MYANMAR'S FUTURE JOBS: EMBRACING MODERNITY MAIN REPORT WENDY CUNNINGHAM AND RAFAEL MUÑOZ, EDITORS with Sjamsu Rahardja, Claire Hollweg, Izabela Leão, Indira Ekanayake, Mansur Ahmed, Mohammed Amin, Habib Rab, and Pui Shen Yoong The Myanmar Future Jobs: Embracing Modernity Report can be downloaded at: http://documents.worldbank.org/curated/en/958621536141390299/Myanmars-Future-Jobs- Embracing-Modernity-Main-Report MYANMAR'S FUTURE JOBS: EMBRACING MODERNITY MAIN REPORT WENDY CUNNINGHAM AND RAFAEL MUÑOZ, EDITORS with Sjamsu Rahardja, Claire Hollweg, Izabela Leão, Indira Ekanayake, Mansur Ahmed, Mohammed Amin, Habib Rab, and Pui Shen Yoong ACKNOWLEDGEMENTS The Overview and Main Report were written by a World Bank team led by Dr. Wendy Cunningham and Dr. Rafael Muñoz. The team included Sjamsu Rahardja, Claire Hollweg, Izabela Leao, Indira Janaki Ekanayake, Mansur Ahmed, Mohammed Amin, Habib Rab, Reena Badiani-Magnusson, Sufian Jusof, Anne Ong Lopez, Pui Shen Yoong, David Alejandro Huertas, Ikuko Uochi, Kyaw Soe Lynn and Audrey Stienon. Excellent administrative support was provided by Khay Mar San and Corinne Bernaldez. The reports was prepared under the guidance of Victoria Kwakwa, Vice President for East Asia and Pacific; Ulrich Zachau and Ellen Goldstein (former and current Country Directors for Myanmar), Abdoulaye Seck and Gevorg Sargsyan (former and current Country Managers for Myanmar) and Jehan Arulpragasm and Philip O’Keefe (social protection sector managers) at the World Bank. The preparation benefitted from detailed peer review guidance provided by Tom Farole, Gabriel Demombynes, Parmesh Shah, and Maryla Maliszewska as well as Lars Sondergaard, Shabih Mohib, Rawang Rojvanit, and many colleagues at the World Bank who provided insights, suggestions, and improvements to the report process and the final document. The team wishes to thank the participants in numerous consultation meetings with the Ministries of Planning and Finance; Labor, Immigration and Population; Agriculture, Livestock, and Irrigation; and Commerce as well as the Union of Myanmar Federation of Chambers of Commerce and Industry. We are particularly grateful for their written comments on the final draft of the report. The report also benefitted from broad consultations with civil society, the Myanmar academic community, the private sector, and international development partners. The team is deeply grateful to Dr. Sean Turnell and the Myanmar Development Institute for their gentle guidance throughout the process. ABOUT THIS REPORT Jobs are a priority policy area for Myanmar. Myanmar has enjoyed rapid economic growth and structural transformation in recent years. This has been accompanied by an expansion of jobs in the private domestic sector, but given the magnitude of the number of jobs in Myanmar – more than 24 million – the new sectors have made only a small dent in expanding job quantity or quality. Economic growth and private sector development are necessary, but not sufficient, to create the jobs that Myanmar needs. The jobs picture in Myanmar is complex. More than one-third of workers own a family farm, and another 16 percent are agricultural laborers. Another one in four people own their own non-farm household businesses. Among wage earners who do not work in agriculture, half are in small firms — and thus are likely to receive few worker protections — while the other half work in large, domestic or foreign private sector firms or in government jobs. MODERN PRIVATE SECTOR Governmen 1.7 Million Jobs Pri ploye Em vat e F es irm t Non-Household Micro Enterprise Agriculture 2.6 Million (Family Farm) 8.5 Million 24.1 Million Jobs Household Enterprise 6.2 Million Agriculture (Hired Labor) 3.9 Million + 2.8 Million Migrants Abroad TRADITIONAL SECTORS 21.1 Million Jobs This heterogeneous job picture requires heterogeneous solutions. The challenge for some job sectors (such as large private sector firms) is to increase the number of jobs, while for others, (such as farms or household enterprises) it is to increase workers’ productivity and jobs quality — which might even lead to fewer, yet better, jobs in these job sectors. The Notes in this report present the nature of jobs in each sector (except the public sector), the challenges to improving these sectors, and recommended policies to develop sector-specific jobs strategies. Building on the government’s Myanmar Sustainable Development Program (MSDP), which provides a framework for jobs policy reform, this report identifies priority area that could have the greatest impact in each sector in promoting this framework. The accompanying Overview document presents the overall jobs picture based on this report. Note 1 addresses the overall Myanmar macroeconomic environment for jobs, while Note 2 profiles the Myanmar labor force. Notes 3, 4, 5, and 6 explore jobs in agriculture, household enterprises, the private sector, and through migration. The Notes are designed to be stand- alone documents that can be used to inform discussions with appropriate Ministries or stakeholders. Myanmar’s Future Jobs: Embracing Modernity Main Report 1 CONTENTS ACKNOWLEDGEMENTS CURRENCY EQUIVALENTS 4 ABBREVIATIONS AND ACRONYMS 4 NOTE 1: A MACROECONOMIC CONTEXT FOR MORE AND BETTER JOBS 5 Trends in Growth and Labor Market Developments 7 Macroeconomic Constraints to Creating More and Better Jobs 14 Growing Macroeconomic Challenges and Vulnerabilities 15 Policy Challenges to Addressing Macroeconomic Shocks and Imbalances 17 Rapid Credit Growth but Low Financial Inclusion Hampers Job Creation 20 Macroeconomic Policy Priorities for More and Better Jobs 22 Clarity, Communication and Credibility of Economic Policies 22 Continued Fiscal Adjustments for Macroeconomic Stability and Growth 24 Maintaining Monetary Discipline and Exchange Rate Flexibility 25 Mitigating Financial Sector Risks 26 References 27 NOTE 2: MYANMAR’S LABOR FORCE 29 Myanmar People are Hard Workers 31 Myanmar Workers Engage in Low-Quality Jobs 34 Age and Gender are Strong Determinants of Time Use Patters 37 Factors Limiting Worker’s Access to Better Jobs 43 Labor Force Policy Priorities for More and Better Jobs 53 More Skills and More Job-Relevant Skills (as Defined by Employers) 53 Creation and Dissemination of Labor Market Information to Inform Skills Development 56 and Jobs Decisions Improving Information on Job Vacancies through Technology and Private Sector 57 Stimulating Jobs in Conflict-Affected Zones, for Income and Building Social Cohesion 58 References 61 NOTE 3: JOBS IN AGRICULTURE IN MYANMAR 65 The Nature of Jobs in Rural Areas 67 Agricultural Labor Productivity in Rural Areas 75 Emerging Policy Developments 77 Policy Priorities for More and Better Agricultural Jobs 78 Enhance Agricultural Productivity Among Smallholder Farmers 78 Develop Agriculture Value-Chains 79 References 81 2 Myanmar’s Future Jobs: Embracing Modernity Main Report NOTE 4: MICRO ENTERPRISES IN MYANMAR 83 Micro Enterprises in Myanmar 86 Micro Enterprises Jobs 91 Policy Priorities for More and Better Micro Enterprise Jobs 99 Expand Access to Finance 99 Improve Skills of Micro Enterprise Workers 100 Increase Access to Markets 101 References 103 NOTE 5: PRIVATE SECTOR JOBS IN MYANMAR 107 Job Creation and Job Destruction 109 Leveraging Domestic Market Potential: Jobs from a Growing Internal Market 112 What and How Myanmar Exports Matters for Jobs 116 Attracting FDI and Participating in Global Value Chains (GVCs) 122 Leveraging the tourism boom 126 Improving Firm Level Productivity 129 Policy Priorities for More and Better Private Sector Jobs 133 Create a Conducive Environment for Firm Creation, Growth, and Diversification 133 Support Firms Serving the Domestic Market 134 Promote and Diversify Exports 135 Encourage Integration into GVCs 136 Attract Domestic and Foreign Investment 138 Increase Private Sector Competitiveness 139 Integrating post-conflict zones into trade corridors 139 References 141 Appendix 143 NOTE 6: MIGRATION AS A JOBS STRATEGY 147 Myanmar is a Mobile Country 148 The Impacts of Migration on Migrants and on Source Countries are Generally Positive 157 High Costs Impede Migration for Jobs 158 Migration Policy can Enhance Migration as a Jobs Strategy 161 Reducing Information Asymmetries 161 Expand Access to Migration to Poor Households 163 Improve Coordination with Migrant-Receiving Countries 164 Enhance the Development Impact of Migration 165 References 167 Myanmar’s Future Jobs: Embracing Modernity Main Report 3 Note 1: A Macroeconomic Context for More and Better Jobs CURRENCY EQUIVALENTS (Exchange Rate Effective May 30, 2017) Currency Unit = Myanmar Kyats (MMK) US$ 1 = MMK 1368.50 ABBREVIATIONS AND ACRONYMS ASEAN Association of Southeast Asian Nations CBM Central Bank of Myanmar EAP East Asia and the Pacific FDA Myanmar Food and Drug Administration FDI Foreign Direct Investment GDP Gross Domestic Product GOM Union Government of Myanmar GVCs Global Value Chains ICT Information and Communications Technology IHLCA Integrated Household Living Conditions Assessment ILO International Labor Organization LEOs Labor Exchange Offices MPLCS Myanmar Poverty and Living Conditions Survey NESP National Education Strategic Policy NGO Non-governmental organization PISA Programme for International Student Assessment PIAAC Programme for the International Assessment of Adult Competencies REER Real Effective Exchange Rate SEZ Special Economic Zone SME Small and Medium-sized Enterprises TIMSS Trends in International Mathematics and Science Study TVET Technical Vocational Education and Training WDI World Development Indicators Regional Vice President: Victoria Kwakwa Practice Senior Director: Michal Rutkowski Practice Manager: Jehan Arulpragasam Task Leaders: Wendy Cunningham and Rafael Muñoz 4 Myanmar’s Future Jobs: Embracing Modernity Main Report Note 1: A Macroeconomic Context for More and Better Jobs NOTE 1: A MACROECONOMIC CONTEXT FOR MORE AND BETTER JOBS 1 1 This Note was prepared by Rafael Muñoz Moreno and Pui Shen Yoong, with inputs by Habib Rab. Myanmar’s Future Jobs: Embracing Modernity Main Report 5 Note 1: A Macroeconomic Context for More and Better Jobs Myanmar is facing heightened challenges in sustaining the high levels of investment and job creation it has experienced since opening up in 2011. Between 2011-2015, sound macroeconomic policies and the lifting of economic controls (e.g. in foreign exchange, trade licensing, telecommunications and financial sectors) led to an acceleration of private investment, including in high employment industries (e.g. construction, light manufacturing) and services (e.g. hospitality, transport, trade). In this time, growth was relatively stable, inflation was below 6 percent, and GDP expanded by 7.3 percent annually—thus exceeding the growth rates of neighboring countries (Figure 1.1), and remaining on par with that of other high performing countries during their period of economic liberalization (Figure 1.2). In the last 2 years, however, declining commodity prices, heavy flooding in agricultural areas, and policy uncertainty have exposed the economy to short-term vulnerabilities and growing macroeconomic imbalances. Inflationary pressures remain high (over 7 percent in January 2017) even as growth has begun to moderate, and both the current account deficit and the budget deficit widened in 2015/16. Figure 1.1 Figure 1.2 Real Growth (%), 2010-2015 Average Real GDP Growth (%), 5-year period after liberalization Myanmar’s real GDP growth has outpaced that of most …and is on par with the growth rate of other countries of its neighbors in recent years… after their liberalization. 9.9 10% 9% 8.7 8.5 8.3 8.2 10% 7.7 8% 7.3 7.3 7% 6.3 9% 6.0 6% 8% 5% 4% 7% 3% 2% 6% 1% 5% 0% 2010 2011 2012 2013 2014 2015 ) ) ) ) ) 2) ) 7) ) 62 68 66 97 77 ) 11 92 90 6 6 (19 (19 (19 19 (19 (19 (20 (19 (19 Lao PDR Vietnam (19 Z( N N A N R R S D M MO TH MY KO MM IN TW ID CH Myanmar Cambodia VN Source: World Development Indicators (WDI), January 2017 Source: WDI, January 2017 Note: Year refers to start of the five-year period . Countries listed are: Taiwan (TWN), Indonesia (IDN), Thailand (THA), Mozambique (MOZ), China (CHN), Vietnam (VNM), Republic of Korea (KOR), Myanmar (MMR), Malaysia (MYS), and India (IND). Three key macroeconomic challenges exist to generating more and better jobs. First, Myanmar’s vulnerability to volatile economic growth, due to a lack of resilient agricultural infrastructure and a narrow production base, can have serious long-term consequences on the quality and stability of employment. Second, inflationary pressures fueled by deficit monetization and nominal exchange rate targeting have made it more difficult to maintain a competitive exchange rate, which is critical to the employment- generating potential of tradable sectors. Third, although credit to the private sector has grown rapidly overall, micro, small and medium-sized businesses have limited access to financial products, impeding their expansion and ability to create more jobs. Low levels of financial inclusion are largely due to interest rate caps that are binding on a widespread range of products. 6 Myanmar’s Future Jobs: Embracing Modernity Main Report Note 1: A Macroeconomic Context for More and Better Jobs Despite Myanmar’s favorable economic outlook and labor market prospects, confidence in its trajectory depends on maintaining investor confidence, for which macroeconomic stability is key. This Note looks at Myanmar’s record of growth and employment, and at the potential impact of emerging macroeconomic challenges on investment and on jobs. Its conclusion identifies policy options that could help sustain the macroeconomic stability that is needed to promote high quality investments, and enable the creation of more, and more productive, jobs. Trends in Growth and Labor Market Developments A legacy of economic isolation has led to poor labor market outcomes Decades of economic isolation have constrained investment and real GDP growth in Myanmar. Private entrepreneurship was initially heavily constrained as the 1962 military coup led to the nationalization of industries and closure to external markets, after which a small, politically connected elite tightly controlled natural resource extraction. Although nascent reforms took place in the 1990s, these were relatively short lived. Sanctions imposed by the European Union, the United States and others in the 1990s further repressed trade and investment in the economy. It is estimated that Myanmar has been trading at only 15 percent of its potential level through 2010, far behind neighboring countries such as Vietnam and Thailand (World Bank 2016). Myanmar’s economic isolation was accompanied by poor outcomes in terms of job creation. Available evidence indicates that the employment intensity of growth, a measure of how employment and output vary together over time, has declined over the past few decades. According to estimates from a cross-country study, a one percent increase in Myanmar’s output led to an increase of 0.35-0.36 percent in employment over 1991-1999 on average, controlling for country dummy and interaction variables (Kapsos 2005).2 This figure subsequently declined to 0.21 percent over the period 1999-2003, in contrast to other countries in Southeast Asia that experienced increases in employment intensity during this time (Ibid). Limitations on data quality aside,3 these results point to the link between economic growth and employment being quite weak in Myanmar prior to 2011. Economic controls repressed demand, which in turn led to significant underinvestment and underemployment. Natural resources were an important driver of growth in the 2000s although they generated little employment. The estimates of employment intensity of growth in Myanmar falls below the ‘normal’ range of 0.3-0.5 for countries where the labor force is growing between 1-2 percent per annum (USAID 2013; Crivelli et al. 2012). In addition to poor outcomes on the quantity of jobs, the available evidence also suggests that economic growth has had little impact on the quality of jobs. Although Myanmar’s economy is moving relatively quickly away from agriculture towards industry and services (Figure 1.3), the distribution of employment across sectors has remained fairly static (Figure 1.4). The share of agriculture in GDP fell from 54.5 percent over 2000-2004 to 32.4 percent over 2010-2015, while the share of industry and services grew from 45.6 percent to 67.6 percent over the same period. Nonetheless, the share of workers employed across agriculture (around 52 percent), services (around 36 percent), and industry (around 12 percent) has remained relatively steady since 2000. The share of employment in agriculture has over time exceeded the share of the sector’s value-added contribution to GDP, reflecting low labor productivity levels and the prevalence of poor quality (low-paid) jobs. 2 The dummy variables are: shares of employment in services and industry, degree of conflict, average trade as a percentage of GDP 1991-2003, average trade balance 1991-2003, and malaria deaths per 100,000 inhabitants. The regressions also control for the interactions between GDP and these dummy variables. 3 These estimates suffer from omitted variable bias, and output data prior to 2010 is not reliable. Myanmar’s Future Jobs: Embracing Modernity Main Report 7 Note 1: A Macroeconomic Context for More and Better Jobs Figure 1.3 Figure 1.4 Sector Value-Added Contribution to GDP (%) Distribution of Employed Workers, by Sector (%) Myanmar’s economy has been moving towards industry …but the sector profile of employment remains broadly and services… unchanged. 100% 100% 90% 90% 33.9% 35.7% 80% 36.0% 39.2% 80% 36.1% 35.6% 70% 70% 60% 11.7% 60% 11.3% 12.2% 11.5% 18.5% 50% 50% 28.4% 40% 40% 30% 54.4% 30% 53.0% 52.4% 52.2% 45.5% 20% 20% 32.4% 10% 10% 0% 0% 2000-2004 2005-2009 2010-2015 2004-2005 2009-2010 2014 Agriculture Industry Services, etc. Agriculture Industry Services, etc. Source: World Development Indicators (WDI), January 2017 Source: IHLCA (2004/05; 2009/10), Census (2014) Box 1.1: Faster Growth Does Not Guarantee More or Better Jobs Economic growth is a prerequisite for job creation, but its impact on the quantity and quality of jobs differs depending on the context. Given that growth occurs partly through the destruction of low-productivity jobs and the creation of more productive jobs, economic growth can have a negative impact on employment in the short term. This is particularly acute for countries undergoing structural transformation, where job losses are likely to occur in less productive sectors and subsectors as labor shifts to relatively more productive activities. Moreover, demographic factors matter: if increases in the share of the working-age population or in the labor force outpace job creation, then unemployment may rise. This is especially relevant in Myanmar’s case, where the working age population is estimated to rise by 5.5 million people over the next 15 years. Importantly, the sectoral composition of growth can influence the quality of jobs created, and by extension the ability of jobs to lift living standards. Loayza and Raddatz (2010) find that more labor-intensive sectors (agriculture, construction and manufacturing) have stronger effects on poverty alleviation by increasing absolute income. Other studies place greater emphasis on the importance of export-oriented manufacturing growth in generating more (and more productive) jobs. Cross-country work by Arias-Vasquez et al. (2012), for example, finds that manufacturing growth is associated with a substantial increase in employment and a decline in unemployment among middle-income countries. Rodrik (2015) cautions that premature deindustrialization—the observed decline in manufacturing employment and real value added in low and middle-income countries over the past decade—may inhibit income convergence, economic development, and political stability. 8 Myanmar’s Future Jobs: Embracing Modernity Main Report Note 1: A Macroeconomic Context for More and Better Jobs Deliberate policies are therefore needed to translate economic growth into more and better jobs that can improve living standards. This is especially crucial in fragile and conflict-affected states such as Myanmar that have high levels of poverty and vulnerability, since jobs are the primary mechanism through which poverty reduction occurs. Examining 16 countries that experienced substantial declines in moderate poverty from 2000 to 2010, Azevedo et al. (2013) find that growth in labor income is the most important contributor to poverty reduction, accounting for more than half the reduction in 10 countries and more than 40 percent of the decline in 4 countries. In addition, public interventions may amplify the ability of jobs to generate positive social externalities. Encouraging business and trade cooperation across groups of different ethnicities can foster trust and social cohesion, thereby reduces the risk of conflict (Kilroy 2011). Studies of multiethnic cities in India show that greater economic interdependence of Muslims and Hindus, including through jobs leads, to more interethnic cooperation and peace (Varshney 2002). There is also evidence that training programs reduced mercenary interest in Liberia (Blattman and Ralston 2015). Reforms since 2011 have accelerated capital accumulation and productivity gains Reforms since 2011 have accelerated capital accumulation and productivity gains, which are estimated to have been the main drivers of subsequent economic growth. Between 2010/11 and 2015/16, GDP expanded by an average of 7.3 percent per annum. World Bank estimates based on the Solow model4 indicate that total factor productivity (TFP) contributed almost half (42 percent) of Myanmar’s growth between 2010/11 and 2015/16, followed by capital accumulation (39 percent). This is to be expected as reforms helped accelerate factor accumulation after years of repressed demand. Myanmar’s overall growth pattern is similar to that of other countries when they were at the same stage of development. Enhanced TFP also contributed at least 40 percent of growth in China, Vietnam and Cambodia during their respective periods of liberalization reform (Figure 1.5). The pace of TFP growth in Myanmar over 2010-2015 (3.1 percent annually, on average) is also comparable to that of these countries, although Myanmar’s is slightly lower than China’s (3.6 percent) and Cambodia’s (4.3 percent) were during their respective growth spurts. Large TFP gains reflect Myanmar’s rapid structural transformation and greater integration with the global economy. One major driver of productivity is structural transformation, where the economy moves from less productive to more productive activities. The pace of transformation in Myanmar has been on par with that of China or in Vietnam during their early phases of economic takeoff (Figure 1.6), contributing to large TFP gains. Increased investment and trade could help accelerate this process further. Moreover, greater integration with the global economy accelerates productivity gains as it brings new capital, technology and knowledge that help drive TFP growth. 4 Using a growth accounting model including human capital developed by the World Bank. Annual GDP is modeled as a function of capital, labor, and human capital adjusted labor; the residual (growth in GDP unexplained by increase in factor inputs) represents productivity gains, or total factor productivity. The income share of capital Is assumed to be 40 percent. Myanmar’s Future Jobs: Embracing Modernity Main Report 9 Note 1: A Macroeconomic Context for More and Better Jobs Figure 1.5 Post-Liberalization Factor Contribution to GDP Growth (%) in East Asia Productivity gains have driven growth during initial stages of liberalization across East Asia 100% 90% 80% 40% 40% 42% 70% 58% 60% 50% 40% 30% 20% 10% 0% Myanmar China Vietnam Cambodia (2010-2015) (1978-1990) (1994-2000) (1993-2000) Capital Stock Labor Human Capital per Labor Total Factor Productivity Source: World Bank staff estimates using Solow decomposition Figure 1.6 Structural Transformation in Myanmar is On Par with that of China and Vietnam 100 CHINA 100 VIETNAM 100 MYANMAR 95 95 Share of Industry and Services Contribution 90 90 90 85 85 to GDP Value Added (%) 80 80 80 75 75 1994 70 1978 70 70 60 65 65 2010 60 60 50 55 55 50 50 40 0 2000 4000 6000 8000 500 1000 1500 2000 500 1000 1500 GDP per capita, constant 2010 $ GDP per capita, constant 2010 $ GDP per capita, constant 2010 $ Sources: WDI, World Bank staff calculations. Note: Data points marked in red refer to the start of the liberalization period. Further gains from productivity may be possible from creative destruction in the private sector, a process by which less productive firms and old production processes are displaced by new and more efficient ones. Through this churning, the economy’s scarce resources are reallocated to more productive firms and sectors, speeding up the process of structural transformation. The upcoming 10 Myanmar’s Future Jobs: Embracing Modernity Main Report Note 1: A Macroeconomic Context for More and Better Jobs Myanmar Enterprise Survey finds that, of the 1,000 formal enterprises surveyed in Yangon, Mandalay, Bago, Taunggi and Monywa, about a third of those interviewed in 2014 had ceased operations by 2016, and about 17 percent of firms ceased annual operations within the past two years. This rate of churning is substantially higher compared to the 7 percent average annualized exit rates found in 47 countries (Aga and Francis 2015), but not unusual given Myanmar’s robust economic growth. However, exiting and surviving firms are virtually identical in terms of labor productivity, employment and sales growth to firms that remain in operating, indicating significant reallocation of resources in low productive firms. Increased labor productivity relative to job creation is driving growth in labor value added Relative to TFP and capital accumulation, employment creation has played a smaller role in driving GDP growth in recent years. Estimates from the Solow model indicate that employment creation contributed 11 percent to Myanmar’s economic growth from 2010/11-2015/16. The contribution of labor gradually picked up, growing by 1.4 percent annually during this period. However, the pace of the expansion has been moderate as labor market participation is already relatively high at 63 percent, comparable to the average of 64 percent for the East Asia and Pacific region. Moving forward, labor force participation rates are expected to rise further due to Myanmar’s demographic dividend and as more women enter in the labor market. Examining output per capita growth also illustrates that increased labor productivity rather than new employment creation has driven per capita output growth. Between 2010 and 2015, Myanmar’s real GDP per capita grew by 6.5 percent annually on average. According to World Bank estimates using the Shapley decomposition method,5 almost all of this growth in output per capita was driven by increases in labor productivity. Labor productivity accounted for on average 5.95 percentage points out of the total 6.5 percent real GDP per capita growth annually (92 percent). In contrast, the contribution of employment to growth seems negligible. The relatively large contribution of labor productivity can be linked to structural transformation in the economy, as discussed above, and to the resulting pattern of job creation in recent years. With higher value-added sectors such as industry and services growing as a share of GDP on the one hand, and the share of labor across all sectors remaining stable on the other, the relative contribution of labor productivity has increased on average. Table 1.1 Increases in Productivity have Driven Value Added Growth per Capita from 2010-2015 Total Period : 2010 to 2015 Percent Change % Contribution Annual Growth Per Capita Value Added 6.46% 100% Change in Productivity 5.95% 92.0% Change in Employment rate 0.00% 0% Change in Participation Rate -0.12% -2% Change in Share of Working Age Population 0.63% 10.0% Source: World Bank staff estimates using Shapley decomposition method. Data from WDI and ILO Trends Econometric Models (July 2015). 5 The Shapley decomposition method splits changes in per capita output into four components: changes in productivity, employment rates, labor force, and the working age population. It also calculates different sectors’ contribution to aggregate productivity and employment growth, shedding light on the roles of productivity and employment creation in driving overall economic growth. Myanmar’s Future Jobs: Embracing Modernity Main Report 11 Note 1: A Macroeconomic Context for More and Better Jobs Evidence from more recent years (2014-2016) also indicates strong job creation in manufacturing and services. The 2016 Myanmar Enterprise Survey reveals that the net impact of firms entering, exiting, expanding, or contracting has been positive for job creation in the manufacturing and services sectors. Overall, the net annual job creation rate was 13 percent,6 with the number of jobs from new entrants growing at 18 percent per year and those from the expansion of surviving incumbent firms growing at 7 percent a year. These expansions offset annual job losses from the contraction of certain surviving firms (4 percent job loss per year) and from firms exiting the market (10 percent job loss per year). The manufacturing sector has been particularly dynamic. Between 2014 and 2016, 40 percent of jobs from new entrants, and over three-quarters of job creation from the expansion of existing firms were in the manufacturing sector—along with the majority (near 60 percent) of job losses from both firm contraction and firm exit (Figure 1.7). Figure 1.7 Per Sector Share of Job Creation by firm type 100% 80% 60% 40% 20% Contracting Exiters Survivors 0% Entrants Expanding -20% Survivors -40% -60% -80% -100% Other services Retail Manufacturing Source: World Bank staff estimates using Shapley decomposition method. Data from WDI and ILO Trends Econometric Models (July 2015). Labor productivity gains occurred in the manufacturing and services sectors, indicating within- sector shifts from less to more productive activities. According to the Shapley decomposition results, manufacturing and services are key sources of productivity gains, expanding approximately 1.8 percent on a yearly basis between 2010 and 2014. These sectors account for nearly 60 percent of the overall contribution to per capita growth. This is consistent with earlier analysis showing high rates of turnover in manufacturing and services in Myanmar between 2014 and 2016, along with high rates of exit among smaller less productive firms (World Bank 2016). 6 Since figures are only from 2014 and 2016, rates are annualized assuming a compound growth function of three periods. 12 Myanmar’s Future Jobs: Embracing Modernity Main Report Note 1: A Macroeconomic Context for More and Better Jobs As in Myanmar, labor productivity growth was a major contributor to per worker value added growth in other countries—including Vietnam, Cambodia, Sri Lanka, Lao PDR and China—during their economic liberalization (Figure 1.8). With the exception of China, which had extremely high annual labor productivity growth rates of 11.3 percent per year between 1991-1995, the relative contribution of labor productivity grew faster in Myanmar compared to in other countries during their liberalization. One possible reason for this is that mean years of schooling in Myanmar was relatively high at the outset of their liberalization, standing at 4.1 years in 2010/11 compared to 3.9 years in China in (1980), 3.6 years in Lao PDR (1995) and 3 years in Cambodia (1995).7 Figure 1.8 Figure 1.9 Per Worker Annual Value-Added Growth (%) Mean Years of Schooling Labor productivity has grown faster in Myanmar during …but human capital levels lag behind those of its transition than it did when other countries liberalized… neighboring countries 14% 12% 10 10% 8 8% 6% 6 11.3% 4% 5.9% 4 2% 4.1% 3.6% 3.6% 0% 2 90 93 96 99 02 05 08 11 14 Cambodia Vietnam China Sri Lanka Myanmar 19 19 19 19 20 20 20 20 20 -2% (1998-2002) (1996-2000) (1991-1995) (1991-1995) (2010-2014) Productivity Employment Myanmar Vietnam Participation Rate Demographic Change China Lao PDR Source: World Bank estimates from Shapley decomposition; Source: UNDP HDI, UNESCO Institute for Statistics (2016), Barro and data from WDI, ILO Lee (2016), ICF Macro Demographic and Health Surveys, and UNICEF Note: Starting years differ from Figures 1.5 and 1.6 due to data availability Multiple Indicator Cluster Surveys. Despite seeing relatively high labor productivity growth, overall labor productivity in Myanmar remains very low and poses a major obstacle to economic progress. Sustaining labor productivity gains will require Myanmar to accelerate the pace of human capital development, which lags far behind other countries in the region (Figure 1.9). About 30 percent of production workers in Myanmar are unskilled (compared to 20 percent in developing East Asia and Pacific countries), and 4 in 10 hiring employers find that the workforce is inadequately educated (Enterprise Survey 2017). The overall skills level in Myanmar may be unable to keep pace with economic growth, and will thus become one of the country’s major constraints. 7 Average number of years of education received by people ages 25 and older, converted from education attainment levels using official durations of each level. Myanmar’s Future Jobs: Embracing Modernity Main Report 13 Note 1: A Macroeconomic Context for More and Better Jobs Macroeconomic Constraints to Creating More and Better Jobs Recent growth in TFP and labor productivity is in large part a reflection of base effects rather than increased productivity, since Myanmar, even with recent reforms, must still address severe competitiveness constraints that hamper investment, job creation and growth (Figure 1.10). National competitiveness can be broadly defined as the institutions and policies that determine the level of productivity in a country.8 Poor policy implementation and weak institutions can lead to low competitiveness, visible through macroeconomic instability, poor public service delivery, and high costs of doing business. Even though Myanmar is endowed with low-cost labor, productivity enhancing reforms in the near-term will be critical for increasing its competitiveness and driving job creation. Figure 1.10 Myanmar Ranks Poorly on Various Aspects of National Competitiveness Institutions 5 Innovation Infrastructure 4 Business Sophistication 3 Macroeconomic Environment 2 1 Market Size 0 Health and Primary Education Technological Readiness Higher Education and Training Financial Market Development Goods Market Efficiency Labor Market Efficiency Source: WEF Global Competitiveness Index, 2015-16 Note: Scores are weighted averages of components ranked from 1 (worst) to 7 (best). While Myanmar faces competitiveness challenges across a range of dimensions,9 addressing those relating to the macroeconomic environment, along with those which impact investors’ perception of risk, will be a precondition to sustaining inclusive growth and employment creation. Changes in price and exchange rate, for example, directly impact investment returns, and macroeconomic policies that influence investors’ expectations around inflation, the cost of borrowing, access to public services, labor costs, and exchange rates will be critical to making investment decisions—and thus determine the level, quality and time horizon of investment projects. Investors will be more willing to stake long-term commitments in labor intensive, manufacturing-type operations if macroeconomic risks are deemed to be manageable. Macroeconomic instability, on the other hand, could spur short-term, speculative investments with little positive impact on employment. 8 World Economic Forum – Global Competitiveness Report. 9 For example, Myanmar is still at the bottom of the World Economic Forum (WEF) Global Competitiveness Index. Its overall rank (131 out of 140 countries in 2015-16) is far behind the next lowest-ranked economies in the region, Lao PDR and Cambodia, at 83rd and 90th place respectively. Infrastructure, the quality of public institutions, and technological readiness are areas of competitiveness where Myanmar scores the lowest. 14 Myanmar’s Future Jobs: Embracing Modernity Main Report Note 1: A Macroeconomic Context for More and Better Jobs Growing Macroeconomic Challenges and Vulnerabilities After experiencing four years of strong growth within a relatively favorable macroeconomic environment, Myanmar has faced a more difficult environment since 2014, reflected in slowed growth rates (Figure 1.11). First, declining commodity prices affected Myanmar’s gas sector, which accounts for around 7 percent of GDP, close to 40 percent of merchandise exports, and 15-20 percent of general government receipts. Second, Myanmar experienced heavy flooding in the summer of 2015, which hit the country’s main agriculture producing areas, causing knock-on effects in the transportation services, food processing, and other sectors. Third, Myanmar underwent a major political transition following general elections in November 2015, which coincided with a moderation in private investment growth. Fourth, slowing global demand combined with tightening external financing conditions further delayed foreign investments, including in the tradable sector. Figure 1.11 Figure 1.12 Economic Growth, by sector (%) Consumer Price Index growth (%) Economic growth has slowed in recent years… …though inflationary pressures remain high. 9% Percent change Percent change 8% 8% 7% 7% 6% 6% 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% 0% 2013/14 2014/15 2015/16 2016/17 2017/18 16 16 6 6 16 7 7 t-1 v-1 1 1 g- p- c- n- b- Oc No De Ja Au Se Fe Agriculture Industry Services Food Non-food CPI Sources: MOPF, WB Staff estimates These developments highlighted a number of Myanmar’s short-term economic vulnerabilities that affect investors’ perceptions of risk. The agriculture supply shock contributed to a sharp rise in inflation, which peaked at 16 percent (y-o-y) in October 2015, and remained over 7 percent in January 2017 (Figure 1.12). The drop in commodity prices contributed to a widening of the current account deficit to 4.8 percent of GDP in 2015/16, up from an annual average of 4 percent in the previous 3 years. Combined with slowing foreign investment flows, foreign exchange reserves declined to below the value of 3 months of prospective imports. The exchange rate depreciated by close to 30 percent between 2015 and 2017 as a direct result of the high inflation caused by the shocks and growing demand. The interventions intended to address this caused a divergence between parallel and official exchange rates, and created uncertainty about the price and availability of foreign exchange. A weaker kyat also increased operational costs in the power Myanmar’s Future Jobs: Embracing Modernity Main Report 15 Note 1: A Macroeconomic Context for More and Better Jobs sector, requiring additional government subsidies—even as gas receipts to the public sector declined. These events caused the budget deficit to rise from 1.1 percent of GDP in 2014/15 to 3.2 percent of GDP in 2015/16. Recent developments have underscored the risk of volatility in economic growth, which can pose difficulties to people seeking to sustain formal, stable employment. Growth has remained strong, though it fell from 8 percent in 2014/15 to 7.3 percent in 2015/16, and is estimated to have dropped even further in 2016/17, to 6.5 percent. One factor exacerbating growth volatility in Myanmar is the lack of resilient agricultural infrastructure. In the agriculture sector, which employs more than half of the total labor force, recent floods have adversely impacted farm production and incomes. While such negative shocks are not unique to Myanmar, low irrigation coverage and other longstanding productivity constraints in agriculture (e.g. an insufficient supply of good seeds) prolong the pace of recovery. Therefore, farm workers are highly exposed to the seasonality of output and employment, and are forced to seek income from other sources, typically in low-paid and informal jobs. Another source of volatility in growth is Myanmar’s relatively narrow production base, which is driven by lack of competitiveness. Around two-thirds of manufacturing output comes from the food processing sector. While manufacturing is traditionally one of the more stable sources of employment and growth in countries, the dominance of food processing in Myanmar makes the sector vulnerable to agricultural supply and price changes. The recent slowdown in the agriculture sector has had negative spillover effects on manufacturing. Food processing firms responded to these shocks by reducing workers’ wages and hours employed in early 2016. The food processing sector’s relatively high dependence on imported inputs makes it also vulnerable to exchange rate volatility. Furthermore, it is also increasingly struggling to compete against cheaper and better quality processed foods imports. Figure 1.13 Figure 1.14 GDP Growth Rates (%) Subsector Share of Industrial Output (%) Myanmar has experienced relatively strong and stable …but is vulnerable to growth volatility due low productivity growth… and a narrow production base. GDP growth rates 12% 10% Construction Food Manufacturing Processing 8% Electric Power Mining and Processing 6% Energy Other 4% 2% t t+1 t+2 t+3 t+4 t+5 China Korea Thailand Vietnam Myanmar Sources: MOPF, WDI and WB Staff estimates Note: t = estimated year of economic take off 16 Myanmar’s Future Jobs: Embracing Modernity Main Report Note 1: A Macroeconomic Context for More and Better Jobs Unfortunately, past policy choices have further exacerbated the risks of volatile growth. In May 2016, for example, concerns over the adequacy of permits and building standards led to the suspension of around 200 high-rise building projects in Yangon City, impacting the construction sector, which employs around 5 percent of the workforce and holds around 30 percent of outstanding credit from the banking sector. Ultimately, shocks have a wide economic impact, and further exacerbate growth volatility. Ensuring predictability, transparency and a phased approach to any policy change will be critical to avoiding large shocks to the economy. Output volatility can have serious long-term consequences on economic growth and incomes, limiting the ability of the labor market to improve living standards through jobs. It is estimated that increasing output volatility by one standard deviation leads to a 1.3 percent reduction in per capita growth—a figure that can rise up to 2.2 percentage points during crises (Hnatkovska and Loayza 2005). Lower-income segments of the population are less protected during economic downturns, compounding the effects of macroeconomic volatility on poverty and inequality. At the aggregate level, volatile levels of household disposable incomes may lead to further feedback effects on consumption, domestic demand, and output, leading to a second-round of reductions in the demand for labor. Policy Challenges to Addressing Macroeconomic Shocks and Imbalances Institutional capacity and policy responses to deal with macroeconomic shocks and imbalances have faced some challenges. This is to be expected given the pace at which the economy has opened up. In the past five years, policymakers have had to manage a rapidly expanding public sector, a surge in foreign capital inflows, and rapid growth in private sector credit. These challenges have been heightened by increased exposure to exchange rate fluctuations and commodity price volatility, and by natural disasters. The government’s policy toolkit to address these issues is growing, though from a relatively low base. Turning to fiscal policy, pressures in 2015/16 led the Central Bank of Myanmar (CBM) to sharply increase inflationary financing of the budget deficit. Monetization has declined since 2010, though it remains an important and steady share of financing due to a lack of either domestic or external alternatives. The legacy of monetization before Myanmar’s reintegration with outside creditors has caused the stock of CBM debt to average around 85 percent of the total outstanding domestic debt stock since 2005 (compared to less than 20 percent on average for a sample of Low Income Countries in the early 2000s) (Bua and Presbitero 2014). The prolonged period of monetization in Myanmar stands in contrast to other countries where spikes in central bank financing is most often in response to fiscal crisis (Easterly and Schmidt-Hebbel 1991). CBM financing in Myanmar has averaged 2.7 percent of GDP per year over the last 10 years, peaking at 5 percent in 2015-2016. Reducing deficit monetization is critical to managing monetary growth and inflationary pressures. Public sector financing needs have historically been a big driver of reserve money growth and M2. Although reduced since 2012/13, fiscal pressures in 2015-2016 increased CBM net claims on government debt. The government introduced Treasury Bill auctions in 2015, and Treasury Bond auctions in 2016. However, it will take time before the market substantially takes up the long-term government securities needed to finance development expenditures. Results from recent auctions produced negative real interest rates due to hesitation in allowing rates to rise, given the impact this would have on government debt servicing costs. The debt market operations clearly demonstrate the need to set out clear macroeconomic policies to anchor economic expectations and properly price government securities. Myanmar’s Future Jobs: Embracing Modernity Main Report 17 Note 1: A Macroeconomic Context for More and Better Jobs Figure 1.15 Figure 1.16 CBM Financing and Shares of Debt Debt by Sector CBM financing, which is highly volatile, …as the public sector deficit tripled peaked in 2015-16… 2% 25% 6% 1% 5% Bonds and T-Bills, % of GDP 20% CBM Financing, % of GDP Fiscal Balance, % of GDP 4% 0% 15% 3% -1% 10% 2% -2% 5% 1% -3% 0% 0% 20 06 20 07 8 9 20 10 20 11 20 12 3 4 20 15 6 -4% /0 /0 /1 /1 /1 / / / / / / 05 06 07 08 09 10 11 12 13 14 15 20 20 20 20 20 -5% 2-year Bond 3-year Bond 5-year Bond Public sector State-Owned Union T-Bills (CBM) CBM financing Economic Government Enterprises Notwithstanding recent supply shocks, monetary expansion has contributed to inflation and growing pressures on the current account. Demand pressures have outstripped supply-side capacity. This has impacted the trade and current account deficits, as illustrated by the relative resilience in demand for imports of consumer items. This has added to currency pressures and contributed to exchange rate depreciation. Figure 1.17 Figure 1.18 Contribution to Inflation Variation, 2011-2016 (%) Change in Inflation (%) Money supply growth has increasingly fueled inflationary …which remains strong even after removing flood effects pressures… 14% 100% 12% 80% Contribution to Inflation 10% Change in Inflation 60% 8% 6% 40% 4% 20% 2% 0% Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 0% Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 2011 2012 2013 2014 2015 2016 Past Inflation Variations Money Supply Headline Inflation Exchange Rate International Food Prices Estimate of Inflation with Base Effect from the Flood Removed Source: IMF staff estimates, in IMF (2017) Source: IMF staff estimates, in IMF (2017) 18 Myanmar’s Future Jobs: Embracing Modernity Main Report Note 1: A Macroeconomic Context for More and Better Jobs High inflation has contributed to Real Effective Exchange Rate appreciation, hurting Myanmar’s external competitiveness and, by extension, demand for labor in tradable sectors. The IMF estimates that, as a result of recent developments, the kyat REER was overvalued by about 7 to 16 percent, depending on the model (IMF 2017a). This real appreciation of the domestic currency is a disincentive to investing in export sectors that could create new and good quality jobs, and also harms jobs in the production of tradable goods that compete with more competitive imports. Figure 1.19 Figure 1.20 Kyat/USD Exchange Rate Reel Effective Exchange Rate CBM has maintained exchange rate flexibility, adjusting …though high inflation did lead to REER appreciation in to external pressures… 2016. Kyat/USD REER Index 1,320 110 105 1,270 100 1,220 95 90 1,170 85 1,120 80 15 15 16 16 16 5 5 5 6 6 16 16 16 5 5 6 6 r1 n1 g1 b1 r1 t1 c1 n1 g1 ep ov an ul ep ar ay ov Ap Ap Oc Ju Au Fe De Ju Au 1J 1M 1N 1M 1J 1N 1S 1S Central Bank of Myanmar Reference Rate China Malaysia Myanmar Parallel Rate Philippiness Singapore Source: Central Bank of Myanmar, WB Staff estimates A sustained real appreciation of the exchange rate can have detrimental effects on a country’s external competitiveness and growth (Hausmann et al. 2005; Easterly 2005; Frenkel and Taylor 2006). As imports become relatively cheaper, producers of importable goods face more competition from foreign goods and may have to cut costs, oftentimes shedding labor, to maintain profitability. On the other hand, firms in export-oriented sectors suffer from a reduced competitiveness and profits as demand for their goods declines, both at home and abroad.10 This similarly reduces the demand for labor in tradable sectors. Given the importance of export-oriented sectors relative to low-skilled services sectors in generating more productive, better paid jobs, maintaining a competitive real exchange rate in line with fundamentals is crucial. To manage pressures on REER, the Central Bank has recently allowed the nominal rate to float. When the kyat first came under pressure in late 2014, the government reacted by introducing administrative controls. This led, among other effects, to a widening gap between the official and parallel markets, speculative trading, and a hoarding of foreign exchange. Since the second half of 2015, however, the reference rate has adjusted to reflect market pressures. 10 It is possible that real exchange rate appreciation benefits exporting firms that are heavily reliant on imported inputs as these become relatively cheaper. However, if labor and imported inputs are compliments in the production process, then greater demand for cheaper inputs would also hurt labor demand. Myanmar’s Future Jobs: Embracing Modernity Main Report 19 Note 1: A Macroeconomic Context for More and Better Jobs Figure 1.21 Deficit monetization and maintaining a fixed nominal effective exchange rate are not conducive to creating jobs in export-oriented sectors Expenditures Real exchange rate Exports become exceed revenues appreciates more expensive (fiscal deficit) relative to imports Government purchases The fixed nominal Tradable sectros become treasury bills from exchange rate cannot less competitive; labor Central Bank to accommodate inflation demand falls finance deficit Stock of highpowered Excess liquidity pushes money rises at a rate that overall price level up exceeds demand Source: Authors The experiences of Indonesia, Thailand and other neighboring countries has shown that maintaining a competitive exchange rate is important for growth and jobs. Export-oriented manufacturing industries, which made significant contributions to development in these countries, tend to generate substantial employment and wage income, and can produce positive spillovers in other sectors of the economy. In Cambodia, manufacturing wage-earners (often female) send remittances to rural households, raising consumption and enabling them to invest in productive assets that indirectly affect agricultural productivity growth (World Bank 2016). The trickle-down effect of manufacturing employment in Cambodia has also been magnified by agreements with companies to provide jobs with fair remuneration under the ILO’s ‘better factories’ program. Rapid Credit Growth but Low Financial Inclusion Hampers Job Creation Another key challenge is the rapid growth in credit to the private sector, which has not been matched by equal acceleration in financial inclusion. Credit to the private sector has been an important driver of M2 growth in the last five years, growing by 34-36 percent annually from 2014-2016, up from 53 percent in 2013-2014. Credit is concentrated mostly among a few big borrowers with collateral, and there are emerging signs of sector concentration and other associated risks. The financial system in Myanmar is small, however, even by the standards of low income countries (19 percent credit/GDP in 2015-2016, growing from 9.6 percent in 2012-2013) and financial inclusion is very low. The lack of access to credit is often cited as the most binding constraint to private sector growth. One of the factors limiting financial inclusion is the practice of administratively fixed interest rates. In response to the banking crisis in 2003, Myanmar imposed both a floor on deposit rates (8 percent) and a ceiling on lending rates (13 percent).11 Moreover, the 2011 Microfinance Law also imposes interest rate caps on micro loans (maximum 2.5 percent flat rate per month) and micro savings (minimum 1.25 11 In 2010/11, the CBM reduced these rates from 12 percent and 17 percent respectively to stimulate the economy. 20 Myanmar’s Future Jobs: Embracing Modernity Main Report Note 1: A Macroeconomic Context for More and Better Jobs percent rate per month). These rules apply to public and private institutions, with some exceptions for banks serving specialized groups. The Myanmar Agriculture Development Bank (MADB) and the Small and Medium Industrial Development Bank (SMIDB) are allowed to offer subsidized loans to farmers and micro, small and medium enterprises (MSMEs) with an 8.5 percent interest rate, but these make up a minority of their portfolios. Interest rate caps have restricted MSMEs’ and rural households’ access to credit. Loan distribution remains substantially uneven since MSMEs still have limited access to finance for investment needs. It is not uncommon for private commercial banks, including relatively large ones, to serve only a few hundred borrowers with relatively large loans on average. While the agriculture sector represents 30 percent of GDP and employs about half of the population, only about 2.5 percent of all outstanding loans are made to this sector. It is estimated that more than 3.5 million farmers are not served by MADB due to the lack of land titles (World Bank 2014c). Although interest rate caps are not unique to Myanmar, they are more binding on a widespread range of products (such as loans or deposits) than they are in other countries. Interest rate caps are used in 76 countries worldwide, and are often justified on prudential grounds where credit and risk management skills are weak, and regulators’ supervisory capacity is low (Maimbo and Gallegos 2014). In Myanmar’s case, it is argued that the floor on deposit rates ensures sufficient returns to Kyat deposits and mitigates against dollarization risks and depreciation pressures (World Bank 2016).12 The constraints that the interest rate caps impose on the portfolio of banking products has hurt private sector development. Since the minimum and maximum interest rates are set by CBM with a spread of only 5 percent, banks are very restricted in the type of products they can offer (GIZ 2013). In general, commercial banks are largely restricted to offering savings accounts, deposit accounts, and short- term loans. Apart from SMIDB, there are no banks offering specific products targeted towards MSMEs. MFIs and cooperatives offer a similarly limited range of products. Moreover, given the high-risk portfolio of MFIs and the existence of a 13 percent interest rate cap on bank lending, MFIs are severely underfunded. According to the United Nations Capital Development Fund (UNCDF), current demand for microfinance in Myanmar is around USD 1 billion, even though the Microfinance Supervisory Enterprise reports that the total loan portfolio of 116 newly licensed MFIs only amounts to USD 118 million (GIZ 2013). Making it easier for MSMEs to access credit would likely have a significant impact on their ability to grow and to create jobs. Analysis from an ongoing Myanmar Enterprise Survey (2017) shows that micro- sized establishments account for the bulk of job creation and destruction. Between 2014 and 2016, the entrance of small firms accounted for nearly 40 percent of new jobs created and 30 percent of jobs lost due to exits from the market. This is consistent with the analysis of enterprise surveys from 99 countries that suggests that small and young private firms contribute disproportionately to job creation (Ayyagari et al. 2011). However, these firms are credit constrained and face difficulties in expanding their operations. Almost a quarter of firms surveyed in the 2014 Myanmar Enterprise Survey identified the (lack of) access to finance as the major constraint for their business, more than access to land (22.7 percent), electricity (17 percent), and a skilled workforce (10 percent). Small (including micro) firms are twice as likely as large firms to identify access to finance as a major constraint, and ten times less likely to have a bank loan or line of credit. To put some of these numbers into context, the percent of firms with a bank loan or line of credit in Myanmar (3.2 percent) is far below both the regional average (22.1 percent) and global average (33.8 percent). 12 CBM requires strict adherence to the actual rates, so banks are expected to compete on service standards. The fixed interest rate structure has meant that real interest rates have been very volatile, given the variance in inflation rates (ADB, 2015). Myanmar’s Future Jobs: Embracing Modernity Main Report 21 Note 1: A Macroeconomic Context for More and Better Jobs Figure 1.22 Figure 1.23 Share of Jobs Created/Destroyed by Firm Access to Finance (% of firms) Entering/Exiting Firms (%) The smallest firms are the biggest contributors to …which remains strong even after removing flood effects job creation… Percent of firms identifying 100% access to finance as a major constraint 18.3% 90% 80% 34% 35% Percent of firms 70% using banks to finance working capital 2% 60% 12% 18% 50% Percent of firms with a 16% 40% 19% bank loan/line of credict 3.2% 30% 20% Percent of firms with a 39% 28% checking or 10% savings account 19.4% 0% Entering Exiting 0 20% 40% 60% 80% 100% Micro (1-4) Small (5-19) Large (100+) Medium (20-99) Medium (20-99) Large (100+) Small (5-19) Source: World Bank Enterprise Survey (2017), staff calculations Source: World Bank Enterprise Survey (2014) Note: Sample size of 632 firms Macroeconomic Policy Priorities for More and Better Jobs Clarity, Communication and Credibility of Economic Policies The ability of Myanmar’s economy to generate more and better jobs, while already strong, will increase through sound macroeconomic policies that address emerging challenges and sustain investor confidence. There are positive signs with growing foreign investment commitments in labor intensive sectors. The biggest increase in commitments have been in the manufacturing and the transport and communications sectors. Between June 2014 and November 2016, FDI commitments to these two sectors increased by 77 percent and 275 percent respectively. As of November 2016, China accounted for around 28 percent of approved investments, followed by Singapore (23 percent), and Thailand. To sustain high levels of investment, it will be critical to ensure economic policies are clear, credible, and well communicated. Despite their economic optimism, investors still need to see reassuring economic policies. The National League for Democracy’s election manifesto released in October 2015, together with the government’s 12 economic policy objectives, promote inclusive growth and poverty reduction in Myanmar. There has also been good progress following the implementation of such policies as the adoption of fiscally prudent budgets, the expansion of the domestic debt market, the maintenance of exchange rate flexibility, and the adoption of the new Investment Law. 22 Myanmar’s Future Jobs: Embracing Modernity Main Report Note 1: A Macroeconomic Context for More and Better Jobs Figure 1.24 Figure 1.25 FDI by Sector FDI by Source country FDI commitments in labor intensive sectors picking up… …with much coming from other Asian countries 70,000 70,000 60,000 60,000 50,000 50,000 Kyat Billion Kyat Billion 40,000 40,000 30,000 30,000 20,000 20,000 10,000 10,000 0 June 2014 November 2016 0 June 2014 November 2016 Transportation & Communications Hotel & Tourism Malaysia UK China Manufacturing Real Estate Oil & Gas Korea, Rep Hong Kong Thailand Mining Power Singapore Sources: WDI, IMF BOP Statistics, WB Staff estimates Figure 1.26 FDI as Percentage of GDP Total FDI flows are starting to pick up. 10% 8% 6% % of GDP 4% 2% 0 84 88 92 04 08 96 00 12 19 19 19 20 20 19 20 20 Cambodia Vietnam Myanmar Sources: WDI, IMF BOP Statistics, WB Staff estimates There exist several options to strengthen the clarity, communication and credibility of economic policies. One is to release an economic vision, the foundations of which have been set out in the NLD’s election manifesto and 12 policy objectives. The vision would spell out expected sources of growth and job creation, enabling policies, and an implementation plan. Clearly communicating these priorities could help further build confidence in the government’s economic agenda, as would regular reporting about progress towards its goals. Myanmar’s Future Jobs: Embracing Modernity Main Report 23 Note 1: A Macroeconomic Context for More and Better Jobs Complementing this vision with regular reporting on economic policies and conditions would play an important role in anchoring economic expectations and sustaining investor confidence. The government could build on existing economic reporting by government agencies on fiscal, monetary, financial sector, and exchange rate policies, on policy outcomes, and on macroeconomic projections. For example, clarity over fiscal and monetary policy measures to contain demand pressures would help anchor exchange rate expectations and avoid speculation. In this regard, MOPF has published fiscal policy statements and a Citizen’s Budget, while the CBM communicates with Parliament through various media on exchange rate policies. Continued Fiscal Adjustments for Macroeconomic Stability and Growth Government policies to limit CBM financing would help manage inflationary pressures. Introducing a quantitative limit on CBM financing would be a sensible approach in the short-term, as it would support the CBM Reserve Money target and help anchor inflation expectations. Over the medium-term, a prudent policy goal would be to only resort to monetization for specific emergency purposes such as natural disasters or severe cash shortages. This would further strengthen the credibility of government financing reforms and of commitments to a more independent monetary policy. Ongoing efforts to expand the domestic debt market, and reduce reliance on monetization would further support monetary independence. Over time, the existence of a greater volume of domestic borrowing instruments helps lower exposure to currency risks and support the strengthens of the institutional infrastructure for local financial markets—as is starting to be seen in Myanmar—thus driving fiscal and monetary policy transparency and credibility. In the short-term, these are unlikely to crowd out financing for the private sector given the small size of the government securities market and to the presence of other, more binding constraints on private sector access to credit. Although developing the domestic debt market is a long-term process, it could be supported in the near term by accepting higher interest rates at Treasury Bill auctions. The current level of market participation is not unusual at this very early stage in domestic debt market development. Other Lower Middle Income countries with more mature public debt management systems have been able to develop deeper and more reliable domestic debt markets, by, for example, expanding non-resident investor participation.13 In the near term, accepting higher interest rates at the auction would imply higher costs to the government. However, these could be partially offset through greater returns (or lower losses) to CBM, and would enable greater market participation, and would further reduce inflationary financing. At the same time, financing for public investment cannot be driven by domestic debt in the near or medium-term. Aside from the challenges of raising sufficient resources to do this, public investments have long gestation periods. Current tenors on domestic Bonds (2, 3, 5-year) can lead to maturity mismatch and rollover risks. The ability to issue longer-term liabilities at lower cost will go hand in hand with the gradual strengthening of wider policy and institutional capacity. As part of its financing diversification, Myanmar should therefore make the most of its access to long- term external concessional financing. Domestic financing cannot substitute for this in terms of volume, interest cost, or maturity. Earlier studies have shown that in low-income countries, external financing can have a positive impact on long-term growth.14 A rebalancing towards longer-term concessional finance, which is currently below the average share of total financing in low-income countries, could help to lower the cost and risk of Myanmar’s public debt portfolio. It could also help address weaknesses in public investment management capacity through external technical assistance. 13 The World Bank, IMF, “Public Debt Vulnerabilities in Low Income Countries: The Evolving Landscape,” (November 13, 2015). 14 Gupta, S. et al, “Expenditure Composition, Fiscal Adjustment and Growth in Low-Income Countries,” IMF Working Paper WP/02/77 (April 2002). 24 Myanmar’s Future Jobs: Embracing Modernity Main Report Note 1: A Macroeconomic Context for More and Better Jobs Having a clear strategy on external concessional finance is particularly important given that Myanmar may graduate from access to concessional finance in the next 5-10 years. Such a strategy should prioritize the use of concessional finance for major projects in the Union Budget or for general budgetary financing. It should also include the full integration of external concessional finance in the government’s borrowing strategy, enabling an assessment of the costs and risks of alternative financing mixes. This strategy could help create fiscal space in a sustainable and non-inflationary manner to promote longer-term economic growth and jobs opportunities. In addition to rebalancing the composition of financing, government spending should be further rebalanced to help accelerate growth and employment creation. Ever since the country opened up in 2011, it moved quickly to allocate more resources to priority public services, following decades of Myanmar having among the lowest rates of government spending in the world for essential social and economic services. The ramp-up in spending was possible thanks to a large jump in revenue (from 6 percent to 12 percent of GDP) following the expansion of the tax base and an increase in gas receipts. Expenditure on education quadrupled during 2009-13 and expenditure on health increased nine-fold during the same period—all while fiscal deficits remained below 3 percent of GDP. However, fiscal constraints have made increased spending on priority public services and infrastructure more challenging. Government revenue remains low and financing options very limited. As a result, priority public investments in economic services are too low to meet the country’s needs.15 The energy and transportation sectors are notably under-funded in the Union Budget relative to their needs. It would be possible to reallocate resources from other ministries to support these sectors as well as other priority areas such as education and health. This would be critical to improving Myanmar’s productivity and competitiveness, increasing the country’s attractiveness as an investment destination. Public investment could, in other words, help crowd in private investment in productive sectors. Maintaining Monetary Discipline and Exchange Rate Flexibility Greater fiscal discipline and the expansion of the government securities market are expected to ease pressures on monetary policy. Liquidity is also expected to increase from foreign capital inflows and growing deposits in the commercial banking sector. This will require scaled-up Central Bank deposit auctions to help tighten liquidity conditions, and keep them in line with the CBM’s reserve money target and price stability goals. Government securities and deposit auctions have, to some extent, liberalized the interest rate for wholesale money market transactions, reflecting a gradual move to use indirect instruments for money supply control. Indirect instruments provide more effective monetary control, contribute to money and capital markets development, and reduce risks of misallocating resources. Together with monetary discipline, ensuring exchange rate flexibility is important to alleviating external pressures. Monetary expansion has impacted the trade and current account deficits, as illustrated by the relative resilience in demand for imported consumer items. This has added to currency pressures and contributed to imported inflation. At the same time, the government is aiming at ensuring exchange rate flexibility by allowing the reference rate to adjust to market conditions through foreign exchange auctions. Although the reference rate has adjusted, it has done so more recently with a lag. Also, when the market rate goes beyond the +/- 0.8 percent official trading band, official dealers get effectively excluded from the market, which hampers the development of the formal market. The experiences of neighboring resource-rich countries illustrate the importance of exchange rate flexibility and sound natural resource management for promoting export-oriented sectors. While 15 World Bank, “Public Expenditure Review: Fiscal Space for Growth” (forthcoming) Myanmar’s Future Jobs: Embracing Modernity Main Report 25 Note 1: A Macroeconomic Context for More and Better Jobs Myanmar is not facing a Dutch disease problem at the moment—and, in fact, is concerned with the opposite—the exchange rate should be allowed to depreciate more readily, and, following the example of other countries in the region, policies should be implemented that strategically take advantage of Myanmar’s natural resources. Malaysia, for example, succeeded in investing its resource rents abroad to avoid real currency appreciation and in supporting exports by investing in infrastructure and services that boosted growth in non-resource tradable sectors. Similarly, Indonesia used resource revenue to support the agricultural sector and reduce costs in the industrial sector.16 Strategic use of revenues from oil and gas increased the productivity of capital in non-rents sectors, lowering the cost of education, irrigation, fertilizer, and infrastructure. This supported livelihoods and food security in agriculture, while also increasing productivity of labor-intensive industries and ultimately creating jobs. Overall, the exploitation of natural resources helped to support high levels of savings and investment. Investing the proceeds from natural gas and other commodity receipts in export-oriented infrastructure (particularly electricity, transport and logistics, which are key bottlenecks to competitiveness) will help Myanmar reduce its vulnerability to Dutch Disease, support job creation in these sectors, and increase investment and growth.17 Mitigating Financial Sector Risks As monetary policy capacity develops, the CBM policy rate could play a bigger role in managing inflation and mitigating financial sector risks. The authorities should consider a phased relaxation of interest caps that balance market liberalization with financial stability. Such a phased approach would have a number of benefits. Lenders would be to plan better, price risks more adequately, and reduce operating cost, while borrowers would have a stable source of financing for business expansion and investment. Regulators and supervisors would also be able to better guard against loan ever-greening, which seems to be a problem in the current system. These positive impacts, however, would have to be carefully assessed against the potential financial risks of abrupt financial liberalization. Despite the theoretical benefits of lifting interest rate caps, Myanmar does not yet seem ready for full liberalization (IMF 2017a). Liberalizing interest rates too early in the absence of a strong financial infrastructure and a supervision and risk management system can lead to risky bank behavior and exacerbate systemic risks (Nehru 2015). Moreover, lifting caps on interest rates may exacerbate inequality if access to credit mostly improves for those who already have it (IMF 2017b), as opposed to enabling new entrepreneurs to start-up of new firms or existing firms and firms to expand or invest by existing firms and farms In the near term, the implementation of the new Financial Institutions Law (2016) through the issuance of prudential regulations will be critical for financial sector stability. Regulations on the acquisition of substantial interest, large exposure, loan classification, and provisioning will help set good practice standards, transition to risk-based supervision, and further empower supervisors to implement the Financial Institutions Law. These could also provide a stronger basis for regular reporting on Financial Sector Soundness Indicators, which the CBM plans to do in the near future. Without this reporting, it is difficult to gauge the real health of the banking system, which in turn can distort economic expectations. These efforts could be complemented by the development of a creditor reporting system, which is also envisaged under the Financial Institutions Law. This would help to improve lending decisions and reduce risks, while potentially expanding access to finance. There is currently no credit bureau or registry to facilitate lending decisions. The regulation on credit reporting is expected to be issued soon, with at least one credit bureau starting operations by June 2017. Consumer protection (for borrowers) should therefore be strengthened accordingly. 16 World Bank (2016): An Integrated Framework for Jobs in Fragile and Conflict Situations. 17 Simulations by the IMF (2017b) show that investing in infrastructure that benefits all economic sectors generates an annual GDP growth rate that is 3.1 percentage points above the trend and increases annual investment growth 7.4 percentage points above the trend. 26 Myanmar’s Future Jobs: Embracing Modernity Main Report Note 1: A Macroeconomic Context for More and Better Jobs References Arias-Vazquez, F.J., Lee, J., Newhouse, D., and D. Robalino. 2012. The Role of Sectoral Growth Patterns in Labor Market Development. Social protection and labor discussion paper; no. 1308. Washington, DC: World Bank Group. Ayyagari, Meghana, Asli Demirgüç-Kunt and Vojslav Maksimovic. 2011. Small vs. Young Firms across the World: Contribution to Employment, Job Creation, and Growth. Policy Research Working Paper 5631. Washington, DC: World Bank. Azevedo, João Pedro, Gabriela Inchauste, Sergio Olivieri, Jaime Saavedra, and Hernan Winkler. 2013. Is Labor Income Responsible for Poverty Reduction? A Decomposition Approach. Policy Research Working Paper 6414, Washington, DC: World Bank. Blattman, Christopher and Laura Ralston. 2015. “Generating Employment in Poor and Fragile States: Evidence from Labor Market and Entrepreneurship Programs.” Available at: https://papers.ssrn.com/sol3/papers. cfm?abstract_id=2622220 Bua, Giovanna, Juan Pradelli, Andrea F. Presbitero. 2014. Domestic Public Debt in Low-Income Countries. Policy Research Working Paper 6777. Washington, DC: World Bank Group. Crivelli, Ernesto, Davide Furceri, and Joël Toujas-Bernaté. 2012. “Can Policies Affect Employment Intensity of Growth?” IMF Working Paper WP/12/218. Washington, DC: International Monetary Fund. Easterly, William. 2005. “National Policies and Economic Growth: A Reappraisal.” In Philippe Aghion and Durlaf, S., eds. Handbook of Economic Growth. Amsterdam: Elsevier. Easterly, William and Klaus Schmidt-Hebbel. 1991. The Macroeconomics of Public Sector Deficits: A Synthesis.” Policy Research Working Paper 0775. Washington, DC: World Bank Group. Frenkel, Roberto and Lance Taylor. 2006. “Real Exchange Rate, Monetary Policy and Employment.” UN Department of Economic and Social Affairs (DESA) Working Paper, No. 19. New York: United Nations. GIZ (Deutsche Gesellschaft fur Internationale Zusammenarbeit). 2013. “Myanmar’s Financial Sector: A Challenging Environment for Banks.” Yangon, Myanmar. Gupta, Sanjeev, Benedict Clements, Emanuele Baldacci, and Carlos Mulas-Granados. 2002. “Expenditure Composition, Fiscal Adjustment and Growth in Low-Income Countries.” IMF Working Paper WP/02/77, Fiscal Affairs Department. Hnatkovska, Viktoria, and Norman Loayza. 2005. “Volatility and Growth.” In J. Aizenman and Pinto, B., eds, Managing Economic Volatility and Crises: A Practitioner’s Guide. 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World Bank. 2016. “Myanmar Economic Monitor: Anchoring Economic Expectations.” Washington, DC: World Bank Group. 28 Myanmar’s Future Jobs: Embracing Modernity Main Report Note 2: Myanmar's Labor Force NOTE 2: MYANMAR’S LABOR FORCE 1 1 This Note was prepared by Wendy Cunningham and David Alejandro Huertas, with inputs from Reena Badiani-Magnusson, Roxana Martinelli, and Ikuko Uochi. Myanmar’s Future Jobs: Embracing Modernity Main Report 29 Note 2: Myanmar's Labor Force A typical worker in Myanmar is a prime-age (25-54 years old) male with a primary school education who is working in rural areas of the Dry or Delta Zones. Nearly 56 percent of workers are men although they only comprise 45.4 percent of the working age population (age 15 and older) (Table 2.1).2 Prime aged workers are a larger share of the population than their population share (65.9 percent compared to 55.7 percent), as youth and (particularly) elderly are not working due to school or retirement. The largest share of workers have only a primary education (40.2 percent), but this is close to the share of Myanmar adults with only primary school (37 percent). However, more of those who have a secondary or tertiary education are working than their population share would predict while those without any education are a smaller share of the working population. Urban and rural workers comprise the same share in the working population as in the working age population. There are more workers in in dry zones and the Ayeyarwady than expected given their population shares (Table 2.1).3 Table 2.1 Characteristics of Working Age Population and Working Population, as share of total Working Working Age Population Population Male 45.4% 55.9% Gender Female 54.6% 44.1% Youth (15-24) 24.2% 22.4% Age Prime aged (25-54) 55.7% 65.9% Older (55+) 20.1% 11.7% No formal education 19.3% 14.1% Primary only 37.9% 40.2% Education Middle school 21.7% 23.6% High school or above 21.1% 22.1% Urban 32.0% 32.1% Region Rural 68.0% 67.9% Hills 17.9% 17.0% Dry 29.7% 31.0% Agro-Zone Delta 26.7% 28.3% Coastal 9.6% 7.6% Yangon 16.1% 16.1% Total Count 35.4 million 24 million Notes: WAP is defined as those age 15 or older. WP is defined as those who worked for wage or income in the 7 days prior to the date surveyed. This rough picture of Myanmar’s workers tells us little about what makes Myanmar workers unique and what can be done to improve their lot. To this end, we explore factors that hinder more and better workers in Myanmar. We begin with a profile of Myanmar’s workers, in terms of how many are working and the nature of their work. Then we turn to factors that may limit Myanmar’s worker’s success as well as means to overcome those constraints. 2 Given the low unemployment rate in Myanmar, the number of labor force participants is similar to the number of workers. For presentational purposes, these terms are used interchangeably unless otherwise specified. 3 This Note relies heavily on the Myanmar Poverty and Living Conditions Survey (MPLCS) that was collected in early 2015. The MPLCS draws a national population sample of 3648 household, that is representative at the agro-region level. Thus, statistics cannot be presented at the state or region level. For a full description of the MPLCS (2015), see World Bank et al (2014). 30 Myanmar’s Future Jobs: Embracing Modernity Main Report Note 2: Myanmar's Labor Force Myanmar People are Hard Workers Two-thirds of Myanmar’s population age 15 or older is working. The working age population, defined as those age 15 or older in this study,4 numbers more than 35.4 million people in Myanmar.5 More than 58 percent worked an hour or more for pay in the seven days prior to the survey. However, if we consider the share who held a job in the past 12 months, nearly 65 percent of the working age population held a job (Figure 2.1). These estimates are consistent with those calculated using the 2014 Census data (67 percent) and the 2015 ILO Labor Force Survey (64.7 percent). Box 2.1 presents a discussion of the factors underlying the different labor force participation rates emerging from each survey. Figure 2.1 Time Use of the Working Age Population, 2014-2015 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% National Urban Rural Male Female 15 to 24 25 to 54 55+ No Education