister’s higher tariffs than capital equipment or intermediates. Office’s Decree No. 69/2015 established a “negative Low tariffs on capital goods and intermediates are list” of export/import licensing requirements, which crucial to avoid stifling investment and efficient further reduced the list of products that are subject to sourcing. However, MFN tariffs apply only to non- import licenses from 78.9 percent of tariff lines to 44.8 preferential partners, so higher rates on consumer goods percent of tariff lines. Within the list of products that essentially serve to create deep preferential margins for are subject to license, the Ministry of Commerce has Myanmar’s ASEAN partners. The positive of this is that also identified products that are subject to automatic it encourages intra-regional trade, in accordance with licenses vs. non-automatic licenses. ASEAN’s objectives; the negative is that it discourages Myanmar’s consumers from taking advantage of Enhanced capacity to properly implement the possibly cheaper consumer goods outside of the block, WTO’s safeguard clause for trade remedies can a source of inefficiency known as “trade diversion”. enhance confidence for further reforms in trade licenses. Temporary price wars, which erupt from time 2.3.2 NTMs: Myanmar’s licensing to time on international markets, can do permanent damage to employment and the viability of SMEs. reform is well under way Until recently, Myanmar did not have trade-remedy Myanmar is currently undertaking an ambitious laws and had to rely on licenses as a potential tool of reform of its licensing system. The stakes are high. last resort in such cases (although there has been not The experiences of India and Indonesia, which both such occurrence so far). However, with assistance liberalized highly complex and bureaucratic licensing from UNESCAP, the MoC is acquiring the legal and systems in the 1990s, show that streamlining licenses administrative capability to use the safeguard clause, a can improve the business environment, attract foreign WTO-consistent trade remedy, to address temporary investors, and expand consumer access to high-quality market disruptions such as import surges that could products. In both India and Indonesia—and in other threaten the viability of domestic producers. countries as well—the elimination of cumbersome The addition of a safeguard clause to Myanmar’s licensing coincided with a period of deep economic trade-policy toolbox opens the question of why modernization. A basic argument for further reform licenses are need at all. The availability of, and capacity is that Myanmar’s licensing system is a legacy of a to use, trade remedies relieves the need to use licenses period when the government was concerned about as a trade remedy, offering more transparent and better the external balance and the protection of domestic protection against market turbulence to domestic producers against foreign competition, concerns that producers. Here two cases need to be distinguished: if are less pressing today.9 Following a depreciation of the license issuance is automatic, licenses play essentially no kyat over the past few years, and barring unexpected role and have only an optional value to restrict imports macroeconomic shocks, the deficit in Myanmar’s administratively; but, as discussed, in the presence of a current account appears to be on a sustainable path; safeguard clause this is redundant. Therefore, licenses as for competitiveness, it is progressively improving play a role only if they are non-automatic. What are the and will improve further with reform of the business pros and cons of non-automatic licensing? environment and improvements in trade facilitation and infrastructure. There are essentially two arguments against non-automatic licensing. The first is a legal one. Myanmar initiated a reform of its import licensing Myanmar’s WTO and regional commitments under regime in 2012, when it replaced a universal ATIGA make it practically impossible to justify non- non-automatic licensing requirement for all automatic licensing for commercial purposes, exposing merchandise imports with a hybrid system in which a “positive list” of products was designated for 9 This note is concerned only with the import licensing system. For a description of the export licensing system, see WTO (2014). 32 CHAPTER 2 CAPACITY-BUILDING: IT’S ABOUT MORE THAN JUST TRAINING BOX 2.4 The Ministry of Commerce (MoC) is currently undergoing a significant transition that will modify fundamentally the nature of its work. Historically, the MoC’s predominant activities were to issue export and import licenses, based on policy decisions made by higher authorities. This has started to change as Myanmar reintegrates with the global economy, and the MoC has been given a mandate to coordinate and formulate policies in the following domains: trade policy, trade promotion, trade remedy, competition, and consumer protection. The MoC has also been called upon to play an active role within the government on trade- related issues that involve inter-ministerial coordination, such as trade facilitation, tariff rationalization, standards and quality infrastructure and Aid-for-Trade projects. Similar to other government institutions in Myanmar, this transition will reduce the emphasis on clerical functions of the MoC and increase the focus on analytical and policy coordination functions. Outdated command and control mechanisms within government institutions are gradually being replaced by mechanisms that are compatible with the market-oriented economy, greater democratization, demands for accountability, and greater demands for inclusiveness. While the MoC has emerged as a strong champion of policy reform, the transition poses significant challenges as the MoC is called on to narrow its capacity gaps to function as a modern trade ministry. There is still limited capacity in its knowledge of basic trade and economic policy issues, data analysis and report writing, policy formulation and consultations, and trade negotiations. The MoC’s 3,050 staff of 12 ranks are all recruited through the civil servant recruitment process managed by the Union Civil Service Board, in addition to officers being transferred from the Army. The process of securing new recruits with adequate profiles often takes considerable time. Currently, the MoC’s staff capacity is being developed both under an internal program and with the support of development partners. The MoC has been organizing in-house trainings for staff in computers, languages, and procedures to issue trade licenses. Development partners have also been providing, and plan to provide, training on policy analysis and have organized workshops on various topics, such as NTMs, trade remedies, regional integration and trade facilitation. Nevertheless, more assistance is needed to strengthening the MoC’s capability in formulating policies and implementing policy reforms. The formulation of a comprehensive capacity development program would include a thorough needs assessment of the MoC’s staff, based on both its current and future responsibilities in the area of trade-related reforms as listed in the DTIS Action Matrix. The assessment will lead to the development of a prioritized capacity development program to be implemented and monitored with the assistance of development partners, in the interest of better aid efficiency. In-class workshops could be complemented with on-the-job training, whereby experts are assigned to support specific officers who are responsible for sensitive tasks, such as those supporting decision-making in the Directorates (e.g., data analyses, policy consultations, reviewing regulations, etc.). Sending staff abroad with high-level training in specialized institutions could also be selectively promoted by the MoC. A system to incentivize staff to develop their capacity and make them more effective in their daily work could also be devised. This could include: (i) adequate incentive and career development path to reward well-performing staff; and (ii) aligning the MoC’s incentives and organizational structure to ensure greater responsiveness to demand for accountability, transparency, and inclusivity in policymaking. 33 MYANMAR’S AGE OF OPPORTUNITY the country to litigation by its trade partners.10 The automatically reduce the number of eligible goods to second argument relates to the ease of doing business. a small number (essentially foodstuffs and chemicals) Non-automatic licenses impose a bureaucratic burden and avoid ad-hoc choices. on companies already facing a difficult business environment, distracting managerial attention Based on this approach, it is important that the and reducing the “readability” of the regulatory choice of which products to keep on the “negative environment. Multinational companies looking for list” (of products still subject to licensing) be host countries in which to locate segments of global grounded on rational consumer-protection value chains (GVC) require highly “programmable” criteria. These criteria could be defined and applied environments, and a requirement for import licenses in cooperation with concerned line ministries (e.g., sends a negative signal in this regard. Thus, licensing health, agriculture, and MST) in order to generate a hurts Myanmar’s attractiveness as a potential GVC consensual list. This is particularly important in order partner, with potential costs for employment and the to avoid the substitution, by line ministries, of other economy. documentation requirements to replace the eliminated licenses, which could happen if licenses are eliminated However, there is a non-trade argument in favor without consultation. of the maintenance of licenses in certain cases. Specifically, when imported products carry potential 2.3.3 Regional engagement and hazards to consumers or the environment, it is commitments legitimate and may be wise for governments to impose screening. Sanitary and technical regulations have Myanmar can use regional economic cooperation a key role to play in a modern economy, and the to leverage its geographical location in a region more liberalized the economy, the more important with sustainable growth and a dynamic trade such regulations become.11 Licenses may help in this sector. In addition to its two neighboring rising regard if they effectively facilitate enforcement. For super-powers, China and India, Myanmar could instance, in the case of pharmaceuticals, if licenses also benefit substantially from integrating into the make it possible to effectively control the traceability ASEAN Economic Community (AEC). As discussed of products and the qualification of importers, their in paragraph 2.1.3, Myanmar’s main opportunity for maintenance is justified. trade expansion is with Thailand and other countries in the region, either part of ASEAN or linked to Thus, the reform’s next steps could be based on an ASEAN under the Regional Comprehensive Economic overarching principle of equipping Myanmar with Partnership (RCEP). To enhance regional formal an adequate toolbox of WTO-consistent trade- trade flows and connect to regional value chains, it policy instruments (including the safeguard clause). will be important for Myanmar to comply with the In this case, licenses could be fully decoupled from commitments undertaken with its regional peers and trade concerns and imposed only: (i) on the basis of most notably the ASEAN Trade in Goods Agreement safety (health and environmental) concerns; and (ii) (ATIGA) (Box 2.4). By structuring its trade reform when they provide effective enforcement tools for program around ATIGA commitments, Myanmar will SPS or TBT measures.12 In terms of valuation, this also achieve full compliance with its WTO obligations, means that licenses should have no implications for as ATIGA is WTO+ in many regards. customs valuation; in terms of trade policy, it means that licenses should not be used to regulate supply and Efforts to meet ATIGA commitments are being demand. Adopting such a “decoupled” approach would undertaken by several ministries, under the coordination of the Ministry of Planning andFinance , which represents Myanmar at Ministerial and 10 For instance, under the current system, Myanmar’s Senior Economic Officials Meetings, and the import licenses determine the valuation of imported products that Department of Customs, which represents Myanmar is used by Customs to assess the base on which border taxes are assessed. This is contrary to the WTO’s Customs Valuation Agree- at technical meetings (Coordinating Committee for ment. the implementation of ATIGA–CCA). The Ministry 11 See Vogel (1995, 2004, 2012). of Commerce retains responsibility for issues relating 12 In WTO jargon, SPS (sanitary and phytosanitary) to, among others, rules of origin, licensing, non-tariff measures are regulations destined to protect human, animal and measures, and the National Trade Repository, while plant health from pests and toxins. TBT (technical barriers to trade) other sectoral issues are dealt with by the Ministry measures are regulations destined to protect consumers from of Agriculture, Livestock and Irrigation, the Ministry unsafe products and hazardous substances. 34 CHAPTER 2 ASEAN TRADE IN GOODS AGREEMENT (ATIGA) BOX 2.5 ATIGA entered into force on May 17, 2010, consolidating all commitments related to trade in goods and bringing greater legal certainty and transparency to regional trade liberalization. ATIGA focuses on tariff liberalization, non-tariff measures, simplification of rules of origin, Customs reform and trade facilitation. ATIGA consolidates and streamlines all the provisions of former ASEAN Free Trade Area (AFTA) Agreement and AFTA-Common Effective Preferential Tariff, and formalizes several ministerial decisions. An Annex to ATIGA provides the full tariff reduction schedule of each AMS and spells out the tariff rates to be applied on each product for each year up to 2015. It comprises elements to ensure the realization of free flow of goods within ASEAN, including the following: tariff liberalization; removal of non-tariff barriers; rules of origin; trade facilitation; Customs; standards and conformance; and sanitary and phytosanitary measures. In order to account for challenges unique to the less-developed ASEAN member states, ATIGA also provides additional flexibility for Cambodia, Lao PDR, Myanmar and Vietnam (CLMV). Under ATIGA, Myanmar benefits from zero-duty access for 99 percent of tariff lines in ASEAN-6 countries and in 40 to 78 percent of tariff lines in CMLV (where bounds represent differences in commitments among CLMV countries). Figure 2.19suggests that ASEAN members, with the exception of Cambodia, are on track in meeting target of import duty elimination according to ATIGA. 35 MYANMAR’S AGE OF OPPORTUNITY of Industry, the Department of Food and Drugs Article 12(2) of ATIGA.13 Moreover, Myanmar is also Administration and the Department of Research and expected to publish online fees and charges under Innovation Article 7(2). The National NTM Committee was established under a Presidential Decision to ensure The government is mapping progress towards progress in this area. The Committee is chaired by meeting ATIGA commitments. Currently, the the Ministry of Commerce, which is being assisted government is conducting a gaps assessment aimed at by the World Bank Group and USAID with the mapping progress towards meeting ATIGA obligations. objective of improving transparency and developing The assessment is expected to result in a comprehensive capacity in the administration to assess the impact reform matrix that can be fully streamlined in the of NTMs and work towards their streamlining and DTIS. Initial findings from the assessment show that simplification. However, the Committee is not fully Myanmar is fully compliant with its commitments to active and the government could consider merging reduce tariffs on trade with the other ASEAN member it with the National Trade Facilitation Committee, states. However, Myanmar still has to review products which is expected to be established pursuant to the in Schedules D and E (unprocessed agricultural Trade Facilitation Agreement. The strong limitations products) with a view to improving market access for in the MoC’s analytical capacity have justified the these products, pursuant to Article 21(2). creation of a task force together with local think-tank One particular area of focus is on improving organizations and academic institutions charged with transparency of trade rules and regulations. The providing technical support to the NTM Committee. government is actively working on several other The task force will be supported over the medium term areas covered by ATIGA, including improving to ensure that it can analyze the impact of NTMs on transparency of trade rules and regulations. NTMs the competitiveness of Myanmar’s exports and on the are being collected and classified to be published in the overall welfare of the population, as NTMs can have National Trade Repository, together with procedures, direct effects on market prices. tariff schedules and other information required under In order to ensure steady progress vis-à-vis AEC implementation, a detailed work program could be developed based on the findings of the ongoing ATIGA gaps assessment. Similar work could also be done to cover also services (ASEAN Framework Agreement on Services, or AFAS) and investment (ASEAN Comprehensive Investment Agreement, or ACIA). Given the diversity of national institutions involved, responsibility for monitoring implementation of the work plan could be formally assigned to a single Figure 2.19: ASEAN schedule for tariff reductions under institution with the mandate to report directly to the ATIGA President, given the importance of the issues involved. Myanmar also participates in ASEAN preferential 100 agreements with ASEAN partners, namely Australia 75 and New Zealand, China, India, Japan and the Rep. 50 of Korea. ASEAN has started negotiation of a Regional Comprehensive Economic Partnership (RCEP), 25 which is expected to be the new platform for regional 0 economic agreements. It will be accompanied by 6 ei sia pp a ng es Th re nd am V a ao Vi ar ta nam AN si di C LM N un nm o in L la ne ay bo SE ap EA Br To et ai C al ya do lA AS M ili M In Ph Si 13 ATIGA, Art. 12.2: “The ASEAN Trade Repository shall contain trade related information such as (i) tariff nomenclature; (ii) Target Implementation as in 2012 MFN tariffs, preferential tariffs offered under this Agreement and other Agreements of ASEAN with its Dialogue Partners; (iii) Rules of Origin; (iv) non-tariff measures; (v) national trade and customs laws Source: Adopted from ASEAN and the World Bank on and rules; (vi) procedures and documentary requirements; (vii) ad- ASEAN Integration Monitoring Report. ministrative rulings; (viii) best practices in trade facilitation applied by each Member State; and (ix) list of authorised traders of Member States.” 36 CHAPTER 2 cooperation to strengthen capacity for implementing To sustain momentum, it will be important for the trade and investment agreements, and places ASEAN government to adopt further reforms to improve at the center of the negotiating process. the investment climate, focusing on increased transparency and predictability. The regulatory Myanmar’s participation in an ASEAN-led process regime needs to be overhauled in order to lower for regional trade agreements can lead to a favorable barriers and improve certainty for the private sector outcome. So far, ASEAN has facilitated more trade to conduct activities, and to avoid regulatory capture flows among member countries at no expense to that undermines trust. While Myanmar has shown trade between individual member countries with remarkable progress in improving the business outside members. It has also lowered their MFN rates environment, it could benefit from further efforts to in conjunction to phasing in of preferential rate for level the playing field and allow for greater competition. ASEAN members. RCEP, which recently started its This could be enabled through the adoption and negotiation process, can potentially help Myanmar to implementation of several fundamental pieces of reduce the cost of engaging in bilateral negotiations legislation that would help establish the foundations with many countries, as ASEAN is supposed to use a of a strong business-enabling environment. The single template for negotiations with its six partners Investment Law is a key law that unifies the Foreign (Australia, New Zealand, China, India Japan, and the Investment Law and the Myanmar Citizens Investment Rep. of Korea). If RCEP is successfully implemented, Law to provide a level playing field for investors, Myanmar’s exporters, particularly SMEs, can use the ensure adequate investor protections to provide greater same form to declare the origins of goods to access confidence, and provide mechanisms for the settlement preferential rates in all RCEP member countries. of disputes between investors and the government if they do occur. As part of this reform, the government 2.3.4 Further reforms to promote could streamline procedures related to the investment FDI are crucial to boost growth approval process and remove the discretion that the Myanmar has taken important steps to attract Myanmar Investment Commission has in that process. foreign investment. In 2012, the government passed a The draft Companies Law is another important new Foreign Investment Law, which allows 100 percent piece of legislation, as it regulates how companies are foreign ownership except in activities that are restricted formed and managed. The Companies Law contains or prohibited through implementing regulations. It provisions on key matters such as the registration of passed the Myanmar Citizens Investment Law in 2013 companies, the management and conduct of companies’ and promulgated the Special Economic Zones Law affairs, financial reporting and audit requirements for in 2014, which provides a framework for SEZs and companies, share capital and capital-raising matters, the generous tax incentives for investing in them. duties of directors, and the winding-up of companies. Gradual economic liberalization has attracted A key issue addressed in the law that affects investment significant foreign investor interest since 2011. in the country is the definition of a foreign company Major multinationals involved in light manufacturing provided in the law. Currently, a single share owned industries are investing in Myanmar and expanding by a foreign investor classifies a company as foreign, their operations. Foreign direct investment (FDI) thereby restricting land ownership. The law seeks to commitments rose very sharply in 2014/15. establish a threshold investment amount by foreigners Commitments went from around US$3.2 billion in a local company before it is classified as a foreign in 2013/14 to around US$8.0 billion in 2014/15. company. This would allow foreign equity investment About 40 percent of this was driven by investment in local companies without requiring joint-venture commitments in the gas sector, which picked up arrangements and enable Myanmar companies to raise rapidly following agreement on 20 production-sharing equity capital from abroad. This provision would also contracts (PSCs) in 2014/15. Commitments in the enable foreign participation in future capital markets telecommunication and manufacturing sectors (20 once these are established. Another key law is the percent each) also grew rapidly, contributing over Arbitration Law, which would strengthen contract US$1.5 billion each in 2014/15. Foreign investment enforcement by provided alternative dispute resolution in manufacturing accounted for two-thirds of the for investors, which can be faster than the prevailing number of newly approved FDI projects in 2014/15. A practice through local courts. large share of these were in the garments and footwear sectors. 37 MYANMAR’S AGE OF OPPORTUNITY 2.4 SUMMING UP: In parallel, more complex reforms can be undertaken in five other areas, as follows: RECOMMENDATIONS By 2019, Myanmar could treble its exports of goods 1. A garment development plan could be and services. This ambitious target is based on two implemented with assistance from development sub-targets: (i) raising GDP growth to 7.7 percent partners and consultants, including: (i) a fiscal per year from now on (the National Development regime ensuring simplicity but no “race to the Strategy’s target); and (ii) doubling the country’s bottom”, for instance, a bonded-warehouse openness ratio from the current one-third to system ensuring the smooth clearance of imported two-thirds, a level more in line with Myanmar’s fabric and a flat-rate corporate income tax fundamentals (comparable to that of, say, Lao PDR (but no unjustified tax holidays); (ii) a labor- in around 2000). For that, exports will need to grow regulation regime inspired from Cambodia’s from now on at 20 percent annually. While this will “better factories” program sponsored by the ILO, be difficult and require many conditions if it is to be ensuring consistency with US standards; and (iii) fulfilled, it is not impossible. In turn, an annual export an infrastructure-development plan set up in growth rate of 20 percent would be the best guarantee dialogue with the sector’s operators and potential that the 7.7 percent GDP growth rate is achieved. investors in energy and transport infrastructure. Thus, all growth objectives are inter-related. 2. Similar plans for other key sectors, including the Achieving such an ambitious target will require development of an SPS certification infrastructure a well-thought-out reform sequencing, with (agribusiness, beans & pulses, mangos) and immediate actions and more long-term ones. Some of an environmental certification (wood of these actions are relatively easy, some more complex; products); and the creation of a well-run import- all will require assistance from development partners promotion office with private-sector involvement. with experience in how to carry out complex reform 3. The implementation of a regulatory improvement programs drawn from other countries. program, in collaboration with line ministries Immediate and relatively easy action (“quick (health, agriculture), to ensure that a best- wins”) is required in the following areas: practice regulatory structure is put in place. This would imply setting up an agency with authority 1. Licensing reform is needed towards a meaningful over government regulatory oversight (ensuring end. No or automatic licensing should become the both business-friendly regulations and adequate rule, and non-automatic licensing the exception. protection of consumers and the environment) This means that no more than two sections and competition policy (fighting collusion and (foodstuffs and chemicals) should be covered abuses of monopoly positions), with adequate by non-automatic licensing, plus possibly a few technical staffing. isolated but well-chosen product lines. Moreover, licensing should have as its only objective the 4. The deployment, with development-partner protection of consumers, and therefore rely on assistance, of private-sector development random sampling and testing rather than on programs for upgrading SMEs’ and systematic inspection and bureaucratic processes. entrepreneurs’ capabilities in reporting standards (e.g., financial literacy, book-keeping), processes 2. The capacity to produce key economic statistics and quality management in production. requires rapid improvement in order to better inform government decision-making. Currently, 5. The creation of a (possibly informal) dialogue Myanmar has very few foreign-trade or national- structure between the Ministry of Commerce, account statistics, severely hampering the the Planning and Finance and the Central government’s ability to set realistic targets, monitor Bank of Myanmar to ensure that trade progress, and discern ultimate impacts on men, competitiveness is part of macroeconomic women and regional patterns of development. policy, in particular exchange-rate management. 38 CHAPTER 3Chapter 1 POVERTY REDUCING THROUGH TRADE CHAPTER 3 Despite Myanmar’s recent growth pick-up, poverty remains prevalent. Export-led growth has the potential to reduce poverty substantially and sustainably, and offers major opportunities to remote and border areas. However, seizing these opportunities depends on key bottlenecks in labor markets being removed through adequate policies, including improvements in the coverage and quality of public education. 39 REDUCING POVERTY THROUGH TRADE 40 CHAPTER 3 3.1 Poverty is with one or more months without enough food to eat dropped dramatically. While the surveys are not prevalent, although its nationally representative, they do indicate unequivocal improvements associated with the timing of the incidence varies beginning of the country’s political transition and integration with the global economy. In most developing countries, poverty is Myanmar’s integration with the global economy predominantly a rural phenomenon and Myanmar promises to be a powerful force in helping the is no exception. Three-quarters of Myanmar’s poor country to reduce poverty relatively rapidly. Indeed, live in rural areas. However, this is because most of the high poverty rate is partly the result of decades of Myanmar’s population lives in the countryside. Poverty international isolation (World Bank, 2014a). Reversing rates between rural and urban areas are similar, and this isolation is likely to be an important step towards even large cities such as Yangon and Mandalay have achieving economic growth and poverty reduction. high poverty rates, although estimates may vary with In fact, evidence from repeated surveys carried out new data. These rates in part reflect the high and rising in rural areas shows that the general condition of cost of living in urban areas, especially the limited the population improved significantly between 2011 access to local services and rentals. But they are also the and 2013 (UNDP, 2014). For example, during this product of difficult labor market integration of rural- period, small businesses and trade increased as a source urban migrants, who have limited access to stable, of household income and the share of households well-paid jobs (World Bank, 2014a). Figure 3.1: Increase in night lights shows rising spatial agglomeration NEPAL BHUTAN BANGLADESH INDIA MYANMAR VIETNAM LAOS THAILAND CAMBODIA 0 250 500 1,000 kilometres Notes: Yellow areas are increases in night lights from 1990 to 2013. Glow over sea areas not corrected. Red lines are major highways. Source: Team calculations using ArcGIS software. 41 REDUCING POVERTY THROUGH TRADE Poverty in Myanmar is typically higher in border The contrast is striking with neighboring Thailand, regions, especially in the western part of the where coastal development, while dominant, has country. Rakhine State, for example, has relatively gone hand-in-hand with inland development. Figure high poverty rates of around 80 percent with peak of 3.1 suggests that Thailand had large increases in night over 90 percent on the Bangladeshi border, and Chin lights all the way to inland borders. In other words, State has poverty rates of around 70 percent. Other border areas of Thailand also experienced economic border areas, including northern and eastern Shan development. Thailand’s spatial development patterns, and northern Kachin, also have relatively high poverty which are consistent with the predictions of economic rates. Some of the distribution of poverty incidence theory, provide a possible model for Myanmar’s future is consistent with long-standing conflicts between development. the central government and ethnic armed groups (EAGs) that are concentrated in several border areas. Poverty in remote regions reflects not just the lack While the poverty figures are not available for several of economic activity in those regions but also the conflict-affected townships (especially in southeastern different cost of living. Myanmar’s households also Kayin areas) in the nationally representative survey by face different prices, as Figure 3.2 shows substantial the UNDP in 2010, the relatively high poverty rate price dispersion across the national territory (relative in Chin, northern and eastern Shan and northern to Yangon prices) for six important food prices, with Kachin states may be also consistent with the conflict most of the distribution above Yangon prices (i.e., incidence.1 The legacy of conflict adds to the impact above 1 in Figure 3.2). Regression analysis suggests of exclusion along ethno-linguistic lines in a cycle that that these systematic price differences do not stem only appears to be difficult to break. from distance to ports and production locations. They also seem to correlate with a host of factors inhibiting In terms of absolute numbers, many of the poor the free flow of goods, including conflict and ethnic are also concentrated in other areas. In particular, fragmentation. the Ayeyarwaddy region accounts for 18 percent of the country’s poor and, combined with the other most Figure 3.2: Households in remote regions face higher populous central regions of Yangon and Mandalay, prices it accounts for 42.6 percent of the poor. That is due Emata rice not only to the concentration of the population in the central plains (the delta and the dry zone) but also to 4 moderately high poverty rates in these areas (e.g., 45.7 3 Density percent in Ayeyarwaddy and 34 percent in Yangon). In contrast, Chin State accounts for only 1.4 percent 2 of the poor due to its small population, while Rakhine State accounts for 14.9 percent of Myanmar’s poor, 1 given its high rate of poverty and the relatively high 0 population. .5 1 1.5 2 Price relative to Yangon Myanmar’s recent growth has reinforced the 2009-10 2011-12 agglomeration of activity—and hence of economic 2013-14 opportunities—towards the center, at the expense Ngagyin of the peripheral regions most affected by poverty. Figure 3.1 shows the absolute increase in the night 3 lights captured by satellites above Myanmar and neighboring countries between 1995 and 2013 (the 2 first and latest satellite measurements). The strongest Density increases in night lights, which correlate closely with increases in economic activity, show up as white spots 1 in Figure 3.1. Clearly, these increases have taken place in the country’s center rather than along its border 0 areas, reinforcing spatial inequality. .5 1 1.5 2 Price relative to Yangon 2009-10 2011-12 1 While there was a ceasefire in Kachin State between 2013-14 1994 and 2011, this was not very effective at improving the liveli- hoods of people after decades-long conflict (see Chapter 4). 42 CHAPTER 3 Ngamyitchin Groundnut Oil 6 2 1.5 Density 4 Density 1 2 .5 0 0 .5 1 1.5 2 2.5 0 .5 1 1.5 2 Price relative to Yangon Price relative to Yangon 2009-10 2011-12 2009-10 2011-12 2013-14 2013-14 Pork Chicken 4 3 3 Density 2 Density 2 1 1 0 0 2 .5 1 1.5 2 .5 1 1.5 Price relative to Yangon Price relative to Yangon 2009-10 2011-12 2009-10 2011-12 2013-14 2013-14 3.2 Deprived and land (World Bank, 2014a).2 Those rural dwellers constitute 40 percent of Myanmar’s population, vulnerable but make up over half of the poor. The association between land and poverty is particularly strong in the delta, coastal and dry zones (Figure 3.3). In the hill zone, the correlation is less evident as landlessness is less prevalent and shifting cultivation on cleared forest land more common (World Bank, 2014a). Access to 3.2.1 Poverty relates to gender, land is not only an important determinant of current limited access to land, and a limited poverty but it is also likely to be important in reaping the benefits of increased trade integration, as discussed supply of skills… below. Overly small land tracts and landlessness constitute “poverty traps” for Myanmar’s poorest households. Widespread poverty also relates to the informality Given their rural location, the poor tend to rely prevalent on Myanmar’s labor markets. A majority on agriculture and casual employment for their of workers are informal, with 42 percent self- livelihood. However, agriculture is the primary source employed,3 14 percent unpaid family labor, and 5 of livelihoods, not just for half the poor, but also for percent casual workers (Figure 3.4). Three-fifths work nearly half of all households. A large share of the rural poor in Myanmar are landless or functionally landless, 2 The Ministry of Home Affairs indicted that according to i.e., cultivation rights to less than 2 acres of cultivable Farm Land Law 2012, land for agriculture cultivation is largely under the Ministry of Agriculture, livestockand Irrigation. 3 This is includes self-employed farmers. 43 REDUCING POVERTY THROUGH TRADE Poverty relates to gender, limited access to land, and a limited supply of skills… 44 CHAPTER 3 Figure 3.3: Poverty correlates with landlessness in rural Myanmar Land cultivation rights and poverty in rural Myanmar 70.0 60.0 50.0 Poverty rate (%) 40.0 30.0 20.0 10.0 0.0 Rural hills Rural dry Rural coasted Rural delta Landless Less than 2 acres More than 2 acres Source: World Bank (2014a). in elementary occupations (e.g., manual labor) or as second top decile. Similarly, access to basic services is skilled agriculture or fishery workers. About 54 percent more prevalent among the non-poor than the poor, but of rural casual workers are living below the poverty line even the former suffer from substantial gaps in access. (World Bank, 2014a). The association between casual work and poverty is particularly strong in the delta and Gender is also a key issue in terms of access to coastal zones. opportunities. While poverty hits male-headed and female-headed households in similar proportions, The poor also have, unsurprisingly, low levels of opportunities open to women in terms of employment human capital, and physical and financial assets, are far more limited (Figure 3.5). The low level of lack reliable access to quality basic services, and female employment in Myanmar translates into a lack are weakly connected to factor and goods markets. of empowerment for women in the household, a lower These characteristics are not unique to the poor but are level of household income, and the under-utilization of shared to a certain degree by most of the population. the country’s potential labor force. The development of For example, only 28 percent of household heads have a dynamic garments sector has the potential to play a more than primary education among the households key role in providing income-earning opportunities for in the bottom decile of the income distribution. women, provided that employment does not interfere However, that share is still only 36 percent for the with the ability of young girls to receive an education. Figure 3.4: Workers’ employment status Figure 3.5: Women face fewer income-earning opportunities 150 100 50 Casual Worker 0 Own account worker Male Female Unpaid family worker Employer Employed Not employed Cooperative employee Source: Authors’ calculations using the 2009-10 Household Source: Team calculations. Survey. 45 REDUCING POVERTY THROUGH TRADE Female access to education is severely constrained, BETTER UNDERSTANDING THE BOX 3.1 with almost 40 percent of women having no ROLE OF GENDER IN FORMULATING formal education. Women’s progress from education TRADE POLICY to employment is highly skewed (Box 3.1). Figure 3.6 shows that female access to education is severely constrained overall, with over 40 percent of women not having any education at all. Even when employment The need to better understand the opportunities develop in the garments sector, role of gender in trade is an important meaningful promotion opportunities into entry-level part of formulating a more inclusive managerial jobs and above will open up for women trade policy in Myanmar. only if they have adequate levels of basic education and vocational training. Similar patterns exist in agriculture Evidence from the developing world suggests where women tend to be relegated to less skilled tasks, that poverty disproportionately affects and have less access to agricultural extension information discriminations against women, adversely and show lower utilization of technology. In contrast, affect their ability to escape poverty (World women account for a higher proportion of tertiary Bank and WTO, 2015). Preliminary analysis graduates than men. While the employment outcomes using available household survey data (HLAC, of these graduates is not yet reported, women’s lower 2010) suggests that women in Myanmar have representation at senior levels of the public and access to fewer income-earning opportunities private sector, including in firm ownership, means and have a higher proportion who have not that Myanmar is not optimizing this highly educated completed primary education. female cohort. While this information is useful, further data Figure 3.6: Women are also have few educational are needed in order to analytically inform the opportunities 120 dialogue on inclusive trade reform and the options for policy intervention. In the context 100 Post Secondary of Myanmar, possible gender-relevant analysis for trade and private sector development 80 Upper Secondary in general might include: (i) constraints affecting women workers in agribusiness, light 60 Lower Secondary manufacturing and tourism; (ii) discrimination against, or impediments faced by, women-led 40 Primary Completion businesses; (iii) options for gender-sensitive trade facilitation for border trade; and (iv) 20 potential economic opportunities for women Less than Primary in conflict-affected areas. All of these areas 0 require the collection of data with adequate Male Female Source: Team calculations. coverage of information to identify issues faced by women, such as through the labor force survey, the household survey and the Female education and vocational training could enterprise survey (World Bank, 2014b). therefore be a key priority for the government. While education policy is not under the direct purview of the Ministry of Commerce, it can play a key role in facilitating partnership platforms between incoming export-oriented employers, development partners, and the Ministry of Labor, Immigration and Population and the Ministry of Education. This could ensure joint efforts in the financing and management of effective vocational training—an area in which government- private sector coordination is key to generating results. 46 CHAPTER 3 Figure 3.7: Share of employment, labor productivity and share of sector in the economy Real Value Added/ Labour employed (Kyatt, 2005price/Unit Labour) 20 Transport and communication Size: Share of Real Value Added (%) 15 Manufacturing 10 Electricity, Gas, Water Agriculture, hunting, forestry and fishery Construction 5 Financial Intermediation Other Services Mining and Quarrying Social and Administration Services 0 0 10 20 30 40 50 Share of Employment (%) Note: The size of the bubble represents the sectoral share in total value-added. Source: Authors’ calculations using the 2009-10 Household Survey. 3.2.2 …all of which feed back into enrollment rates were 87 percent in primary school (grades 1-5), 58 percent in middle school (grades low productivity 6-8) and 32 percent in high school (grades 9-11).5 Half of all workers are engaged in the primary Poor families, especially in rural areas, have very low sector, and services dominate the remaining share enrollment rates. Until recently, government resources of employment. But these sectors have very low for education were inadequate, but a renewed productivity, as shown in Figure 3.7. Manufacturing commitment to expand access is expected to generate and construction are the most productive sectors, and better enrollment outcomes. The government has while they account for large shares of the economy tripled its education budget over the past two years, (reflected by the large bubble sizes), they only account hiring additional teachers and raising teacher salaries for 7 and 4 percent of total employment, respectively. (which nevertheless remain low).6 These patterns suggest that most jobs have very low levels of productivity, consistent with Myanmar’s In addition to the need to increase enrollment rates, largely agrarian economy. Three-quarters of jobs are there is significant room for improving the quality in rural areas, and even manufacturing activities are of education services. Data on leaving test pass rates primarily located in rural areas. for 2009 show that just over one-third of students completing secondary school passed the exit exam Low enrollment rates mean that Myanmar’s workers (Central Statistical Office Statistical Yearbook, 2009). are ill-prepared to meet the shifting needs of the This means that out of a Grade 1 cohort of about 1.2 modernizing sectors.4 Enrollment rates are also very million students, only 460,000 make it to 11th grade, low by regional standards, particularly at the middle- and 166,000 successfully graduate by passing the and high-school levels. According to 2010 data reported leaving exam. in the World Bank Country Partnership Framework, 5 There is some discrepancy in enrollment measures due to different data sources and coverage. 4 Many firms also face non-labor related constraints to raising their productivity adequately to meet international competi- 6 Source: Forthcoming Public Expenditure Review, draft tion standards. Education chapter by Lars Sondergaard, January 2015. 47 REDUCING POVERTY THROUGH TRADE Figure 3.8: Food staples dominate the poor’s budgets 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1 2 3 4 5 6 7 8 9 10 Food Health Education Other non-food Housing Utilities Durables Source: World Bank staff estimates on the basis of 2009-2010 IHLCA survey. Myanmar’s poor education outcomes—due to beans and pulses exchanges, under which daily prices low enrollment rates and low quality—mean the are compiled into an automated audio information workforce is ill-equipped to compete for skilled database accessed by phone, giving famers up-to-date jobs or perform at productivity levels necessary information on market prices. to keep pace with the modernizing economy. This includes self-employed or micro-entrepreneurs trying Only a small number of employers provide on-the- to run their own informal businesses. Foundational job training to overcome the lack of preparedness, literacy and numeracy skills are essential to and these tend to be large firms. According to the participating effectively in economic opportunities, World Bank’s 2014 Enterprise Survey (World Bank, even at the most basic level. Myanmar’s increasing 2014b), less than 10 percent of small firms provide integration into regional and global markets means training to their employees. For the firms that do that economic opportunities are rapidly changing, provide training, many tasks are firm- and product- and Myanmar’s workers are struggling because their specific, such as the use of machinery in garment training is inadequate for many types of employment.7 manufacturing, or the maintenance and repair of Furthermore, low literacy rates, particularly in rural specific machinery. In addition to providing on-the-job regions where education access is weakest, undermine training, we encountered other coping strategies used the capacity of farmers to acquire knowledge about by employers to address inadequate skills. The first is improved farming techniques. On the other hand, the a reliance on hiring only experienced factory workers, increasing penetration of mobile phones allows farmers with particular preference for migrants returning from to access the market information system tied to the factory work in Thailand (these workers also demand significantly higher pay). The second is to hire over- qualified workers for unskilled or semi-skilled tasks. 7 The Myanmar education system offers only 11 years of For example, one firm hires only university graduates instruction compared with 12-13 years in the rest of the region. The for agro-processing work, using the attainment of a BA curriculum is outdated and the teaching techniques are based on degree as a signal of capacity to acquire skills. rote memorization rather than reasoning skills. Reference: Public Expenditure Review chapter on education. 48 CHAPTER 3 3.2.3 The poor are also vulnerable the elasticity of income to GDP for the poor is similar to that for the non-poor (Dollar et al., 2013). Several to price shocks recent examples demonstrate the role of export growth Because food staples constitute a dominant share in ‘poverty reduction miracles’ observed in East Asia, of the poor’s budget, trade can affect the poor South East Asia, Botswana and Mauritius, among through the price of food, and some form of social others (Calì et al., 2015). protection may be needed to mitigate the impact. Figure 3.8 illustrates that food represents about 73 to Trade policy can also contribute to more harmonious 75 percent of 1st and 2nd quintile households’ spending, development across regions. The agglomeration of which makes them vulnerable to price shocks. Indeed, economic activity in the country’s center illustrated in simulations suggest that even moderate shocks on Figure 3.1 results from the combination of conflict in food staple prices could have severe effects on poverty, border areas (see Chapter 4) and of Myanmar’s past illustrating the vulnerability of Myanmar’s households inward-looking policies. Theoretical and empirical to price fluctuations.8 For instance, based on household- research going back to the work of Krugman and Livas survey consumption patterns, a 10-percent rise in the Elizondo (1996) has shown that inward-oriented trade price of rice and cereals for consumption (excluding policies lead to the agglomeration of economic activity paddy, the rice typically produced by households) around large urban centers. By contrast, open trade, in could raise the cost of living by 4.3 percent and could particular through overland borders, leads activity to raise the incidence of poverty by around 2.9 percentage spread out spatially. points.9 A 50-percent rise would raise poverty by 14.4 For exporting firms or firms importing percentage points, or close to half the baseline poverty intermediaries, congestion costs offset the benefits rate. of locating in large urban centers, leading them to choose alternative locations. In many large urban areas 3.3 Trade can in developing-country megalopoles, congestion costs appear quickly because of the lack of adequate sanitary reduce poverty and and public-transportation infrastructure, which have typically not kept pace with rapid urban population vulnerability growth. For these type of firms, the domestic backward and forward linkages that lead firms to agglomerate are weaker than firms that rely significantly on local markets for their input sourcing or product sales. Myanmar could encourage firms to move to the 3.3.1 Export-led growth can northern part of the country, closer to China. In improve outcomes for many… the case of trade expansion with China, for example, International evidence shows that a more open Myanmar could make location in the northern part of trade policy is associated with higher economic the country more attractive for firms to locate under growth in the long run.10 As economic growth is the acceptable security conditions. This trade-induced main driver of poverty reduction (Dollar and Kraay, spatial de-concentration of activity could be a chance 2002; Ravallion, 2001; Dollar et al., 2013), increased for Myanmar’s peripheral regions and could play a role trade also tends to be associated with poverty reduction in the integration of conflict-affected areas into the in the long run (Dollar and Kraay, 2004). Increased national development process, provided that markets trade should also boost shared prosperity, given that work (in particular labor and credit markets) and that development takes place in a context of law and order where vulnerable groups are protected. 8 The team used Quadratic Almost Ideal Demand Sys- tem (QUAIDS) developed by Banks et al. (1997) 9 These estimates need to be adjusted in the case of households being net producers. 10 See Rodriguez and Rodrik (2000) for a critique of early studies establishing the positive link between trade openness and growth; see Feyrer (2009) and Brückner and Lederman (2012) for more recent evidence in support of the positive trade-growth link using new methods. 49 REDUCING POVERTY THROUGH TRADE 3.3.2 …provided that key bottlenecks temporary internal migrant,12 and 8 percent had at least one permanent internal migrant. The states with the on factor markets are addressed highest share of households with an internal migrant Key constraints holding back Myanmar’s export growth were Kachin (33 percent), Kayah (22 percent), Sagaing include continuing labor-market bottlenecks and low (21 percent) and Taninthayi (18 percent). Note that productivity. It will be important for these constraints to be workers migrate due to both push and pull factors, addressed through investments in education and training, with push factors being a dearth of local employment as well as, possibly, active labor-market policies, although opportunities and high poverty rates. Logistics these are typically difficult to implement effectively. regressions on the determinants of internal migration indicate that households below the poverty line, or in Labor-market bottlenecks the bottom 40 percent of the income distribution, are Anecdotal evidence suggests that the post-isolation twice as likely to have an internal migrant compared boom in export demand and GDP growth translated with the non-poor or the top 60 percent of households into sharply higher labor demand. As factories in the income distribution. expanded, new factories were created, and road traffic Excess labor demand appears to affect both skilled and the demand for freight transportation and other and unskilled workers, but for different albeit modes of transport increased, generating a burst of related reasons. As discussed above, the majority of transport services growth, dramatically increasing jobs in Myanmar are unskilled due to the relatively demand for labor. The increasing demand for non-technical nature of agricultural and industrial agricultural exports such as rice, beans & pulses, and production, and relatively low levels of capital fruit may not have increased the number of farmers, investment. There are many reasons for low capital but certainly increased the total area under cultivation. investment, including financial constraints, regulations It has also generated jobs in basic processing, such prohibiting imports of used machinery, and poor as cleaning/sorting/packaging these products for supporting infrastructure, such as electricity and the export.11The surge in demand from once-restricted transport network (discussed in other chapters). The markets, such as the EU, the Rep. of Korea and Japan, labor part of the equation is also important: Myanmar has created an excess demand for labor as labor supply has an abundance of unskilled labor and a severe under- struggles to catch up. supply of skilled workers. Educational attainment rates But what is holding back the supply of labor in a are low (as discussed above), access to educational country with a large population? This raises questions services in remote areas is limited, education quality about why labor supply cannot keep up with demand, is poor, and technical and vocational education and particularly given Myanmar’s large population, the training (TVET) programs are modest (e.g., the relatively high rate of poverty, and the low skill levels Ministry of Labor’s three training centers graduate a that characterize most work. Are labor shortages total of 1,000 workers annually in a work force of over affecting all sectors and all skill types, or only in semi- 30 million workers). skilled and skilled manufacturing and services sector Excess labor demand can be seen in high turnover jobs? Or are there other factors (e.g., labor mobility rates and wage increases. The signs of excess labor constraints, skills/training) impeding the matching of demand—both skilled and unskilled—are seen demand and supply? primarily in high turnover rates, particularly in Although there seems to be a limited structural manufacturing activities,13 and also by increasing shift from primary activities (farming/mining) to wages. Unfortunately, the lack of wage data precludes secondary (manufacturing) and tertiary (services), us from measuring the wage inflation effect. But a these shifts are beginning to occur, and workers sampling (non-representative) of wage data indicates are moving—or at least temporarily migrating— that base manufacturing wages have nearly doubled to where jobs are to be found within Myanmar. in the past three years. Also, there seems to be an In 2009-10, 6 percent of households had at least one increase in the daily wage of unskilled day-laborers. For 12 A temporary internal migrant is one who relocates within Myanmar for work, but for three months or less. A permanent 11 Agricultural packaging is primarily for raw products internal migrant relocates internally for more than three months. (e.g., rice is packaged into 50 kg bags) for export to distributors/ wholesalers who transform or repackage products for consumers. 13 Based on anecdotal evidence from interviews. 50 CHAPTER 3 LABOR SHORTAGES AND MIGRATION BOX 3.2 A fundamental factor exacerbating the labor shortage is the ease with which workers can migrate to readily available jobs in Thailand. Large numbers of Myanmar citizens work in Thailand, most of whom reside there at least temporarily, although the duration of residency varies significantly, from day workers to those holding 3- to 7-day border passes (renewable), to those with regularized status who have worked and lived in Thailand for over 10 years.1 An estimated 2 million Myanmar nationals currently work in Thailand, although the number could be higher, since accurate measurement is difficult. Wages in Thailand are significantly higher, even for the least skilled workers such as agricultural day laborers. The minimum wage in Thailand is Baht 300 per day (equivalent to US$10/day and K 12,000 per day), about three times the going wage in Myanmar. Based on an IOM survey of Myanmar migrants in Thailand,2 about one-third earn less than the minimum wage (most of whom are undocumented), one-third earn the minimum wage, and one-third earn more than the minimum wage. There is significant heterogeneity in the sector of work, wages and formality status (the majority being informal), and these vary across the different regions of Thailand. Prior to migrating, about 20 percent were unemployed, one-third were self-employed farmers, and 40 percent were wage employees. About one-third comes from urban areas, two-thirds come from rural areas. Not only are higher Thai wages attracting workers from Myanmar, the real wage is even higher given the lower cost of living in Thailand. Myanmar’s prices are inflated in part due to high transportation costs given its landlocked position. The recent growth and investment boom have also driven prices higher, not only the price of labor, but also the price of consumer products and especially the cost of land. 1 The current legal maximum residency is four years. 2 Chapter 10: Assessing Potential Changes in the Migration Patterns of Myanmar Migrants and Their Impacts on Thailand, “Thailand Migration Report 2014”, the United Na- tions Thematic Working Group on Migration in Thailand, edited by J. Huguet. 51 REDUCING POVERTY THROUGH TRADE example, at Mandalay Port, a steady supply of informal because they want to return to their villages, not to workers—mostly internal migrants—camp along the economic opportunities in urban centers. The factors river banks in search of day work loading/unloading determining the migration decision could change as cargo. The current (end-2014) daily rate averages Myanmar’s economy grows, and alternative and more K 10,000 per day, more than double the pay of semi- attractive employment becomes available. On the skilled factory workers. other hand, nearly two-thirds of surveyed migrants say they would require at least the same level of income The inability of Myanmar’s employers to offer in Myanmar to induce them to return from Thailand more attractive wages despite excess labor demand (Box 3.2).15 highlights the need to improve profitability through better quality. Despite significant wage growth since Specific skill shortages 2011, wages in Myanmar remain very low compared with other lower-middle income countries. Some The shortage of skilled professionals is especially firms have offered higher wages to attract and retain acute. Yangon University, a leading institution of workers, reducing turnover and maintaining a trained higher learning in the region in the 1950s, suffered workforce with specific skills and acquired expertise unrest in the 1960s and periods of closure in the 1980s that raise the productivity of the firm. Nevertheless, and 1990s. According to the CESR report (2012), there is tight competition between firms, so employers “[b]etween 1988 and 2000, universities in Yangon are wary of becoming involved in a price war and seeing were closed for 10 out of 12 years”. For example, their trained workers poached by competitors offering graduates from business-related disciplines such as marginally better compensation. Moreover, given the accountancy and marketing, and more technical skills prevalence of low quality of outputs, some producers such as engineering, are difficult for employers to find. are operating with very small margins that may not be Demand and competition for these skills is so great able to accommodate significantly higher wages. And that turnover rates are high and wages at the very top where margins are sufficient, employers may be loath of the skills spectrum are being bid upwards. Firms to raise wages without a link to productivity gains. participating in the World Bank’s 2014 Enterprise Survey (World Bank, 2014b) cited the dearth of skilled As industrial and farming activity and exports workers as one of the biggest constraints to firms continue to grow, the labor shortage for unskilled operating in Myanmar. workers could begin to push up wages, thereby diminishing Myanmar’s comparative advantage Part of the reason is the drain of migrant workers regarding low wages in attracting FDI. On the abroad seeking better opportunities and pay. Nearly other hand, this could have the positive effect of 4 percent of households in Myanmar have at least one attracting skilled migrants back from Thailand. But permanent external migrant.16 The states with the the wage gap is very large and would require significant highest share of households with an external migrant wage increases in Myanmar and most likely a long were Tanintharyi (20 percent), Kayin (19 percent) and adjustment period. Moreover, the Thai economy relies Chin (16 percent). This contrasts with the recent UN heavily on migrants, who make up 7 percent of its total survey of migrants in Thailand, which indicates that labor force, and between two-thirds and three-quarters most migrants come from states bordering Thailand, of Thailand’s roughly 3 million migrants come from with the largest share being from Shan State.17 Logistics Myanmar. regressions on the determinants of external migration indicate that poor and vulnerable households are Lower wages in Myanmar compared with neighboring countries may deter Myanmar’s migrant workers from returning home. According to a survey 15 Thailand’s stance on immigration has evolved over of Myanmar migrants in Thailand, most intend to time, with periodic initiatives to regularize immigrants, which involves a degree of legal and social protection while at the same return to Myanmar eventually (80 percent, according time imposing a fixed duration for legal residency. But unskilled mi- to the IOM survey),14 but relative wages are very low grants are not allowed permanent residency, and informal workers and many plan to accumulate significant savings first are ineligible for social security, although an increasing number of migrants can pay for optional health insurance coverage. 16 More than three months. 14 “Assessing Potential Changes in the Migration Patterns 17 “Thailand Migration Report 2014”, United Nations of Myanmar Migrants and Their Impacts on Thailand”, International Thematic Working Group on Migration in Thailand, edited by J. Organization for Migration, Country Mission in Thailand, December Huguet. 2013. 52 CHAPTER 3 more likely to have an external migrant. For migrants to Thailand, large numbers are informal and work in 3.4 Policy Options agriculture, fishing, construction and domestic work.18 Low productivity Labor productivity and therefore skills need to at least keep pace with wages. If Myanmar’s workers 3.4.1 Education are to compete regionally and internationally, average Closing the skills gap will require intensified efforts labor productivity will need to rise significantly. Even on the part of the government to improve education if wages for unskilled work remain competitive, there outcomes. These could focus on expanding education are non-wage factors that determine labor productivity access in remote areas, increasing enrollment rates relative to labor cost, including both cognitive and so that a secondary education becomes the norm, non-cognitive skills. For example, firms perceive a lack curriculum reform to better align graduates’ skills with of soft skills even among highly skilled workers. And the demands of the private sector, and upgrading the with respect to the knowledge economy, Myanmar quality of teaching. The most effective way to address ranks almost last out of 145 countries in the World competitiveness challenges in a country with low Bank’s Knowledge Economy index, which assesses human capital levels such as Myanmar is to focus on country preparedness for competing in the knowledge basic education, rather than industry-specific skills, economy.19 and can help to foster more broad-based job creation and therefore more inclusive growth. The acquisition of workplace skills is essential to firm productivity, competitiveness and ultimately, Technical and vocational education training (TVET) inclusive growth. Addressing the skills gap is critical programs attempt to address the skills shortage for improving the productivity and competitiveness of but may not have the scale to have much impact Myanmar firms, especially SMEs, which are less able to in Myanmar. The Ministry of Labor (reorganized as provide training to their workers directly. the Ministry of Labor, Immigration and Population in April 1st, 2016), fully aware of the skills shortage, is Low wages are not enough to attract investment. currently expanding its offerings, with development Myanmar’s unskilled but very low-wage work force has partner technical assistance. The Ministry of Labor been adequate to attract foreign investment so far, but has three training centers—in Yangon, Mandalay and the level and intensity of capital investment have been Pathein—that provide skills in nine disciplines (e.g., limited by the lack of supporting infrastructure. Low welding, electrical, AC, pipe-fitting, etc.).20 The TVET wages are not enough on their own; inputs need to budget is K 90 million per year, allowing the training arrive undamaged and on time to the production line, of 1,000 people annually, which is unlikely to make and outputs need to be packaged, quality controlled much of a dent in labor market demand. The Ministry and delivered to market. These various supply chain of Industry is also directly engaged in TVET, and processes require efficient and reliable logistics and training about 1,000 participants annually through other supporting services, aspects of Myanmar’s six training schools and another 1,200 participants economy that remain underdeveloped. Without through “Mobile TVET” throughout the country. concurrent progress in these areas, the economy will Other ministries also provide training (e.g., the Border struggle to attract very large amounts of FDI that can Affairs, Agriculture and Tourism), and the government help it to move more quickly up the value chain. wants to further expand its TVET capacity (under the National Education Law). To finance this expanded skills development program, the government plans to establish a skills development fund financed by employers, equivalent to 0.5 percent of employee salaries, as well as through PPP arrangements with training institutes. Ultimately, the TVET programs will be combined into a polytechnic institute with equivalence to the post-secondary level. 18 Ibid. 19 http://siteresources.worldbank.org/INTUNIKAM/Re- sources/2012.pdf 20 The Mandalay center offers training in only two disci- plines, and the Pathein center in only one discipline. 53 REDUCING POVERTY THROUGH TRADE Myanmar is also participating in an ASEAN-based 3.4.3 Closing the data gap skills upgrading effort. This ASEAN-based effort focuses on accreditation of training centers, establishing There is currently a lack of relevant employment national competency standards, and certification of data. The dearth of employment data makes it competencies (i.e., testing). It has signed eight Mutual difficult to document carefully the characteristics Recognition Agreements (MRAs) for professional of employment in terms of sectoral, occupational, workers under ASEAN. GIZ is providing TA to geographic and gender composition, particularly with implement a pilot project for skills development, the respect to their evolution in the post-isolation period first round of which has been completed. The training/ and how particular population groups have been certification framework will encompass four of the affected. The Ministry of Labor publishes annual data eight levels in the national qualification framework. on formal employment using surveys of firms enrolled The government is also drafting an Employment and in social security. The data cover 18 industrial zones Skills Development Law. The government’s objective across nine sectors (ISIC codes), as well as data from is to ensure that Myanmar’s workers can compete outside the industrial zones. But these data cover only locally with labor inflows from other ASEAN countries 850,000 social security affiliates—i.e., formal sector post-AEC, as well as compete internationally in other employees—out of a likely total employment level of ASEAN countries in the context of potentially higher around 30 million. labor demand for Myanmar workers abroad. The Ministry of Labor is now engaged in an extensive effort to improve its labor data. In early 2015, the 3.4.2 Active labor-market policies 
 Ministry of Labor fielded a labor force survey (LFS) Helping employers to find workers and helping of 26,000 households, with financial and technical workers to find jobs can increase the efficiency assistance from the ILO and some technical input from of the labor market. Active labor market policies the World Bank. This is the first LFS since 1990. The typically provided in other countries include World Bank provided the sample frame based on the employment information services, pre-service training recent census and also conducted its own pilot survey for new labor force entrants, job centers that help of 3,648 households in 2015. employers and employees create good matches, and It is essential for the government to be able to policies to increase labor mobility. Further analysis of track the evolution of job creation and job quality the dynamics of Myanmar’s labor market is necessary for the entire economy. Looking ahead, it will be in order to recommend measures to address the most important for the government to collect labor-force pressing needs. survey data and/or household survey data, as well as Support for external migrants would be helpful agricultural census data, on a regular basis in order to in boosting remittances. In order to enhance track the evolution of job creation and job quality for the positive impact on development of migration the entire economy, both formal and informal, and outside of Myanmar, the government could seek to to highlight any divides between men and women or develop additional protocols on cross-border worker particular ethnic populations and regions. Making the movements to complement the migrant documentation data publicly available will increase their usefulness currently required by Thailand (the largest receiving and allow both the government statistical offices country), and also extend these to other ASEAN and researchers from a range of research centers and member countries. There may be other aspects of development institutions to analyze the data. Such support for external migrants that could facilitate skills analysis will be useful to inform the government’s labor development and transfer to the domestic economy, strategy and identify welfare measures that can be used such as through lowering the cost of remittances, and/ to target social protection or other government services or improving access to financial services and schooling to needy population groups. options for itinerant workers and their families, among others. 54 CHAPTER 4 OPENING CHAPTER 4 UP FOR PEACE Trade opens new economic opportunities for populations that have long been isolated by years of conflict. But the development of trade also carries risks of increased tensions if its benefits are not perceived as being shared fairly and/or if proper safeguards are not put in place to protect vulnerable groups from expropriation, environmental degradation, or poor working conditions. Such safeguards could take cross-cutting forms, such as legal definition and enforcement of property rights, in particular for traditional farmers, transparency in large contracts, and project-specific measures. It is important that trade development plans in ethnic areas in Myanmar recognize the tension- creating potential of large projects and include proactive consultations with ethnic minorities in their early design. Support for local ethnic communities could be made available to compensate those groups that stand to lose from trade-induced changes. 55 56 OPENING UP FOR PEACE Photo credit © Minzayar - Natural Resource Governance Institute (NRGI) CHAPTER 4 Figure 4.1: Many areas were still controlled by EAGs in 2014 BGF 1001 KACHIN BGF 1002 PMF TARTAW GYI Myiktinya ABSDF (A) AA ABSDF (A) KACHIN PMF PANG SAY BGF 1006 MNDAA(A) Part Lashio SAGAING PMF Kaung Kha SHAN BGF 1006 Hakha (NORTH) BGF 1008 CHIN SHAN (SOUTH) RAKHINE NAYPYIDAW Taunggyi MAGWAY KNLP BGF 1004 KNLP (Part 1) BAGO BAGO BGF 1005 (WEST) (EAST) BGF 1013 BGF 1011 BGF 1014 BGF 1012 BGF 1015 MON BGF 1016 YANGON KAYIN ABSDF (A) BGF 1021 AYEYERWADY BGF 1017 BGF 1018 BGF 1019 BGF 1020 BGF 1022 BGF 1021 KIA KNU TNLA KPC SSPP DKBA UWSA NVSP RCSS ALP NDAA CNF KNPP NSCN-K PNLO KNO 8 TANINTHARYI Headquarters BGF and PMF Others Source: Burma News International, “Deciphering Myanmar’s Peace Process,” 2014, p. 45. 57 OPENING UP FOR PEACE 4.1 Shaking off a legacy of conflict Figure 4.2: The locus of armed conflict areas has shifted Panel A: 1997-2009 Panel B: Sept. 2011-Mar. 2015 Kachin Kachin Sagaing Sagaing Chin Chin Shan Shan Mandalay Mandalay Rakhine Rakhine Magway Magway Bago Bago Bay of Ayerwaddy Bay of Ayerwaddy Bengal Yangon Bengal Yangon Andaman Andaman Sea Sea Source: Myanmar Peace Monitor for 2011-15 data and ACLED for 1997-2009 data. Myanmar’s effort to reengage with the global one consideration among many for ethnic groups economy is taking place against a backdrop of to seek greater autonomy in a federal structure. The internal conflicts and efforts to secure peace with Communist Party of Burma began to engage in ethnic armed groups (EAGs). Myanmar is home to an hostilities in 1948, while Myanmar’s longest-running ethnically diverse population, with around 135 ethnic civil war, with the Karen National Union (KNU), groups. Internal conflicts started almost immediately was officially declared in January 1949 (Keenan, after the declaration of Burma’s independence, driven 2012). Numerous other ethnic groups also have by numerous factors, including ideological, religious longstanding hostilities against the government. Many and ethnic differences, and historically different of the ethnic minority groups maintained control over administrative structures from the British era (Taylor, territory, establishing de facto “mini states” including 2009).1 Natural resources, while not often mentioned administration, schools and hospitals, and sought to by ethnic groups as a reason for conflict, were certainly defend their “’liberated’ areas” (International Crisis Group, 2003). From 1989 to 1995, the military negotiated ceasefires with over 25 insurgent groups, the 1 According to Taylor, one of the key causes of the first of which were parts of the failed Communist Party post-independence Karen conflict was a “growing perception that of Burma (South, 2011). These ceasefire deals were the state could not protect the Karen Christian community, and that often unwritten, allowed groups to retain weapons the Karen thus owed a higher loyalty to their ethnic label than to the state.” and some territorial control, and rewarded them with 58 CHAPTER 4 business concessions, especially in natural resource Besides the loss of life, conflict in Myanmar has often extraction, including mines and timber (Min Zaw Oo, lead to forced labor, land confiscation, arbitrary 2013). In 2011, the government began signing a new taxation, exploitation of forestry and natural series of temporary ceasefire agreements with ethnic resources, and restrictions on movement, which minority groups. By the middle of 2012, 13 EAGs has stifled productive economic activity and bred had reached ceasefire agreements with the government distrust and resentment between the state and the (Min Zaw Oo, 2013). In March 2015, ethnic leaders local populace. Given the ongoing conflicts and illicit and the Myanmar government agreed on a draft nature of many of these activities, systematic figures nationwide ceasefire agreement (NCA), an important on their pervasiveness do not exist. However, there step in the peace process.2 is widespread documentation of their existence and consequences. Practices such as forced labor and forced While ceasefires have helped to improve the conscription were previously ‘widespread’ in Myanmar, situation on the ground in some parts of Myanmar, according to some reports.3 DTIS team interviews many ceasefire areas are not universally seen as suggest that the intensity of such practices has reduced secure (Figure 41). Conflict has resumed in other in most ceasefire areas although it has not ceased parts of Myanmar, notably in Kachin and Shan states. altogether.4 Conflict drained fiscal resources that could In February 2015, fighting also erupted in Kokang, otherwise have been spent on productive activities: between the government and the Myanmar National the previous military government apportioned around Democratic Alliance Army (MNDAA), which also 20-25 percent of total government spending during had a ceasefire with the previous regime. Besides the the 2000s of the budget for military purposes (IMF, conflicts between the Myanmar military (Tatmadaw) 2007).5 Conflict creates uncertainty and risk for and EAGs, the country has also experienced a surge in businesses, particularly small businesses, deterring communal violence between different religious groups investment and disrupting trade. For example, fighting in Rakhine State. in Myanmar’s Kokang region in early 2015 led to the The geographical concentration of conflict has imposition of martial law and the closure of many shifted over time with increased intensity in north- roads. Trade through Myanmar’s most important land eastern Myanmar. Figure 4.2 shows changing patterns border crossing to China, Muse/Ruuli, decreased and of conflict over time and across Myanmar. Panel all trade was halted as Myanmar’s third-largest crossing A shows data from media reports gathered by the at Chin Shwe Haw was temporarily closed and almost Armed Conflict Location Events Dataset (ACLED), all businesses in that town also shuttered as residents suggesting that between 1997 and 2009, conflict fled in fear of the fighting (Kyaw Hsu Mon, 2014 ; was relatively concentrated in Kayin State and Kayah Kyaw Hsu Mon, 2015 ; and the EU-Myanmar Center, State and Sagaing Division, and much less in Kachin 2014). and Rakhine states, where conflict was essentially absent. Panel B draws on over 700 different reports of conflict incidence collated by the Myanmar Peace Monitor between September 2011 and March 2015. The incidents are concentrated in northeastern Shan State and southern Kachin State, and to a lesser extent 3 ILO (2012), “Decent Work in Myanmar” for forced la- in southern Shan, Kayin and Rakhine states. This bor, see Earthrights International, (2003). The DTIS team interviews found that nearly half of the interviewees complained about some pattern is different to that registered in the pre-ceasefire kind of land confiscation, while nearly one quarter had experienced period, when the ACLED suggests that the conflict corrupt or arbitrary taxation of livestock and shops or businesses. was relatively concentrated in Kayin and Kayah states. About the same had shared reported forced labor (Vicary, 2005). Figure 4.2 also suggests that areas of historical conflict 4 The ILO Liaison Officer in Yangon noted in a recent only partly overlap geographically with the current interview with the Irrawaddy newspaper: “In the regions where the conflict areas. The conflict mapping also shows that army has a heavy presence, the situation continues to be serious. And it is the army that enforces mainly forced labor. And it is the despite the current ceasefire, conflict incidents still army which is the problem, in terms of action too.” (Hong-Trang happen in these areas. Perret-Nguyen, Interview with the Irrawaddy). 5 The estimates of military spending are likely to understate the true level of resources flowing into the military, for 2 However, the NCA was short on detail of key compo- multiple reasons. A multi-tiered exchange rate system obscures nents, such as a military code of conduct or interim arrangements official figures by undervaluing imported military equipment, while for EAGs. Much remains undiscussed, most importantly the entirety official budget figures do not include any funds or in-kind resources of the political dialogue that will form the basis for a final peace raised at local levels, either voluntarily or involuntarily. agreement. 59 OPENING UP FOR PEACE Figure 4.3: Average distance between villages to the land confiscation on the local population.6 While closest markets (in hours) the state often lacked the transparency in granting concessions for the extraction of forest and natural 35 resources, armed groups also used revenue from natural 30 resources and the taxing of borders and local trade 25 to finance their struggle or to sustain their survival. 20 Such experiences may cause passiveness or abnormal 15 responses of individuals and businesses in conflict areas 10 to the growing trade opportunities, such as avoiding 5 to produce surpluses, staying small to avoid arbitrary 0 taxation, and staying away from main roads to avoid confiscation of assets, property and production by in g an ne go on ce s n y in G ad hi ch actors involved in armed conflict. Sh Zo ng Ba en ga EA C w Ka Ya es ry ar Sa o D Pr er N Ay G EA Rainy season Summer Source: WFP Agricultural Survey 2013/14. 4.2 Trade can help give peace a chance in The large economic costs of conflict in Myanmar are consistent with the evidence from other civil Myanmar conflicts. Evidence from Sierra Leone (Collier and Duponchel, 2013) and Côte d’Ivoire (Klapper et al., 2013) shows the large direct impact of conflict on individual earnings as demand for and production of 4.2.1 Trade can provide goods and services are disrupted. Ksoll et al. (2013) opportunities for border regions… also show the large negative impact of political violence in Kenya on exports, especially by restricting Experience from other countries and Myanmar the mobility of labor. Conflict can also restrict the suggests that higher income from trade opportunities mobility of goods as in the case of the Israeli check- and lower prices are important channels associated points in the Palestinian territories, which have large with a reduction in conflict intensity. In Colombia, negative economic impacts (Calì and Miaari, 2013). higher incomes among coffee growers (due to increases In the Basque region of Spain, conflict-related violence in international coffee prices) were associated with significantly reduced economic growth relative to reductions in conflict intensity (Dube and Vargas, neighboring regions (Abadie and Gardeazabal, 2003). 2013). Similarly, Palestinian localities that experienced Conflict can dramatically increase poverty, too. In positive export shocks experienced a lower intensity of Rwanda, for example, 20 percent of the population subsequent conflict (Calì and Miaari, 2014). Berman sank into poverty following the genocide (Justino and and Couttenier (2014) show that these conflict- Verwimp, 2006). Taken together, the international reducing effects also apply to African regions that evidence clearly suggests that conflict reduces incomes, benefitted from the introduction of preferential market demand, production and trade, and increases poverty. access in the US. International evidence suggests that This pattern is also likely to apply to the conflict- a reduction in the prices of the main commodities affected regions of Myanmar, although the lack of consumed by households raises their real incomes and systematic socio-economic data in conflict affected reduces the risk of violence (Bellemare, 2015). For areas does not currently allow us to test this hypothesis Myanmar as well, there seems to be a strong association more formally. between reduced conflict intensity and increased trade, as measured by price differentials (Abidoye and Calì, A legacy of predatory behavior against local ethnic 2015). populations by the various parties involved in fighting is likely to affect their response to new 6 The pattern is well-documented in the Karen Human trade opportunities. Various reports suggest that the Rights Groups “orders reports”, which contain translations of military and ethnic armed groups engaged in conflict written orders from the military to villagers. Here are two samples, often imposed arbitrary taxation, forced labor and one from 1998 and one from 2008-11: http://www.khrg.org/1998/03/ khrg9802/slorc-orders-villages-set-98-pa%E2%80%99an-district- central-karen-state and http://www.khrg.org/2011/10/khrg1103/ civilian-and-military-order-documents-march-2008-july-2011 60 CHAPTER 4 Trade can help to connect ethnic areas of Myanmar, Figure 4.4: Natural resources concessions and conflict long isolated by conflict, with the rest of the economy, areas and expand opportunities for rural communities beyond subsistence agriculture. In doing so, trade Ma Maykha River liek holds the promise of increasing production, reducing ha Riv er prices and increasing incomes. This can also help to India reduce the conflict risk in these areas by increasing Chindw the opportunity cost of engaging in conflict, which is China Irrawaddy River r Rive eLi in Rive the cost of using the time to engage in activities other Bangladesh Shw r M ek ive r on than income-generating ones. The higher the income, R g e Ri ng ve Salween Rive yit r M the higher the cost of engaging in militias and armed Kalad groups. an Riv r Paung Laung River Laos er Irraw add International trade can also encourage the location y Riv of economic activity in border areas, helping to er prevent its excessive agglomeration around large urban centers. International trade is, in general, a factor of spatial de-concentration of economic Thailand activity, as hypothesized long ago by Krugman and Livas-Elizondo (1996). As mentioned above, recent research shows that relatively closed borders and inward-oriented trade policies lead to agglomeration of economic activity in large cities and away from border regions, while expanding international trade leads activity to spread out spatially. This has been observed in an African context using night lights captured by Map of Natural Resources & Conflict Area satellites. On average, across countries, night lights Planned Mega Dam Constructed Mega Dam tend to become sparser as one gets closer to borders. Oil and Gas Concessions However, in the case of borders characterized by good Agri-Business Concessions facilitation and logistics, this effect is reduced, showing Commercial Forestry Production that economic activity develops in border areas. Proposed Construction Industrial Estate Proposed/ Under Construction Special Economics Zone Mining Concessions Given the relative isolation of many of the conflict- Gold Mines affected regions, these channels may be particularly Conflict Area important for Myanmar as trade integration has more potential to raise incomes and reduce Source: Myanmar Peace Monitor (2013) consumer prices. In addition, many of the ethnic areas are plagued with difficult geography and low market Encouraging ethnic communities to trade with density, which can increase the returns to investing other ethnic groups through better connectivity can in trade-related infrastructure. A survey of the UN’s help sustain peace by contributing to the building World Food Programme (WFP) of 796 villages across of trust between warring parties. Indeed, trade seven states plus the dry zone suggests that villages hinges on trust between groups and, by fostering trade, with a presence of one or more EAGs have on average trust can help deter civil conflict (Rohner et al., 2013). a substantially higher distance from the closest market At the same time, trade also stimulates mutual trust than villages in other areas (Figure 4.3). Conflict- between groups, e.g., as trade relations require learning affected regions, including Chin and Kachin states, the language or the customs of the other group. This record the largest average time to the closest markets. conflict-reducing effect of ethnic trade has found Villages in Shan also have on average a higher than empirical support in other contexts (e.g., Olsson, median time to markets. 2010, in Sudan; Porter et al., 2010, in Nigeria). This effect would be maximized if ethnic minorities from the economic peripheries were involved in trading activities with the economic core. Better connectivity would mean lower transport costs. This channel is 61 OPENING UP FOR PEACE important as in the more remote ethnic areas there extraction, in particular, carries serious risks and is not much trade, especially with the economic core challenges for trade development in conflict areas. Two of the country. DTIS fieldwork suggests that most important factors may exacerbate the risk of expanding of the trade by local ethic groups in many of conflict trade in these areas. areas is rather with Thailand and China. If there are no other barriers—such as regulatory ones—and the First, low trust between groups involved in conflict local markets are profitable enough, this would lead to tends to increase the risk of conflict around logging increased competition among traders to buy from and and extraction of minerals, precious stones, and oil sell to connected villages.7 and gas. There is abundant evidence that the presence of such resources is associated with higher conflict risk, for Furthering trade relations with neighboring example in Colombia (Dubes and Vargas, 2013), in the countries is also an important strategy to help Democratic Republic of Congo (Maystadt et al., 2014), resolve internal conflicts. A high volume of trade in Nigeria (Abidoye and Cali, 2015) and throughout with neighboring countries can be an important Africa (Berman et al., 2014).8 This is particularly the deterrent for domestic civil conflict (Calì and case in contexts with low accountability, with a recent Mulabdic, 2014). Neighboring countries can mingle history of civil conflict, with high ethnic and economic in domestic conflicts, often by helping insurgents divisions (Calì and Mulabdic, 2014), conditions that and thus destabilizing fragile equilibria. Intense trade are prevalent in conflict-affected areas in Myanmar. relations between two neighbors, A and B, increase the While systematic data on natural resource production costs to A of a conflict in B and vice-versa. This higher and potential by regions were not readily available cost reduces the opportunity of the intervention of A to the team, DTIS fieldwork and existing literature in fomenting civil conflict in B (and vice-versa). The suggest that ethnic areas have large endowments of role of regional neighbors seems to be important also natural resources, including minerals, precious stones in Myanmar’s conflicts, with both Thailand and China (jade), hydro-power and tree crops. Indeed, a recent nurturing relations with Myanmar’s rebel groups along report (Global Witness, 2015) estimates that the value their borders (Ball and Farrelly, 2013). of jade exports—mostly unrecorded from Kachin State—dwarfs that of total formal Myanmar exports. 4.2.2 …provided that it is inclusive Figure 4.4 shows that most dams (both planned and For trade to generate opportunities, it will be constructed), forestry and commercial agri-business important for sensitivities associated with conflict concessions are concentrated in and around conflict and trade to be addressed. Sensitivity about trade areas, as are many mining concessions. Certain development is rooted in a lack of trust between the resources, notably jade, are particularly concentrated government, ethnic armed groups, and local ethnic in ethnic areas, which are also home to significant communities. The distrust held by many ethnic people deposits of rubies, gold, and many other minerals. in Myanmar is a direct result of longstanding conflict and However, other sectors such as manufacturing and discrimination, which included forced labor, arbitrary services are relatively undeveloped in these areas, and taxation, land confiscation and development projects ongoing conflict is one of the key reasons for this. This that had negative externalities for local communities. further contributes to dependence on natural resource For many ethnic populations, their primary historical extraction in these areas. engagement with the state was with the military, which had a strong presence in many ethnic minority areas. Furthermore, there is a lack of settled land in post- Because of this, many ethnic people view the military conflict areas, which tends to increase the fragility and the government as synonymous (Interview with of peace. While land is often the greatest asset of civil society representative, Shan State, January 24, rural people, official land titling is largely lacking in 2015). Ethnic populations often hold suspicions not post-conflict areas. Ethnic populations in ceasefire only about government projects but also work by other areas often cannot ‘prove’ land ownership for lack of outside organizations, such as companies and INGOs, formal documents, and sometimes cannot demonstrate especially when these organizations come with continuous occupancy because conflict has forced government permission (Interview with international them to migrate or traditional farming patterns rely expert, Yangon, January 13, 2015). Natural-resource 8 This is due to what the literature defines as ‘rapacity 7 DTIS team interview 127 with civil society, Shan State, effect’, which refers to the idea that valuable economic resources January 25, 2015. can provide an incentive to fight over their control. 62 CHAPTER 4 THE PRECEDENT OF KACHIN STATE BOX 4.1 The ceasefire between the Kachin Independence Army (KIA) and the Myanmar military, which lasted from 1994 until 2011, was one of Myanmar’s longest lasting and most important. However, the lack of conflict was not associated with rapid, broad-based development. The most immediate consequence of the ceasefire was a widespread growth in natural resource extraction (mostly jade) and plantation agriculture in Kachin State. Despite 17 years without fighting, the ceasefire brought limited benefits for the people of Kachin State and was “widely regarded as [a time] of lost opportunities” (Transnational Institute, 2013). Despite promises from the SPDC, a political dialogue about the future of Kachin-Burmese relations did not occur. There was little improvement in public goods and services. For example, limited government statistics show that throughout the 2000s, the total length of all roads in Kachin State increased by 7.3 percent (Central Statistical Organization, 2012). Yet over the same time, natural resource extraction grew dramatically. During the 2000s, the number of non-jade mines in Kachin State grew from 0 to 342, the officially recorded production of jade jumped more than 2,400 percent, and the volume of teak and hardwood trees extracted grew nearly 500 percent (Central Statistical Organization, 2012). Yet the Kachin people enjoyed few benefits from outsized growth in resource extraction, in part because there were no robust, transparent mechanisms within either the government or the KIO/KIA to translate resource revenues into broad social spending and development projects. Natural resource extraction did benefit the government, Kachin’s EAGs and select businesses. For the Kachin Independent Organization (KIO), the ceasefire created opportunities to get into business, which meant new revenue coming especially from jade, gold mining and logging (International Crisis Group, 2013). Global Witness, a UK NGO, argued that the ceasefire actually opened up the needed space for logging on “an industrial scale” (Global Witness, 2003). According to a recent report by the Transnational Institute (TNI), the government also benefitted, as regime officials and businesses took over many lucrative natural resource concessions in Kachin State, including logging, gold-mining, agriculture and the valuable jade mines at Hpakant. Growth of crony business, disenchantment about the failure to further the Kachin ‘cause’, growing militarization in Kachin State, and stagnation on political dialogue, together contributed to deteriorating relations between Kachins and the Myanmar government. Over time, there were “increasing complaints from communities and civic groups over the lack of transparency of these resource revenues” because little of it was used for the benefit of the population (International Crisis Group, 2013). Many in Kachin perceived that their cause had been “systematically discriminated against by Tatmadaw and government leaders”, and became increasingly dissatisfied with Myanmar’s central government (Transnational Institute, 2013; International Crisis Group, 2013). At the same time, the central government took advantage of the ceasefire to increase the number of Burmese soldiers in Kachin State (number of battalions rose from 26 in 1994 to 41 in 2006) (Kachin Development Networking Group, 2007). The long-standing grievances of the Kachin were not addressed through political dialogue, and in the lead-up to the 2010 elections, the regime reneged on key promises to the KIO, including by making demands that they transform into a Border Guard Force (International Crisis Group, 2013). This contributed to the government abrogating the ceasefire, and the resumption of conflict in Kachin State. Since 2011, the KIA and the government have been engaged in active fighting, which has been concentrated in strategic and resource-rich areas, including Hpakant, Myanmar’s jade capital, again a sign of the importance of the presence of natural resources for conflict. The ‘Kachin case’ now serves as a cautionary tale for many of Myanmar’s other ethnic groups about the risks of economic development before a peace agreement has been reached. 63 OPENING UP FOR PEACE on shifting cultivation. This generates concerns that Improving the governance of natural resources increased government authority in ceasefire areas extraction, such as through the Extractive Industries will help outside businesses to take over land from Transparency Initiative (EITI), can strengthen the farmers, especially if the government’s granting of land trust between Myanmar’s ethnic populations and concessions proceeds more quickly than land titling the government, and help to share the benefits of (Community Visit 106, Kayin State, January 16, trade with local populations. One key challenge 2015). For traditional land owners, the lack of official for trade-related infrastructure is that it can hasten title increases the risk of having land confiscated, and the development of contentious and poorly governed lowers the chance of receiving compensation if a private sectors, including mining, logging and commercial business obtains that land via government concession.9 agriculture. Both mining and logging are important The government and the KNU are starting titling natural resources in ethnic-minority areas of Myanmar. activities in some areas (Community Visit 106, Kayin However, the existing regulatory structure provides few State, January 16, 2015). However, these efforts are environmental protections for local communities and small in comparison to the scale of the problem. no direct revenue from resource extraction to state/ regional or local governments. The distribution of While trade certainly opens new economic natural resource revenue is certain to be a key issue in opportunities for ethnic groups, the benefits are by political dialogue between the government and EAGs, no means automatic. The benefits from trade-related many of which cite the precedent of Kachin State infrastructure development, such as hotels, restaurants, (Box 4.1) to illustrate the problems with economic transportation services and commercial agriculture, can development during ceasefires that did not include open up economic activities that may have previously any agreement on economic governance.11 Myanmar’s been unviable, and improve the economics of other participation in EITI can help improve the quality businesses that depend on transportation networks. of governance in extractive industries and increase However, these benefits are by no means automatic. the confidence of stakeholders, including ethnic DTIS fieldwork found that some ethnic group communities, over the reform steps in the industries. members believe that they are not in a position to take advantage of new opportunities, because they lack the DTIS fieldwork suggests there are at least two necessary capital to develop even small businesses or to important conditions for engaging local ethnic grow existing businesses, and lack the skills to obtain communities and EAGs in economic decision- newly created jobs or directly benefit from enhanced making. trade opportunities.10 The lack of agreement, or even substantive dialogue, between the government and 1. A broad and transparent consultative process ethnic actors about the distribution of benefits and the with meaningful influence over the decision- role of ethnic actors in decision-making significantly making process. There is currently no formal increase the risk that key actors will be dissatisfied framework for EAGs to participate in and influence with trade-related development. This evidences one the decision-making around development of the key challenges of trade-related developments in projects in ethnic areas, although the signing of conflict-affected areas: ethnic minorities need to also the Nationwide Ceasefire Agreement (NCA) realize benefits from them. may change that. EAGs and ethnic communities generally want to be active decision-makers in trade-related development of ethnic areas, not passive beneficiaries of state- and development partner-led decisions. 9 Title cannot always prevent land from being confis- cated but it can be useful when negotiating compensation with 2. An effective mechanism to compensate businesses that obtain land concessions. Traditional land owners without official title often receive less compensation than those negatively affected people, including also who have titles (Interview 127 with civil society, Shan State, January redressing eventual complaints and grievances 25, 2015). from the process. The incipient Bawgata dam, 10 For example, our interviews suggest that in southern Shan local mining businesses complain that they cannot develop medium and large mines as they lack capital. This emerged in the team’s fieldwork both in Kayin and Shan areas. Because of this 11 The Nationwide Ceasefire Agreement provides vague dearth of appropriate skills some EAGs feel that these trade oppor- mention of economic development projects, and notes on some tunities would be mainly filled by migrant workers from other areas occasions the need for ‘consultation’ and ‘joint development’. of the country. This can complicate ethnic relations if it contributes However, the document lacks detail and guidance on implementa- to a perception of economic domination. tion. 64 CHAPTER 4 a proposed project involving the Myanmar Figure 4.5: Foreigners’ arrivals, border vs. other entries government, the KNU, and the Norwegian Water Resources and Energy Directorate (NVE) in the 3,000,000 eastern Bago Region, demonstrates that ongoing and meaningful consultation combined with 2,000,000 mitigation of negative externalities can significantly 1,000,000 improve the prospects for development projects in minority areas (South, 2014). 0 2010 2011 2012 2013 2014 Total tourist arrivals Border entries 4.3 Developing Source: Ministry of Hotels and Tourism, opportunities in “Myanmar Tourism Statistics 2014”, http://www. myanmartourism.org/index.php?option=com_ ceasefire areas content&view=article&id=368&Itemid=359 158. However, despite the near-term possibilities in developing agriculture, sectors outlined in the The government’s National Export Strategy (NES) NES, with the exception of tourism, do not appear highlights key products that Myanmar wishes to to be as relevant in contributing to development in prioritize in its export development. This section briefly post-conflict areas. Myanmar’s NES puts significant addresses five such key sectors, namely agriculture, weight on agricultural and fishing products by including tourism, timber, mining, and manufacturing, to four groups of products—rice, rubber, beans & pulses, illustrate the potential costs and benefits of their and fisheries—among the seven key export sectors development in conflict-affected areas. (Republic of the Union of Myanmar, 2014). Beans and pulses are a valuable export crop but largely grown in While these sectors and others will all play a role the dry lowland climatic areas. Rice is a widely grown in the country’s development broadly, the costs crop but the often hilly terrain, lack of transportation and benefits of developing each of these in conflict- infrastructure, and the comparatively low value for affected areas differ from their development in the weight of the crop make it less economical to develop. rest of Myanmar. As some of these sectors, such as Rubber is commonly grown in areas of mixed control timber and mining of minerals and precious stones, are (both government and EAGs), although it is not grown particularly concentrated in conflict-affected areas, this as regularly in areas under the control of ethnic groups. could inform the entire development strategy of the With rubber, however, the crop takes some up-front sector, and may lead to reconsidering the identification investment and trees require 5 to 7 years to begin of the key export sectors. producing. This long time horizon is problematic in conflict areas, where continued instability and tenuous 4.3.1 Agriculture relations between the government and EAGs lessen its The agriculture sector holds unique prospects appeal. There are significant risks that an investment in for immediate improvements in well-being. The rubber may not yield a return if there is a reversion to majority of people living in these areas engage in conflict agriculture, sometimes for subsistence but also for small-scale trade. There are numerous advantages to Given the lack of physical infrastructure and the slim developing agriculture in ceasefire areas. First, because prospects for its development in the near term, post- such a significant portion of the population engages in conflict areas would benefit most from agricultural agriculture, the benefits would be broad-based. While development programs that focus on high value, skill levels across the economy are generally low, most low weight, non-perishable crops that can provide people already have a familiarity with agricultural near-term returns (spices such as cardamom, as production. By raising labor incomes agricultural well as tree crops including coffee and tea, although development could also be helpful in reducing the risk timelines are longer). Increased agricultural trade and of conflict in these areas. production in ceasefire areas also hinge on how well the two aforementioned cross-cutting issues are addressed: 65 OPENING UP FOR PEACE land and the increased authority of the government. barriers on services are addressed or removed. As explained above, much of the land is not properly Restrictions on homestays and guides, as well as titled in conflict-affected areas. This creates significant licensing challenges for hotels, all serve as barriers to challenges in reallocating land to more efficient uses entry into the tourism sector, although these barriers through market mechanisms, and creates significant are lower for other tourism-related businesses such as potential for grievances when one or more individuals travel agents. Other barriers to entry include access claim traditional land ownership over areas that have to finance, as the vast majority of people in ceasefire been allocated to another owner through government areas cannot get a bank loan (they are unbanked and concession. Agricultural development is also likely to own no titled property, which is required to get a be accompanied by an increase in government staff, loan in Myanmar). The legacy of conflict also affects with the ministry such as the Ministry of Agriculture, potential tourism development, for example landmines livestock and Irrigation playing the lead role in licensing prevent adventure tourism in large parts of Myanmar’s and oversight to the agricultural sector. However, this ceasefire areas. By bringing a more solid prospect for influx of government staff is a potential problem in peace, the NCA could spur further tourist arrivals to areas where the trust towards the central government is these areas. This would increase the need of scaling up low, and where EAGs fear this presence may jeopardize tourism-related infrastructure in areas long forgotten their legitimacy. by international and domestic tourism flows. 4.3.2 Tourism 4.3.3 Timber Tourism is Myanmar’s largest services sector export The timber sector is a major source of export and, given the region’s popularity and Myanmar’s income for Myanmar, worth US$1.2 billion in unique cultural and geographic sites, the subsector is 2012, or about 12 percent of Myanmar’s total primed for significant growth. The number of tourists exports (Republic of the Union of Myanmar, 2014) entering through Myanmar’s major tourist entry points and income for conflict-engaging parties. Most of (Yangon, Mandalay, Bagan, Mawalmyine, Myeik) has Myanmar’s formally exported timber, until 2014, was nearly tripled in the past five years, to almost 585,000 raw or marginally refined. However, legislation that in 2014. However, the number of people crossing the came into effect that year banned the export of raw border overland has nearly quadrupled, to almost 2 logs, permitting only value-added forestry products. million people in 2014, likely also as a consequence While timber holds significant potential as a revenue- of the temporary ceasefire deals signed in these areas and employment-generating export, Myanmar’s timber (Figure 4.5).12 These figures show that nearly two- has long been a source of funding for key conflict thirds of visitors to Myanmar are coming to border actors in the military, private sector and the EAGs. areas, which are often dominated by ethnic minorities. One of the challenges for forest management in ethnic While most of the border entries visit only for a day, areas is that there is little presence of the Ministry of significant growth in the numbers is evidence of the Natural Resources and Environmental Conservation. huge potential to develop services to lengthen these Instead, logging in these areas is often controlled by visitors’ stays from one to a few days. Also, there is an the military and EAGs.13 This happened in Kachin important need to focus tourism development in ethnic State in the 1990s and 2000s, and created a ‘vacuum’ in areas near these key border crossings, not to cater to the which Chinese companies and others took advantage travelers arriving through major airports, but to those (Global Witness, 2003). Timber provided financing coming from China, Thailand, and other neighboring for both ethnic insurgents and the military to fund countries. If managed properly, the growing tourism conflict (Global Witness, 2003). Given the opacity of sector has the potential to bring significant benefits to the timber trade, especially in ethnic areas, it is hard ceasefire areas and ethnic minorities. to assess the extent to which this trade has financed fighting parties, but the field interviews suggest that The benefits of the surge in both regular tourism much of the trade is informal and is appropriated by and border entries will have greater benefits for these parties. Myanmar’s ethnic minorities if unneeded regulatory 12 A significant number of these people are probably crossing the border for some type of economic engagement. Avail- 13 A Global Witness report on Kachin State noted that able figures do not differentiate the various purposes for crossing logging in Kachin State was “controlled by several groups including the land border. the SPDC Northern Command Tatmadaw (armed forces) units, the NDA(K), and the KIA/O.” (Global Witness, 2003). 66 Photo credit © Minzayar CHAPTER 4 The mining sector presents some of the most significant challenges for development and trust- building in ceasefire areas. 67 OPENING UP FOR PEACE There are significant discrepancies in Myanmar’s and those who reap the benefits. DTIS field interviews timber export data and the corresponding import suggest that mining is often associated with negative data of trading partners. Myanmar’s exports to externalities for local communities, such as water and China were only 26 percent of the reported Chinese land pollution, and land confiscation. These costs of imports from Myanmar. However, Myanmar’s exports mining are also in line with international evidence to Thailand were 190 percent larger than Thailand’s (Aragon and Rud, 2015). In Myanmar, light regulation reported imports of timber from Myanmar. These of mining and the lack of an effective, accessible discrepancies only serve to illustrate the significant judicial system often prevent communities near mines informality in the timber trade, and cannot account from obtaining adequate (or any) compensation for for any of the trade that was not captured by either these negative externalities. importer or exporter (which is likely to be a significant share of the trade). Mining in conflict-affected areas is also more complex to develop. There is no agreement between There are a number of other major challenges with the government and most EAGs about mining, so development of the timber sector. First, timber although a company may hold a license to mine in harvesting in Myanmar is currently unsustainable an EAG area, it is often unable to develop a mine and has led to significant environmental damage and because it also has to ask for informal permission from deforestation. Myanmar’s forests shrank by an average the EAGs (Focus Group 108 with the Private Sector, of 435,000 ha and 309,000 ha per year between 1990 Kayin State, January 16, 2015).14 The expansion of the and 2000, and 2000 and 2015, respectively (Forest mining sector entails a number of conflict-related risks. Research Assessment, or FRA). Together, the country These include increasing divisions over the distribution lost 15 percent of its forest cover over those 25 years of natural resource revenue, creating greater incentives (FAO Global Forest Resource Assessment, 2010). for all groups to seek a greater share of resource Since forests are often in Myanmar’s peripheral ethnic revenue, and creating new grievances because of the areas, these negative externalities are borne by ethnic ongoing failures to properly regulate the sector or people and risk feeding existing grievances with the provide redress mechanisms for affected individuals government. Also, forestry products have the potential and communities. to create employment. However, there are issues with the distribution of costs and benefits from development 4.3.5 Manufacturing of this sector. The majority of value-added activities in Manufacturing is essential for the prospects of which raw timber is converted into finished products many of the country’s ceasefire areas. These areas are would take place in larger cities such as Yangon and often close to large markets in neighboring countries Mandalay, with little benefits would go to local ethnic and the lower wages in certain border areas may communities from where a significant portion of the provide a competitive advantage in developing the harvested timber originates. These environmental and sector. In addition, manufacturing development is also conflict externalities suggest that it will be important less likely to create controversy than natural resource- to strengthen the institutional mechanisms governing based development in these areas. It also generally environmental sustainability and the distribution of has lower land requirements than agriculture, and the benefits before developing timber exports further. distribution of value-added is typically more inclusive than for mining and commercial forestry. 4.3.4 Mining The mining sector presents some of the most However, the challenges of developing a strong significant challenges for development and trust- manufacturing base in conflict-affected areas are building in ceasefire areas. The main beneficiaries of significant. Many conflict-affected areas, especially mining activities are generally narrow, and the sector those outside urban areas and towns, lack even requires good governance—specifically transparency in licensing, output extracted, revenue management and 14 In one DTIS field interview a businessperson referred effective government spending—to transform mining that it was not possible to do mining in some KNU areas because revenue into broad-based benefits. Mining is also “there is no clear understanding between the armed groups and the government on mining” and therefore the KNU “won’t agree associated with costs that are often borne by people to let them do mining” (Focus Group 108 with Private Sector, Kayin living around mines (e.g., environmental degradation, State, January 16, 2015). However in other KNU areas, civil society battered local infrastructure) and there is often a groups reported that the local brigade “provided security for the company that did coal mining” (Focus Group 111 with Civil Society, disconnect between those who bear the costs of mining Thailand, January 18, 2015). 68 CHAPTER 4 the most basic infrastructure, such as roads and reliable electricity. These areas also often lack the 4.4 Implications for necessary labor, as decades of conflict have hindered development and pushed many people from conflict- policies and projects affected areas to seek work elsewhere, making many communities remittance dependent. The smaller labor force and remittance dependence are likely to push the If they are to succeed, trade-related interventions reservation wage up, though detailed data on prevailing need to address the political challenges as well as wage rates for unskilled labor in Myanmar’s ceasefire technical challenges. A general implication of the areas are not available. Post-conflict parts of Myanmar DTIS analysis on this topic is that in conflict-affected also lack large urban centers and thus economies of areas, trade-related development cannot be approached agglomeration, which are often important for keeping as a technical problem. This work is inherently political. the manufacturing sector competitive via lower costs It will be important for trade-related interventions to and/or higher quality. Most importantly, there remains address both the technical and political challenges, and the ever-present risk of conflict in current ceasefire risk failure if they do not. How interventions are done areas, due to the still fragile relations between the can be as important as what trade-related activities government and the EAGs. Especially for export- are implemented. For trade-related interventions to oriented manufacturing sectors that have relative have a positive effect on Myanmar’s peace process and freedom in their choice of location, the additional risk ethnic relations, they could support the framework for of investing in Myanmar’s remote conflict-affected relations as outlined in the draft Nationwide Ceasefire areas makes them less competitive. This emerged clearly Agreement (NCA), and incorporate means through in field interviews with businesses in northern Shan which ethnic populations have a voice in determining State. There, Lashio could serve as a magnet to catalyze their economic future, a role in crafting it, and a share investments in manufacturing thanks to the availability of the benefits. of labor, decent infrastructure and the proximity to The draft NCA calls for consultation between EAGs the Chinese market. However, such investments have and the government for carrying out certain projects not materialized allegedly at least in part due to the in ceasefire areas during the interim period, as well instability associated with the renewed fighting. as during peace negotiations. Included in these While green-field manufacturing activities may projects is aid from development partners for ‘regional be challenging to set up in the difficult conditions development and capacity-building’, as well as any of border areas, mining-based manufacturing can ‘regional development and capacity-building’ work offer substantial benefits. For instance, Myanmar’s (Draft Nationwide Ceasefire Agreement, 2015). The jade mined in Kachin State is mostly exported raw. A draft NCA also notes that for ‘planned mega-economic complex web of regulations affect the trade, including projects’ that could impact civilians in ceasefire areas Ministry of Mines Order No. 11/97 banning the jade (which would likely include all mega-economic trade in certain border towns, Order No. 19/2000 projects), implementation ‘shall be undertaken in designating specific routes for the jade trade, and a consultation with local communities and relevant number of other laws and regulations. However, these ethnic armed organizations’ (Draft Nationwide regulations—essentially non-tariff measures restricting Ceasefire Agreement, 2015). Both of these areas the jade trade—do not seem to contribute to an orderly have direct relevance for the recommendations of market in any way, as they fail to prevent parallel trade the DTIS and the development of Myanmar’s trade and they do not address the sector’s key issues, including and trade-related infrastructure. Underlying all the how to ensure sustainable mining, how revenues are recommendations is the important conclusion that the shared, and how Myanmar can better appropriate the process of how interventions are make matters greatly. gains from trade. While the prevailing view seems to be Their success or failure, and their effect on inter-ethnic that peace should come before any reform of the jade relations and the peace process, will depend as much mining regime, the government could instead reinforce on the way in which they are conducted as on the the peace process by improving the jade mining sector’s problems they aim to address. contribution to the local economy. In particular, the Myanmar’s long-running conflicts and the ceasefire government could encourage the development of agreements have important implications for the local jade-processing activities to provide employment country’s trade integration. These complexities alternatives to smuggling and to ensure that the gains lead to three different sets of recommendations to from trade remain in Myanmar. development partners, as well as the government: 69 OPENING UP FOR PEACE • A list of policy actions that can promote trade in Content a way that maximizes the benefits for peace and • To the extent possible, promote the development helps improve ethnic relations; of more labor-intensive land-scarce economic • A negative list of interventions that could be activities in conflict-affected areas, including avoided, or at least considered carefully, so as not tourism, manufacturing and certain agro- to undermine the delicate peace transition and industrial production. In particular, local jade the fragile trust between ethnic minorities and the processing could be encouraged, leading to the government; and development of a local jewel industry. This could • A list of recommendations conditional on a set of be encouraged through market-based instruments, changes to happen. including an export tax on raw jade. Such a In this regard, it is important for the government and tax would be justified economically given that all development partners that are planning to engage Myanmar is a very large producer of jade and in trade-development projects in conflict-sensitive or can therefore affect the terms of trade in its favor, ceasefire areas to practice the following approach: through well-designed instruments such as an export tax at the appropriate level. 4.4.1 Positive list • Enhance access to land by improving the functioning of the land market and security of Process land tenure in conflict-affected areas, including • Sequence carefully the roll-out of select trade- also by resolving the overlapping claims on land related activities and infrastructure development by government and non-state actors. in ceasefire areas to follow the signing of a • Improve the connectivity between Myanmar’s nationwide ceasefire agreement. This would help main growth centers (Yangon and Mandalay) and to prevent the trade development strategy in the ethnic periphery, with careful attention to the conflict areas from moving ahead of the peace other recommendations on process made here. process, and may provide a further incentive for • Increase trade with neighbors, as this reduces further parties to sign the NCA. their incentive to create internal instability in the • Help affected local communities to understand, country. participate in, and benefit from trade integration. This would require first a clear understanding 4.4.2 Negative list of the most important constraints in each Postpone trade-related activities and trade-related area to reap the benefits from increased trade infrastructure development in areas close to existing opportunities. On the basis of this, programs conflict, including but not limited to the corridors from could be developed for the ethnic-minority Lashio-Muse, Lashio-Chin Shwe Haw and throughout communities, for instance on learning about Kachin State. Risks associated with the current conflict development projects, accessing government risk causing stoppages in projects and causing trade services, developing relevant skills and helping patterns to change quickly and dramatically. them to access capital. Similar concern applies to the distribution of benefits • Advocate for improved transparency in mining from development partner-funded trade-related activities, including in particular jade mining, interventions. Issues of ethnic representation and through the establishment of accessible and knowledge of the local context are extremely important transparent statistics on the sector’s operators and for the successful implementation of such projects. In the terms of their licenses. This could be achieved addition, anecdotal evidence suggests that sometimes through collaboration between DICA and other development partners are limited from working in government ministries’ departments. some areas by government or EAG restrictions. Such • The Ministry of Commerce could undertake a restrictions imply that projects may not reach the natural-wealth evaluation study following the most remote and impoverished areas, which would World Bank’s established methodology, in order negatively impact the distribution of benefits.15 How to assess the sustainability of current mining development partners implement projects in ceasefire operations and the rate at which the country is areas, not just what they implement, can determine the currently depleting its natural capital. success or failure of a project. 15 One group of interviewees noted that the government limits the areas in which development partners can work, and plac- es some restrictions on work in remote areas. (Interview 127 with civil society, Shan State, January 25, 2015). 70 CHAPTER 5 TOWARDS INFRASTRUCTURE SPS/QUALITY CHAPTER 5 AN EFFECTIVE In order to compete successfully on export markets, Myanmar could consider adapting its quality infrastructure to meet the demands of buyers with various levels of demand in terms of quality and SPS certification. This will require both a legislative/ regulatory modernization effort and a capacity-building effort in ministries involved in setting and enforcing standards. However, to support export development, the development of a quality infrastructure could be driven by commercial demand and, in areas where the health and safety of domestic consumers are at stake, also by the need from regulators enforcing legislation to protect consumer health and safety. It will be important for Myanmar to avoid rushing to build quality infrastructure disproportionate with its enforcement capabilities. The regulatory regime could also be carefully designed to avoid conflicts of interest and rent- seeking by the ministries involved. 71 TOWARDS AN EFFECTIVE SPS/QUALITY INFRASTRUCTURE 72 CHAPTER 5 CHANGING MARKET REQUIREMENTS 5.1 Today’s markets BOX 5.1 require complex and One garments exporter, interviewed demanding quality for this study, explained how her international buyers now send infrastructure a team of inspectors from an independent company every year to verify how she complies with the 5.1.1 Myanmar is opening up to a buyers’ codes for corporate social different world responsibility. The opening up of Myanmar’s economy after a Such verification has become increasingly demanded prolonged period of political and economic isolation over the past decade, and today, following a string is exposing Myanmar’s businesses community to a of factory fires and a building collapse in garment new and rather different world. For example, garment factories in neighboring Bangladesh, this demand is exporters, once successful in the 1990s, are now a condition for supplying global brands. Her buyers linking up again with global buyers. But those same never asked about this back in the 1990s. buyers now behave rather differently (Box 5.1). Another exporter, of seafood products, described Many markets offer opportunities for Myanmar’s how his association, the Myanmar Fishery Products exporters, but with new and different demands for Processor and Exporters, had purchased testing quality. Regional markets may sometimes be less equipment and installed it within the Department demanding in terms of quality management than of Fisheries. They did this to gain access to the EU high-end garment and seafood markets, although this market. The EU demands that the Department may change with rising incomes. That the demand for of Fisheries monitors seafood quality, and the quality varies is an advantage for Myanmar, because association found that it had to finance the testing so does the capacity of Myanmar producers and equipment to allow the Department of Fisheries to exporters to manage quality. Thus, it will be important fulfill its regulatory functions and thus keep markets for Myanmar to find a way to balance its export open for association members. In the 1990s, the EU markets’ quality demands with its capacity for quality was not as demanding as it is today. management. The garments exporter and the seafood exporter are 5.1.2 What is a quality two examples of Myanmar producers and exporters now meeting stringent quality requirements in infrastructure? foreign markets. How Myanmar may meet quality A quality infrastructure includes activities by public requirements in its export markets is the topic of institutions, private operators and users that enable this chapter. a country to achieve objectives of quality and safety. These objectives cover national quality and safety issues and international trade requirements. The activities that constitute quality infrastructure include technical regulation, standardization, testing, inspection, certification, accreditation and metrology. Box 5.2 details these activities its basic components. To establish trust, governments and private buyers formulate requirements in the form of mandatory technical regulations (including SPS measures), voluntary standards and private quality requirements. To check that products, services, systems and persons comply with such requirements, quality infrastructure 73 assesses conformity through testing, certification and WHAT IS A QUALITY INFRASTRUCTURE? BOX 5.2 inspection. Accreditation provides the guarantees that such tests, certificates and inspections are provided by competent service providers. Last but not least, metrology (i.e., the science of measurement) ensures Investing in a quality infrastructure that all the measurements during testing, certification to promote exports could be and inspections are accurate. recognized as an advanced method Three factors are pushing Myanmar’s producers towards better quality management and thus of quality management. When the implementation of new measures that satisfy considering how to do this, the increasing quality requirements. First, Myanmar is following questions can be asked: reintegrating into global value chains with higher and more exacting quality requirements. Second, Myanmar is integrating into regional markets that have lower • Is the absence of a quality infrastructure quality requirements than global brands, yet the a constraining factor for quality export regional requirements are rising. China, for example, production, or do other factors, such as poor is tightening its SPS management and Myanmar equipment, also play a role? is a member of ASEAN, which has a program for the regional harmonization of standards. Third, as • Does investing in a quality infrastructure carry Myanmar’s own consumers see their incomes grow they risks of promoting rent-seeking? How efficient will become more aware of quality. Thus consumers is the government bureaucracy? Does the legal will put pressure on goods and services targeting the framework follow international best practice? domestic market. A broad overview of the quality/ SPS Do conflicts of interest exist within the existing issues facing Myanmar’s exporters is offered in Table quality infrastructure? 5.1. • Can capacity-building take place relatively Building capacity to manage quality requires a step-wise easily, or is absorption capacity a constraint? approach. It will be important for producers, exporters and the government and development partners that • Does capacity-building follow a step-wise support them to be aware of export markets’ quality approach or attempt to jump to too advanced demands and the challenges that production of the methods and technologies too soon? right quality pose. For Myanmar, these demands will vary tremendously. Rice, for example, is exported • What is the level of quality management to both markets demanding only basic parameters demanded? Assess demand for specific services. like size and markets demanding absence of banned Is capacity-building commercially viable? Does pesticides requiring high tech testing. The awareness of quality infrastructure capacity satisfy the need basic hygiene is still lacking in Myanmar and without for government regulation? this awareness, for example, the importance of hand washing and the risk of contamination, the application • How to configure the future quality of advanced technologies to measure microbiological infrastructure? Which services should the contamination would be in vain. Thus, awareness of government provide? What is the rationale market demands and basic quality features is the first for government intervention? Which step in quality management. Second, basic institutions services should be provided by the private can be established and simple technologies applied sector? Which services should be produced before more advanced concepts could be implemented. domestically? Which services may be supplied Hand-washing campaigns come before microbiological most efficiently through imports? testing, for example. Third, advanced methods such as internationally accredited laboratory testing are the final step. It will be beneficial if capacity-building efforts within a quality infrastructure recognize that quality infrastructure is only one piece in the puzzle. Successful 74 CHAPTER 5 WHAT IS A QUALITY INFRASTRUCTURE? BOX 5.2 QUALITY REQUIREMENTS Quality requirements are specifications of the nature of the product, including its production methods as demanded by buyers or regulated by regulatory agencies both of which may be either domestic or foreign depending on the end market of the product. Quality requirements may be expressed as purely private requirements determined by a single or a group of buyers, as formal standards, or as technical regulations. Some private quality requirements may operate in a fashion similar to standards in the market place due to their market dominance. STANDARDS Standards are documents, established by consensus and approved by a recognized body, that provide for common and repeated use, rules, guidelines or characteristics or their results, aimed at the achievement of the optimum degree of order in a given context. Standards set quality requirements providing the basis for the evaluation of compliance with the demands of buyers and regulatory agencies. Standards may be set by a variety of actors, including national, regional and international bodies. National standardization bodies bring together public and private stakeholders to develop a formal consensus national standards. Such standards may become international standards if adopted by international standardization bodies following certain procedural rules about the development of standards.1 Following the definition of the WTO TBT Agreement, compliance with a standard is voluntary. TECHNICAL REGULATIONS Technical regulations are documents that lay down product characteristics or their related processes and production methods, including the applicable administrative provisions, with which compliance is mandatory. They may also include or deal exclusively with terminology, symbols, packaging, marking or labelling requirements as they apply to a product, process or production method. A range of government departments may adopt technical regulations. Technical regulations are highly variable in formulation, ranging from being highly prescriptive to setting out only the end goal of regulation, thereby leaving the choice of how to comply up to the private sector. Often technical regulations refer to standards as the technical basis of regulation. This approach ensures that a consensus exists between public and private sector actors on the most efficient ways to comply with regulation. TESTING AND INSPECTION Testing means the determination of one or more characteristics of any particular material, product, service or process according to a procedure. Inspection means the examination of a product design, product, process or installation and determination of its conformity with specific requirements or, on the basis of professional judgement, with general requirements. Testing and inspection may be done by first parties (in-house), second parties (buyers or regulatory agencies) or third parties (bodies independent from both transaction parties). For many needs, testing and inspection services are tradable. Small and large service providers supply testing and inspection services across borders, in developing countries typically to exporters. 1 In 2002, the WTO TBT Committee adopted a decision outlining procedural requirements necessary for the de- velopment of international standards (i.e., transparency, openness, impartiality and consensus, effectiveness and relevance, coherence and developmental dimension). This implies that no particular institution is authorized to produce international standards, but an international standards may be issued by any institution that respect the TBT Committee’s decision (WTO, Document G/TBT/1/Rev.8 of May 23, 2002). 75 TOWARDS AN EFFECTIVE SPS/QUALITY INFRASTRUCTURE BOX 5.2 CERTIFICATION Certification is the assurance by an independent body that a product, services, system or process conforms to quality requirements, standards or technical regulation. The certification bodies are often private but may also be public, especially in markets for which conformity assessment services are little developed. As with testing and inspection, certification services are tradable and a large number of global firms provide such services across borders. ACCREDITATION Accreditation is a third-party attestation related to a conformity assessment body conveying formal demonstration of its competence to carry out specific conformity assessment tasks. Conformity assessment bodies undertaking testing, inspection and certification can seek accreditation on a voluntary basis as proof of competence in a given area. The accreditation may be a domestic or a foreign entity. More developed countries often has a single national accreditation body responsible for all areas of accreditation. CALIBRATION Calibration is the set of operations that establish, under specified conditions, the relationship between values of quantities indicated by a measurement instrument or measurement system, or values represented by a material measure or a reference material and the corresponding values realized by standards. Firms often use calibration laboratories to calibrate their measurement equipment, although some calibration takes place in-house. Calibration services may be provided by private or public service providers and they may be produced domestically or imported. METROLOGY Metrology is the science of measurement. More developed countries have established a national measurement system designed to maintain, develop and diffuse measurement standards. This system provides calibration services to independent calibration laboratories and other institutions involved in measurement. Calibration laboratories in turn provide services to firms and public sector agencies using measurement equipment. Measurements are traceable through a chain of comparisons back to the national system and eventually to global measurement standards, thereby guaranteeing the accuracy of the primary users of measurement equipment. 76 CHAPTER 5 TABLE 5.1: ILLUSTRATIVE QUALITY AND SAFETY ISSUES FOR MYANMAR’S EXPORTS PRODUCT MARKET DRIVER GROUP & QUALITY AWARENESS QUALITY PARAMETERS Oil & gas Global Large corporations with high Standards, Quality infrastructure awareness, Insurance needs services Equipm. rental Copper China Quality management, e.g. ISO 9001 certificate Rice China Regulatory authorities Varieties EU Regulatory authorities Varieties Regional Underdeveloped for regional Varieties buyers Dried peas, China Underdeveloped for regional Traditional parameters, e.g. size, taste beans and Regional buyers lentils Oilseeds Regional, Asian Underdeveloped for regional, Variety Cleanliness higher for overseas Fruits and Regional Underdeveloped for regional Traditional parameters, e.g. size, vegetables buyers taste, color Rubber China, South International buyers, low Cleanliness East Asia awareness due to many small Proper post-harvest techniques farmers Seafood EU regulatory authorities, very Size, Species ,Taste , Color high awareness Forestry China, regional products Garments High income Global production networks with Design and foot- countries exacting and high standards Durability wear Tourism China, regional, Possibly high/ diff. from local Western parameters 77 TOWARDS AN EFFECTIVE SPS/QUALITY INFRASTRUCTURE STANDARDS, PRIVATE PROTOCOLS AND TECHNICAL REGULATIONS RELATING TO: CONSUMER SAFETY FOOD SAFETY PLANT AND ENVIRONMENTAL & STANDARDS ANIMAL HEALTH SOCIAL ISSUES Potentially some Labor & environ-mental standards, (e.g. OHSAS 18001, IS0 14001) Sustainability reporting Pesticide residues Pests Weeds Pesticide residues Pests Weeds Little awareness Chemical residues Pests Benzopyrene Weeds Pesticide residue Phytosanitary limits yet rarely certification yet enforced regionally rarely enforced regionally Hygiene requirements Antibiotics residue limits HACCP2 Pests, but Certification but may not be taken questions about into account enforcement by market Azo dyes Private labor standards, codes of Heavy metals practice, Private environmental EU REACH1 chemical codes of practice, Wastewater treat. control program Demand for safety For some markets, pressure for food for hotels and ensuring local benefits restaurants 1 European Union’s REACH (Registration, Evaluation, Authorization and Restriction of Chemicals) chemical control program. 2 Hazard Analysis and Critical Control Points. Sources: www.myanmaryangtse.com.mm/en/certifications.html; 78 CHAPTER 5 QUESTIONS TO ASK BEFORE INVESTING export production requires much more. First, products BOX 5.3 IN A QUALITY INFRASTRUCTURE TO of sufficient quality can be produced before it is PROMOTE EXPORTS worth considering how to manage quality by the use of quality infrastructure services, such as testing and certification. It is no use setting up certification schemes or investing in laboratories if we suspect already that there will be few certifiable products or that most Investing in a quality infrastructure products will fail the tests. Many problems in quality management cannot be solved by investing exclusively to promote exports could be in quality infrastructure. A recent World Bank report recognized as an advanced method on Myanmar’s rice industry, for example, points out of quality management. When that managing rice varieties better and investing in modern milling equipment would increase the quality considering how to do this, the of Myanmar rice. following questions can be asked: Often, the measures needed to create the product quality • Is the absence of a quality infrastructure and quality infrastructure services reinforce each other. a constraining factor for quality export Garments producers in Myanmar, for instance, mainly production, or do other factors, such as poor produce “cut, make and trim” (CMT) garments. CMT equipment, also play a role? garments are produced when the producer receives all the materials (fabric, buttons, thread, etc.) and patterns • Does investing in a quality infrastructure from the buyer, produces according to the patterns carry risks of promoting rent-seeking? How and finally packs the garments for export. The tight efficient is the government bureaucracy? Does control over the inputs that this mode of production the legal framework follow international best allows the buyer simplifies the producer’s compliance practice? Do conflicts of interest exist within with garment requirements. For example, there will the existing quality infrastructure? be no need to test whether the producer uses buttons • Can capacity-building take place relatively containing heavy metals, because the buyer already easily, or is absorption capacity a constraint? knows the chemical composition of the buttons supplied. • Does capacity-building follow a step-wise approach or attempt to jump to too advanced 5.1.4 Avoiding the rent-seeking trap methods and technologies too soon? It is useful for the proponents of quality infrastructure • What is the level of quality management capacity-building to also be aware that a quality demanded? Assess demand for specific infrastructure can be misused (and often is in services. Is capacity-building commercially developing countries) for rent-seeking purposes. viable? Does quality infrastructure capacity Technical regulations can be set simply to generate satisfy the need for government regulation? revenue for a particular public agency. Government testing, inspection and certification “services” may • How to configure the future quality serve only to ensure the financial viability of an agency. infrastructure? Which services should the Government-controlled accreditation may serve as a government provide? What is the rationale means to keep private conformity-assessment providers for government intervention? Which out of the market. services should be provided by the private sector? Which services should be produced Thus, capacity-building in the area of a quality domestically? Which services may be supplied infrastructure could target two objectives: service most efficiently through imports? provision and trade facilitation. Both Myanmar’s private sector and its government regulators, seeking to safeguard consumer health and safety, demand services such as testing, certification and inspection to ensure buyers and citizens that goods, services, systems and persons comply with the requirements established to guarantee the safety and quality of 79 TOWARDS AN EFFECTIVE SPS/QUALITY INFRASTRUCTURE Figure 5.1: Organization of the NSQD within Myanmar’s quality infrastructure Other Ministry of Science & Technology Other government government laboratories, agencies, e.g. e.g the Food Department of Research & Innovation (DRI) Myanmar Quality Control Agricultural Laboratory of National Standards & Quality Department (NSQD) Produce FDA Laboratories Trading Metrology Accreditation Standards Division Division Development Division Conformity Metrology Accreditation Standards Assessment Private, Regional Foreign buyers Foreign Foreign quality laboratories standardiza- assurance accreditation tion bodies and bodies, e.g. International firms present certification in Myanmar, the Singapore standardization bodies Accreditation bodies, e.g ISO, e.g.SGS, OMIC Council ASTM Myanmar production. Service provision is about building the capacity to deliver these services at a level 5.2. A regulatory commensurate with Myanmar’s needs. framework in need of The regulatory part of a quality infrastructure may, however, hinder trade if regulations are poorly modernization designed. In many countries, in particular low-income ones, regulations suffer from overlap and duplication of work because inter-ministerial coordination structures are weak or non-existent, or in some cases because regulations are imposed just to extract rents. 5.2.1 Technical regulation and SPS Thus, trade facilitation demands that the government regulatory framework and the development partners that support it build capacity that is both effective in meeting the demand 186. The legal framework for technical for services and does not interfere unnecessarily with regulation, including the regulatory framework for business. The way to ensure that Myanmar’s future SPS management in Myanmar, needs to be updated quality infrastructure meets both service provision and and in comparison with international best practice, trade facilitation needs is to draw from international incomplete. Myanmar has no general law on technical best practice in establishing a quality infrastructure regulation. However, the recently adopted Law on free from conflicts of interest and to assess demand for Standardization covers issues beyond standardization services and calibrate the future quality infrastructure proper, including technical regulation. It is the aim of carefully to meet this demand (see Box 5.3 below for the Law on Standardization to ensure that Myanmar question list). follows the Code of Good Practice for the Preparation, Adoption and Application of Standards of the WTO TBT Agreement. Historically, Myanmar has enacted a series of laws adopted without coordination and over a long time span to regulate selected issues. On March 19, 2014, Myanmar passed its first Consumer Protection Law. Myanmar also adopted a National Food Law in 2007, a National Drug Law amended 80 CHAPTER 5 in 2014, a Traditional Drug Law amended in 2014 Yamao, 2012). In theory, the FDA checks documents and an Electricity Law in 1984. SPS management is from manufacturing plants and inspect imports. But governed by a string of laws including the National in practice the law cannot be implemented due to the Food Law of 1997, the Pesticide Law of 1990, the volume of food imports, Myanmar’s long and porous Animal Health and Development Law of 1993, and borders, and the FDA’s limited staff and facilities. Trade a Plant Pest Quarantine Law of 1993 (Republic of is burdened unnecessarily if the FDA, in an attempt to the Union of Myanmar, 2014). The Plant Protection fulfill its overreaching mandate, resorts to document- Division, under the Ministry of Agriculture and checking and piecemeal implementation with no Irrigation (reorganized as the Ministry of Agriculture, value for food safety. A better way to regulate food Livestock and Irrigation on April 1st, 2016) , is safety hazards originating from imports would be to currently working with the Attorney General’s Office introduce international best practice, for example risk- to revise the Plant Pest Quarantine Law. profiling, by identifying the major risks and carefully calibrating regulation with implementation capacity. There is a lack of coordination in the process of developing technical regulations and rules for SPS In the future, Myanmar faces a high risk of burdening management. This effort is typically led by individual trade unnecessarily if it does not reform its system of ministries without sufficient consultation with other technical regulation and SPS management. Today, branches of government, with the private sector, or much of the regulatory framework is out of date with civil society. This uncoordinated approach to and out of line with international best practice, and regulation leads to overlaps between government remains unimplemented. None of the trading firms ministries and low awareness among the private interviewed for this paper cited technical regulations sector of the legal framework. Overlaps risk wasting as a major concern. But for two reasons technical scarce resources in implementing the regulations. Low regulation could become a burden in the future: awareness leads to piecemeal implementation of laws, with the degree of implementation depending more on 1. The government and development partners that the relationships between the regulator and the agents support it plan to build regulatory capacity. If it is supposed to regulate than on the actual purpose the capacity were increased without reforming and content of the law. the underling regulatory system, Myanmar’s regulators would soon begin to implement This ineffective and inefficient regulatory system numerous outdated regulations that are not in naturally makes it difficult for the government to reach compliance with international best practice. the legitimate objectives1 of technical regulation and Thus, it is crucial that deep reform predates SPS management, such as the protection of the life and implementation capacity-building. health of its citizens.2 From a trade perspective, such an overlapping and poorly coordinated regulatory system 2. Such regulation may become the preferred that is designed without private sector consultation outlet for protectionist pressures. In the past, risks becoming a burden. This potential burden is protectionist interests used more direct means, exemplified by a requirement by the National Food such as licensing, but as Myanmar liberalizes Law that demands all imported food to be certified less obvious means will become the protectionist by the Food and Drug Authority (FDA) (Lin and instrument of choice. Technical regulation is one such a less obvious means. To minimize the risk of technical regulation being used for protectionist 1 Under WTO law, the legitimate regulatory objectives of purposes, Myanmar could consider reforming regulation are broad and numerous. The TBT Agreement explicitly its regulatory framework. Tit will be important mentions that, among others, national security requirements, that the new regulatory framework complies the prevention of deceptive practices, the protection of human health and safety, animal or plant life or health or the environment with international best practice in order to avoid constitute legitimate and thus permissible objectives. The SPS conflicts of interest. Agreement echoes the TBT Agreement by stipulating that govern- ments have the right to use sanitary and phytosanitary measures to Today, Myanmar abides fairly well with international protect human, animal or plant life or health. best practice with the separation of technical regulation 2 The difficulties of regulating is compounded by the and conformity assessment, and with the separation of severe lack of knowledge of the status of the issues targeted by conformity assessment and accreditation. It is crucial legitimate regulatory objectives. For example, the evidence of food safety hazards or product safety hazards is very scarce. Naturally, that Myanmar continues to respect such best practice Myanmar’s regulators cannot regulate effectively when they do not as it builds capacity. Myanmar could also carefully know which problems are big and which are small. 81 TOWARDS AN EFFECTIVE SPS/QUALITY INFRASTRUCTURE assign regulatory responsibilities to relevant ministries and departments without overlaps and wasteful 5.2.2 Standards duplication of work, something Myanmar does not do today and for which the costs will rise as capacity increases. It is also important to keep in mind that, from an Myanmar is only just now beginning to establish a export perspective, most of Myanmar’s own technical domestic system for standardization. The national regulation is likely to be irrelevant. More relevant for standards body is the Department of National exporters is the technical regulation of the importing Standards and Quality (NSQD) under the Department country. Naturally, exporters need to listen to their of Research and Innovation (DRI), which itself is a part customers, in this case a foreign state. EU fisheries of the Ministry of Science and Technology. The NSQD regulations typify the significance of importing market is the central department in quality infrastructure. Its regulations. The EU sets stringent and exacting organization and how it relates to other providers of requirements for countries and manufacturers wishing quality infrastructure is depicted in Figure 5.1. It is to export fisheries products to the EU. Myanmar has organized around the four central services of quality responded by adopting EU regulations on fisheries infrastructure, namely the green boxes representing products. In practice, Myanmar only enforces EU standards, conformity assessment, accreditation and regulations for the manufacturers targeting the EU metrology. The NSQD is a central but not the only market. Thus Myanmar operates with a two-tier system provider of these four services. The upper dark blue providing a high degree of food safety at high cost for boxes represent government providers, while the lower EU-bound exports, and a lower degree of food safety lighter blue boxes describe private providers. at low cost for its own citizens and much of its regional exports. How to operate such a two-tier system is a The NSQD is organized in three divisions responsible future challenge for Myanmar, as the country targets for, respectively, standardization, accreditation and markets with a high ability to pay and a higher safety metrology, as depicted in Figure 5.1. While much awareness. It is an unavoidable challenge as Myanmar needed capacity-building is still to start, activities needs to supply exports of high quality to high-income within standardization have already resulted in markets and products of sufficient quality at affordable 77 national standards being under development. costs to its own citizens and less affluent export markets. Line ministries such as the Ministry of Commerce through the Myanmar Agricultural Produce Trading Focusing on exports can help to drive capacity- are involved in standardization activities outside the building and generate positive spillovers for the NSQD. management of domestic safety and quality issues. In seafood exports, for example, the implementation of Previously, the NSQD was a rather out of date library stringent food safety management to comply with EU of international standards. Until now, the NSQD has import demands may be used to increase the awareness merely kept a library of internationals standards, most of food safety issues, such as the use of antibiotics in of which are outdated, and is only now starting to shrimp farming and to manage such issues through become involved in standardization proper (Republic the use of a quality infrastructure originally established of the Union of Myanmar, 2014). Since August 2015, to comply with export market requirements. In this with support from USAID, the Standards Development example, satisfying the commercial demand for a Division has had access to the ISO standards library, quality infrastructure helps to satisfy the demand from allowing free consultation and on-site printing on regulators to manage domestic food safety problems. a cost-recovery basis. The Standards Development Through exporting processes, the government can Division facilitates 20 technical committees with increase public awareness on the importance of representatives from government, academia, the product safety, basic hygiene, better quality of inputs, private sector and NGOs. In November 2015, the in protecting Myanmar’s consumers against potential Standards Development Division notified the WTO abuse of product competition. Such action can also that Myanmar had achieved compliance with the Code help to strengthen reputational base of Myanmar’s of Good Practice for the Preparation, Adoption and products that can be exported. Application of Standards of the WTO TBT Agreement. Myanmar will also comply with the ASEAN Policy Guideline on Standards and Conformance. Currently, the NSQD is a corresponding member of ISO and IEC. 82 CHAPTER 5 Moves to establish an NSB risk being overly dominated commercial value and add unnecessary costs to the by the government, with insufficient focus on the private sector. need for services from the private sector. The current efforts to establish a Myanmar National Standards Currently, in Myanmar the institutions involved in Board (NSB) suffer from an overly strong focus quality infrastructure do not suffer from the same grave on aligning it with the formal structure of NSBs in conflicts of interest as in the other developing countries. much higher income countries and a weak focus on The avoidance of conflicts of interest is key to keeping the demand for the services that a future Myanmar things that way. Currently, the NSQD is not involved NSB could realistically offer. The international model in technical regulations or in conformity assessment. is to establish an NSB developing national standards However, officials interviewed during fieldwork for the through a system of technical committees. Stakeholders DTIS revealed a lack of familiarity with the distinction from across society—business representatives, NGOs, between technical regulations and standards. Such a academics, government officials, etc.—join such lack of familiarity is common in countries that have technical committees that develop standards using a historically experienced a high degree of state control. consensus approach.3 The problem is that the capable It is crucial that the NSQD only develops voluntary stakeholders in Myanmar who are supposed to sit in standards and does not acquire the authority to make such committees are very few and the government, such standards mandatory in the form of technical which has few insights into the demand for standards regulations. originating in national or global business operations, As a result of Myanmar’s recent isolation, the country is likely to effectively run the standardization process. continues in some instances to apply outdated Small firms dominate the private sector and these firms standards. In rice, a colonial standard, the Beale do not have the time, resources or technical ability to classification system, is still in use. This system is ill participate in standard-setting. Similarly, academia is suited to today’s global rice market. It mixes different little developed, and the same goes for NGOs. rice varieties, including some with different cooking In other developing countries, NSBs have suffered from characteristics, and makes it difficult for producers of severe conflicts of interest because of their involvement high-quality rice to achieve the price premium that in setting standards, technical regulation, and the supply their rice deserves and which would send a market of conformity assessments, such as testing, inspection signal of what is in demand in the newly opened global and certification. The problem arises when an NSB market.4 The Standards Development Division of the develops standards that it makes mandatory through its NSQD has established a technical committee for the influence over technical regulation, and subsequently agro-based sector that has drafted new rice standards supplies testing, inspection and certification services for Myanmar based on Codex Alimentarius standards. against these mandatory standards that it itself has These new rice standards are currently at the stage of developed. While such practice is contrary to best public consultation. practice outlined in the WTO SPS Agreement, it is still Buyers can have a strong influence on Myanmar common in some developing countries, for example in producers to apply international standards. Myanmar Bangladesh. In other developing countries, such NSBs producers occasionally adhere to international are often much influenced by rent-seeking motives. standards, such as the standards developed by the This rent-seeking may be caused both by the private International Standardization Organization (ISO), the motives of officials to generate income through the American Society for Testing of Materials (ASTM), conformity assessment services and by the institutional and other bodies developing international standards. need to ensure the financial viability of the NSB in The NSQD maintains a library containing some of question. NSBs’ main source of income in developing these international standards. But normally when a countries tends to be government subsidies, which is Myanmar company applies an international standard, always scarce. Thus the NSB faces strong pressure to it is on the recommendation of a foreign buyer, or develop its own sources of income through the sale because it works for a foreign entity that specifies in of such conformity assessment “services” that have no detail the use of an international standard prior to project implementation. It should be emphasized that 3 Myanmar officials from the NSQD outlined such a fu- ture system during field research for this report undertaken in May 4 The rice case study below discusses further the Beale 2015, much like the system that Myanmar officials sketched to the classification system. The World Bank (2014b) analyzes the Beale author in May 2015. classification in depth. 83 TOWARDS AN EFFECTIVE SPS/QUALITY INFRASTRUCTURE Myanmar’s exporters will need to comply with the and undertakes chemical and microbiological standards and requirements of their buyers and their analyses. A new laboratory building is currently under importing markets. Thus in most cases exporters do construction. not need national Myanmar standards as evidence of what foreign markets require. Whenever international buyers demand proof of conformity of the exported products, they rely on the services of the private industry. When a service such as 5.2.3 Conformity a test or a certification is not available in Myanmar, the assessment private service industry will often rely on its network of laboratories and accredited certifiers in other countries in the region. The government-run conformity assessment activities are numerous but often of low quality and limited As Myanmar reintegrates into the global economy, capacity. Various ministry-run government-funded suppliers will seek to increase the availability of services laboratories. The only laboratory with internationally as they respond to the growing and diversifying recognized accreditation to the international laboratory economy. Private firms will increase the supply both standard ISO 17025 is the fisheries laboratory of through Myanmar-produced services and through the Department of Fisheries.5 That laboratory has trade. The government and development partners been accredited to six parameters, a subset of the that support it will also seek to increase capacity as necessary analysis needed for exports to the EU, the evidenced by the recent or planned beginning of a most demanding market. The fisheries laboratory may string of projects implemented by, among others, be considered a special case because of the stringent USAID, UNIDO, GIZ, PTB and ADB. EU regulations requiring the existence of a capable laboratory. The EU regulations represent a clear and Myanmar has a small industry of private firms that precisely articulated demand and have promoted supply conformity assessment services. These services public-private collaboration where the private fisheries are provided on a for-profit basis serving clients in the exporters have financed laboratory equipment that has voluntary part of the market. There is an even smaller been installed in the Department of Fisheries. set of public bodies engaged in conformity assessment against mandatory Myanmar regulations. This private Two other institutions also have laboratories, but these industry includes Myanmar representation of global only have old and basic equipment. Other laboratories services firms such as SGS, OMIC, and Bureau Veritas. include the National Analytical Laboratory of the The industry is much smaller than it is in neighboring Ministry of Science and Technology (under DRI countries such as Bangladesh and Thailand. SGS is the supervision since May 2015) and the Analysis firm with the longest presence in Myanmar, dating Department of the Department of Research and from colonial times. It services the oil and gas industry, Innovation (DRI), which together have six testing the mineral industry and the garments industry with laboratories in the areas of ores and minerals, food, testing, inspection and certification, including product (waste) water, general inorganics and organics, and testing and certification, and systems certification such an instrumental laboratory. These laboratories are old as ISO 9000. The industry only supplies a limited share and only have basic equipment. Historically, DRI is of the economy, because the low volumes traded of a research organization and the shift towards offering most products do not warrant investment in expensive demand-based conformity assessment services will be infrastructure such as laboratories. The low volumes of challenging. The National Analytical Laboratory has seafood exports, for instance, have prevented private spent a considerable amount on advanced equipment, firms from investing in seafood testing against EU but has only a small staff, and it is not clear who the regulations. clients will be for the services to be supplied. The Food and Drug Administration (FDA) has three laboratories Private sector associations have also started providing in Yangon, Mandalay and Nay Pyi Taw, with the Nay services for their members. The Myanmar Agro-based Food Processors and Exporters Association (MAFPEA) has established the Food Industries Development 5 The NES contains a quick evaluation of these laborato- Supporting Laboratory funded though Japanese ries and concludes that only the Department of Fisheries laboratory support. This laboratory employs 11 staff members is accredited to ISO 17025 (Republic of the Union of Myanmar, 2014a). 84 CHAPTER 5 Pyi Taw laboratory being the main one. The FDA German National Metrology Institute (PTB) and the laboratories employ 100 staff. United Nations Industrial Development Organization (UNIDO), plans to establish the Accreditation Another institution is the Myanmar Inspection Division as Myanmar’s future accreditation body. The and Testing Services (MITS). MITS is a company Singapore Accreditation Council has been selected recognized by the Ministry of Commerce to provide as a partner for the Accreditation Division and the certification services against technical regulations latter will eventually, as it builds capacity and gains only, and thus operates exclusively in the mandatory experience, develop into a fully independent national area. It is mandated to inspect imported and exported accreditation body. agricultural and industrial products. MITS uses various government laboratories for its testing needs. The Accreditation Division is under the MNSQ, which is itself under the DRI. The DRI runs testing The current proposal to invest extensively in building the laboratories as discussed in the preceding section. The capacity of a government laboratory could be reviewed. nesting of the functions of both accreditation and The National Export Strategy (NES) recommends an testing under the DRI constitutes a potential conflict extensive investment program in laboratory capacity of interest, as there is a risk that the DRI may have (Republic of the Union of Myanmar, 2014). The NES the incentive to influence the Accreditation Division has developed an action plan at a total cost of US$25 when it accredits either the DRI’s own laboratories or million, of which two-thirds or about US$17 million some of the competitors to these laboratories. Whether has been set aside for laboratory capacity-building. the Accreditation Division will gain international It is important to first clarify who the clients will be recognition when it is under the authority of a body also for this extensive expansive of services. Likewise, running laboratories is an open question. It is possible the timing and sequence of such future investment that the organizations responsible for international needs to be carefully examined.clients will be for this recognition of accreditation bodies, the International extensive expansive of services. Likewise, the timing Organization for Laboratory Accreditation (ILAC) and sequence of such future investment needs to be and the International Accreditation Forum (IAF), will carefully examined. deem that the Accreditation Division has sufficient independence, if it is granted an autonomous status. Gaining international recognition as quickly as possible will, however, be easiest if the Accreditation Division is separated from the DRI and put under another arm of government with no authority over conformity 5.2.4 Accreditation assessment bodies. 5.2.5 Metrology Metrology has only just started to develop in Myanmar. The DRI lacks appropriate buildings and There is no national accreditation body within equipment and its staff lacks training. Thus, until Myanmar. The Accreditation Division of the NSQD recently, there were no significant industrial, scientific, will in the future serve as Myanmar’s accreditation or legal metrology activities in Myanmar, and the body. However, the Accreditation Division employs DRI was unable to calibrate equipment in line with only six staff and is still to begin its activities. The international best practice. Since 2015, with the few laboratories and certification bodies in Myanmar support of UNIDO and the PTB, the DRI has begun accredited to an international standard are accredited to upgrade laboratories and train staff. The Metrology by foreign bodies. Even a technically competent future Division plans to offer commercial calibration services Myanmar accreditation body will find few laboratories for electrical instruments, mass and temperature in and certification bodies to accredit given the low mid-2016. Manufacturers and laboratories needing demand for services. Thus a Myanmar accreditation calibration in other areas can continue to seek such body will be nearly 100 percent dependent on services from foreign suppliers. government funding. Future development-partner support, in particular The Accreditation Division is working with PTB from PTB, is likely to build metrology capacity. The and UNIDO. The roadmap for accreditation, jointly Metrology Law foresees the establishment of a National agreed between the Accreditation Division, the 85 Metrology Institute. However, the previously allocated RICE QUALITY PARAMETERS TABLE 5.4 funding for the construction of a building meant to house metrology laboratories has been cancelled. Furthermore, the Myanmar Engineering Society plans to establish a mass calibration laboratory with support from an internationally well-known equipment PHYSICAL AND CHEMICAL manufacturer. PARAMETERS Paddy rice: Milled rice: Moisture content Milling degree Degree of purity Broken rice Varietal purity Whiteness 5.3 Case studies Grain dimensions Chalkiness Cracked grains Myanmar Small Immature grains Loan Enterprise Damaged grains Amylose content Yellowing Gel consistency This section now presents selected case studies of major Myanmar exports sensitive to quality and SPS management. The case studies illustrate the very different quality requirements that exporters need to meet and discuss Myanmar’s capacity to respond to such requirements. Food safety and phytosanitary parameters 5.3.1 Garments Pesticide Residues Heavy metal contamination Myanmar’s garments industry has considerable potential Phytosanitary status but remains dwarfed by other Asian producers. With its large population and proximity to other successful exporting countries, Myanmar could become a major new sourcing hub for the global brands that dominate the mid- to high-end of global garments markets. The industry has grown rapidly, doubling in size over just three years (MGMA, 2015). Today, Myanmar exports garments worth about US$1.5 billion a year. However, Myanmar remains a globally small exporter. Cambodia is about three times larger, Vietnam and Bangladesh 10-15 times larger, and China more than 100 times larger. To continue growing, the industry is looking towards global brands. The German sportswear brand Adidas has begun sourcing Myanmar garments and San Francisco-based GAP has announced that it will buy from a Rep. of Korea firm owning factories in Myanmar. Whether more international brands will come to Myanmar depends not only on traditional sources of competiveness, such as wage levels and logistics, but also on compliance with buyer requirements. Prominent among the requirements are CSR issues. Adidas has been at pains to explain that it only decided to source from Myanmar after two years of discussions with Myanmar stakeholders. Assisted by the EU-funded SMART program, these stakeholders 86 CHAPTER 5 have now launched a code of conduct for the garments suspicion by Bangladesh’s foreign buyers, who have industry. continued to mandate their suppliers to use services from recognized laboratories, many of them run by Compliance with buyer requirements necessitates the multinational quality assurance firms (EIF, 2013). availability of services from a quality infrastructure. The quality infrastructure supporting compliance Why government garment laboratories may face with garment requirements is exclusively supplied by difficulties competing with private ones is illustrated private providers. Myanmar’s exporters obtain services by the experiences of a garment testing laboratory in through three channels. First, the foreign buyers may Sri Lanka. The Textile Training and Support Centre provide testing services and advice and training on (TTSC), a government body, failed to convert quality production. Second, private providers based the capacity it built, having received international in Myanmar may provide testing, certification and development partner assistance, to new customers. A inspection services, typically acting as independent project evaluation concluded that Sri Lankan exporters or third-party providers, often at the request of the preferred privately provided services (UNIDO, 2010). buyer. Such providers can supply services against many While the TTDC had obtained accreditation against quality parameters, including inspection of CSR issues. ISO 17025, foreign buyers often request services from Third, testing, certification and inspection services laboratories that they themselves have nominated and are imported. Myanmar is close to larger services foreign governments may also require that to prove industries, such as those in Vietnam, Thailand and compliance with specific regulations, testing has to Bangladesh, and services may even be imported from be done at laboratories that the foreign government much further away, for instance from Europe or Japan. itself approves.6 Furthermore, exporters found that the TTSC laboratory was slow to conduct the testing, had Myanmar still has very few private services providers. In weak diligence, and had no supporting services such as major garment exporting countries, such as Bangladesh packaging, house-to-house delivery, or mailing. and Vietnam, the private quality services providing industry are large, with multitudes of competing UNIDO evaluated the Sri Lankan experience to learn providers, many of which will be affiliated with global usual lessons. UNIDO (2010) evaluates the Sri Lankan quality assurance firms. However, in Myanmar there experience and recommends how future projects to are still very few private services providers. One is the support the garments industry might be designed. The Swiss-based multinational SGS, present in Myanmar report recommends that in the future “interventions since 1948. As garments exports grow the market for should explore ways of further increasing the benefits services will grow with them, and both foreign and for private laboratories while watching very closely the local firms will find it worthwhile to expand the local thin borderline between making markets for SMTQ offer of services. services work but not distorting them” (UNIDO, 2010: 38-39). UNIDO (2010) identifies two ways The government could consider using the potential in which capacity-building had supported private of the private services providing industry. Ideas to laboratories. First, the TTSC became a source of establish the DRI as a testing and certifying body for technical knowledge for exporters setting up its own garment quality have been considered in the National in-house laboratories. Second, capacity-building at the Export Strategy (Republic of the Union of Myanmar, Sri Lankan calibration laboratory provided calibration 2014b). But, the DRI does not support these ideas services in demand from the private garments and thus has no plans to establish such bodies. To laboratories. promote growth in garments, the government could instead exploit the potential of the private services providing industry to assist exporters with compliance by ensuring this services industry’s freedom to operate. 6 One example is the US Consumer Product Safety Other countries in the region have seen unsuccessful Improvement Act (CPSIA) adopted in 2008. This Act authorized a series of new regulations and associated testing requirements for attempts to establish government-run laboratories children’s products and some other products too. To demonstrate that compete with the private sector. In Bangladesh, compliance with CPSIA regulations, a producer must use the test- the textile laboratory of the Bangladesh Standards and ing laboratories approved by the US for this particular purpose. In Testing Institution (BSTI) offers tests for azo dyes, Sri Lanka, the only approved laboratories are the private labora- tories of Bureau Veritas, Intertek and SGS, despite the availability formaldehyde and a few other parameters. However, of other ISO 17025 accredited laboratories. The list of approved this government laboratory has been received with laboratories is available at http://www.cpsc.gov/cgi-bin/labsearch/ default.aspx 87 TOWARDS AN EFFECTIVE SPS/QUALITY INFRASTRUCTURE 5.3.2 Fisheries products Inspection and Quality Control Division (FIQCD) under the Department of Fisheries. The fisheries industry in Myanmar is a major employer and source of exports. The fisheries sector constitutes a Myanmar has encountered severe market access major source of livelihoods and exports in Myanmar, problems for its capture and culture fisheries products with about 3.5 million people working in the industry, to the EU in the past. In 2003, the EU banned and nearly everybody consuming fisheries products Myanmar fisheries products because of hygiene regularly. There is a strong tradition for the extensive problems in the supply chain (CBI, 2012). In 2007, cultivation of fish and shrimp by small farmers, and the EU allowed exports of capture fisheries products. an equally strong tradition for capture fisheries mainly A team from the Food and Veterinary Office (FVO) in inland waters and close to shore, although recently of the EU inspected Myanmar’s fisheries industry marine fishermen have begun to operate across the in 2009. In anticipation of the FVO inspection, whole of Myanmar’s ocean territory. But foreign vessels the FIQCD had reduced the number of Myanmar continue to catch most of Myanmar’s most valuable processing plants approved for export to the EU from open water species, such as tuna (Republic of the 43 to just eight. The FVO inspected these parameters Union of Myanmar, 2014). of the Myanmar system: The fisheries sector accounted for US$279 million in exports in 2012. The NES for the fisheries sector reports • Registration and approval that of the total recorded exports of US$279 million in • Control of fishing vessels 2012,7 26 percent went to Japan, 21 percent to China, • Control of landing sites, auction halls, wholesale 16 percent to Thailand and 14 percent to Malaysia. The markets and ice machines major products are frozen fish, whole fish, fish fillets • Control of establishments handling fisheries and crustaceans. In the same year, Myanmar exported products US$156 million worth of crustaceans, 80 percent of which went to Japan, China and Malaysia. • Control of fisheries products • Official certifications There is a wide variation of quality requirements • Laboratories in fisheries products. Quality requirements in the export trade of fisheries products vary tremendously, • Follow-up of Rapid Alerts System for Food and from simple organoleptic requirements such as taste Feed notification and odor mainly reflecting species and freshness, to chemical residues such as antibiotic residues and stringent specifications for the organization of national Highlighting various deficiencies, the FVO forced food safety management systems. Myanmar to upgrade its fisheries food safety system. The FVO concluded that a “system of public health The EU is the most demanding market targeted controls for fish and FP is in place in Myanmar. by Myanmar. The general requirement is that the The system’s effectiveness is compromised by some exporting country introduces a food safety system deficiencies in its implementation, in particular, by for those fisheries exports destined for the EU that weaknesses in official controls of water/ice and FP, is equivalent with the EU system. To oversee this state of hygiene of the vessels and landing sites and system, the exporting country has to establish a traceability” (FVO, 2009). The existence of numerous competent authority that approves individual plants deficiencies and deviations from the relevant EU for export, oversees fisheries food safety and runs regulations forced the FIQCD to submit an action plan monitoring and testing programs targeting issues, such on how to upgrade Myanmar’s system. The EU did not as microbiological safety and testing for contaminants. allow the import of Myanmar fisheries products before In Myanmar, the competent authority is the Fish a new inspection had taken place in 2010 (CBI, 2012). Today, 20 Myanmar plants are approved for exports to the EU, although industry sources say that in practice 7 As always in Myanmar, there is considerable uncertainty only about five actually do export. Only products from about trade figures. While international trade data recorded around US$300 million of exports in 2012, the Department of Fisheries pub- capture fisheries are approved, while Myanmar cannot lished a total of exports of US$653 million. CBI (2012) speculates export aquaculture products to the EU, although some that the differences is caused by the Department of Fisheries not shrimp exports from western Myanmar are reported to reporting the border trade with Bangladesh, India, China and Thai- enter the EU through Bangladesh. land to the international trade statistics. 88 CHAPTER 5 Processors financially supported the Department of annually. That is less than one-fifth of the level in the Fisheries to install the necessary testing equipment. A 1930s (World Bank, 2014c). visit to a processing plant and a roundtable discussion with processors conducted during May 2015 for Just recently, exports have rebounded and in both 2012 this DTIS revealed that processors approved for EU and 2013, Myanmar exported around 1.3 million tons. exports thought the Myanmar public health system However, 95 percent of Myanmar’s rice exports are of worked satisfactorily. Myanmar has adopted EU low quality rice (World Bank, 2014c). This focus on low regulations, although it only enforces them strictly for quality puts the country in jeopardy, because the global EU-approved factories. The association of processors consumer demands higher quality rice. Europeans are has supported the Department of Fisheries by now buying Myanmar rice because Myanmar can offer financing testing equipment installed on Department its rice cheaper under the “Everything-But-Arms” of Fisheries’ premises. Most parameters can now be agreement, but they are not interested in the lowest tested in Myanmar, although some still require testing qualities. Even the market segments that historically abroad. Dioxin is tested in Malaysia due to the high have bought the lowest quality rice, most notably in costs of the necessary equipment. Africa, have also started to demand higher quality rice. Some firms have to meet certification that goes Rice quality is many things, as shown in Box 5.4. One beyond that of the EU. One firm interviewed was of the most important parameters is the percentage of currently working to be certified by the British Retail broken rice, because the price of broken rice is only Consortium (BRC). This is a private certification about half that of whole grain rice. Myanmar’s rice has program going beyond EU requirements. Even a high percentage of broken rice. While EU-bound rice apparently minor issues required significant work. For typically contains maximum 5 percent broken rice, example, the BRC code bans nuts from the processing Myanmar’s most common export is 25 percent broken plant. But Myanmar workers traditionally eat nuts for rice. The variety of rice matters too. Myanmar has more lunch and cook in peanut oil. This traditional practice than 1,000 varieties and unfortunately mixes them up. risks introducing nuts to the plant. Mixing rice varieties causes several problems. Different In general, Myanmar processors meet very varying varieties cook differently, while rice millers operate quality requirements. Processing firms thought the best with homogenous rice. Consumers prefer certain EU had the most demanding requirements, although varieties of what is known as “fragrant rice” and the Japanese market also had very exacting standards Myanmar has one of the best. Myanmar’s Paw San rice but these were not set by the Japanese authorities but was selected as the world’s best rice at the World Rice by buyers. These requirements would be different in Conference in 2011. nature from the EU ones, less focused on food safety Rice’s phytosanitary status is becoming a matter of and more on appearance and taste. Japanese buyers great concern, in particular in trade with China. regularly visit processing plants and provide quality Since China became a rice deficit country in 2011, training. Regional buyers such as Vietnam have it has quickly become an important destination for import requirements that on the surface look like EU Myanmar rice. That rice passes the land border at requirements but are enforced far less vigorously. One Muse, and China officially considers this trade illegal firm found that the Chinese market did not care much due to phytosanitary concerns, despite the fact that in for quality. practice China appears to tolerate it. In January 2015, Myanmar and China agreed on a Memorandum of 5.3.3 Rice Understanding on the rice trade that will be followed Rice dominates the rural economy of Myanmar and with an SPS protocol detailing China’s conditions tremendously influences its culture. Myanmar is a rice- for importing rice.8 Mimicking a similar protocol surplus country and prior to the Second World War, with Cambodia, the agreement foresees that rice it was the world’s largest rice exporter. After the war exported to China will be certified by an authorized exports never recovered but continued to fall following Chinese company based in Myanmar. The protocol the country’s independence when the government will determine a list of pests unwanted in rice and the created a state monopoly in the rice trade. Myanmar measures for managing them. It is the hope that the settled as a supplier of low quality rice, most of which was sold in Africa. In later decades, Myanmar has exported around one quarter to half a million tons 8 Cambodia and Lao PDR have already agreed on SPS protocols on rice with China. 89 TOWARDS AN EFFECTIVE SPS/QUALITY INFRASTRUCTURE SPS protocol will allow for high volumes of sea trade ration length and breadth. Given that varieties with with China that will be facilitated by Myanmar’s sound different cooking characteristics are grouped together, management of the phytosanitary risks. this procedure reduces value compared with selling rice internationally by variety. It will be important for Improving quality will require building capacity Myanmar to abandon the Beale system and replace in a quality infrastructure and in phytosanitary it with an internationally recognized system that management. In order to improve the quality of its rice, allows its rice to be sold by variety. The Department Myanmar could intervene in the value chain and build of National Standards and Quality has begun the capacity in its quality infrastructure and phytosanitary development of new rice standards for Myanmar based management. A recent World Bank report on the on Codex Alimentarius standards. This work should Myanmar rice industry discusses at length the need be supported by development partners to ensure that to upgrade quality (World Bank, 2014c) and that abandoning the outdated Beale classification system discussion, alongside interviews during May 2015, is allows for rice to be sold by variety. the basis of the analysis here. It will be important for phytosanitary management Myanmar needs new investment in order to upgrade to be improved and the SPS protocol with China its old rice mills. Technologically, the milling industry to be finalized and properly implemented. This is needs to change because outdated milling equipment a precondition to keep developing its rice trade results in low quality, including a high percentage with China. Investment in laboratories needed for of broken rice. The need to upgrade equipment is surveillance may be warranted. an example of how increasing product quality is a larger question than simply upgrading the quality 5.3.4 Beans and pulses infrastructure. New investment will need support in the form of access to electricity, and better rice Myanmar accounts for almost 10 percent of total distribution and management. The current legal clause world exports of beans and pulses. Beans and pulses for government approval for a joint venture with a are a category of crops that includes peas and lentils. foreign investor in the rice milling sector could be Myanmar is a major exporter, and exported beans and relaxed (World Bank, 2014c). v pulses worth US$804 million in 2012, equivalent to nearly 10 percent of total world exports. Three- Better extension services and provision of seed quarters of Myanmar’s exports go to India (Republic of would also help farmers to improve quality. Other the Union of Myanmar, 2014). examples of supply chain interventions outside quality infrastructure investment that could improve quality Local inspections are conducted by the more stringent are better extension to farmers and provision of seed. foreign buyers. An interview with an exporter of Today, farmers mostly use their own seed from last beans conducted for the DTIS revealed that, even year’s harvests. Thus varieties become mixed. There for a sophisticated market such as Japan, quality is a role to be played by quality control of the seeds requirements are relatively easy to comply with and the and the support of seed multiplication. The number export procedures straightforward. The exporter sells of varieties available could be reduced and the fragrant dried beans to Japan, as well as Indonesia, Malaysia and varieties could be promoted. World Bank (2014b) Thailand. Of these four markets, the Japanese buyer is advocates that such promotion could take place within the most demanding. This buyer imports butter beans a public-private effort that identifies both fragrant that are then processed into bean paste. Key quality and non-fragrant varieties with particular potential. requirements include a low percentage of foreign The Myanmar Rice Federation has already started this matter, pesticide residues, and aflatoxins, together work by identifying eight varieties that could provide with phytosanitary requirements, and especially for the a starting point. Japanese market’s corporate social responsibility. The major quality problem for the exporter is to minimize Most relevant for investment in the quality the percentage of foreign matter in the beans. Farmers infrastructure and SPS management is reforming tend to mix the beans with stones and sticks to increase the rice classification and improving phytosanitary the weight, and the exporter is therefore required to management. Currently, Myanmar applies the colonial- clean the beans, first by machine and then by hand. era Beale classification system, which is only used in The Japanese buyer inspects the exporter’s facilities Myanmar and not understood abroad. The Beale system annually and requires that the exporter uses services groups rice varieties according to paddy length and the from a Japanese service provider, OMIC, to supply 90 CHAPTER 5 Myanmar accounts for almost 10% of total world exports of beans and pulses. 91 TOWARDS AN EFFECTIVE SPS/QUALITY INFRASTRUCTURE fumigation to meet the phytosanitary requirements areas marked by civil conflict. In an assessment of and for testing for pesticide residues and aflatoxins. forestry management conducted for the EU Forest For other markets, the exporter uses the fumigation Law Enforcement, Governance and Trade (FLEGT) services offered by the Swiss company, SGS. program, Woods and Canby (2011) state that current logging quotas are higher than the scientifically A greater challenge for Myanmar’s exporters is poor recommended allowable cut. Previous governments logistics. The exporter stated that compliance with set production targets independent of scientific advice. quality requirements was a minor issue in the beans In addition, the government has great difficulty in export business compared with the logistics difficulties controlling logging due to rampant illegal logging of coordinating purchasing operations from a multitude occurring on top of the already unsustainable of small farmers. The exporter has a stable decade- production targets. As a result, the teak forests that long relationship with an agent responsible for the have made Myanmar’s forestry industry famous have purchasing operation. In the past, export procedures become fragmented and greatly reduced in both were burdensome, but dealing with the government quantity and quality. However, the current government has improved in recent years. However, the problems is making efforts to ensure that timber harvesting is in of export procedures experienced earlier were mainly accordance with the Annual Allowable Cut (AAC). bureaucratic, such as slow handling of applications for permits, and were not related to quality issues. The main export markets are India and China, while buyers in high paying markets such as the US and The NES calls for advanced quality management the EU are deeply concerned about unsustainable measures, although no market demand for such forestry practices. Some of Myanmar’s exporters sell measures is apparent. The newly published NES for their forestry products to the US and the EU through beans and pulses appears to contradict the views of Malaysia, where certificates of origin can be falsified the exporter interviewed. While the beans exporter (Woods and Canby, 2011). The introduction of views quality management as a minor issue, the forestry certification schemes could instill confidence NES recommends implementing advanced quality in Myanmar’s forestry management and attract new management measures (Republic of the Union buyers. Myanmar currently has no internationally of Myanmar, 2014d). The NES recommends recognized certification system (Republic of the Union implementing the Good Agricultural Practices scheme of Myanmar, 2014c). developed by ASEAN, to implement HACCP and Good Management Practices, and to promote the The Ministry of Natural Resources and Environmental development or organic production to niche markets. Conservation has established the Myanmar Forestry Advanced measures like HACCP would work if the Certification Committee and tasked it with market is aware of their benefits and opportunities thus developing an internationally recognized certification generating sustainable demand for such measures. scheme. This committee was established in 1998, but progress to date has been modest. Myanmar 5.3.5 Timber could choose to opt for a Voluntary Partnership Agreement under the EU FLEGT program. A ban of the export of raw logs since 2014 has Alternatively, Myanmar could consider putting in impacted this major industry. An estimated 500,000 place independent third-party monitoring and audit people depend on the production of forestry products. systems to gain credibility (Woods and Canby, 2011). The government banned the export of logs on April 1, 2014, causing a drastic change in the industry, which now needs to fulfill minimal processing requirements in order to be allowed to continue its dominant export business. The export of forestry products constitutes about 10 percent of total official exports from Myanmar. Logging is an important source of income for ethnic minorities, especially in Kachin State along the Chinese border and in Kayin State along the Thai border (Woods and Canby, 2011). There are controversies surrounding forestry because of the high rates of unsustainable and illegal logging, and the high level of activities in ethnic-minority 92 CHAPTER 6 SERVICES TRADE IN CHAPTER 6 As part of the country’s broad- ranging economic and regulatory reform process, Myanmar has started opening up its services sector to international trade. Nevertheless, lingering restrictions still remain in the governance and administrative framework, as well as in the laws and regulations. These administrative and regulatory barriers introduce uncertainties and additional costs in the operation of services firms in Myanmar, limiting the economy- wide benefits of the market opening of the sector. 93 TRADE IN SERVICES 94 CHAPTER 6 Figure 6.1: Myanmar’s STRI is broadly in line with comparators (2012) ASEAN Member States: Industry STRI Education and medical services included 100 80 60 STRI 40 20 0 IDN PHL THA LAO MYS VNM MMR KHM SGP Financial Telecom Retailing Transportation Professional Education Medical 6.1 A relatively open overall regime… Overall, Myanmar has a relatively open regime for The relatively high level of restrictiveness on trade in services, particularly when compared with financial services is mainly explained by limitations other ASEAN member states. By and large, ASEAN on cross-border financial transactions (as discussed countries maintain relatively restrictive services sector later in Chapter 8). In the case of banking services, policies, especially compared with other developing cross-border transactions of deposits and loans are regions, as well as developed countries. While the subject to approval by the CBM, while in the case of overall restrictiveness among ASEAN countries is high, insurance companies, cross-border provision of car the most restrictive policies are applied in particular insurance, life insurance, and reinsurance services are to transportation and professional services. Figure 6.1 not allowed.1 In the case of air transport services, cargo provides individual information for Myanmar and and passenger, domestic and international, restrictions all ASEAN member states. It shows that Myanmar’s require establishing a joint venture, with foreign equity services policies within the ASEAN context are participation limited to 49 percent in such entities. relatively open. In particular, telecommunications Other transport services are allowed, except for rail and retail services are formally open to foreign transport services. In the case of maritime transport services providers. These indices represent the impact of domestic regulations (services trade policies) on imports of services and services providers. 1 However, non-residents’ foreign currency deposits as well as local currency deposits can be allowed by the banks without needing to get CBM’s approval. 95 TRADE IN SERVICES services, as well as maritime auxiliary services, there POLICYMAKING BENEFITS FROM EFFECTIVE BOX 6.1 are no restrictions, except that the acquisition of an INTRA-GOVERNMENTAL COORDINATION existing entity is not allowed. Tough restrictions exist also in the area of professional services. Auditing services are not Given the regulatory intensity of many services allowed to be provided by foreigners. Similarly, activities and the range of subsectors involved, proper regarding domestic legal services, only nationals coordination across various government agencies from Myanmar can provide these services. Regarding is critical. Promoting an effective process of intra- commercial presence, in some professional services governmental coordination is likely to generate a entry through direct branches or full partnerships number of positive policymaking externalities. These is not allowed (accountancy, architecture and include the following: engineering services). In the case of domestic legal services, on the other hand, entry is allowed through Crafting unified government positions. Coordination branches, separate legal entities and joint ventures. is essential to develop negotiating positions based on complete assessment of key national priorities and to 6.2 …but a fragmented ensure that negotiators are informed of the full range of policymaking framework factors influencing the domestic services market. Trade in services remains a new area for Generating information based on measures policymaking for Myanmar’s institutions. While affecting trade in services. Policymakers need accurate Myanmar, as a WTO and ASEAN member, has information on the domestic regulatory environment been involved in various trade negotiations that affecting trade in services. Trading partners require this include trade and investment in the services sector, information during trade negotiations. Creating and the government does not currently have a specific updating a central inventory or focal point (such as a agency taking a leading role in formulating a database) of regulatory measures can help to meet such comprehensive policy on trade in services. As a transparency obligations. result, Myanmar lacks a clear strategy on trade in services policy, and negotiations are carried out in Identifying and analyzing the effects of measures on an ad-hoc manner, often trying to keep pace with achieving economic or social policy objectives. It is more advanced regional partners and without important for governments at all levels to periodically bringing a comprehensive strategic view to the review the effectiveness of domestic policies and negotiations. regulations in achieving economic and social policy objectives. Doing so may involve analyzing the trade Policy formulation in the trade in services or investment effects of regulatory measures. requires a skilled coordinator and efficient procedures, to share information and determine Avoiding duplicating consultations with other policy directions. Given the breadth of the services agencies and domestic stakeholders. Given sector, and the highly technical regulatory skills that the multitude of subsectors and measures arising it requires, the role of a policymaker in the trade from the trade in services, it will be important for in services is inherently one of a coordinator. For officials to achieve a balance between engaging intra- an effective trade policy, information needs to flow governmental partners on issues of mutual concern back and forth between the trade ministry and the and avoiding inundating key departments and agencies specialized regulatory agency. Relevant regulatory with too much information or too many requests for offices typically include the telecommunications input. Good regular lines of communication between regulator (telecommunications services), the central individuals can assist in quickly addressing issues bank (banking), the transport ministry (transport without creating unnecessary processes. services), and professional bars and associations Contributing to an ongoing assessment of the (professional services). The ministries responsible impact of liberalizing trade in services. In most for sub-sectoral policies and regulatory offices countries, data for impact analysis are the responsibility could first provide the trade ministry with a clear of the national statistical agency. However, collecting picture of the regulatory status quo on their specific such data is challenging for several reasons. Recourse subsector, including current laws and regulations, to anecdotal information can be useful. policy goals and the regulatory plan. The trade Source: Adapted from Marconini and Sauve (2010) and OECD (2002), Managing the Request-Offer Process, Paris: OECD. 96 CHAPTER 6 ministry would then articulate a services trade policy, negotiations in trade in services. While the MoC including guidelines on potential international has been the leading ministry on negotiations in obligations, as part of a broader national trade policy in trade in goods, it has not been actively involved close consultation with competent authorities and the in trade in services discussions. In fact, despite its private sector. The policy can be enacted through the substantial mandate for trade in services, the MoC adoption of necessary changes in the regulations under is currently constrained by limited resources from the orbit of each relevant body. The trade ministry and devoting dedicated staff in this field. other relevant ministries would have access to proposed • Ministry of Transport (MoT) (Reorganized as new regulations at conception and at the drafting stage the Ministry of Tranport and Communications to assess the impact on trade and their compliance with on April 1st, 2016): Assigned in 2012 as the focal international trade agreements. point for ASEAN trade in services negotiations, the MoT is currently the main ministry In Myanmar, multiple government ministries share involved in services trade policy. The MoT overlapping mandates on trade in services, often coordinates AFAS rounds, as well as ASEAN+ in a conflicting and inefficient manner. In recent negotiations, seeking guidance from other line years, coordinating roles between different ministries ministries and departments in specific sectoral have shifted, but the institution remains unclear and discussions. Importantly, the AFAS focal point inefficient. Figure 6.2 highlights the main ministries role means that de facto the MoT monitors the involved in trade policy formulation with current or implementation of trade services commitments past broad mandates in trade in services coordination, in all services subsectors covered by AFAS, and it summarizes their main roles and services sector including those related to the ASEAN Economic expertise. In addition to sector-specific regulatory Community (AEC). Nevertheless, trade in services bodies, which may be engaged or consulted regarding coordination remains a secondary role that has their sectoral expertise, at least four institutions are to be balanced with its transport policymaking relevant to trade policy formulation in Myanmar: and regulatory functions. As a result, the MoT • Ministry of Commerce (MoC): Currently, the has little capacity or understanding of trade focal point for WTO negotiations, including policy beyond its sectoral expertise, and currently goods and services matters, the MoC is formally features no dedicated team to deal with such mandated with coordinating multilateral matters. Figure 6.2: Several ministries involved Ministry of Ministry of Ministry of Ministry of Commerce Transport Planning Tourism Mandate Mandate Mandate Mandate Services policy Monitoring of AFAS No current No current mandate Formulation commitments services-specific Former services Services negotiating implementation mandate negotiating body at body at WTO Services negotiating De facto support to WTO WTO focal point body at ASEAN & other ministries regional bodies Representation at ASEAN focal point ASEOM meetings Monitoring of AEC implementation Services expertise Services expertise Services expertise Services expertise No dedicated services No dedicated services 3 dedicated staff Some legacy expertise team team beyond transport members on services negotations services 97 TRADE IN SERVICES • Ministry of Planning and Economic Development (MNPED) (Reorganized as the 6.3 A relatively open Ministry of Planning and Finance (MoPF) on April 1st, 2016: Assigned as the ASEAN AFAS regime but with focal point prior to the appointment of the MoT, the MNPED currently holds the representation lingering restrictions of Myanmar at ASEAN Senior Economic Ministry (ASEOM) meetings, which oversee, among other areas, negotiations on services trade. In addition, the MNPED is responsible for the implementation of AEC goals. Despite 6.3.1 Regulatory regimes have been the limited direct engagement with trade in modernized services negotiations, the MPED is the only agency with specific expertise and some minimal Investment regime staff specifically devoted to trade in services Since 2011, Myanmar has taken major steps negotiations, as a legacy of its broader role until to increase private investment in its economy, 2012. This staff supports de facto other ministries including by foreign services providers. One of the in conducting services negotiations. main instruments to crystalize this market opening • Ministry of Hotel and Tourism (MoHT): The was the introduction of the new Foreign Investment initial, de facto, services trade coordinator and Law in 2012, opening a number of sectors to foreign negotiator before the WTO due to the strong participation and incorporating important guarantees focus of Myanmar GATS commitments in the to foreign investors. As a result of this broad process, services sector, the MoHT currently holds no the conditions for establishment of foreign services formal role beyond its sectoral scope. Nevertheless, suppliers have greatly improved. a limited extent of broad understanding of services trade negotiations and policy remains within the The introduction of the new Foreign Investment ministry, as a legacy of its broader role. Law (FIL) was one of Myanmar’s central actions for removing barriers to foreign capital and for This institutional framework brings about signaling the new economic model. The main substantial challenges regarding services trade measures contained in the law include: relaxing policymaking. First, the absence of one specific agency restrictions on foreign investment in terms of sectors clearly responsible for trade in services coordination and equity participation, facilitating land-lease by leads to overlapping coordination responsibilities and foreign-invested entities, and widening tax and other inefficient use of resources. More importantly, it also investment incentives as a tool to attract foreign means that no agency is currently capable of aggregating investment. interests, demands and regulatory concerns from different services subsectors and formulating these into The new FIL provides options for carrying out a comprehensive policy. The position of the appointing investment in Myanmar. An investment may take any broad coordination roles to a sectoral ministry also of the following forms: (i) carrying out an investment puts the agency before conflicting interests, as it will by a foreigner with 100 percent foreign capital in be important for it to support policy and regulatory a business approved by the Myanmar Investment positions from its own services subsector, while Commission (MIC); (ii) a joint venture between a impartially negotiating commitments on a wide range foreigner and a citizen or the relevant government of subsectors based on broader economic and trade department and organization; and (iii) a contract that policy goals. has been approved by both parties. • The FIL and its implementing legislation set out a number of services subsectors that remain limited to domestic investment, as well as others where foreign participation is only permissible in the form of joint ventures. The services subsectors reserved for Myanmar citizens listed in Foreign Investment Rule of 2013 issued by the Ministry of National Planning and Economic Development are: 98 CHAPTER 6 • Private traditional hospitals; In other activities, foreign investment proposals are • Trading of traditional herbal raw materials; considered on a case-by-case basis by the MIC. The MIC issued Notification No. 1/2013 dated January 31, • Research and laboratory for traditional medicines; 2013, offering further guidance on the FIL, including • Ambulance transportation services; details on subsectors in which foreign participation • Establishment of health care centers for the aged; is prohibited and those subject to joint-venture • Contracts for restaurants, cargo transport, and the requirements. The notification lists 21 activities in cleaning and maintenance of railcars; which no foreign participation is allowed, including • Agency; printing and broadcasting, navigation services and air control management. Forty-two other activities are • Generation of electricity under 10 megawatts; and subject to joint ventures with Myanmar citizens, in • Publishing and publication of periodicals in ethnic accordance with MIC guidance on the level of domestic languages, including the Myanmar language. participation required in each activity, including in the following services subsectors: Table 6.1: SOEs in the services sector Ministry SOE Services Sector Ministry of Information Printing and Publishing Enterprise Publishing services News and Periodicals Enterprise News distributions Ministry of Finance Myanmar Economic Bank Banking Myanmar Investment and Commercial Bank Banking Myanmar Foreign Trade Bank Banking Myanmar Insurance Enterprise Insurance Myanmar Small Loan Enterprise Microfinance Ministry of Construction Department of Human Settlement and Housing Construction Development Ministry of Livestock, Fisheries Livestock, Feedstuff, and Dairy Products Distribution and Rural Development Enterprise Ministry of Communications Myanmar Telecommunications, Myanmar Posts Telecommunications, and Information Technology Postal services Ministry of Cooperatives Cooperative Export Import Enterprise Trading, Distribution Ministry of Hotels and Tourism Myanmar Hotels and Tourism Services Hotel Ministry of Rail Transportation Myanmar Railways Rail transport Road Transport Enterprise Road transport Ministry of Energy Myanmar Petroleum Products Enterprise Fuel distribution Source: WTO Secretariat, 2012. 99 TRADE IN SERVICES Cross-border services • Distribution of some food products; In general, Myanmar’s regulation does not limit • Packaging; the provision of cross-border trade in services or the ability of its consumers to acquire services from • Air transport services, maritime transport and abroad. This reflects not only Myanmar’s openness to freight forwarding services; trade in services but also the fact that regulating these • Building and repairing of new ships at dockyard; modes of supply, where the provider is located outside • Inland port services through container terminal the country’s jurisdiction, is technically challenging. and warehouse services; No modern economy maintains across-the-board • Private special hospitals/private special indigenous restrictions on cross-border trade. A typical restriction hospitals; and on this mode of supply is a requirement that the provider • Tourism services. has representation in the country in order to be able to provide the service (“local presence requirements”), but this is usually found only in relation to a handful of For investment in any of the above restricted or specific services. This is also true for Myanmar. prohibited activities, permission from the MIC may be granted with the approval of the government. Presence of individual services However, in the case of approval, foreign equity must not be more than 80 percent in any of these providers reserved activities, if the investment is considered to While the temporary presence of individual services be beneficial to the citizens and particularly to ethnic providers is not restricted as such in Myanmar, minorities. For those large foreign investment projects strict visa requirements are still a burden for foreign that are seen as bringing substantial benefits to public services providers. The government is taking steps security, improving surrounding areas and improving to relax the visa requirements, including the issuance the living conditions of citizens, the MIC can submit of on-arrival visas at the major entry points. Foreign the application to Pyidaungsu Hluttaw (Parliament) services providers can obtain business visas for up to 70 through the Union Government for approval. consecutive days’ stay with an invitation letter. State-owned enterprises A number of additional limitations apply to the services provided by foreign experts and the intra- The government is directly involved in a number corporate transfer of employees. Although foreign of key services subsectors through the presence of firms registered with the MIC are allowed to hire state-owned enterprises (SOEs). The State-owned foreign experts and technicians, preference is be given Economic Enterprise Law of 1989 set outs the general to Myanmar citizens (MIC, 2014) and employment framework for SOEs, and lists the areas that are de in positions that do not require a particular skill is jure reserved for the state, and thereby excluded reserved for Myanmar citizens (PwC, 2014). from foreign or domestic investment. Table 6.1 lists the main SOE actives in the services sector, and the Foreign services providers wishing to employ foreign relevant regulator. workers for longer than 70 consecutive days have to fulfill additional procedures in the registration. The According to the SOE Law, several key infrastructure following procedures have to be completed in order to services subsectors are reserved for the state and are employ foreign experts and technicians (PwC, 2014): therefore excluded from private (either foreign or domestic) participation. These services subsectors are: • The investor has to mention the number of foreign experts/technicians to be employed in the • Banking services investment application form submitted to the • Postal services MIC. • Telecommunications • After obtaining the MIC permit, a company has • Air and railway transport to apply for an appointment and work permit. • Broadcasting and television services • With the endorsement of the MIC, a company However, as shown in banking, telecommunication has to apply for a work permit to the Directorate and air transport, the government may decide to allow of Labor under the Ministry of Labor, and for the private sector to operate in these sectors. a stay permit and visa to the Immigration and National Registration Department under the Ministry of Immigration and Population. 100 CHAPTER 6 Services companies not registered with the MIC, policies for private investment have greatly improved however, face greater difficulties, as they need to in recent years, the broader regulatory framework and obtain an endorsement of the relevant ministry business environment still have room for improvement. for their activity. There are no standard rules and Regulatory quality, understood as the ability of the requirements for each for the ministries to provide government to formulate and implement sound this endorsement. In practice, foreigners employed policies and regulations that permit and promote or providing services for longer periods of time private sector development, saw some improvement generally skip the registration procedures altogether during 2005-10. This coincided with the adoption and simply operate under 70-day business visas. These of policies on the business environment at that time, employment requirements create important additional but since then regulatory quality has stagnated (Figure costs for businesses. They also weigh more heavily on 6.3b). The perceptions on the rule of law, related to the domestic and foreign SMEs that are not registered with obedience to rules relating to the quality of contract the MIC, as these firms do not receive the benefits of enforcement, property rights, the police and the advocacy by any major government ministries. courts, as well as the likelihood of crime and violence, have also declined over the past few years (Figure 6.3a). 6.3.2 But gaps remain between Similarly, perceptions on the quality of public services, rules and reality the civil service and its degree of independence from political pressure in policy formulation, as captured by Governance is still underdeveloped government effectiveness measures (Figure 6.3c), have also remained relatively unchanged. This is contrary to General (or horizontal) laws and regulations refer the progress achieved in other relevant dimensions, such to those measures that affect multiple services as investment liberalization and business simplification subsectors, or the services sector as a whole. The procedures. regulatory framework for services includes not only laws and regulations governing a particular subsector, The main restrictions on trade and investment but also includes measures that affect a wide range of in services stem from administrative practices subsectors (“horizontal” measures). Regulations on that result in unclear and unpredictable business tourism, for example, obviously affect services providers regulations. As is common in least-developed in that subsector, but so do other laws and regulations, countries that have removed trade barriers to services, such as regulations on buying and selling of foreign the existing governance framework does not only act currency, laws on entry and length of stay of foreigners, as a barrier to trade and investment in services, but and procedures related to the establishment of firms. also increases the risks for existing companies and Typically, horizontal policies are not necessarily meant limits their competitiveness. This reduces the interest to regulate services industries, but focus on general to invest and sometimes also affects the quality of policies, or regulate a mode of supply that cuts across services. Furthermore, some services subsectors, different services subsectors. Measures at the horizontal such as telecommunications, professional services level are hence those affecting all services industries. and distribution, suffer from the lack of an adequate Examples of horizontal measures not directly aimed regulatory framework, which brings about an informal at regulating international trade, but that imply subsector with low quality services. horizontal restrictions on a mode of services supply, include the following: Administrative practices differ from • Cross-border trade: measures on the transfer of de jure regimes funds, restrictions on access to foreign currency. The actual regime for investment in the services • Commercial presence: limitations on land sector has important differences with the framework ownership, restrictions on establishment of established in the legal instruments. In many cases, juridical persons, and domestic employment actual practices are more liberal than the legal regime, requirements for foreign companies. as some ministries and government bodies attempt to • Presence of individual services suppliers: visa advance in the market-opening policy, even when older requirements for foreigners, limitations on lengths laws still apply. In other cases, administrative practices of stay. embody restrictive policies that are well-established, but that lack any clear legal sources. Despite the Regulatory quality, the rule of law and general formal ban stated in the SOE Law, in recent years governance all play key roles in defining the general the government has been taking steps to open key business environment. While Myanmar’s broader 101 TRADE IN SERVICES Regulatory quality, the rule of law & general governance all play key roles in defining the general business environment. 102 CHAPTER 6 Figure 6.3: Myanmar’s governance indicators are lagging subsectors such as banking and telecommunications its peers to private participation, including foreign investment. These exceptional authorizations have taken the form a) Rule of Law of ad-hoc licenses. The distribution subsector, however, remains de facto reserved for domestic firms, despite 100 the fact that it is not listed as such in the FIL or other legal instruments. 0.50 0.00 The gap between formal laws and actual practices fails to provide a transparent and objective regulatory -0.50 framework, which results in higher costs of entry. To a large extent, this regulatory gap is the result of the -1.00 intense reform process undertaken by the authorities, -1.50 together with the capacity constraints of the Myanmar administration. It may even be a necessary part of the -2.00 policy experimentation needed in broad regulatory Cambodia Indonesia Lao PDR Malaysia reform. However, a number of administrative Myanmar Philippines Thailand Vietnam practices directly oppose the market-opening policy, such as the ban on foreign firms operating in the b) Regulatory Quality distribution subsector. More importantly, overall, the lack of consistency between the legal regime and actual administrative practices adds a layer of opaqueness 100 and uncertainty to the system, weakening the market- 0.50 opening policy and diminishing its potential benefits. 0.00 In addition, Myanmar’s general regulatory investment framework remains complex and -0.50 unpredictable. The numerous laws that regulate the -1.00 entry of investors depending on the sector and the location, and depending on whether the investor is -1.50 local or foreign, add to the confusion, which affects not only applicant investors but also government officials, -2.00 who both face contradictory rules. The OECD has Cambodia Indonesia Lao PDR Malaysia noted that this complexity is one of the most pressing Myanmar Philippines Thailand Vietnam problems of the current regulatory framework, with foreign investors sometimes requiring overlapping c) Government Effectiveness approvals, and facing detailed and often opaque criteria 150 for scrutinizing individual projects (OECD, 2014). In addition, investors have also noted that the increase 100 of foreign investor scrutiny of the country, and the 0.50 increase of investment proposals, have overburdened the government, creating a bottleneck when it comes 0.00 to investment approvals (US Commercial Service). -0.50 -1.00 -1.50 -2.00 Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Thailand Vietnam Source: World Governance Indicators. 103 TRADE IN SERVICES Figure 6.4: Myanmar’s telecom sector has been booming a) Mobile Telephony b) Broadband Internet 150 150 Subscriptions x 100 people Subscriptions x 100 people 100 100 50 50 0 0 2004 2006 2008 2010 2012 2004 2006 2008 2010 2012 Cambodia c) Internet Servers (x 1 million people) Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Thailand Vietnam Indonesia Lao PDR Malaysia Myanmar Philippines Thailand Vietnam Source: WDI. 6.4 Sectoral policies In terms of specific services subsectors, Myanmar’s 6.4.1 Telecommunications services next challenge is to consolidate the market- opening achieved so far, and to complement The market for telecommunications services that liberalization effort with adequate subsector- in Myanmar is still small. Similar to financial specific regulatory and institutional frameworks that services, the market for telecommunications services foster transparency, protect consumers and ensure in Myanmar is still in its infancy. The existence of competition. Priority services subsectors in this competitive telecommunications markets, especially agenda include: (i) telecommunications, (ii) banking for broadband services, and the skills of employees, and insurance, (iii) retail and distribution services, are among the main determinants of services and (iv) professional services, including accounting, exports. The government is making great strides auditing and legal services. In some key subsectors, in modernizing the country’s telecommunications the government is already taking steps to improve infrastructure and services by reducing barriers to the institutional and regulatory conditions. In foreign investment, and improving the institutional particular, with support from development partners and regulatory framework. Decades of isolation have including the World Bank Group, the government impacted heavily on Myanmar’s telecommunications is implementing programs to enhance capacity and infrastructure. Mobile and broadband penetration improve prudential regulations for banking services, are among the lowest in the world, and substantially as well as setting up an independent regulatory below the level of its neighbors, including those at a agency for telecommunication services. However, the similar level of development (Figure 6.4). Inadequate government has yet to make similar progress in other telecommunications infrastructure, particularly in important services subsectors, such as professional business-oriented services such as broadband or the services, distribution and insurance services. availability of internet servers, generates high costs for modern industries. 104 CHAPTER 6 In 2013, the government enacted a new Professional services Telecommunications Law, meant to revamp the institutional and legal framework for the operation Despite their importance, professional services in of telecommunications services. Importantly, the Myanmar are still underdeveloped and capacity new law allowed for domestic or foreign companies to is limited. While a number of restrictions apply apply for telecom licenses, recognizing the importance to professional services in Myanmar, especially in of attracting investment into this subsector. The law the accounting and auditing subsector, the major also mandated the establishment of an independent challenges in Myanmar remain establishing an regulatory body for the telecom market, the Myanmar adequate governance and regulatory framework that Telecommunications Commission, by 2015, currently ensures quality and promotes capacity development. still under development. Myanmar has made important progress in upgrading Capacity-building of human resources in the accounting and auditing services, but formal subsector are also critical, both in government restrictions on foreign providers remain in place. and the private sector. These legal and institutional Under the Myanmar Companies Law, companies must improvements are, with the support of development maintain proper books of accounts, which are required partners, being complemented with technical assistance to be kept at the registered office of the company, and and capacity-building in the relevant ministries have to appoint one or more auditors. The law also within government. Given the novelty and technical mandates an annual audit, which must be performed complexity of regulatory and monitoring functions in by Myanmar auditors or firms owned by Myanmar the telecom market, the government is giving priority CPAs. The Myanmar Accountancy Council (MAC) to the human resources involved. This entails not only is Myanmar’s main accounting body, responsible continuing training programs for government officials, for setting the accounting standards and registering but also linking with technical schools and engineering auditors and accountants able to practice in Myanmar. universities to ensure that technical capacity is being In order to qualify as an auditor or an accountant, an developed not only in government but also for the applicant must be either CPA-certified by the Myanmar telecommunications subsector as a whole. Institute of Certified Accountants (MICPA), or hold an accountancy certificate or degree conferred by any foreign country recognized by the MAC. In addition, auditors have to be citizens of Myanmar and registered Table 6.2: Myanmar’s MRAs on professional services MRA Signing date Implementation through Engineering Services December 9, 2005 ASEAN registration (ACPECC) Nursing Services December 8, 2006 Bilateral registration Architectural Services November 19, 2007 ASEAN registration (AAC) Framework Arrangement November 19, 2007 MRA on Surveying Qualifications Medical Practitioners February 26, 2009 Bilateral registration Dental Practitioners February 26, 2009 Bilateral registration Accountancy Services August 28, 2014 Bilateral registration 105 TRADE IN SERVICES Figure 6.5: IT-enabled services suffer lagging infrastructure Talent availability and quality Enabling Cost environment Infrastructure Cambodia Lao PDR Myanmar Thailand Vietnam Source: World Bank / Rockefeller Foundation Online Outsourcing Competitiveness Tool. Note: there are no data on cost variables for Myanmar. with the MAC to obtain a Certificate of Practice. the terms of the licenses granted to foreign-owned Accounting standards in Myanmar are set out by the law firms, which allow foreign lawyers to practice MAC, based closely on the International Financial in association with a Myanmar lawyer, except for Reporting Standards (IFRS), with the following litigation before Myanmar courts, which is reserved exceptions: (PwC, 2014): for Myanmar citizens. The openness to foreign legal services, together with the flexible use of business visas, • IFRS 9: Financial Instruments has allowed the subsector to grow by attracting foreign • IFRS 10: Consolidated Financial Statements expertise. However, providing adequate training and a • IFRS 11: Joint Arrangements standard curriculum for education institutions, as well • IFRS 12: Disclosure of Interests in Other Entities as a sound monitoring and regulatory body, would be invaluable in promoting the development of domestic • IFRS 13: Fair Value Measurement capacity in legal services. As an ASEAN member, • Similarly, the MAC has also prescribed the Myanmar is party to seven mutual recognition Myanmar Financial Reporting Standards for SMEs arrangements on professional services concluded in the that are adopted from IFRS for SMEs. region (Table 6.2). Legal services currently do not have a regulatory The level of implementation of these arrangements framework similar to accounting and remain in Myanmar is unclear. In general, it appears that largely unrestricted to foreign participation. While the low capacity in Myanmar’s professional regulatory the Ministry of Justice is recognized as the regulatory bodies for professional services is a hurdle in the body for legal services, the profession currently lacks implementation of these arrangements. In accounting a regulatory framework or actual monitoring body. services, despite the progress in the subsector and The only restrictions on the subsector are set out in the technical assistance projects maintained with 106 CHAPTER 6 Figure 6.6: Dynamic tourism indicators highlight Myanmar’s potential (a) Tourism is rapidly expanding in Myanmar... 700 140 600 120 500 100 Millions of USD (current) 400 80 Thousands of visitors 300 60 200 40 100 20 0 0 1996 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1997 Tourist arrivals Tourist receipts Source: World Development Indicators. (b) …but a large potential for growth remains Total Contribution to GDP (% of GDP) Total contribution to Tourism exports employment (% employment) (% of total exports) Investment in tourism (% of exports) Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Thailand Vietnam Source: World D Source: World Travel and Tourism Council. Data values for 2014. evelopment Indicators. 107 TRADE IN SERVICES Figure 6.7: Despite a lack of infrastructure, tourism has great Myanmar’s large, dynamic and talented youth offers potential a solid starting point for IT services within the Cultural resources Business region. Anecdotal evidence suggests that a number and business environment Safety and travel security of IT products, such as mobile apps and computer Natural Health and software developed in Singapore, are in fact developed resources hygiene by Myanmar-owned businesses. These businesses are Tourist Human established or conduct operations through Singapore service resoures infrastructure and due to limitations in infrastructure, the regulatory labour market environment, or difficulties in processing international Ground ICT readiness and port payments in Myanmar. These challenges are reflected infrastructure Prioritization in Figure 6.5, which portrays the indicator for Online Air ofTravel transport & Tourism Outsourcing Readiness. The indicator points to a infrastructure Environmental International comparatively strong position for Myanmar within Openness Price sustainability Competiveness the region in terms of quality and availability of talent. While the whole region faces important challenges Source: WEF, 2015. in this area, Myanmar is still ranked above countries such as Cambodia and Lao PDR, both of which now have small domestic IT services industries. However, the regulatory bodies, there has been no major step poor telecommunications infrastructure and a weak to date towards implementation of the MRA. A regulatory environment are holding back the subsector’s comprehensive evaluation of the conditions and needs overall competitiveness. for implementation of the ASEAN MRAs would be beneficial to increase capacity and promote the Challenges for capital transfers are particularly development of professional services in Myanmar. harmful for IT-related businesses. While part of this is the results of international sanctions, the current regime adds regulatory barriers that make the process more cumbersome. As mentioned in the section on Business and IT-enabled services cross-border payments and transfer of funds above, the “Business services” encompasses a wide range current regime provides that banks check the capacity of activities that, save for professional services, for business to engage in international transfers, are generally open and only lightly regulated. In depending on the terms of their license. Whereas addition to professional services, activities covered MIC-registered businesses have broad terms that allow include computer services, real estate services, research for most international transfers, DICA-registered and development, and services that encompass companies typically require ad-hoc permits for each activities as diverse as “services related to energy transfer. Myanmar’s IT companies are typically SMEs distribution” and “convention services.” As a result that are domestically owned, for which they are of the rapid technological progress in IT, information registered at DICA. However, even small start-ups technology-enabled services are an increasingly in the IT subsector are often reliant on international important area of business services. Information transfers, as these services typically do not require the technology-enabled services (ITES) include services physical proximity between providers and consumers. directly related to information technology, including As a result, Myanmar’s IT services providers, including software development, system integration and SMEs, often prefer to locate in Singapore or Thailand, webpage design. They also include business services which offer easier channels for international transfers, that use IT to, for example, process insurance claims, in addition to good infrastructure and more conducive perform desktop publishing, conduct audits, complete regulatory requirements. tax returns and transcribe medical records. Trade in ITES still represents a small share of total exports of Tourism most developing countries and only a handful have Tourism stands out as Myanmar’s main candidate developed sizable, export-oriented IT and ITES for services exports in the short and medium terms. subsectors. The economic opening of Myanmar has led to a boom in foreign arrivals and revenue from tourism, doubling the number of visitors and more than tripling tourism receipts between 2007 and 2012 (Figure 6.6a). In fact, 108 CHAPTER 6 while tourism in Myanmar is among the lowest in the The licensing regime for hotels and restrictions region, it is the one with the highest annual growth rate on homestays could also be reviewed. Operating a (Ministry of Hotels and Tourism, 2013). hotel business or lodging-house business requires prior permission from the Ministry of Hotels and Tourism. Despite this growth, the contribution of tourism to After obtaining ministerial permission and completing Myanmar’s economy is still relatively low compared the hotel construction, the enterprise must apply for with its neighbors. Although the contribution of a license. Licenses are not transferable without the Myanmar’s tourism to total exports is substantial, the permission of the authorities (WTO Secretariat, 2014). total contribution of tourism to GDP and employment In addition, Myanmar could also review options to is the lowest in the region, as well as the investment in relax restrictions on homestays, which could provide the subsector. This suggests that there is still substantial opportunities for local communities in remote areas to potential that remains untapped. In fact, the World host adventure tourism Travel and Tourism Council (WTTC) estimates that an annual growth rate of over 8 percent is possible Distribution in the tourism subsector in Myanmar over the next decade, which would result in a contribution of almost Myanmar might also consider opening up 15 percent to Myanmar’s total exports by 2025 distribution services for foreign investment. Distribution services are not listed among those services The government has a master plan for tourism subsectors reserved for Myanmar citizens under the with six strategic focal points. The government has Foreign Investment Law, or included in the sectors recognized the potential of tourism services in its reserved for SOEs. Stakeholders’ accounts confirm the Tourism Master Plan 2013-2020, developed by the impossibility of a foreign investment firm being licensed Ministry of Hotels and Tourism, and has identified a for the distribution of goods. In order to overcome this number of conducive actions. The master plan points limitation, foreign firms need to engage in contractual to six main strategic pillars (Ministry of Hotels and arrangements with domestic companies, which are Tourism): able to import and distribute products following the • Strengthen the institutional environment international company’s guidance. This mechanism, • Build human resource capacity however, affects the quality of services to consumers. In November 2015, the MoC issued Minister’s Office • Strengthen procedures for destination planning Decree No. 96/2015 allowing joint-venture companies • Develop quality product and services registered under the MIC to import agriculture inputs • Improve connectivity and tourism-related (fertilizers, seeds), pesticides and medical/hospital infrastructure equipment. While this is certainly an important step, • Build the image and brand of tourism in Myanmar might consider further gradual opening of Myanmar distribution services to foreign participation in order to improve the quality of logistics in Myanmar. Myanmar’s tourism subsector is facing important challenges that require strong inter-ministerial support. The World Economic Forum Travel and Tourism Competitiveness Index ranks Myanmar 134th out of 141 economies. The main challenges to tourism services relate to infrastructure, both in terms of air and ground transport, as well as in ICT availability. In addition, the current limited options in terms of entertainment, convention centers and other business- oriented tourism also appear to be a limiting factor (Figure 6.7). These are all important challenges that will take time to address. Therefore, Myanmar could consider focusing its effort on addressing challenges in certain areas using “Destination Management”. This is a platform that can help the tourism subsector to benefit from better inter-ministerial coordination to manage cultural sites, the zoning of hotels, programs to raise workers’ skills, and the provision of key infrastructure. 109 TRADE IN SERVICES While tourism in Myanmar is among the lowest in the region, it is the one with the highest annual growth rate 110 CHAPTER 7 TRADE CORRIDORS CHAPTER 7 IMPROVING MAIN MYANMAR’S Located on the ancient Silk Road, Myanmar holds a strategic location to facilitate trade, which is key to further unlocking of its economic potential. It shares overland borders with China, India, Lao PDR and Thailand, which together account for about US$15 trillion in GDP, or one-fifth of the world’s total GDP. Myanmar is also located in the growing Indian Ocean Rim, with proximity to dynamic markets in Bangladesh, India and East African countries. But the challenge is not only to connect Myanmar to those markets but also to connect remote areas within Myanmar to trade corridors. While the government is keen to link up industrial areas with foreign markets through trade, it will be important to make a coherent effort to link local and remote areas with industrial agglomerations and nearby international markets. This requires a coherent approach to reduce hard and soft bottlenecks in logistics infrastructure, but could generate huge competitive gains. 111 MYANMAR’S KEY TRADE CORRIDORS NEED UPGRADING 112 CHAPTER 7 7.1 Myanmar’s key Figure 7.2: Myanmar’s major trade corridors trade corridors need upgrading All of Myanmar’s main corridors need massive investments TAMU for the upgrading of capacity if it is to keep up with CHIN SHWE HAW predicted traffic increases. Failing to invest now could hold back development, not just of trade but also of manufacturing, while keeping important segments of the MANDALAY MONG LA population out of reach of market opportunities. TAUNGGYI Figure 7.1: Myanmar’s highway network (’000 km) TACHILEIK 40.0 SITTWE 35.0 KYAUKPYU 30.0 25.0 20.0 15.0 MYAWADDY 10.0 5.0 YANGON 0.0 1 5 6 7 8 9 0 1 1 6 -0 -0 -0 -0 -0 -0 -1 -1 -9 -9 00 04 05 06 07 08 09 10 90 95 20 20 20 20 20 20 20 20 19 19 Bituminous Metalled Surface Earth Source: Central Statistical Office Statistical Yearbook, 2009. Many roads have poor quality surfaces and are too narrow. The highway network in Myanmar has grown from around 23,000 km (in 1990) to 36,000 km in 2010/11, based on available official figures (Figure sections (i.e., between Myawaddy and Hpa’an), some 7.1). Around two-thirds of the highways are paved, but routes will then also be accessible for container trucks, conditions of the various transport routes in Myanmar and will contribute significantly towards lower road vary (Central Statistical Office Statistical Yearbook, transportation costs and lead times. 2009). Many road sections still suffer from poor quality surfaces and/or restricted width. The shoulders Ten priority trade corridors have been identified. are often unpaved and the road width permits only one In 2014, a National Transport Development Master vehicle. This situation contributes to safety issues and Plan (NTDP), developed by Japan’s International accident rates that are particularly high in Myanmar Cooperation Agency (JICA) in cooperation with (especially between trucks and motorbikes). For the Ministry of Transport (Oriental Consultants Co. example, the high price per kilometer from Yangon Ltd., 2014), identified a total of 10 priority corridors to Myawaddy is because of the dangerous roads (road based on passenger and freight demand from 2014 safety, the security situation, and road conditions) to 2030, as well as on a national spatial development between Hpa’an and Myawaddy. Container trucks are framework. The spatial development approach focuses reluctant to accept cargo from Yangon to Myawaddy on connectivity between national and regional growth and therefore the daily container truck volume is centers, agro-industrial centers and areas that have a very low. With the ongoing upgrade of some road special-function, such as border towns and markets. 113 MYANMAR’S KEY TRADE CORRIDORS NEED UPGRADING The DTIS has built on this work, focusing on the Figure 7.3: Capacity and traffic along the Yangon-NPT axis critical corridors for trade expansion over the next five 70,000 years (Figure 7.2). Based on JICA’s work and the World Bank Group mission on the ground, four major trade 60,000 Capacity of NH1 + Expressway and transport arteries in Myanmar appear critical to 50,000 Myanmar’s medium-term development and to unlock 40,000 latent trade (Figure 7.2): PCU 30,000 • Yangon-Nay Pyi Taw-Mandalay (AH1) / Yangon- 20,000 Pyay-Magway-Mandalay; Capacity of NH1 • Mandalay-Lashio-Muse (AH14); 10,000 • Mandalay-Kalay-Tamu (AH1) and 0 2010 2015 2020 2025 2030 2035 Year • Mandalay-Monywa-Kalay-Htotla-Tiddim-Rih Truck demand exceeds the Capacity increase should (two branches of the same corridor; and design capacity of NH1 be considered • Yangon-Bago-Hpa’an-Myawaddy (AH1) Source: JICA, 2014. 7.1.1 Yangon-Mandalay: Myanmar’s backbone to heavy traffic seems to be inevitable. However, in Developing this corridor will play a pivotal role order to control road damage from trucks and other in Myanmar’s domestic and international trade heavy vehicles, the axle weight of vehicles could be because Yangon and Mandalay are both prime cargo limited in a first stage (rather than limiting gross generators, as well as acting as gateways to domestic truck weight).1 Simultaneously, the highway needs and international destinations. Already today, the upgrading, as it will deteriorate within a few years once Yangon-Nay Pyi Taw-Mandalay corridor is Myanmar’s heavy traffic is permitted. The upgrading will require most frequented cargo route, with an estimated the total reconstruction of the highway, including the freight volume of 57 percent of the total traffic in four foundation and widening of the road. Widening the corridors (45 percent on AH1, another 12 percent road should be no problem as the sides are cleared using the Yangon-Pyay-Magway-Mandalay corridor). already. It will be important for reconstruction of the The corridor also connects export-oriented industries National Expressway to commence as soon as possible, with Yangon port, from where goods can be shipped. because the current lower traffic is easier to divert onto the AH14, with less congestion than the increased Yangon and Mandalay are also important markets traffic that will be using the road in few years’ time. for agricultural products and a transit route to Tamu, Muse and Myawaddy, and international Improvements in the Yangon-Mandalay artery will destinations worldwide via Yangon port and airport. also impact the performance of cargos of other Goods traveling along the route include all kinds of corridors because of the transit/access to gateway agricultural and fisheries goods for final consumption function. It will further facilitate the development of (i.e., fruit and vegetables, staple fruit, fresh/chilled/ export-oriented industrial areas outside the Yangon frozen fish, shrimps, prawns, etc.), semi-finished metropolitan area, because an efficient transport products (i.e., rubber, fruit and vegetables, fisheries corridor decreases the relative distance to market. products, etc.), or goods for export via land borders This is particularly important for highly perishable (i.e., seafood, agricultural products), and the port goods (e.g., mangos) or in industries with short order and airport (agricultural products, seafood, consumer cycles (e.g., fast-fashion garments manufacturing). goods, manufacturing goods). Facilitating access to an export gateway reduces lead times and cuts costs to import raw materials and export Traffic projections suggest that in 2017 heavy traffic semi-finished and finished goods, especially if Customs along the AH1 will surpass the road capacity. This can be alleviated by permitting trucks to use the National Expressway between Yangon and Mandalay, 1 This would prolong the life of the road as the damage before the combined road capacity also becomes is not caused by the gross weight of the truck but by heavy axles. insufficient in around 2028 (Figure 7.3). Based on In order to determine the maximum permitted axle weight, further investigation into the road design and foundation could be under- the projections, opening the National Expressway taken. 114 CHAPTER 7 clearance can be completed at inland locations such as has established itself as a secondary border crossing. a bonded Inland Container Depot (ICD). Border trade from Myanmar to China is dominated by agricultural products (i.e., rice, fruit, pulses & beans, 7.1.2 Mandalay-Lashio-Muse/Chin etc.), seafood (frozen shrimps and fish, live eels, etc.) and natural resources (i.e., jade, rubies, etc.) and from Shwe Haw corridor: China’s overland China to Myanmar by consumer goods for daily use, gateway automobiles and motorbikes, machinery, medicine, fertilizers and construction materials. Traffic volumes Eighty-six percent of Myanmar’s border trade takes of heavy trucks crossing the border amount to about place between Myanmar and China, with most of 1,000 trucks per day (total both directions). that trade using the road link from Mandalay via Lashio to Muse. In recent years, Chin Shwe Haw Figure 7.4: Transport options between Central China and Myanmar/India China Chengdu Barge on Yangtze River Chongqing Short-cut to Myanmar Truck / Rail Taiwan Myanmar (Burma) Vietnam Laos Hainan Yangon The Philippines To India Thailand Cambodia To Myanmar, India Transshipment Malaysia Singapore Malaysia Malaysia Source: (Nittsu Research Institute and Consulting, 2014) 115 MYANMAR’S KEY TRADE CORRIDORS NEED UPGRADING It is expected that this corridor will continue to Pursuing exchange of traffic rights beyond the increase in volumes of traffic over the next few years, municipal level could be explored. Although the fueled by economic growth of the two countries and municipal agreement is not yet fully utilized because as China develops its hinterland. Yunnan province in Chinese long-haul trucks do not cross into Myanmar, China, with its 4,000 km of borders with Myanmar, pursuing this would help to: (i) eliminate barriers to Lao PDR and Vietnam, could play an even more transport; and (ii) allow both Chinese and Myanmar important role in the future as the main land gateway truckers to base their decisions on whether to cross the for Chinese goods to Southeast Asia. There is already border on purely commercial/business grounds, and a discernible trend of Chinese manufacturing firms not on regulations, fears, or prejudices. starting to locate inland (away from eastern/coastal China) to Chengdu and Chongqing in order to escape 7.1.3 Yangon-Myawaddy: rising land prices and labor costs in the coastal areas. Myanmar’s gateway to ASEAN With distances to the ports of Shanghai or Guangzhou of 1,400-2,000 km are similar to distances by road Myawaddy is the main trade gateway to Thailand to the Myanmar-Chinese border (1,400-1,700 km), for central and southeastern Myanmar. Export goods and for Chinese manufacturers eyeing the Myanmar carried along the corridor are currently dominated by and Indian markets, the road link via Myanmar may agricultural produce, such as maize, peanuts, dried become a viable and attractive transport route (Figure chilies and onions, as well as frozen seafood. The 7.4). Using the land connection via Ruili/Muse, lead seafood comes from processing firms located around transport times could be cut significantly as distance Yangon. Import products from Thailand are mainly by road to the border (1,400-1,700 km plus another motorcycles, vehicles, heavy machinery, petroleum, 460 km to Mandalay) is comparable to distances to mobile phones and medical products. the ports. But the overland route saves the time of the The Yangon - Bago - Hpa’an - Myawaddy corridor ship from China to Myanmar/India, port handling and connects major agricultural areas with markets transshipment costs, and sea freight (Nittsu Research in Thailand and Yangon. For example, Mon State, Institute and Consulting, 2014). Kayin State and the Bago region are traditional rubber- Although Myanmar’s road infrastructure along planting areas and are connected by the corridor. In this corridor is usable throughout the year, it does 2011/2012, these three states/regions had a planted area not yet meet the necessary conditions for freight of combined 755,345 acres (305,677 ha), 56 percent of logistics purposes. Instead of tunnels and bridges, the total planted area in Myanmar. Combined output Myanmar has winding roads that slow traffic down of the three regions was more than 115,000 tons, to only 20-25 km/h and below. The condition of the 77 percent of the national output in that same year corridor is worsening with every truck passing, and the with Mon and Kayin states being the most dominant ongoing road maintenance is insufficient and provides (FAO, 2010). With demand likely to increase in only a temporary fix. manufacturing centers such as Yangon, Mandalay, and possibly around the Myawaddy area, the corridor will The current exchange of traffic rights between be central for bringing products from farm to buyer. Myanmar and China is currently limited and According to 2010 trade statistics, the largest export regulated by a municipal agreement between Muse markets for rubber were China, Thailand, India, Rep. and Ruili. According to this agreement, Chinese trucks of Korea, and Indonesia (UN Comtrade, 2014).2 may cross into Myanmar (up to the Mile 105 Logistics Currently, all production in Mon and neighboring Center, 12 km from the border) and Myanmar trucks states uses at least parts of this corridor to transport may cross into China (up to the city of Ruili, 8 km the rubber to market (i.e., to Yangon for domestic from the border). The greater exchange of traffic rights consumption and exports via sea freight or via Bago could be accompanied by harmonization of axle loads to Muse for export to China by land). Of the 80,000 and other transport regulations so that Chinese trucks tons of rubber currently exported, around 70 percent can fully utilize their truck capacity and provide the is transported to China via Muse. basis to make such an expansion economically and commercially viable. For this, the road between the border and the Mile 105 Logistics Center could be 2 The export value in 2010 amounted to US$66 million. The largest shares were recorded for China (US$36.6 million), Thai- upgraded, otherwise the heavier traffic from China will land (US$6.6 million), India (US$4.8 million), Rep. of Korea (US$3.8 destroy the road over time. million), Indonesia (US$3.7 million) and 19 others. It should be noted that the export values are likely to be underestimated due to the large informal trade of rubber. 116 CHAPTER 7 The corridor also leads through one of Myanmar’s In addition, the road provides greater flexibility in largest rice growing areas. The regions of Yangon, when goods can be carried to the border. East Bago, Mon and Kayin are home to a total rice cultivation area of around 4.9 million acres (1.98 At the border, there is a significant risk of cargo million ha), similar to production in the Ayeyarwaddy/ disappearing without proper Customs clearance. delta region (FAO, 2010). While much rice is Customs clearance takes place at the customs facilities consumed locally rice is also exported. a few kilometers away from the border. Between the border and the customs clearance point is a so-called There is also growing potential from Thailand to “free-zone”. The city of Myawaddy is located in that import maize from Myanmar, which is grown along free zone, as well as several warehouses (not under this corridor. Already today, trade in maize across the Customs control) where traders can store their cargos if Myanmar/Thai border is larger than official statistics they do not want to clear them immediately (i.e., if the suggest, as much of it is traded informally. While the receiving truck is not available). Since goods arrive in Thai markets for rice, rubber, maize and other products open trucks, there is a serious risk of cargo disappearing is likely served directly via the corridor, for exports via in the free zone and then being carried out by normal Yangon port (i.e., to the Rep. of Korea, Indonesia, and vehicles without clearance from Customs. Hence, a possibly China and India) the corridor has at least a stricter monitoring system can be considered. supporting role in bringing the products to market. Customs inspection processes can also be more However, constraints in logistics infrastructure and efficient. Physical inspection is done (on imports) after services hamper trade development in areas along the goods have been reloaded on a Myanmar lorry, and around this corridor. With no refrigerated trucks which implies unloading them again. It would be more available in Myanmar, frozen seafood is transported productive to perform the examination as the goods from the factory to the border in open trucks with ice are being trans-loaded. Declaration control appears blocks around it and covered by a tarpaulin, until it is weak, but it is likely that officials posted in Myawaddy received by Thai trucks with proper cooling equipment. have a good knowledge of the trader population, and There is already a dedicated facility for a cold chain adequate sources of intelligence. However, with the warehouse at the border but the private sector is to date traffic increase likely to occur when AH1 is completed, reluctant to invest. These practices present a significant the current approach and procedures may prove health risk and prevent Myanmar’s products from insufficient. reaching higher market segments. 7.1.4 Mandalay-Kalay-Tamu/Rih Closing of some of the bridges along the corridor during night time creates unnecessary delays in corridor: Huge long-term potential logistics. The closing of these bridges occurs despite Tamu is the principal land gateway for trade with the active ceasefire agreement in place. This may be India in addition to via the ports of Sittwe and a remnant of security precautions from past conflicts Yangon. Trade by land also happens at a second border between ethnic armed groups and Myanmar’s military. crossing point just south of Tamu at Htotla/Rih on the Other road sections of the corridor may need to be border with Mizoram, India. While growth in cross- eventually upgraded too, but this is not a priority at border trade between Myanmar and India has been present. So far, the road is passable independent of the robust over the past 6 years, from US$15 million in season, but there seem to be sensitivities among the 2006/2007 to more than US$60 million in 2014/2015 local communities despite the ceasefire agreements in (Ministry of Commerce, 2015). The Government of place. India has recently upgraded the road to become an all- weather road. Goods traded across the border to India During the time of the field visit in January 2015, are mainly betel nut, beans and pulses, wheat flour, there were major infrastructure upgrades already cigarettes, shoes and clothing items. Imported goods ongoing. The new road linking Mai Sot district with are mainly lentil seeds, motorcycles and spare parts, Umphang district is by far the most important one. On bicycles and spare parts, cotton and traditional Indian the Myanmar side, the new road section will cut the dresses. The route is also used for the transit trade in travel time from 4 hours to less than 1 hour. However, skin care products from India to China via Mandalay the possible impact (in time savings) will be much and Muse and for inexpensive consumer goods from larger because the old road allowed for only one-way China to India. traffic (with the traffic direction alternating every day). 117 For communities in northwestern Myanmar, the PROTOCOL FOR MYANMAR-INDIA BOX 7.1 corridor is an important lifeline both to access BORDER TRADE relatively cheap consumer goods from India and also to sell agricultural produce domestically via collectors. Products originating from the greater Tamu area are solely agricultural produce such as paddy, Protocol for border trade beans, oil seeds and sugarcane. These are transported to local and regional markets such as Kalay and Monywa, between Myanmar and India or directly to Mandalay. Upgrading the corridor, and is set the 1994 Indo-Myanmar thereby reducing transport costs, will be an important Border Trade Agreement, which element in bringing communities in Sagaing region and Chin State relatively closer to market, as they are recognizes three types of trade: among the poorest in Myanmar. This will enhance 1. Normal trade through Letters of Credit both access to public services, as well as better access (L/C); to regional markets. At the same time, India is a large consumer and processor of pulses and beans. 2. Exchange of locally produced items between This also opens up further possibilities to develop indigenous people residing up to 40 km food-processing capabilities for pulses and beans in from the border and up to US$1,000 value Mandalay and Sagaing. using simplified documentation; and Trade along this corridor is expected to grow 3. Barter trade of 62 commodities of up to especially if issues related to conflict along the Indian US$20,000 in value per transaction border, balancing payments for the barter trade, exchange rate arrangements, and transshipment Given problems with Myanmar’s financial sector of cargos can be resolved (Box 7.1). Trade via land in expanding L/C based trade (see Chapter II), also offers much shorter lead times than sea transport. the absence of exchange in traffic rights between For example, it takes roughly one week to transport Myanmar and India (even at the municipal goods by road from New Delhi to Tamu, but it takes level), border trade between India and Myanmar one month to send the same goods by ship via Yangon. has likely been reduced to barter trade, or With Chinese manufacturing firms increasingly exchanges between people living near the border locating inland, trade overland to Myanmar and of locally produced items. India becomes more feasible. Therefore, providing Myanmar and India have agreed to pursue a connectivity to markets will be essential for further MOU on exchange rate arrangements that will economic development of this region. Nevertheless, open the possibility for banks in both countries, materializing higher cross-border trade with India will especially in border areas, to facilitate exchange take time. of Myanmar’s kyat for Indian rupee, and vice- In order for this corridor to unleash its full potential, versa. This would allow traders in the two some upgrades of the two main transport links are countries to use their local currencies instead of necessary. First, given the preference of transporters first obtaining US dollars. for using a combination of AH1 and the national road between Monywa and Kalaymyo despite the very bad condition of the road, priority could be given to this national road connection. At present, the AH1 is usable throughout the year. It is not the preferred route for transporters between Mandalay/Monywa to Kalay/Tamu because it is 70 miles (110 km) longer, fuel consumption is higher, and the driving time is 3 to 4 hours longer. However, upgrading is needed in the medium to long term. Although many of the bridges along the corridor have been upgraded by the Indian government, many are severely overloaded. Many of the bridges are declared 13-ton bridges but are used on a daily basis by trucks with a gross weight in excess of 27 tons. The bridge at the Tamu border also appears 118 CHAPTER 7 too small for even existing traffic and needs to be the opening of the border gate to three hours daily; upgraded. The road links between Rih and Tiddim are (ii) treat it as an informal facility; and (iii) frequently also in urgent need of rehabilitation. close the access when the level of smuggling becomes too obvious. Eventually non-stop traffic may bring Better trade facilitation and border operations are additional benefits such as cheaper and more reliable needed to facilitate transshipment and more border transport and greater cargo security. Similarly, Indian trade. With the current restrictions in place, the traffic officials could be accommodated in a refurbished volumes are still relatively limited at only 10-20 trucks Trade Zone on the Myanmar side, when this becomes per day during the low season and can get up to 200 politically feasible. trucks per days in the peak agricultural season. The Government of India is currently building a new border Myanmar may want to look into the possibility facility that may eventually resolve some of the trade of linking this corridor to leverage development impediments surrounding transshipments. Currently, potential at the sub-national level. For example, Chin land disputes and a lack of traffic rights exchange State and Rakhine State have untapped potential for (even on a municipal basis) result in an inefficient agriculture and fisheries products that could be further transshipment process, where goods are carried with developed to meet export demand, particularly from carts over distances of more than 500 meters of dirt the Bangladesh and Indian markets. Currently, there road. Eventually, non-stop traffic may bring additional is also a plan to develop SEZs in Kyaukpyu. Facilities benefits such as cheaper and more reliable transport and access roads in the ports of Sittwe or Kyaukpyu and greater cargo security by reducing transshipment could also be considered for upgrading, in order to operations. Establishing an exchange rate arrangement make the ports an additional gateway for Myanmar, including for border trade can help traders to settle particularly for firms in Rakhine State, to access imbalance in barter trade financially, instead of using markets in the “Indian Ocean Rim”. Linking either goods, paving the way for increased trade. Other essential of these ports through better road infrastructure with reforms to increase trade between India and Myanmar the Mandalay-Kalay-Tamu corridor could potentially include: establishing local cross-border traffic rights attract transshipment for trade with China’s Yunnan and identifying options to ease border trade restrictions province. without compromising security issues. Training may be needed to inform border officials and private sector 7.1.5 Other than roads, other users (Customs brokers, transporters, traders, laborers) logistics infrastructure also needs to on the current trade policy between the two countries and associated processes.3 Improved infrastructure is be developed and upgraded needed to facilitate trade clearance transactions and to Myanmar’s railway needs to be provide improved logistics services such as a cold chain, truck parking facility and warehousing. revitalized and rebuilt Despite Myanmar’s long tradition of railway The Government of Myanmar may want to consider operations dating back 137 years, rail transport discussing with the Government of India the in the country remains underdeveloped. The rail possibility of piloting Myanmar officials working network has 6,110 km, of which only 705 km are out of the new modern facilities on the Indian double-track. In total, 960 stations are connected via side of the border (e.g., to pre-clear imports). This rail. The tracks are one meter gauge and un-electrified. may be explored as a transitional arrangement prior Myanma Railway, an SOE, is the only operator to eventually considering a co-located or jointly- providing transport services for passengers and freight managed border post, when political conditions and managing the railway system. allow. Formalizing trade is also important as the open practice of smuggling and informal trade (especially Unreliable services are likely behind the limited of electronic goods coming from China/East Asia) demand for freight railway services in Myanmar, partly explains why the Indian authorities: (i) limit and mainly used for transporting low value per ton or non-time-sensitive products. MR offers dedicated freight train services and parcel services (freight wagons 3 The World Bank Group team found a lack of under- coupled with passenger trains). So far, railway transport standing of the current policies—e.g. the exchange rate regime— only accommodates 3.5 million tons, 4 percent, of total which leads to misinterpretation and suspicions of malicious intent by the trading partner, and missed opportunities for increased volume of freight transport in Myanmar. In Yangon trade. and Mandalay, road transport makes up around 93 119 MYANMAR’S KEY TRADE CORRIDORS NEED UPGRADING Myanmar’s railway needs to be revitalized and rebuilt 120 CHAPTER 7 percent of all freight traffic. The remaining 7 percent is Inland waterways: potential less carried by rail and inland waterways. On the Mandalay- Lashio-Muse/Chin Shwe Haw corridor, road transport costly alternative for freight is the principle mode with rail accounting for a meager transport 2 percent of freight traffic demand. Although the Myanmar has 6,650 km of passable waterways prices for rail transport are extremely competitive, the along its major rivers, and inland waterways are low share of rail transport in total traffic demand can an important means of freight transport within be explained by the unreliability of rail transport. MR Myanmar after trucking.4 The longest inland has relatively old rolling stock (with ages of over 30 waterway is the Ayeyarwaddy River, spanning over years). Problems with the quality of the track also limit 2,170 km and cutting across the country from the the speed of the locomotives and cause higher risks of southern coast to the middle of Myanmar. Unlike the damage due to vibration during transport. These issues situation for railway freight transport, both private and limit the use of railway services to transporting heavy state-owned companies offer freight services via inland and non-time sensitive goods (e.g., cement, wood waterways transport (IWT). products). Lead times are unpredictable, passengers are given priority over cargo, and the locomotives are too However, fleets in IWT are mixed and may affect weak to pull more than a couple of wagons. demand for IWT freight transport. Most passenger- cargo ships serving Myanmar’s inland waterways are Identifying market feasibility for an internal aging vessels over 20 years old. They are complemented container depot (ICD) in Mandalay with access by self-propelled barges and tugboats. Estimates to multi-modal transport could be considered. suggest that the freight volume transported through The main objective is to facilitate transportation IWT is about 10,200 tons/day, or 3.7 million tons/year of inbound containers to Mandalay and attract (higher than freight railway).5 This number is likely to exports of containerized cargo from Mandalay and reflect sub-optimal demand for IWT given the lack of the surrounding regions. Mandalay is the second- proper docking and cargo-handling facilities. largest consumer market in Myanmar, attracting both international and domestic freight. It is also a natural Given the longer travel times but lower costs per transportation hub for the Upper Myanmar region ton/km, IWT has the potential to carry more bulk that produces agricultural crops for both domestic and non-time sensitive cargo (e.g., petroleum drum- consumption and international export. Connecting cans, construction materials, wood/wood products). an ICD in Mandalay from Yangon via railway (about Connecting IWT through road to ICDs and bonded 760 km equivalent by road), which currently takes 20 warehouses can strengthen trade linkages between the hours, could work if the following basic circumstances hinterland and Yangon. But to attract more users, there are met: (i) direct access of container trains to the port needs to be an improvement in: (i) ports for inland areas in Yangon; (ii) Customs regulations that allow the waterways to handle freight and proper cargo terminals establishment of in-land bonded ICD; (iii) availability for IWT;6 (ii) connections between ports and roads, and of warehousing facilities near the ICD to reduce safety in navigation; and (iii) improved river navigation the cost of cargo handling and (iv) establishment of for vessels through proper river management. a commercial container railway services, possibly Strengthening regulatory institutions on IWT is also through a joint-venture of stakeholders, for example, important for revitalizing IWT freight transport in Myanma Railway, the ICD operator, shipping liners, Myanmar. The Ministry of Transport has decided to freight forwarders, and the trucking industry. turn the Department of Inland Water Transport into merely a service provider in IWT competing with private operators. Currently, Myanmar’s IWT accounts for about 10 percent of market share in freight and passenger transport in Myanmar but suffers from an old and inefficient fleet. Myanmar may want to consider 4 JICA (2014), Myanmar Transport Masterplan 5 Ibid. 6 http://www.jterc.or.jp/koku/koku_semina/pdf/140307_ presentation-04.pdf 121 MYANMAR’S KEY TRADE CORRIDORS NEED UPGRADING establishing a regulator for IWT with similar status to Rep. of Korea, Singapore and Taiwan in the 1970s and the Myanmar Port Authority, in order to ensure safety, 1980s. In China, they are associated with export-led the provision of navigational devices, dredging and the growth by concentrating infrastructure development provision of IWT infrastructure (docking facilities), and piloting policy reforms in selected areas. Successful either directly by IWT or through private operators. SEZs are typically those that can leverage comparative advantages sought by investors, such as location, labor Facilitating linkages between cost advantages, skills capabilities and infrastructure. corridors and the economic China’s experience also suggests the need for the capability to manage SEZs that can adapt to the needs activities of local communities of industries. However, SEZs in some countries have Communities residing along border areas on the become “white elephant” projects, attracting firms Myanmar side need support to increase their seeking tax-benefits, but failing to produce substantial productive capacity. They are typically among the employment or struggling to sustain competitively as poorest and most isolated communities in the country, labor costs continue to increase. and several of them have been affected by armed conflicts. Naturally, many people in these areas have Experience from Thilawa could be useful in migrated out of the towns in search of jobs elsewhere, designing and developing other SEZs. Although but would prefer to remain in their home towns if typically the activities in an SEZ take time to develop, more economic opportunities could be made available. Myanmar may want to consider identifying areas to Interviews revealed that community members are strengthen the governance and management of SEZs open to integration with the main economic centers to make them work better should they need to be of Myanmar, as well as with neighboring countries. developed elsewhere. For instance, issues that may be However, they lack not only adequate connectivity outside the mandates of the SEZs could include the infrastructure (local roads, access to railways) but also provision of infrastructure to the nearest port, road limited access to electricity and telecommunications access to a major economic corridor and improvements infrastructure. in workers’ skills. Such issues could be crucial for the sustainability of Thilawa or other SEZs. Environmental Local communities also cite a lack of irrigation and social safeguards with local communities can also services, trade finance, agricultural extension be very sensitive and, hence, it may be useful to draw services and skills development as key impediments on the experience of Thilawa (or Dawei) on how best to increasing their capacity for production and to address these issues. trade. Agricultural machinery, access to finance, better seed, and inputs and technology to improve yields and quality, as well as better market intelligence and marketing skills, are all cited as key support needed to improve agricultural output. There is significant demand for agricultural products from both India and China, including for rice, pulses and beans, and high- value fruit, herbs and spices. Skills development is also needed to support local entrepreneurs, workers and potential manufacturing ventures, including for food processing. Reviewing lessons learned from Special Economic Zones (SEZs) Many developing countries are using SEZs to promote export-led industrialization, but their success tends to be mixed. Developing countries often declare a specific location as a SEZ to attract export-oriented investment, pilot policy reforms that would otherwise be difficult to implement nationwide, or develop lagging regions. SEZs are often associated with successes in facilitating industrialization in the 122 CHAPTER 8 FACIIITATING THROUGH SMOOTH LOGISTICS TRADE Growing international trade and export- oriented investments in Myanmar are expected to increase demand for more sophisticated logistics services. The demand for logistics services is likely to shift from simple freight transport or customs brokerage towards planning and scheduling of shipments, tracing and tracking of cargo, and inventory and warehouse management. It will be important for Myanmar’s authorities to accompany this transition with reforms to allow operators to increase their efficiency and service quality. Improving trade facilitation practices and procedures can be considered a priority agenda for Myanmar, as it affects overall logistics efficiency and competitiveness for producing goods in Myanmar. 123 FACILITATING TRADE THROUGH SMOOTH LOGISTICS 124 CHAPTER 8 THE MANGO EXPORT SUPPLY CHAIN BOX 8.1 Myanmar mangos are highly regarded among Singaporean consumers for their freshness, fragrance and texture (no fiber in the flesh). Since 2012, Myanmar mangos have been exported to Singapore using air freight from Yangon to Singapore’s Changi airport (Mandalay airport cannot be used for air freight). During peak season (May-June), volumes amount to 2-3 tons per week and less in July because mangos are only available in Shan State. The supply chain can be divided into two parts: the first from the farm to Yangon airport, which is organized by a Myanmar trader, and the second from the Singapore airport to the supermarkets, which is organized by the Singaporean importer. The average shipment size is around 500-600 kg with an approximate value of US$6,000-7,200 (around US$12.00 per kg). The selling price is a seasonal price and is fixed already in April. Orders are made by the Singaporean buyers depending on demand. The lead time from placing the order until the goods are shipped is roughly 1-2 days. Whereas air transport from Yangon to Singapore is only 3.5 hours, the majority of time is used to organize the shipment: selecting the fruit, conducting hot water treatment, packaging in boxes, transporting the cargo from Mandalay to Yangon using express buses, completing all export formalities, and loading the cargo onto the plane. Transport from the farm to Yangon is arranged by the Myanmar trader and the international segment by using a freight forwarder, because freight forwarders are better able to obtain volume discounts. The average transport price is around US$0.50 per kg, or US$250-300. The contract between the Myanmar exporter and the Singaporean importer is on a free-on-board (FOB) basis although the actual shipment is on a cargo, insurance, freight (CIF) basis. Damage and losses during transport are minimal (close to 0 percent). Because the contract currency is in Singapore dollars, the Myanmar trader carries the exchange rate risk. The fixed purchase price can go both to the advantage or disadvantage of the Myanmar trader depending on the development of the mango price. There are two principal difficulties in the export of mangos: (i) Obtaining the export license from the Ministry of Commerce because it requires to submit an SPS certificate. But due to the short order cycles, SPS certificates cannot be obtained in time for the cargo to be shipped. To circumvent this obstacle, the exporter submits the SPS certificate of comparable mangos while the actual export mangos are still on the tree at the time of application. (ii) Logistics challenges such as costs, transport time and the lack of temperature control. 125 FACILITATING TRADE THROUGH SMOOTH LOGISTICS Figure 8.1: The need to improve logistics and trade from trade openness. Very soon the outdated processes facilitation in Myanmar and procedures in border clearances are likely to become binding constraints for trade and investment in Myanmar. In addition, requirements for advance 4 income tax payments for exports is unnecessary and having a negative impact on Myanmar’s trade 3.5 competitiveness. Box 8.1 below presents an example of LPI score the supply chain for mango exports. 3 Cambodia 8.1.1 The demand for logistics 2.5 services will grow 2 Myanmar Along with greater trade potential in Myanmar, there is 1.5 4 6 8 10 12 also higher potential demand for modern logistics service Log income per capita providers (freight forwarding, customs brokers, and Notes: LPI score is adjusted for population to control for third-party logistics). But expansion and logistics service the effect of country size. Source: staff calculation from providers in Myanmar are limited by the lack of a clear WDI using 2014 LPI and 2013 GDP figure. regulatory framework, underdeveloped cargo insurance, and gaps in technological know-how. The logistics services industry in Myanmar is still 8.1 Leveraging at an early stage of development. The industry is generally still focused on traditional services, such as Myanmar’s location trucking, warehousing and customs brokerage. This is a normal situation, as previously demand for logistics through powerful services in Myanmar has been largely for domestic logistics purposes. The use of containerized cargo for domestic distribution in Myanmar is still very limited and domestic cargos are generally transported in break-bulk, through trucks, rail or inland-waterways (Banomyong and Ishida). Most handling and shipping of freight in Myanmar is still done traditionally, without a unit load At present, Myanmar’s logistics lags behind other system (e.g., pallets), which makes cargo handling in countries in East and South Asia. Myanmar’s Logistics Myanmar more costly and time-consuming (Myint, Performance Index (LPI) is lower than other countries 2014). The lack of proper infrastructure for docking around the same level of income per capita, such as (such as in inland waterways) limits the use of more Cambodia (Figure 8.1). While customs procedures effective ways for cargo-handling and increases weigh down the score, low performances in all areas of operational costs for logistics service providers. While the LPI, international shipments and logistics quality producers have found the use of airfreight to transport and competence, are also causing the overall low LPI high-value and time-sensitive products, the lack of air score for Myanmar. All of these mean that, in general, cargo facilities beyond Yangon airport is causing lost organizing supply chains in Myanmar is relatively more opportunities for Myanmar producers in other cities to costly and time consuming than in most neighboring fulfill market demand. countries. An underdeveloped legal framework inhibits the Logistics is about managing supply chains, the development of domestic logistics services. A cargo efficiency and reliability of which are determined insurance market in Myanmar for partial damage by to what extent transport infrastructure, border or total loss does not exist, as the general insurance agencies and transport regulators, and services market only really started in 2013 (KPMG, 2013). providers interact in a predictable and efficient But equally important are the underdeveloped rules manner. In this regard, its LPI score suggests that for freight forwarding businesses, implying that the Myanmar needs to close the gap in the quality of duties and responsibilities of freight forwarders are not logistics and trade facilitation with neighboring yet formally specified. This severely limits the extent to countries if it hopes to maximize the opportunities which consumers are willing to accept risk from services 126 CHAPTER 8 offered by logistics providers in Myanmar. While Figure 8.2: Container throughput at the Port of Yangon FDI logistics services are expected to have a positive impact on manufacturing and development of services 800 industry, the lack of clarity in the regulatory framework 35% 700 30% in freight-forwarding services is limiting foreign 25% 600 interest in acquisitions or green-field investments in 20% 500 logistics services companies, which would otherwise 15% 400 10% lead to more jobs and technological transfer. Instead, 300 5% the current situation may preserve the status quo of 0% 200 separation, where foreign logistics companies focus -5% 100 only on handling international logistics, while the -10% 0 -15% domestic logistics industry is limited to handling only local deliveries. 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 8.1.2 Port congestion will need to Source: Myanmar Port Authority. be addressed The Port of Yangon is an important gateway for logistics capacity, inadequate equipment, and long processing infrastructure in Myanmar and the overall logistics chain for pre-customs clearance (obtaining the necessary can benefit from improved efficiency in cargo-handling permits and compliance) are all contributing to long at the port. Port management and infrastructure are dwell times. insufficient for handling the increases in traffic that can be expected. Importers also often use the port as a warehouse, which increases the space constraints. This is either With the surge in trade volumes in recent years, because importers do not have the space to store upgrading port facilities and logistics infrastructure the cargo at their own facilities, or because they face will soon be required if ports in Myanmar are to financial constraints to pay the duty payable before the avoid hitting their capacity limits. Around 80 percent goods are sold. For example, cars are often not cleared of Myanmar’s trade is handled by the Port of Yangon, a by Customs until they have been sold onwards. The river port situated 32 km in-land, which includes four port’s generous demurrage policy of 7 days may also terminals, namely Asia World, Htitan, Bo Aung Kyaw incentivize importers to keep cargo at the port for as and Myanmar Industry. Cargo throughput (measured long as possible. in TEU) grew from 155,000 TEU in 2004/05 to more than 617,000 in 2013/14, an increase of about 400 Another driver of port congestion is the lack of percent (Figure 8.2). General cargo grew at a slower pace ability to handle less-than-a-container-load (LCL) of 140 percent over the same period, despite the global shipments. At present, importers that share a container trend away from general cargo towards containerized with multiple shipments can clear their cargo at any goods. The number of vessels has doubled, indicating time (although Customs agents are encouraged to clear that the average size of the vessels calling the port of several shipments at once). To clear the cargo, the port Yangon has also increased. fetches the container from its terminal location to a dedicated area (container freight station) where the With increasing traffic, port congestion has become importer can take out the shipment. The container is more prevalent. Port congestion has also been then closed again by the port operator with an ordinary exacerbated by long dwell times (the time to release a lock (not a Customs seal) and brought back to its container from the port after a vessel arrives) at the Port original location. This is not only highly inefficient, of Yangon. According to a 2014 Time Release Study but also accumulates handling costs and breaches conducted with the support of the ADB, the average Customs integrity (after the first shipment has been cargo clearance (from arrival of the container to its cleared, there is no recourse if cargo is removed without removal from the port) takes around 6.5 days in the clearance). In addition, the cost of cargo clearance for Asia World Port Terminal. However, clearance times LCL shipments is high by international standards, as of 10 days have also been reported as being common all fees are based on FCL shipment (rather than LCL by logistics service providers. No single actor can be shipment). singled out as being the main culprit behind long dwell-times. Instead, a combination of limited port 127 FACILITATING TRADE THROUGH SMOOTH LOGISTICS The port’s main access road is the “New Strand WHY A BONDED-WAREHOUSE SYSTEM? BOX 8.2 Road”, dedicated for heavy traffic near the port area. However, at present, the road cuts the port area (Asia World Port) in two, which may lead to challenges in managing the port space. Furthermore, in order A bonded cargo space outside to access the dedicated truck road, including from the port area may also be used to some of Yangon’s industrial zones, trucks have to pass through heavily congested city traffic, which impedes consolidate/de-consolidate cargo traffic flows in and out of the port. and thereby alleviate congestion in the port. Currently, terminal The Port Authority has not fully implemented electronic document processing. The Port Authority operators do not complain about currently uses different systems and is still developing this practice (as they can charge an electronic data interchange (EDI), an automated handling and demurrage fees), system for the exchange of trade documents. Currently, but the long-term costs of internal the Port Authority’s document clearance system is only logistics in a space-constrained partially (electronically) connected to Customs, and only facilitates documents related to movements in/out. environment outweigh the Moreover, there is no direct connection with freight benefits. forwarders to allow for more efficient scheduling of A bonded facility would unfold its maximum cargo pick-up and transfer. At least for the time being, potential if it is shared among all port terminals, as weak telecommunications are also preventing the full this would reduce transaction costs for importers implementation of port EDI. with LCL cargo from more than one shipping line Facilitating more investment in private bonded (and possibly terminal). A facility in the direct warehouses inland could help export-oriented vicinity of industrial zones could also be a possible manufacturers to develop further in Myanmar. model to explore. Myanmar’s Customs provides provisions for bonded A bonded storage area could also be used to store warehouses and such facilities already exist in Yangon cargo waiting for import clearance. The cargo and Mandalay for both cargo passing through the could be transferred after a certain period of Port of Yangon and the land borders of Muse.1, 2 time from the port facilities to the storage area. Consultations have revealed significant demand for Although there would be handling costs involved such facilities by garments manufacturers, many of (these could be partly passed on to the importer which are not located in SEZs and aspire to move and partly borne by the port), the benefits of a de- away from “cut-and-trim” businesses towards “FOB” congested port are far greater than the subsidized businesses. Access to a private bonded warehouse handling costs, mainly in the form of greater would help garments manufacturers to stock inventory throughput capacity of the terminals. of intermediate inputs (fabric, buttons, accessories, etc.) and diversify their products and designs to meet Bonded warehouse facilities may also help to buyers’ needs. attract foreign investors into Myanmar. According to private sector representatives, one leading There is a case for exploring the utilization of the manufacturer of electronic products has stated railway for freight transport between Yangon and that bonded warehouse facilities are one of the Mandalay, and in developing an inland container pre-conditions for investing in Myanmar. From a logistics perspective, a bonded warehouse is necessary for two main reasons: (i) to act as a buffer 1 A bonded warehouse is a secured warehouse facility that is covered by Customs rules. Goods stored in a bonded ware- to balance supply disruptions from the unreliable house are temporary relieved of VAT and import duties until they logistics, and (ii) to import inputs and re-export. are distributed domestically, or not subject to VAT and import du- ties if the goods are exported. For exporters, bonded warehouses are attractive because they can conduct manufacturing, packaging, temporary storing and Customs inspection for exports at minimal administrative costs. 2 http://www.myanmarcustoms.gov.mm/bondedware- housedutyfreeshop.aspx 128 CHAPTER 8 depot in Mandalay with warehousing facilities Figure 8.3: Number of registered vehicles in Myanmar nearby. As discussed in the Corridor Chapter, Yangon- (’000) Mandalay is the backbone of the trade corridor within Myanmar, connecting the two most important 600 locations of agricultural and industrial producers 500 and connecting them to an international gateway in 400 Yangon. Currently, cargos are mainly carried by truck with low fuel efficiency via the AH1 road, which is 300 a non-expressway road. Current rules require that 200 customs clearance for sea freight can only be done at ports in Yangon or Thilawa. To reduce congestion at 100 the container terminals and to bring import containers 0 as fast as possible and as close as possible to the cargo 1990-91 1995-96 2000-01 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 owner, a change in the Customs regulations could be considered to permit the establishment of inland Customs—bonded ICD facilities with adjacent Cars Trucks (light and heavy) Buses warehousing facilities for containers and the stuffing/ unstuffing of cargo. It is important that rail freight has Source: Central Statistical Organization, Ministry of direct access to the Port of Yangon to avoid additional National Planning and Economic Development, 2011 costs from handling the containers. The available evidence seems to suggest that most 8.1.3 Making Myanmar’s trucking logistics operators in Myanmar rely on old or industry competitive second-hand vehicles. Interviews with the Myanmar Trucking plays an important role in transporting goods Trucking Association suggest that the industry is from port to hinterland and within Myanmar. Despite dominated by second-hand Japanese trucks. The mix increasing numbers of trucks in Myanmar, the industry is complemented by new Chinese trucks, as well as is hindered by poor efficiency and underdeveloped service 30+ year-old trucks. While access to used trucks helps quality. A comprehensive strategy could focus on addressing transport operators to offer services, operating costs the lack of access to finance, fostering competition and the are relatively high because of low fuel efficiency (on consolidation of transport operators, and develop logistics average 2.8 km/liter). Myanmar’s trucking industry infrastructure. fares relatively poorly on core performance criteria. For example, according to the container truck association, Over the past two decades, the number of registered truck utilization (measured in average kilometers per vehicles in Myanmar has dramatically increased. year of a truck in working condition) ranges widely The number of registered vehicles in Myanmar rose from as low as 15,000 km to 80,000 km. from 178,500 in 1990/91 to 2,476,672 in June 2012 (Ministry of Commerce, 2013). This number has Although the government has liberalized pricing probably risen far more since then, as the government for trucking services, the industry is still operating has lifted restrictions on the import and registration of a pricing mechanism that encourages less efficient vehicles. The majority of the new vehicles are passenger trucks to continue operating. In a perfectly cars and 2- and 3-wheelers. The number of trucks, competitive market of freight transport, inefficient both light and heavy, experienced only a modest players would have been sidelined, but that is not increase from 2000/01 to 2010/11, from 54,000 to the case in Myanmar. First, there is still demand for 64,000 (Figure 8.3). Between 2011/12 and 2014/15, irregular (non-scheduled) and low quality freight the number of registered cars and trucks in Myanmar transport services from industries that do not require increased by 85 percent and 186 percent, respectively, high vehicle standards. These services are typically because of an easier import processing for vehicles and offered by individual or small trucking companies with greater availability of affordable tractor-trailers from second-hand trucks, as there are very few companies China. The impact of the increased number of vehicles with more than 20 trucks (JICA, 2014). Second, the in the country, most notably cars, is mostly visible in freight transport market in Myanmar is kept artificially larger urban areas such as Yangon and Mandalay, where alive through the “gate” system, where prices are traffic congestion is prevalent, especially during rush- determined based on the operating costs of the least hours efficient service providers (Box 8.3). While the cargo volume should be sufficient for higher utilization rates, 129 the high number of low-efficiency vehicles is causing THE “GATE” SYSTEM IN MYANMAR’S TABLE 8.3 an over-supply of truck capacity in Myanmar. TRUCKING INDUSTRY 8.2 Streamlining the In Myanmar, the trucking industry bureaucracy in trade is organized into so-called “gates”. facilitation Gates exists in each major city and each gate specializes on one trunk route, for instance. Yangon- Mandalay. Myanmar’s border procedures are onerous and In addition, the container trucking gate is unnecessarily bureaucratic. The length and complexity of responsible for the container distribution from the the procedures penalize the country in international ratings port to every destination in the country. Every gate by slowing down and discouraging formal transactions consists of a pool of operators. Membership in the while encouraging parallel trade. It will be important to gates is usually not obligatory. Newer and larger address the issues addressed together, including congestion operators generally do not participate in the gate reduction, streamlined procedures and increased reliance system. The gate manager, in cooperation with the on IT. members, determines the price of certain routes. The manager is also responsible for consolidating 8.2.1 The burden of onerous loads (Ksoll & Quarmby, Private Sector Views on procedures penalizes Myanmar’s Road Transport along the Yangon – Mandalay – ratings Muse/Ruili – Kunming Corridor, 2013). The prices are usually set taking into account the operating Myanmar’s trade has surged dramatically in recent costs of all its members and are therefore based on years, but practices in trade facilitation have not the least-efficient service provider. Competition is significantly changed. According to the World usually limited as there are few operators outside Bank Group’s 2015 Doing Business report, traders in the gate system. Myanmar can spend up to 60 percent of their time (both in import and export) preparing documents, and undergoing customs clearance and inspections, in order to ensure compliance with trade rules and regulation (Figure 8.4). Therefore, reviewing and Figure 8.4: Trading across borders – time to trade sub- indicators 100% 2 80% 3 3 60% 13 40% 20% 0% Myanmar EXP Inland transportation and handling EXP Ports and terminal handling EXP Customs clearance and inspections 130 CHAPTER 8 THE BUREAUCRATIC BURDEN OF TABLE 8.4 100% LICENSING 2 80% 6 60% In order to obtain an import 4 40% or export licenses, a trader must provide the following 20% documentation: 0% 1. Copy of registration and identity cards; Myanmar 2. Sales contract; EXP Inland transportation and handling EXP Ports and terminal handling 3. Pro-forma invoice; EXP Customs clearance and inspections 4. Packing list; DB 2015 - Time to export in Myanmar (days) Source: World Bank, 2015 Doing Business database. 5. Certificates of origins; 6. Depending on products: letter of simplifying procedures in trade facilitation are crucial recommendations from line ministries if Myanmar is to be able to meet growing trade volumes (e.g., Food and Drug Agency, Ministry of and increased demand for timeliness in exports and Agriculture, Quarantine, Ministry of Industry, imports. Ministry of Science and Technology); and Current initiatives to improve port infrastructure 7. Recommendation from Myanmar Economic facilities are likely to be inadequate in the medium Bank (MEB) for bank balance. term. Myanmar is moving ahead with improvements in port infrastructure facilities in Thilawa, next to Source: NES (2015) and World Bank interviews. Thilawa SEZ, the construction of which is now being completed. However, the current initiatives are likely to be inadequate in the medium term to meet the growing demand for a more responsive and reliable supply chain, for the following reasons: • Limited guidelines defining the responsibilities and expected service level of border agencies, and the limited alignment of procedures for document clearances and inspections across relevant ministries; • Underdeveloped risk management system and overlapping authorities for inspecting cargos in and outside ports are causing inefficiencies; • Bottlenecks in transport and logistics infrastructure are causing delays, depressing logistics performance and causing business opportunities to be lost; and • The prevalence of conflicts in border areas (e.g., in Kachin) often disrupts border trade and creates parallel border check-points by local armed ethnic groups, promoting informality in international trade and eroding revenues from import duties. 131 FACILITATING TRADE THROUGH SMOOTH LOGISTICS Moving ahead to address these challenges requires traders often need to obtain paperwork from other a coordinating platform, with prioritized actions ministries (such as letters of recommendations, etc., and buy-in from stakeholders. No single ministry depending on the products) and demonstrate proof alone can solve the cross-cutting and inter-ministerial of payment (down payment for imports) (Box 8.4). nature of problems in logistics and trade facilitation. Items a) through to d) are standard documentation Important stepping-stones would be the establishment for customs clearance, and item e) is only required if of a coordinating mechanism and the development of traders are claiming preferential tariff rates. However, a clear action plan to improve practices. There is also processing letters of recommendations and certificates a need to update the legal framework in logistics and needs to be done in different ministries(depending trade facilitation to allow the government and the on the product), requiring separate documents and private sector to close gaps in the current practices with prerequisites (licenses, lab testing, samples, etc.), all international standards. of which can take a long time to process.4 For exports and imports through Yangon or Thilawa, traders can Myanmar can use regional and multilateral apply for these licenses in Yangon or Nay Pyi Taw. But initiatives to push ahead with domestic reforms in for export and import through inland border posts the logistics and trade facilitation. Commitments with procedure is more challenging, as traders have to apply the ASEAN Economic Community (AEC) and the for export and import licenses at border trade offices. WTO’s Trade Facilitation Agreement (TFA) require Since laboratory and testing facilities are not available member countries, including Myanmar, to implement in border areas, traders have to process these either in domestic reforms that will lead to the establishment of Nay Pyi Taw or Mandalay, while freight waits at the a national single window (NSW) for customs clearance, border posts.5 For Muse border post between Myanmar promoting regional integration in logistics services, and China, high traffic volumes and the time needed and streamlining non-trade measures (NTMs). to deal with customs pre-clearance are contributing Current export and import procedures in Myanmar to long queues of freight trucks around Mile 105, start with a pre-customs clearance to obtain export increasing costs for traders and depleting the return on and import licenses. The positive side is that the process is centralized at the MoC because by law the MoC has the sole authority to issue export and import licenses in Myanmar.3 While issuance of 4 World Bank Group team interview in Mandalay, January licenses by the MoC generally takes less than 7 days, 2015. There was a case where an exporter has waited for 1 year to obtain approval to renew its certificate from Food and Drug Agen- cy. 5 Certain border posts, such as Muse between Myanmar 3 Licenses are generally valid for three months with and China, have small laboratory facilities, but these cannot be possibility for extension. used to test food products. Table 8.1: Requirements for export or import processing and verification by Customs EXPORT DOCUMENT PROCESSING AND IMPORT DOCUMENT PROCESSING AND VERIFICATION: VERIFICATION: • Original export license from the MoC • Original import license from the MoC (depending on products) • Original seller’s invoice with bank stamp or • Original sales contract or Invoice foreign exchange certificates • Original packing list • Original sales contract • Original shipping instruction (or booking • Original packing list note) • Original Bill of Lading • Proof of buyer’s advance payment from bank or buyer’s L/C Source: NES (2015) and World Bank interviews. 132 CHAPTER 8 assets for vehicle owners.6 payment terms on a standard commercial basis.8 Cargo clearance and inspections at seaports and After customs pre-clearance, traders proceed airports suffer from a lack of risk management through customs clearance processes, which are systems and overlapping authorities to inspect generally divided into document verification and goods. At present, there is no effective risk management cargo clearance/inspection. After traders obtain system that Customs can use to decide which containers export or import licenses from the MoC, they can or shipments should be fully inspected. The decision start the document verification process by filling a process for Customs to decide whether containers of Customs Declaration (CusDec) and submitting this non-green channel importers should go through the to Customs along with the supporting documents, as red channel (for full inspection) or the yellow channel presented in Table 8.1. Document processing involves (for inspection by X-Ray machine), and the green the verification of paperwork, valuation of cargo, and channel (documents inspection only) is based on a advance payment of income tax. “lucky draw”.9 However, containers, particularly those • There are several issues in document verification in green channel, can still be subjected to inspection that draw complaints from traders and have outside the port, as mobile teams led by the MoC and larger implications for Myanmar’s trade consisting of police and Customs have the authority to competitiveness. do this. The MoC established mobile teams to respond • Current customs valuation practices do not to growing concern of under-invoicing, incorrect use comply with the WTO Agreement on Customs of certificates of origin, and smuggling. The teams are Valuation. There is high degree of uncertainty active outside the Port of Yangon and the airport, as well as how Customs determine the value of goods. as at border posts. The private sector has complained Interviews and anecdotal evidence suggest that that additional inspections by mobile teams can Customs either applies a certain mark-up on the require a whole day’s delay, making shipments late and value of exports or imports stated in the invoice, adding costs for traders.10 In addition, decisions on or uses an arbitrary higher value from internet which containers should be categorized as destined for searches, which increases the incentive for traders the green channel occur after the customs document to under-invoice their goods.7 verification stage, which is not completely “green” compared with modern systems, where immediate • Requirements to settle advance income tax release (green channel status) is obtained immediately are severely affecting exporters’ cash-flows, after importers self-declare whether or not the shipment especially SMEs, as the tax deduction process meets green channel criteria.11 can only be done once a year along with the annual declaration of corporate income tax. For exports going through seaports, a mandatory For SME exporters, this means that less cash is requirement to appoint the Shipping Agency available for productive investment. The shifting Department (SAD) as the sole shipping agent is an of responsibility to collect income tax through the unusual practice. The SAD is a department under customs process is highly unusual and could be Myanmar’s Port Authority, which is a supervisory body seriously reconsidered. for the operation of seaport terminals. The SAD acts • The requirement for Myanmar exporters as a state agent for seagoing vessels and it implements to show that foreign buyers are using L/Cs cargo loading/unloading operations at ports. In other or have made advance payments is eroding countries, exporters can decide to hire an agent in order the attractiveness of sourcing products from to facilitate the processes at the port, while Myanmar Myanmar. While the government may be concerned about the risks of non-payment, this is not the proper instrument to address the issue, 8 About 60 percent of world trade is done through cash- as it poses serious limitations on the flexibility in-advance or open account. Bank of International Settlements, of buyers and Myanmar’s exporters to negotiate January 2014, Trade Finance: Development and Issues. CGFS Papers No. 50. 9 Interviews and field visit suggest that the proportion of “lucky draw” is fixed at 60 percent for green channel, 30 percent yellow channel, and 10 percent red channel. 6 World Bank Group team interviews in Mandalay, Janu- ary 2015. 10 Myanmar Business Forum, public private dialogue on customs clearance issue, March 2015. 7 Myanmar Business Forum, public private dialogue on customs clearance issues, March 2015. 11 Standard approach in ASYCUDA electronic system. 133 FACILITATING TRADE THROUGH SMOOTH LOGISTICS is one of the very few countries in the world in which 8.2.2 Building momentum in contracting the SAD is mandatory, thus imposing a great barrier for exporters.12 Another bottleneck for ongoing Customs modernization exporters is the necessity to obtain signatures and Customs is undergoing modernization that should stamps from the SAD, as this requires exporters to be implemented by the end of 2016. With the physically visit the SAD office. support of JICA, Myanmar’s Customs is embarking on an important modernization process that is expected Cross-border trade going through Myanmar’s to be implemented by the end of 2016. The Myanmar 15 border posts is subject to similar process and Automatic Cargo Clearance System (MACCS) is based procedures, but coherent statistics are unavailable. on the Japanese Nippon Automated Cargo and Port Muse, a border town between Myanmar and China, Consolidated System (NACCS) and the Customs handles the largest volume and value of cross-border Intelligence Database System (CIS).13 This program is trade and from casual observations it appears to be expected to significantly reduce the amount of manual relatively better equipped and staffed than other document checking through an automated document border posts. However, coherent statistics and figures verification process (reviewing information, valuation, for freight transport cleared through border posts are and electronic payment of import duties) and the not available, as the MoC and Customs tend to have introduction of risk management for cargo inspection different accounts of the number of freight trucks and capability to track cargo during the customs passing through and the value of goods cleared through clearance and inspection processes. This initiative is border posts. In addition, there are the following issues: crucial in improving efficiency and certainty in the • Lack of proper laboratory facilities to handle customs clearance process. testing on food and potentially hazardous But Customs modernization will not solve all the substances (such as chemicals). Such tests have problems. While the ongoing Customs modernization to be done in Mandalay or Yangon, while freight is vital, this alone will not be exhaustive in covering trucks remain sealed and waiting at the border; the wide needs and problems in logistics and trade • Involvement of local ethnic groups in facilitating facilitation in Myanmar. Logistics and trade facilitation parallel check points, leading to informal trade are key to the efficiency and reliability of the supply and eroding revenue from customs tax or duties; chain. Therefore, a comprehensive reform agenda— and going beyond just customs automation—could be considered and implemented. • For trade going through Muse, there is a 1.5- hour difference in the operating hours between The trade facilitation glass in Myanmar is still only Myanmar and the Chinese border agencies. half full. Table 8.2 presents a summary of key challenges and ongoing initiatives in Myanmar’s logistics trade Facilities and procedures for border checkpoints can facilitation. The table suggests that Myanmar is be improved to facilitate small-scale female traders implementing several key initiatives around “core/ to engage in border trade. Box 8.5 illustrates some traditional” issues related to customs clearance and the of the difficulties faced by small-scale female traders, development of transport infrastructure. However, the highlighted in a World Bank survey. These difficulties glass is “half full” because the operating environment have to do with the behavior of Customs officers, for logistics and transport operators in Myanmar has unnecessarily harsh enforcement, and being caught still to be improved and the regulatory framework between the demands of large-scale tax evaders who governing policies in logistics and trade facilitation use them because of their lack of outside opportunities remains to be updated. and the risks involved. Experience in some border posts in East Africa suggests that training aimed at Customs Myanmar could leverage its engagement in regional officers on professional conduct towards women (e.g., and multilateral fora of economic integration to via educational videos) can be effective, even when sustain reform momentum in trade facilitation. up against highly gender-discriminating cultural Myanmar could use the ASEAN commitment backgrounds. to implement an NSW as an impetus for further simplification of procedures for trade facilitation, 12 https://www.bimco.org/~/media/Operations/Tariffs/ 13 The full NACSS also has National Single Window Myanmar/Agency_fees_1994-01-01.ashx feature. 134 CHAPTER 8 WOMEN FACE SPECIAL OBSTACLES AT BORDER CHECKPOINTS TABLE 8.5 In 2015, the World Bank conducted a study at selected check points in Cambodia and Lao PDR with Thailand and Vietnam. The study aimed to fill knowledge gaps on the patterns of small-scale cross-border trade in those countries and the profile of those engaged in it. Qualitative (field observations, stakeholder interviews and focus group discussions), as well as quantitative (sampling frames listing small-scale cross-border trade transactions and in-depth interviews) data, were collected. The survey focuses on people who dealt with the authorities and were involved in the trade of goods that cross the border in man-powered vehicles or vehicles with fewer than four wheels. The findings show that women face certain types of idiosyncratic treatment at the border, including authorities’ insistent questions, either discriminatory or with sexual innuendos. In general, however, no evidence of sexual harassment was found. Certain constraints seem to justify the discrepancy between the share of women in crossings and in the general population of crossers:   Women are charged higher tax rates than men, and are less often able to negotiate taxes and fees; Women spend on average more time to clear border procedures than men; and Women face a dissuasive tax wedge when willing to upgrade from brokerage to own-account trading or to scale up business activities. Despite gender-specific constraints in participation, the report found that this business area may be a worthwhile avenue for income generation and empowerment for women. Evidence is based on comparisons with socioeconomic status in similar jobs and on income distributions, and calls for enhanced inclusiveness and gender-awareness in trade facilitation projects. The report identified important patterns of small-scale cross border trade in those countries, with an important welfare impact on the population. Some of these findings include: A high proportion of small cross-border traders report situations where a cash and in-kind bribe was expected of them in the course of their cross-border activities; Many authorities are present at the border and levy taxes or fees on small cross-border traders beyond their mandates; In Cambodia, they are often assisted in the collection of tax payments by plain-clothes, unauthorized individuals; Most taxes are informal in the sense that their amount is not fixed, and payment is not recorded or the record does not match the actual payments made. For the majority of crossings, legitimate taxation and informal rent extraction cannot be disentangled and small cross-border traders often fail to see where the line should be drawn; and Discretionary and volatile taxes and fees inflict a significant welfare cost on small cross-border traders. There is evidence of (limited) tax evasion, but confiscations harm vulnerable brokers disproportionately and may have adverse effects on small-scale female traders who do not cross the border themselves. Barely one- fifth of all small cross-border traders report having evaded taxation in the 12 months preceding the survey. Moreover, small cross-border traders confirmed that “large” traders sometimes use them as a front to evade taxes, but they are often unaware of the size of the total shipment. However, confiscations impose a heavy burden on small traders, especially brokers, and solutions to tax evasion less detrimental to vulnerable border users could be investigated.  135 FACILITATING TRADE THROUGH SMOOTH LOGISTICS MOVING TOWARDS MODERN TRADE FACILITATION AND LOGISTICS: INCORPORATING A TABLE 8.2 NEW FOCUS KEY PILLARS OBSERVABLE GAPS SAMPLE OF KEY IN MODERN ONGOING INITIATIVES LOGISTICS AND TRADE FACILITATION Customs Outdated regulations, largely manual processes, Myanmar Automated modernization ineffective risk management, and practices that Cargo Clearance System are not yet fully aligned to international norms (MACCS) is expected to run by November 2016 with a focus on automation of processing within DG Core (traditional) focus Customs, risk management, and an electronic payment system Amendment of Customs Law Trade and Infrastructure (road and ports) soon will reach Transport Masterplan logistics capacity limit while transporting freight through Continuing the completion infrastructure rail and in-land waterways are still underutilized of SEZ in Thilawa by 2016 Border posts are lacking proper facilities to Upgrading of ports (e.g., inspect and test cargo Thilawa, Kaladan) Parallel check points by local ethnic groups Missing links of highway/roads connecting Myanmar with China, India, ASEAN Quality of Infrastructure gap, and financial instruments Multi-Modal Transport logistics service (insurance, financing new freight transport) are Operation Law (pending providers constraining modernization of domestic freight approval) and fluidity of forwarders and transport operators supply chain No port community platform to schedule and track cargo and insufficient infrastructure is causing long delays and poor reliability New Focus Coordination, Fragmented policies and procedures to obtain Physical upgrading of lab regulatory recommendations and certificates facilities reforms, Limited capacity of border agencies in delivering capacity services (testing, risk management) building Absence of formal collaboration of border management agencies No consolidated public listing of trade-related regulations and no National Single Window to allow single submission and synchronous processing of cargo clearance 136 CHAPTER 8 including aligning business processes of separate 154 percent for Thailand). Although financial border agencies, to allow traders to submit electronic institutions in Myanmar have grown rapidly over the forms to relevant border agencies and obtain quick past four years due to the large demand for credit responses. These changes in business procedures within and increasing confidence in the banking system, the border agencies are required so that they can provide a financial system as a whole still contributes only in a one-day turnaround in approvals compared with the modest manner to economic growth and prosperity. current eight days. In order to achieve this, Myanmar may want to start working on the following areas: Access to finance for firms and households is extremely low. Only 23 percent of adults had access • Compiling information on rules, regulations and to financial services in 2014 (FINDEX). Moreover, less procedures for export, import, customs and port than 10 percent of private sector firms borrow from clearance that would lead to a fully operational commercial banks. Most commercial transactions in Trade Portal; the economy are settled in cash due to the absence of • Preparation of a roadmap for the NSW that will a modern payment system infrastructure to process lead to the development of an electronic NSW payments. The salaries of millions of civil servants and for port, Customs and other border agencies private sector employees are still paid in cash. clearance; The formal financial system consists of 19 small- • Review of the business processes to issue licenses scale, closely held banks, four state-owned banks, and certificates in border agencies that are likely to and a small number of microfinance institutions participate in the NSW: e.g., Quarantine, FDA, (MFIs). There are 17 foreign bank representative the Ministry of Commerce; office, and nine foreign banks were issued limited • Selection and implementation of an IT-based licenses in 2015 to conduct corporate banking. The payment system for the NSW that will support nature of banking services is rudimentary. There is integration with the ASEAN Single Window only one state-owned insurance company in Myanmar, (ASW); which undertakes only very basic insurance business. • Identifying a legal framework and international Twelve new insurance companies have been given cooperation for implementing the ASW; and conditional licenses by the Myanmar Insurance Business Supervisory Board to start operations. The • Capacity-building on trade facilitation. banking sector dominates the finance sector and A vigorous administration training effort is also accounts for most (95 percent) of the financial sector needed. The problems created by cumbersome assets held outside the central bank. procedures are compounded by a frequent lack of clear knowledge of which rules apply in the administration. Trade finance products are still underdeveloped In a transition period where many of those rules are in Myanmar. This is largely due to limited capacity bound to evolve and new economic actors appear, in the banking sector, the residual impact of previous mechanisms could be put in place to ensure that the sanctions by Western economies, and outdated new rules are effectively understood and applied on the regulations. There is still a very limited number of ground, while old rules are phased out. banks that can provide documentary based credits (e.g., back-to-back L/C) for exporters. As discussed in later paragraphs, sanctions over certain Myanmar businesses, or the potential risk of money laundering, 8.3 Improving access have contributed to over-cautiousness on the part of foreign banks in dealing with Myanmar’s banks and to trade finance businesses. Myanmar recently relaxed regulations, asking importers to make advance payments on import before delivery. However, other regulations too have counter-productive effects: • The US$1,500 cap on fees for letters of credit is Myanmar has a small and undeveloped financial potentially limiting the supply of L/Cs of larger system. The country has some of the lowest levels of value. It will be important for prices and fees for penetration of financial services in the world, with a L/Cs to be based on risk and liberalized. ratio of private sector credit to GDP in 2013 of only • The prohibition of trade credit insurance is 13.6 percent (compared with 97 percent for Vietnam, 137 FACILITATING TRADE THROUGH SMOOTH LOGISTICS limiting the expansion of open account financing, CBM, the Ministry of Finance, and the Ministry of which is necessary in industries with a short Commerce. Myanmar might consider the following payment cycle, such as the garments and textiles capacity-building program on trade finance: industry. • The financial education of bank employees, as well • Collateral requirements for L/Cs could be as SME managers, is important in optimizing the further relaxed. While the 100 percent collateral small amounts of cash and receivable financing requirement has been relaxed by the CBM of start-ups, and even bigger import and export recently, current recommendations by the CBM companies. One form of education would be to require that they be set at “reasonable levels”. inform banks about trade finance products, other While collateral of movable assets is prohibited, than letters of credit (although the handling of cash and land collateral are allowed. Nonetheless, letters of credit is relatively time-consuming and banks continue to require collateral at anywhere subject to too many authorizations). Increasing between 30 and 100 percent of the value of a contacts and partnerships with locally-established L/C, thereby making it unaffordable for cash- foreign banks might help the transmission of constrained or landless business operations. know-how and learning-by-doing. International institutions such as the IFC have considerable Other trade finance products are in principle not experience from other countries in building on- prohibited. Local banking institutions can discount, site capacity in local banks regarding the use of buy, sell, and exchange bills of exchange, bills of modern trade finance instruments. lading, promissory notes and other traditional trade • Encourage banks and traders to enroll in bills, although these products are hardly used or carry International Chambers of Commerce (ICC) or prohibitive cost (such as the acceptance of bills of lading other institutions’ (such as the Washington-based by local banks). However, the capacity of local banks to International Institute of Finance) courses through handle these instruments is very limited, and clients learning platforms for practitioners. The ICC are not necessarily aware of their existence. Supply Academy was launched in March 2015, and aims depends on the availability of bank staff able to handle at supply trade finance e-courses (including on them. Such staff is scarce and has a rapid turnover. The letters of credit, receivable financing, and other same goes for the issuance and endorsement of letters simple trade finance instruments), leading to of credit. professional certification. The ICC Academy is While importation against documents can based in Singapore and will be providing global sometimes be arranged by a limited number of local e-learning at affordable fees. banks, it is not available to all clients due to the • Financial education of trading companies is shortage of simple risk management skills in this needed for them to be able to match their areas. Receivable financing, a form of trade finance receivables and payables, hence optimizing their particularly adapted to SMEs with short export and scarce cash reserves. One challenge for the viability import cycles and few cash reserves, is at an initial of new import-export oriented industries such stage of development in Myanmar. Local private banks as textiles and garments is to balance out cash are not familiar with factoring or forfaiting, which inflows and outflows in very short production are receivable and payable financing frequent in the cycles. Any maturity mismatch between receipts garments and textiles industry and, more generally, on their exports (typically paid of a 90-day basis) in global supply chains with short production cycles. and imports (to be paid after the issuance of letters Banks may off-load part of the risk to factoring or of credit, either locally or abroad) may lead the forfaiting companies that are active in international company to becoming cash-strapped. Besides, any markets, or to insurance companies, as they often delay in the process of letter-of-credit issuance lack the skills to propose these relatively simple and may postpone inputs and hence production, straightforward products. and ultimately lead to the dissatisfaction of final buyers. It is therefore important to educate banks and industries about the potential of short-term Concerns over availability and certainty in accessing receivable and payable financing. Financial education US dollars at market rates in Myanmar are another could usefully extend to authorities, as the regulation reason for the private sector to seek financial of trade finance instruments is spread between the services abroad. In this area, the government has adopted a number of positive reforms, having reduced 138 CHAPTER 8 OFF-SHORE TRADE FINANCING BY MYANMAR’S IMPORTERS AND EXPORTERS BOX 8.6 Current regulatory constraints and lack of efficiency, if not know-how, in the supply of trade finance instruments led most of the importers and exporters met during the mission to seek alternative modes of financing overseas. One of the most commonly practiced is the use of a parent company registered in Singapore or Hong-Kong to act as an intermediary with trading or banking counterparties. Using remittance channels normally used for the transfer of savings by Myanmar workers established in the region, Myanmar’s importers and exporters send money transfers to the parent company or individuals to guarantee for the issuance of letters of credit by Singapore, Thai or Hong Kong banks, which themselves are necessary to guarantee payments to foreign suppliers. Remittance channels are also used to circumvent the obligation on Myanmar residents to pay for imports only on delivery. Exporters often require advance payments or cash guarantees, notably for car exports, but also other goods, including industrial inputs. One relatively common practice is for the buyer to send a payment through remittance channels to Singapore. Once the merchandise is delivered to Myanmar, an official payment of the same amount will be sent to the seller, with the seller returning the advance payment through the remittance channel once the transaction is completed. These practices mobilize a fair amount of cash, and therefore are affordable for companies with a certain size, or active in sectors that generate higher profits (construction, import and distribution of imported durables, and consumer goods) than lower margin businesses (agriculture, garments) for which cash resources are scarce. Apparently, local and foreign brokers help Myanmar’s importers and exporters to find overseas banks ready to open or endorse letters of credit on their behalf. Cash deposits are often necessary, particularly for “newcomers”, albeit not always if the trader in question has already a good track record of payment or credit. Information was provided about possible “commissions” reverted by brokers to local banks, although this could not be confirmed by the mission. Other banking services are provided off-shore, such as working capital, pre-shipment financing and foreign exchange services. Second-best solutions may be tolerated by the government in view of the limited capacity or desire of small local banks to take on more risks, or to handle quickly and efficiently trade services and instruments. The status quo may even have generated a “conservative consensus” towards maintaining current practices, in view of the benefits generated by it (kickbacks of commissions from brokers to small local banks; gaining time and efficiency for traders). In the long run, there is a danger of creating a dual market for trade services, if relatively less efficient services are left to local start-ups, small and medium-sized enterprises, and the more efficient services are affordable only to larger, well-established and higher profit-generating groups. 139 FACILITATING TRADE THROUGH SMOOTH LOGISTICS the number of exchange rates from seven to two. At been over-cautious regarding what is exactly implied by present, the CBM maintains the operation of a managed US legislation. exchange rate, keeping the local currency (kyat) within a band of purchasing and selling rate against the US The licensing of foreign-banks in Myanmar’s dollar. An inter-bank market was opened for banks local market for financial services is a positive to exchange US dollar liquidity. The CBM proceeds development. This comes in a context in which the with currency auctions, and monitors the markets. The international banking community has shown only a annual turnover in the markets is around US$2 billion very limited appetite for investing in new “frontier” annually. countries. Since the global financial crisis of 2009, many global banks, in particular European- and US- The current government policy of opening the local based, have been reducing international networks and banking market to foreign-owned banks aims at not correspondent relationships, deleveraging balance only increasing the level of competition but also sheets, and reducing costs. This overall environment is increasing collaboration and transfers of know-how not favorable for Myanmar’s financial sector expansion, between local and foreign banks. However, newly which needs to establish links with the rest of the licensed foreign banks (Bank of Tokyo-Mitsubishi, world, in particular through correspondent banking SMBC, OCBC, and six other banks to be licensed) relationships. At the present time, these relationships are confined to offering financial services, including are few—only about 30 relationships for the most active trade finance, to foreign companies, joint ventures and bank in trade. The expansion of these relationships domestic banks, not directly to local firms. The gradual is not supported either by the “hand-over” effects of approach is aimed at protecting the local financial sanctions, or the increased compliance requirements industry (“infant industry protection”) from being on international banks. severely affected by the competition of potentially larger players. The expectation is that international banks As compliance efforts are increasing, the perception will “professionalize” and bring synergies to Myanmar’s of reputational risk is at its highest, also on know- financial sector as a whole. Eventually, importers and your-customer (KYC) and anti-money laundering exporters may find the recourse to overseas financial (AML) rules. Despite efforts to upgrade standards, the services to be less attractive. local financial sector is still regarded as being behind the requirements, which does not help international This scenario may work if the market for trade financial integration. It was sensed during the mission finance is not segmented for too long, with foreign that the local financial industry was very willing companies benefitting from the advantage of better to catch up on existing requirements. At least one services for foreign-owned but locally-established global bank representation office is dispensing local banks, and local firms being confined to locally-owned seminars on KYC and AML rules, destined to improve banks. Some business interlocutors have indicated their compliance with international standards. Such an intention, if the segmentation were to last, to qualify as excellent initiative deserves not only to be continued, joint ventures by changing their ownership structure, but expanded. Material on KYC and AML rules exists to benefit from the services of foreign-owned banks. in the websites of the ICC Banking Commission and the Bankers’ Association on Finance and Trade (BAFT). Although the lifting of international sanctions on This could be used by the local banking association. Myanmar’s financial industry has taken place in steps, the residual impact on the country’s banking sector has yet to dissipate. For example, US sanctions on transactions with some of the four state-owned banks have been lifted by the US Treasury. Details of the current status of US regulations regarding financial transactions with Myanmar are transparent and can be found on the website of the US Treasury. Education is needed within the domestic and international financial industry about what the US Treasury and other countries’ regulations regarding Myanmar mean in practice. Domestically, some private banks have never been under sanction, although the perception might be otherwise. Internationally, non-US banks have also 140 EXECUTIVE SUMMARY REFERENCES REFERENCES ABADIE, ALBERTO AND J. GARDEAZABAL. 2003. “The Economic Costs of Conflict: A Case Study of the Basque Country.” American Economic Review 93 (1): 113-132. ABIDOYE, B.O. AND M. CALÌ. 2015. “Income shocks and conflict: evidence from Nigeria.” Policy Research Working Paper No. 7213, World Bank.  AKRESH, R., S. BHALOTRA, M. LEONE, AND U. OSILI. 2012. 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INTERVIEWS AND FIELDWORK Ending Poverty and Boosting Shared Prosperity in Myanmar. The World Bank. ______________2014B. Enterprise Survey: Myanmar. The World Bank. ______________2014C. Myanmar - Capitalizing on Rice Export Opportunities. The World Bank. WORLD BANK AND WORLD TRADE ORGANIZATION. 2015. The Role of Trade in Ending Poverty. WORLD TRADE ORGANIZATION. 2014. “Trade Policy Review of Myanmar.” https://www.wto.org/english/tratop_e/tpr_e/s293_e. pdf WORLD FOOD PROGRAM, AGRICULTURAL SURVEY 2013/14. INTERVIEWS AND FIELDWORK Consultations with private sector in Mandalay, January 12, 2015 Consultations with private sector in Yangon, January 15-18, 2015 Community Visit 105, Karen State, January 15, 2015. Community Visit 106, Karen State, January 16, 2015. Interview 103 with international expert, Yangon, January 13, 2015. Interview 108 with private sector, Karen State, January 16, 2015. Interview 114 with ethnic group representative, Thailand, January 19, 2015. Interview 125 with civil society representative, Shan State, January 24, 2015. Interview 127 with civil society, Shan State, January 25, 2015. Focus Group 104 with civil society, Karen State, January 15, 2015. Focus Group 108 with private sector, Karen State, January 16, 2015. Focus Group 109 with private sector, Thailand, January 17, 2015. Focus Group 111 with civil society, Thailand, January 18, 2015. Focus Group 120 with private sector, Shan State, January 22, 2015. Focus Group 129 with civil society, Shan State, January 25, 2015. 149 EXECUTIVE SUMMARY EXECUTIVE SUMMARY