The transformation of Myanmar from decades of isolation mirrors, on a smaller scale, the dramatic changes in Eastern and Central Europe in the 1990s, as well as the opening of both China and Viet Nam. The challenges for Myanmar in simultaneously engineering a political and economic transition are enormous. Reformers in the Myanmar government have laid out their ideas in the Framework for Economic and Social Reform, including budgetary and tax reforms; monetary and financial sector reforms; liberalisation of trade and investment; food security and agricultural growth; land issues; and improvements in infrastructure availability and quality.
The government has received advice from international organisations, bilateral donors and others about priorities for, and sequencing of, reform. This OECD Investment Policy Review of Myanmar, undertaken in partnership with the ASEAN Secretariat, takes a broad brush to the question of investment climate reform. The review covers almost all ten policy areas in the Policy Framework for Investment – PFI to varying degrees, as well as a special focus on agriculture, a sector which still employs two thirds of the labour force and which will play a key role in alleviating poverty. Beyond progress in reform in each policy area, the review looks at the institutional structure of government in Myanmar and at how the legislative reform process has been carried out. It also addresses the question of institutional capacity and how this will affect the credibility of reforms, as well as at what complementary measures both within and outside of Myanmar might help in filling this capacity gap.
Through this review, conducted in close collaboration with the government of Myanmar, including a task force of 17 ministries and agencies, the OECD provides an objective assessment of progress in Myanmar in its ambitious reforms, as well as of reform challenges that remain. The review also shares the experience of how other countries, such as Viet Nam, have tackled the same challenges when they were at a similar phase of transition. It also helps to benchmark Myanmar’s performance against these and other countries. At the same time, the government of Myanmar can use the PFI assessment exercise to help build consensus and capacity within government and to foster a whole-of-government approach to investment climate reform.
The historical context in Myanmar shapes the reform process
History matters for the government as it embarks on reforms. Myanmar is often advised to learn from the mistakes of others, but some of the most relevant lessons may come from an earlier attempt at opening in the late 1980s. Investments by state economic enterprises, often in joint ventures with foreign multinational enterprises (MNEs), in extractive industries and the energy sector provided little tangible benefits to local populations and were often seen as contributing to human rights abuses. At a time when the judiciary was acquiescent and any opposition silenced, foreign investment came to be associated with the full litany of possible ills: land grabbing, population displacement without adequate compensation, forced labour and other abuses of both worker and human rights.
The rise of civil society and of reformists in government who appear to have learned the lessons of this earlier reform experience suggest that history is not likely to repeat itself. Home governments and investors are also more attentive to the dangers of investing in weak governance zones. The experience of Bangladesh suggests that reputational risks can affect both the host government and investors, with implications for the ability of a host country to attract more investment in the future. Both the international climate and the domestic one in Myanmar are very different from what they were 25 years ago.
In the early 1960s, Myanmar was one of Asia’s leading economies, with a per capita income more than three times that of Indonesia and twice that of Thailand. Fifty years later, per capita income on a purchasing power parity basis is roughly ten times higher in Thailand. The military takeover in 1962 launched the “Burmese Way of Socialism” which led to wide-scale nationalisation of industry and the financial sector. Agricultural land had already been nationalised, and farmers were obliged to sell their produce directly to the government.
Myanmar’s first departure from self-imposed isolation in 1988 coincided with political turmoil which led to increasingly stringent sanctions in major markets such as the United States. Canada, Australia, the European Union and others also imposed certain restrictions, while Japan cut off most of its aid. Any nascent interest in investing in Myanmar by enterprises from most OECD countries was quickly reversed, and many investors from OECD countries that were already present in Myanmar withdrew.
The new government of President U Thein Sein took over in 2011 and began the first steps towards reform. By-elections were held in April 2012 which were judged by the UN Special Rapporteur for Myanmar to be, by and large, free and fair, and the National League for Democracy won 43 out of 44 seats. A general election is to be held in 2015, which explains in part the government’s desire for what it calls “quick wins” in the reform process so that the fruits of reforms will already be abundant by then. Another landmark in Myanmar’s international opening is its current chairmanship of ASEAN.
Legislative reform has proceeded at a rapid pace…
Going beyond any consideration of the political calendar, there is a justifiable sense of urgency on the part of the government to reform the legislative framework. Not only do some key laws, such as the Companies Act, date back to colonial times, but others – adopted under the military junta in the past – are often ill-suited to an open economy and not in conformity with international standards. Dozens of new statutes have already been enacted, but at the same time, a hyperactive government and a newly empowered and assertive parliament, together with insufficient public consultation, mean that draft laws are not adequately vetted. There is also the risk that the government will copy legislation from other countries which may be ill-suited to the conditions currently found in Myanmar.
Many international observers have expressed the concern that the government’s haste to provide a modern legislative framework may come at the expense of laws that are suitable, credible and able to be implemented given the existing capacity levels within government. The UN Special Rapporteur reported in 2012 that “there remains no clear and comprehensive strategy for legislative reform, resulting in a somewhat ad hoc and uncoordinated process […] the legislative reform process should allow for proper consideration by the parliament, and for systematic consultation and discussion with relevant stakeholders, including civil society” (UN, 2012).
… but with insufficient consultation and review
Public consultation is partly a way of ensuring more effective laws by bringing to light ex ante any possible adverse implications or inconsistencies. By involving stakeholders at an early stage, it also creates greater buy-in and understanding by stakeholders of the new or amended legislation which will assist in implementation and enforcement. Consultations on draft laws have sometimes been selective. The government solicited comments from the national chamber of commerce (UMFCCI) during the drafting of the Foreign Investment Law, for example, but wide consultations were reportedly not held. The lack of adequate consultation to date can be attributed to several possible factors: the perceived need for speed in legislative reform, a legacy of secretiveness within government and the possibility that disclosure of a draft statute would violate the Official Secrets Act (IBA, 2012). This situation is reportedly improving, as the government has published in the state gazette the text of all draft laws submitted to the parliament since July 2012 (Rieffel, 2012).
Beyond public consultations, certain institutional innovations might be necessary in order to improve the legislative process. The International Bar Association recommends establishing a law reform commission to make future reforms as consistent and efficient as possible (IBA, 2012). A parliamentary Committee on the Rule of Law, Peace and Stability was established in August 2012 and chaired by Daw Aung San Suu Kyi to review existing legislation and make recommendations on amending or revoking laws where necessary. The Attorney General’s Office is also involved in vetting draft laws, including checking their conformity with international commitments.
Once laws are passed, it is also essential to ensure that they are enforced by an independent and competent judiciary. Judicial reform takes time. Judges need to develop their own capacity to act as arbiters rather than simply administrators of the law, but even more important is the change of mind set required. The courts need to demonstrate independence and people and companies need to develop trust in judicial recourse. Even if the 2008 Constitution guarantees the independence and impartiality of the judiciary, in practice, the President nominates the Chief Justice of the Supreme Court and controls the financing of Myanmar’s court system (IBA, 2012). As a result, in spite of the constitutional guarantees, the judiciary is widely judged, both within and outside of Myanmar, to be under-resourced, politically influenced and lacking in independence (EU, 2012).
Ministries sometimes have overlapping responsibilities in implementing laws
The Myanmar government is divided into over 30 ministries, with sometimes overlapping responsibilities and poor inter-ministerial co-ordination. This affects not only policy effectiveness but also the overall investment climate because of the uncertainty which it creates for investors. In terms of tax administration, for example, 15 types of tax in Myanmar are collected by seven departments falling under six ministries. Foreign investment approvals sometimes require both line ministry and MIC approval. This institutional fragmentation can also be seen in the transport sector, with six ministries involved. Similarly, various land administration bodies have been set up in line with the two new laws concerning agricultural land. Their overlapping roles and responsibilities give rise to some incoherence in land management and increase tenure insecurity. To begin to address the poor inter-ministerial co-ordination, six senior ministerial posts have been created under the President’s office.
… and the government faces significant capacity constraints
It is widely recognised, both within government and outside, that the administration faces enormous capacity constraints which are only exacerbated by its ambitious reform agenda. All 13 of the ministries and agencies visited during the OECD mission highlighted their need for greater capacity to keep up with the pace of reforms and manage a rapidly changing economy. Legislative reforms and international commitments will only be as credible as the capacity within the government to implement them. Credibility matters for foreign investors interested in making long-term commitments to Myanmar, such as in extractive sectors. As suggested by the quote by President U Thein Sein above, the government recognises that it lacks capacity in many areas. Developing this capacity will take time and the government will need to rely to some extent on civil society, foreign governments and international organisations for technical and policy advice. Foreign investors can also play a role by ensuring they respect both domestic laws – even when those laws are not effectively enforced – and international expectations for responsible investment. Similarly, civil society can play an important complementary role to ensure that human rights are protected, that officials and businesses obey the law, that workers’ rights are respected and that the environment is not degraded.
Long term reforms are necessary to improve governance
Addressing these governance challenges will take time, particularly the question of capacity, but they are essential if reforms are to be credible and hence effective in achieving the desired outcomes in terms of inclusive and sustainable development. The remainder of this overview chapter will look more at the question of what to reform, but the sense of urgency behind the reforms should not overlook the issue of how to reform. The recommendations on governance elaborated below are already understood by the Myanmar government, but it is worth reiterating them because they will ultimately determine the success or failure of the entire reform agenda.
Trends in foreign investment
Investor dissatisfaction with the investment climate might manifest itself in a declining share of investment approvals that are actually realised or of foreign investment as a share of total gross fixed capital formation. Both China and Viet Nam witnessed declines in FDI in relative terms after the euphoria of the initial reform period wore off and as any difficulties experienced by investors became widely known. In Myanmar, approvals of Chinese projects have already plummeted from USD 8 269 million in FY2010 to only USD 407 million in FY2012 and only USD 0.76 million in the first two months of FY2013. Some of this might result from the fact that certain large projects were approved in 2010 in energy and oil and gas sectors but it might also be partly a result of the uncertain policy environment.2
In spite of this sharp drop in approvals, recent figures for realised investments suggest that FDI inflows are still growing rapidly. Furthermore, recent approvals suggest that FDI trends are likely to depart from previous patterns. While investors from OECD countries have yet to commit significant sums, many large multinational enterprises have pledged to invest in Myanmar. In addition, the most active sectors for foreign investment over the past 12 months have been manufacturing and hotels and tourism. Approvals were 94 in FY2012, compared to only 13 in the previous fiscal year.
Investment regulation and protection
Myanmar has initiated a broad reform process to improve its legal and regulatory framework for investment to create a more favourable investment climate. The enactment of the new Foreign Investment Law (FIL) and its accompanying implementing rules marks a milestone towards a more open and secure legal environment for investment. While the basic framework is now in place, the FIL is only the first step in a long process, and its importance is in part as a symbol of the government’s desire to welcome responsible foreign investment after decades of autarky and economic sanctions.
The 2012 FIL offers some improvements over the earlier 1988 Foreign Investment Law but still leaves many questions unanswered, notably with respect to investor protection and the procedures for admitting foreign investors. The new FIL is an important first step and, now that it has been enacted, the government has turned to many other pressing issues. While many of the recommendations in this review concerning the FIL will only need to be addressed in the medium term, there is nevertheless a risk that the lack of clarity in the FIL and the uncertainty surrounding protection of investment, if not sorted out quickly, will fail to ignite sufficient investor interest in projects in Myanmar and could create problems in the future in terms of disputes between investors and the government.
One of the most pressing problems of the current regulatory framework is its complexity, with half a dozen laws regulating the entry of investors, depending on the sector and location of the investment and on whether or not the investor is foreign. The approval process is equally complex, with foreign investors sometimes requiring overlapping approvals and facing detailed and often opaque criteria for scrutinising individual projects. If the process is not streamlined, it risks creating bottlenecks as the influx of investment proposals bumps up against capacity constraints in the Department for Investment and Company Administration (DICA). The authorities recognise these problems and are taking steps to rationalise the legislative framework, but the flurry of legislative activity – with over 30 laws enacted since 2011 – implies that draft laws are not always properly vetted.
Another issue of concern is the amount of discretion allowed to the Myanmar Investment Commission (MIC) under the FIL, both in terms of the approval system for investment and the conditions that may be attached to individual projects. This flexibility allows the government to open progressively and selectively to foreign investment and to try to maximise the potential benefits from that investment. But flexibility comes at a cost. It creates uncertainty for investors concerning the criteria upon which the decision to admit them is based. It also creates opportunities for corruption when individual officials are given responsibility for deciding on what basis to admit an investment project. Too much discretion may also favour large investors in their negotiations with the MIC by allowing them to extract the maximum benefit in terms of incentives and other favours in exchange for a commitment to invest.
The government is currently considering options for reducing the amount of discretion and the likely capacity constraints of the MIC. Among the options are the development of clear criteria for approving investment in each sector and the possibility of delegating some of the responsibility for approval to DICA or to regional governments.
The implementing rules for the FIL set out an extensive list of sectors in which foreign investment is either prohibited or restricted. Myanmar has more statutory restrictions than any other country except China, as measured by the OECD FDI Regulatory Restrictiveness Index. Many of these restrictions may have been imposed to appease domestic interests in the short term while the government endeavours to create a propitious investment climate for foreign investors through the FIL and its implementing regulations. Over time, the government will need to review these many sector- and product-based restrictions to assess their impact not only on the competitiveness of individual sectors but also on the overall investment climate itself. The authorities report that they are currently reviewing the list of restrictions, particularly with respect to performance requirements, and will be issuing a new notification soon.
Joint venture requirements, for example, are often imposed in order to promote technology transfers, backward linkages and domestic entrepreneurship and to allow local firms to share in any economic rents. While foreign investors might welcome a local partner in some circumstances, joint venture requirements have often been found to be counterproductive, by dissuading potential investors while at the same time minimising the potential spillovers from that investment.
In terms of the degree of protection afforded to foreign investors through the FIL, it incorporates a few welcome innovations that are likely to enhance the level of protection granted to investors. But at the same time, some of the core investment protection standards are absent from the new legal framework and a few legal provisions would need further clarification as to the scope and level of protection they provide.
The principle of non-discrimination has not been incorporated in the investment framework and foreign investors are subject to numerous specific restrictions, notably for accessing land. Myanmar is also endowed with a very basic regime for protecting intellectual property rights, which is expected to be broadly redesigned soon to bring the country in line with international practices. Likewise, the expropriation regime is not aligned with internationally recognised practices and has a narrow scope that does not appear to protect investors against indirect expropriations.
Myanmar provides much stronger protection for foreign investors, notably against expropriation, through the few bilateral investment treaties it has concluded. As Myanmar expands its treaty network, it will need to balance the preservation of its policy space against the need to provide strong legal protection of investment, as well as ensuring full consistency between the treaty provisions and domestic regulations.
Lastly, Myanmar needs significantly to improve the mechanisms for enforcing contract and property rights and for settling disputes. This implies strengthening the independence of the judiciary and developing alternative dispute resolution means, particularly commercial and investment arbitration. In this regard, the recent ratification of the New York Convention for the Recognition and Enforcement of Foreign Arbitral Awards is a positive first step towards more secure access to international arbitration.
Investment promotion and facilitation
In a context of ambitious reforms, with numerous investment-related laws and regulations under review, investment promotion and facilitation in Myanmar take on an important role in providing the private sector with an avenue to interface with the government. Despite the various initiatives to streamline business registration and procedures, including the one-stop shop in Yangon, the current system remains cumbersome. The Directorate for Company Administration’s (DICA) role as a co-ordinator of investment attraction to the various sectors is vital to avoid duplication of government efforts and uphold standards of practices in dealing with investors. DICA is well placed to tackle hurdles to improve the investment climate and is highly solicited. A gradual decentralisation of its functions should be foreseen to avoid untenable strains on its capacity to deliver. Such decentralisation should be accompanied by capacity building measures in the other agencies and regional offices.
Myanmar currently lacks a well-defined vision for its private sector development, though it has incorporated elements in this regard in different laws. Such a strategy would contribute significantly to sequencing private sector development reforms, allocating responsibilities among agencies, and elaborating a strategic vision with all relevant stakeholders. This also entails improving the framework conditions for SMEs, which is being addressed through the upcoming SME Law and other measures, including the establishment of the SME Development Centre in Yangon.
Special economic zones (SEZs) play a central role in Myanmar’s efforts to attract investment and to promote competitive semi-manufactured or manufactured goods with significant local value addition. If accompanied by the right mix of supporting policies and measures aimed at strengthening the ability of local companies to partake in the economic activities generated in the zones, such a policy could lead to the creation of both new local enterprises and of dynamic business networks and clusters.
Taxation
Given Myanmar’s substantial investment needs for physical and social infrastructure, the government will need considerably to improve revenue mobilisation. The tax system does not generate enough revenue to ensure fiscal stability or to curb budget deficits. Myanmar currently has one of the lowest levels of tax revenue collection relative to GDP, forcing the government to rely on unstable revenues from natural resources to meet its spending needs. In addition, the tax structure is overly complicated, with 15 different types of tax collected by seven different departments falling under six ministries. Simplifying income tax by reducing the number of different tax rates and perhaps setting an even higher exemption threshold would make it considerably easier to administer, reduce compliance costs and decrease the incentives and opportunities for evasion and avoidance. Complaints have been reported among the local business community about tax avoidance, especially by the largest taxpayers. Effective programmes of community information dissemination and outreach would help to build a culture of tax compliance in Myanmar.
Finance
Myanmar’s financial sector is still at an early stage of development. It remains strongly underdeveloped and repressed, with financial intermediation almost entirely dominated by an unsophisticated banking sector. The country has no private debt market and the equity market is virtually non-existent. A deep and sound financial sector can contribute to Myanmar’s economic stability and the emergence of entrepreneurial activity through a more efficient mobilisation and allocation of resources and an environment facilitating the development of business linkages.
The process of opening and liberalising the economy entails a number of risks to economic stability during the transition. In the absence of appropriate financial sector supervision and regulation, financial institutions may end up undertaking risky activities in excess of their capacity to manage them. Moving forward in this process while minimising risks will require a wide range of reforms to upgrade Myanmar’s monetary and fiscal management capability and to modernise its financial sector, particularly its supervisory and regulatory framework. An important step has already been taken as an initial effort to unify its multiple exchange rates, with the managed floating of the kyat (Myanmar’s currency) in April 2012 and the lifting of key foreign exchange restrictions in August 2012, including the requirement to use only export proceeds for imports and all the restrictions on current payments and transfers for international transactions. Reforms to improve macroeconomic management capacity and a gradual financial liberalisation have begun to be implemented.
The government has also prepared a financial sector roadmap to: foster monetary development with a new foreign exchange management law; further open the banking sector to foreign participation; and develop the country’s capital market with the launch of a stock exchange expected in 2015.
Infrastructure
The shortage of infrastructure in Myanmar is an important obstacle to meeting the needs of society and to enterprise and economic development. Years of economic isolation have aggravated the country’s already weak sources of finance for infrastructure development. Currently, the need for infrastructure investment is substantial and the government cannot finance these investments alone. Encouraging private sector participation has become essential both to expand infrastructure services and to promote efficiency in the provision of such services by incumbent state-economic enterprises (SEEs). The government has shown interest in relying on the private sector and has taken steps to make this happen. Telecommunication services were opened up to private participation in 2013 and other regulatory enhancements are expected in other sectors to create a credible and stable environment for safeguarding private interests. Many challenges remain, however. There is a need to address institutional fragmentation in some sectors and to build clear sector plans clarifying the role expected from the private sector and SEEs, and co-ordinating the development of infrastructure projects. There is also a need to build regulators’ planning and assessment capacity so as adequately to prioritise investments and facilitate private sector involvement. Regulatory uncertainties arising from a lack of independent regulators and appropriate price-setting mechanisms also still need to be addressed. Furthermore, the presence of vertically integrated SEEs also discourages private investment.
Building the right policy frameworks for enhancing investment in infrastructure, while permitting the country to leapfrog to greener infrastructure systems, is critical for supporting long-term growth and ensuring an efficient and sustainable use of Myanmar’s resources. Myanmar is one of the most vulnerable countries to climate risks and natural disasters. Extreme weather events such as cyclones and recurrent floods highlight the need to take into account climate change risks. Long-lived infrastructure systems can be particularly vulnerable to extreme weather events, particularly in flood-prone or coastal areas. As a major part of Myanmar’s infrastructure required to meet development objectives is yet to be built, Myanmar has the opportunity to leapfrog to greener and climate-resilient infrastructure systems, to avoid locking-in carbon-intensive and climate vulnerable development pathways without slowing its economic growth rate. Beyond the climate change challenge, investing in green infrastructure can help achieve Myanmar’s development objectives by addressing the infrastructure challenges associated with Myanmar’s growing urbanisation and industrial development. Low-cost, efficient green energy infrastructure such as off-grid renewable energy systems can for instance improve access to energy in rural areas. In fast-growing cities, where local air pollution and health issues are likely to arise in upcoming years, investment in public transit systems can help improve local air quality, reduce traffic congestion and enhance mobility. Hence there is a need to take advantage at an early stage of the possibility of favouring green solutions in Myanmar’s efforts to expand infrastructure assets.
Trade
Despite decades of isolation, Myanmar continued to participate in international and regional trade initiatives and is a member of various global, regional and sub-regional groupings, such as the World Trade Organisation (WTO) and ASEAN. The government is currently undergoing its first WTO Trade Policy Review. Despite generally low import tariffs, importers face numerous non-tariff barriers. Exporters suffer from the general shortcomings in the investment climate, but also occasionally from export restrictions in certain sectors. These must be addressed as part of overall investment climate improvements, should Myanmar aim significantly to benefit from regional trading opportunities, as well as from other advances made in the domestic policy framework and liberalisation.
Sanctions from various governments have had an impact on Myanmar’s trading structure and have led to its intensification of regional trading relationships, especially with China and Thailand. As sanctions are being lifted and Myanmar is developing trading capacity, new products and a renewed competitiveness in others, such as in textiles, may emerge in the years to come.
Promoting sustainable investment in Myanmar’s agriculture
While Myanmar was considered the “rice bowl” of Asia in the 1930s by exporting around 3 million MT of rice annually, its agricultural productivity has suffered since then from decades of extensive government controls and public and private under-investment. In the new context of economic reforms, Myanmar offers the potential for rapid agricultural development relying on its abundant land and water resources. The government has identified agriculture as a priority sector and aims to focus particularly on boosting rice, oilseed and bean production to supply the domestic market and increase agricultural exports. If the right policies are implemented and appropriate budget expenditures support these objectives, Myanmar could recover its place as a major agricultural producer and exporter in Southeast Asia. Significant challenges need to be addressed to achieve this potential, the major challenge relating to land tenure security.
Land tenure remains insecure for most smallholder farmers for a wide range of reasons: i) a complex and long registration process; ii) weak protection of registered land use rights; iii) rigid land classifications that do not reflect the reality of existing land use; iv) inefficient land administration;v) lack of recognition of customary land use rights; and vi) active promotion of large-scale land allocations without adequate safeguards.
Only 20% of the land has been registered in Myanmar, mainly due to the complexity of the registration process and the lack of benefits, and even the drawbacks, of registering land use rights. While the adoption of new legislation on agricultural land in April 2012, namely the Farmland Law and the Vacant, Fallow and Virgin (VFV) Land Management Law, intends to be combined with an accelerated land registration process, in practice, land registration remains long and uncertain as several agencies at various government levels have to approve registration and applicants are required to fulfil numerous conditions. Furthermore, the registration of land use rights does not necessarily lead to higher land tenure security as land use rights may be withdrawn if the numerous conditions and required administrative procedures are not respected.
Despite slight recent improvements, the land classification remains rigid as it remains difficult to change land from one category to another. As a result, this classification does not always reflect current land use, thereby impeding land users from registering their rights and increasing land tenure insecurity. For instance, some forest land has been partly or completely converted to agricultural use but remains classified as forest land. The classification of agricultural land into two categories managed by different agencies with overlapping roles and responsibilities undermines the efficiency and coherence of land management.
The new land legislation does not fully recognise customary land rights. Although shifting cultivation relies on fallow land, the VFV Land Law states that land use rights may be confiscated if VFV land is not cultivated, thereby leaving many smallholders relying on such practices with very insecure land rights. The new land legislation is in line with government efforts to attract large-scale investments that could lead to employment creation and bring the necessary expertise and financing to enhance the competitiveness of agricultural value chains. The legislation states that, if investment projects are approved by the government, the time and size limits set on land leases can be lifted. Indeed, while agricultural investment trends cannot be interpreted due to limited data, data on land investment of the Ministry of Agriculture and Irrigation show that large-scale land allocations have increased significantly over the past decade.
In a context of weak governance and accountability, large investments in land may result in adverse social impacts. They may lead to land conflicts, thereby harming not only local producers but also large investors. Such conflicts have made the headlines in recent months demonstrating the urgency to design and enforce effective safeguards to ensure that existing land use rights are respected and local communities fairly compensated in case of eviction. Furthermore, the land actually developed and cultivated by the companies that have been granted land would approximate respectively only 36% and 20% of the total land area allocated. The risks related to large-scale investments in land often outweigh the benefits such investments may bring.
Adequate safeguards should thus be developed to ensure that large-scale investments do not have adverse social impacts.
The legislation should also more strictly regulate the potential adverse environmental impacts of these investments. While the recent Environmental Law demonstrates the efforts made to promote sustainable environmental management, it presents major weaknesses. Environmental and social impact assessments are not compulsory, and, most importantly, the law vests the ministry with absolute and limitless discretion, with government approval, to ignore its provisions.
After land tenure insecurity, limited access to finance constitutes the second major constraint for agricultural investors, particularly smallholders. Only 1-3% of the volume of formal bank loans is extended to the agricultural sector. As a result, most smallholders access credit through informal institutions at high interest rates. The Myanmar Agricultural Development Bank had the monopoly of providing loans to farmers until recently and was able to offer only seasonal loans covering a small share of production costs and on a short-term basis. Although the new Microfinance Law that allows for the development of microfinance institutions should help fill the gap, reforming the MADB would help expand its scope and coverage and ensure that agricultural investors can access long-term credit.
The erratic issuance of rice export quotas also hinders investment in agriculture and partly explains the low export prices of Myanmar’s rice to the detriment of agricultural producers and traders. Open, transparent and predictable agricultural trade policies, both domestically and across borders, can improve the efficiency of resource allocation, thus facilitating scale economies, reducing transaction costs and boosting productivity and rates of return on investment.
Finally, investment in agriculture is impeded by limited access to agricultural inputs, particularly seeds and fertilisers, inadequate rural infrastructure and weak extension services and research and development institutions. The domestic supply of fertilisers remains far below demand while imported fertilisers are often adulterated. As detailed in Chapter 7 on infrastructure development, access to infrastructure assets is currently one of the weakest in the region. However, irrigation infrastructure has significantly expanded since 1988, absorbing up to 80% of the agricultural ministry’s budget, to the detriment of public expenditures on extension services or research and development – although these last two sectors have proved to be the most effective ones to raise agricultural growth in most countries. Extension staff remains inadequate both in number and quality and an efficient mechanism for performance management is lacking.
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