Major constraints

When Myanmar, earlier known as Burma, began to emerge from military dictatorship in 2011, most Western embargoes were lifted in response to the wide-ranging political and economic reforms introduced. Over the past three years, attempts by the quasi-civilian government led by former general Thein Sein to lure foreign investment, create jobs and improve infrastructure have generated excitement over the country's potential as Asia's next frontier market.

However, analysts criticize that one of the major shortcomings of the government has been to pay too much attention to foreign investors and not to focus enough on raising household incomes in the rural sector through agriculture policy reforms. According to a recently released report by the Asian Development Bank (ADB), the country must upgrade its infrastructure and improve the quality of human capital if it is to achieve sustainable economic growth and reap the full benefits from its ambitious reform agenda.

The ADB paper titled Myanmar: Unlocking the Potential, says full realization of the economy's potential could push annual average gross domestic product (GDP) growth as high as 9.5 percent by 2030, up from its pre-reform baseline of 4.8 percent. Growth of this magnitude could push GDP per capita to nearly 5,000 USD by 2030, up from about 900 USD today. But Cyn-Young Park, Assistant Chief Economist at the ADB, also points out in a DW interview that Myanmar still faces enormous challenges in creating broad-based, inclusive, and equitable growth as poverty remains high and access to economic opportunities and social services is unequal.

DW: How would you describe the current state of Myanmar's economy?

Cyn-Young Park: Major economic reforms since 2011 and re-engagement with the international community have successfully stimulated growth. The economy has sustained GDP growth of more than seven percent for two years running, bolstered by rising exports and foreign investment. But the country remains one of the poorest in Asia with per capita income at about 900 USD, along with Cambodia, Bangladesh, and Nepal. The current growth is also very narrowly based. It is driven by exports of natural resources - mostly gas and mining products - construction and tourism.

Safeguarding macroeconomic and financial stability is an immediate challenge. Faster growth and an influx of foreign investment are already fuelling inflation, presenting a risk to macroeconomic stability. With the financial market still underdeveloped, large capital flows and increased private sector investment may put strong upward pressure on prices of non-tradable goods and real estate. An appreciation of the real effective exchange rate could reduce export competitiveness and falling commodity prices could precipitate a deterioration of the current account.

What is the potential level of economic development and growth the country can achieve in the coming years?

The forecasting model used in the study details structural components of the Myanmar economy - comprising 32 sectors and five factors of production: capital, land, natural resources, and labor, both skilled and unskilled - and allows for dynamic macroeconomic analysis. The model results suggest that implementation of the right policy mix can lift the country's potential annual GDP growth rates from its pre-2011 baseline of an average of 4.8 percent to as high as 9.5 percent by 2030. That is, Myanmar could grow at an average 9.5 percent per year and raise its per capita income to nearly 4,800 USD by 2030, if it makes the right policy decisions.

A significant upside potential exists relative to this scenario, especially as the upcoming "Asian Century" presents a unique opportunity for Myanmar. Asia is expected to account for about a half of world income and more than 40 percent of world consumption by 2050 and Myanmar stands to gain enormously if it can effectively leverage its location as an economic corridor at the crossroads of Asia.

Many analysts argue that one of the major shortcomings of the government has been to pay too much attention to foreign investors and not to focus enough on raising household incomes in the rural sector through agriculture policy reforms. What does the country need to do to maintain sustainable growth, especially in rural areas?

Agriculture remains the backbone of the Myanmar economy, with about two thirds of the population in rural areas and agriculture accounting for 32 percent of GDP, 52 percent of employment, and 21 percent of exports. With relatively abundant land, water, and labor resources and proximity to the world's fastest growing markets for food, the country has comparative advantages in this area.

The country also needs to address major constraints that have impeded agricultural development, and to develop the basic public-good infrastructure to unleash agricultural productivity growth. These include: strengthening weak input markets particularly for quality seeds, fertilizers and pesticides; improving irrigation and other water management systems for rice and other crops; improving land administration and access through reform of land rights and registration processes; enhancing credit availability for agriculture and agri-business; and improving agricultural data collection and information sharing.

Clear opportunities exist for targeted investment in agriculture-related infrastructure, institutions, and innovation to enable rapid growth in productivity and value addition in the agriculture sector. This will immediately benefit those reliant on the sector for income and food security and also contribute to sustained high and inclusive growth in the long run.

What other key areas does the government need to focus on?

I would like to highlight three areas: First is institution and capacity building. Inadequate institutional and human resource capacity remains the biggest hurdle facing the country. Basic legal, regulatory, and institutional frameworks are being put in place for nation building, but more importantly, new institutions need to gain adequate capacity and capable human resources.

Second is human capital and infrastructure development. Infrastructure gaps remain large in Myanmar, calling for immediate policy attention and investment particularly in the areas of transport, energy, and telecommunications.

The study estimated the investment gaps for major infrastructure systems could total as much as 80 billion USD by 2030. Achieving sustainable economic growth and employment generation would also require longer-term commitments to skills development and investment in human capital. In the short-term, policy measures should focus on upgrading skills and strengthening vocational training, but in the long run, the education system requires comprehensive reforms at all levels to provide skilled and educated workers that will meet the increasing demand for skills as the country moves up global value chains.

The third area is establishing a business and investment friendly environment. The World Economic Forum's latest Global Competitiveness Report ranks the country 139th out of 148 countries in the Global Competitiveness Index. The government needs to coordinate and calibrate its policies to provide a range of systemic support, including better regulatory environment, stronger physical and social infrastructure, and improved access to credit and financial services.

There are experts who argue that under the surface, little has changed in Myanmar, especially for the 70 percent of the population that lives in rural areas. Focusing on GDP growth alone is not helpful in a country like Myanmar. What is your view on this?

Myanmar faces enormous challenges in creating broad-based, inclusive, and equitable growth. Poverty remains high and access to economic opportunities and social services is unequal across regions. Reforms should target areas that can increase chances for a broad range of the population to grasp economic opportunities soon. Undue delays would reduce chances that the reforms will be successful. One major challenge in this context is the creation of jobs. The country has a vacuum in skilled labor and a large group of uneducated youth.

High youth unemployment could be a serious risk if not properly addressed now. Proper jobs and learning opportunities need to be created for the youth. It is also important to remember that, ultimately, the reform success will depend on the country's ability to ensure that participation in the growth process and the sharing of its benefits is as broad as possible. This can be achieved by making social inclusion and balanced regional development central to the reform agenda; in particular ensuring equitable participation of ethnic minorities in the economic growth and development process.

Cyn-Young Park is Assistant Chief Economist at the Economics and Research Department of the Asian Development Bank.