Development of Smes in Myanmar in The Globalization Era
Development of Smes in Myanmar in The Globalization Era
Development of Smes in Myanmar in The Globalization Era
Development Of SMEs
In Myanmar In The Globalization Era
Balbir B. Bhasin, University of Arkansas, USA
Sivakumar Venkataramany, Ashland University, USA
ABSTRACT
SMEs are of overwhelming importance to the young and growing economies of most Southeast
Asian nations, but this is exceptionally the case for Myanmar. The country is rich with resources
but has not managed to rid itself of post colonial mismanagement, socialist and bureaucratic
tendencies. This paper evaluates the existing private sector development policy in Myanmar which
can only be defined as lacking any substance, coherence and coordination. Myanmar needs to
create a meaningful and comprehensive policy for the development of its private sector. This
includes trade and investment liberalization and creation of infrastructure. Much can be learned
from other members of ASEAN, such as Singapore, Malaysia and Thailand, that have succeeded
in similar endeavors.
INTRODUCTION
A
s with most growing economies, Myanmar needs to develop its small and medium sized enterprises
(SMEs), which is the key engine for growth for all Southeast Asian countries. Myanmar, formerly
known as Burma, is potentially a very wealthy country. With a population in excess of 58 million
(2008), it is the largest country in mainland Southeast Asia. It is well endowed with rich natural resources. It has
abundant natural gas reserves. It has large areas of arable land, forestry, minerals of numerous varieties, and
freshwater and marine resources, yet it remains poor due to isolation and mismanagement. It has seen an average
growth rate of only 2.9%, among the lowest in the region (ADB, 2009). The WTO recognizes Myanmar as one of
the least developed countries with its exports at $6,937 million and imports at $4,288 million for 2008. The country
ranks at 107 among all nations in terms of inward FDI performance. It has received an inward foreign direct
investment (FDI) of $323 million in 2009 which is dwarfed by the South East Asia receiving $36,806 million. There
is no outward FDI from Myanmar, whereas southeast Asia has made $21,284 million.
The country’s history has seen the unification of three waves of immigration from Cambodia (Hmong), the
eastern Himalayas (Mongol) and northern Thailand (Tai) under the Buddhist King Anawratha in the 9 th century at
Bagan. By the 14th century after numerous invasions by the Mongols, and then by neighboring Siam, the country
was carved up among warring tribes. The arrival of Europeans traders in 1824 – Portuguese, Dutch, and British -
finally resulted in the colonization of Burma by the British in 1937. The British were expelled by the Japanese
during the Second World War in 1941. The Japanese surrendered in 1945 and Burma became independent in 1948
under the leadership of their great statesman Aung San, who was assassinated soon the same year. The Union of
Burma became a democratic republic with U Nu as Prime Minister.
In 1962, left-wing general Ne Win staged a coup, banned political opposition, suspended the constitution,
and introduced the “Burmese way of socialism.” After 25 years of economic hardship and repression, the Burmese
people held massive demonstrations in 1987 and 1988. These were brutally quashed by the State Law and Order
Council (SLORC). In 1989, the military government officially changed the name of the country to Myanmar. The
ruling junta has maintained a tight grip on Myanmar since 1988. There have been numerous uprisings against the
government in favor of democracy, but they have been ruthlessly put down by the military.
On May 3, 2008, Cyclone Nargis ravaged the Irrawaddy Delta and Yangon, killing 22,500 people, leaving
up to a million homeless, and causing serious damage to the agricultural sector. The major agricultural product is
rice, which covers about 60% of the country’s total cultivated land area and accounts for 97% of total food
produced. The agriculture sector accounts for 43% of GDP, while less than 20% is industry and the remaining 37%
is services. Seventy percent of the labor force is in agriculture, 7% in industry and 23% in services (CIA, 2010).
Agricultural products, in addition to rice, are pulses, beans, sesame, groundnuts, sugarcane, hardwood, fish and fish
products. Industries are agricultural processing, wood and wood products, mainly from teak, copper, tin, tungsten,
iron, cement, pharmaceuticals, fertilizer, oil and natural gas, jade and gems. Other than the state-owned industries,
the majority of the industrial sector comprises of SMEs.
Myanmar’s history of economic development since independence can be divided into three distinct periods
of political economy:
1948 to 1962: Period of parliamentary democracy with a mixed but free economic system
1962 to 1988: Period of command and socialist economy under military rule
1988 onwards: Period of market oriented economy under military rule
The country opened its economy to private investment only in 1988. Prior to this, the Social Economic
System existed and everything was controlled by the state. In 1989, the SLORC, later reconstituted as the State
Peace and Development Council (SPDC), allowed private sector businesses to “engage in external trade and to
retain export earnings and started to legitimize and formalize border trade with neighboring countries, hitherto an
activity that had been deemed illegal” (Kudo and Mieno, 2007). A modest expansion of the private sector was
permitted and some foreign investment was allowed. Priorities set were development of agriculture as the base to
support development of other sectors, proper evolution into a market-oriented economic system, invite investment
and technical participation from internal and external sources, and initiative and control to remain in the hands of the
state. Economic reform measures for various sectors were aimed at adopting a market oriented system for allocation
of resources and distribution of goods and services, encouraging private investments and entrepreneurial activities
domestically, and opening the country to foreign direct investment; and promoting exports responsibility for
implementing the industrial policy was put in the hands of the Myanmar Industrial Development Committee
(MIDC).
Traditional enterprises have long existed in Myanmar. They were small cottage industries engaging in
handicrafts, textile manufacturing, weaving, jewel cutting and polishing, lacquer ware, wood works, gold, silver and
blacksmithing. During the colonial period, the British did not promote the establishment of industries for
manufacturing consumer goods, and domestic industries did not get any assistance from the government.
Consequently, local industries were concentrated in agriculture and resource-based industries like rice mills and
sewing mills (Aung Kyaw, 2008). After independence, the Anti-Fascist People’s Freedom League (AFPFL)
government welcomed private sector and foreign investment. Private industries flourished parallel to public sector
factories. Most large-scale industries were run by the state. The government provided some incentives for SMEs in
the form of financing and supply of raw materials. Consequently, by the 1960s, SMEs had achieved considerable
progress in food, garment, weaving, cosmetics, chemicals, and consumer goods, such as toys, soap, food snacks, and
clothing industries. Ultimately, licenses to build factories had to be restricted as state-owned companies were unable
to compete. Records in 1961-1962 show that 91% of registered companies were owned by Myanmar nationals, up
from 86% in 1953-1954. Joint ownership with foreign nationals increased only from 4.5% to 5.5%. This was the
direct result of the indigenization trend set after independence. The boom in private enterprise came to an end when
the military took over in 1962. The Revolutionary Council declared the implementation of the socialist economic
system and all significant private businesses were nationalized.
This system led to deterioration of the economic system and limited reforms had to be made in the 1970s.
The Right of Private Enterprises Law was enacted in 1977. It recognized the legal status of private enterprises and
allowed them to perform specified economic activities. However, private investments during the socialist period
were limited to small-scale industries. The role of SMEs was subordinate to state-owned companies and
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International Business & Economics Research Journal – June 2012 Volume 11, Number 6
cooperatives. Only in 1988 did the SLORC reverse the trend and adopted the market-oriented economic system. The
Private Industries Enterprises Law was enacted in 1990, the Promotion of Cottage Industrial Law in 1991, and the
Myanmar Citizen’s Investment Law in 1994 to boost private business enterprises. The Union of Myanmar Chamber
of Commerce and Industry, established in 1989, was upgraded to the Union of Myanmar Federation of Chambers of
Commerce and Industry (UMFCCI) in 1999 (Aung Kyaw, 2008). By 2004, SMEs in Myanmar accounted for 92.6%
of the total industrial sector, while large industries for only 7.4% (Mandal, 2007). Classification of industries by the
government of Myanmar was formalized by the Private Industrial Enterprises Law of 1990 and is based on power
used, number of employees, capital, and production as shown in Table 1.
By 2007, membership of the UMFCCI had reached 16,363 – comprising of 10,854 local companies, 1,656
enterprises, 770 foreign companies, 185 cooperatives, and 2,898 individual members. SMEs today dominate most of
Myanmar’s economic activity, accounting for 90% of the industrial sector and 99% of manufacturing sector (Tin
Maung, 2007).
The MIDC policy guidelines for the development of SMEs, as well as the industrial structure, are based on
the principles (Kan Zaw, 2006) of development of industries with agriculture as the base, enhancement of quantity
and equality of industrial products, increased production of new types of machinery and equipment, production of
machinery and equipment for industrial use, and creation of suitable conditions for a shift to an industrialized state.
There are numerous government departments, agencies and institutions promoting SME development in Myanmar,
some of which are listed below (Kan Zaw, 2006; Khin and Htwe, 2007):
Human resource development programs, for supporting SME development, is the responsibility of various
government ministries, which include the Ministry of Science and Technology, the Ministry of Industry the Ministry
of Cooperatives, and the Ministry of Education. Sharing this responsibility is the UMFCCI and other NGOs.
Myanmar also works, to a limited extent, with external organizations, such as the United Nations Development
Program (UNDP), Japan External Trade Organization (JETRO), and the Myanmar-Japan Association (Kan Zaw,
2006). Table 2 shows the number of enterprises in Myanmar in 2004.
Very limited research has been done on SME development though it is the main structure of the Myanmar
economy. A closed economy – that which is seen as being flawed - recently opened to private enterprise. Not being
connected to the global economy, there is little scope for growth and development. In such an environment, the
resources available are also limited and expertise in technology, management, distribution, quality control, and
export is scarce indeed. Aung Kyaw (2008) studied the policies relating to financing of SMEs in Myanmar for the
Institute of Developing Economies. He concludes:
Today, the role of SMEs (in Myanmar) has become more vital in strengthening national competitive advantage and
the speedy economic integration into the ASEAN region. However, studies show that SMEs have to deal with a
number of constraints that hinder their development potential, such as shortage in power supply, availability of
long-term credit from external sources, and many others.
Among the problems and constraints cited as impediments to growth were poor infrastructure, resulting in
shortage of electricity, weak telecommunications and transportations systems, weak drainage and sewage systems,
and limited space. There was also a shortage of spare parts and raw materials, low level of technology, insufficient
machines and equipment, lack of capital, and shortage of foreign currency. The number of registered enterprises is
presented in Table 2.
Kudo’s (2002) study of young entrepreneurs found that access to finance, effects of culture and limited
exposure, high inflation rate, and competition were major problems faced by entrepreneurs. Another survey in 2003
(Htein) and one in 2007 (Aung Kyaw) found similar impediments to SME growth - shortage of capital, shortage of
skilled labor, and shortage of power. The Myanmar government itself has acknowledged that SME development
does require serious attention as it is a critical component of the country’s economy. The challenges faced by SMEs
in Myanmar are similar to those faced by other developing nations. Kyaw Zaw, Deputy Director General of the
Directorate of Investment and Company Administration, Ministry of National Planning and Economic
Development, in his presentation to the ASEAN-Japan Seminar on FDI: Sharing Japanese SMEs Dynamism in
ASEAN’s Integration” in 2007, cited the following challenges that SMEs faced:
The government feels that it has recognized the need to participate actively in promoting the development
of SMEs, but only recently, and intends to pursue this goal by giving it governmental and non-governmental focus.
As a prelude to discussing policy considerations, it is necessary that the share and value of SME
contribution to Myanmar’s economy is well understood. Even though SMEs contribution to the country is large, it is
only to the industrial sector of the economy, which remains the smallest at 19.8%. Agriculture is the largest sector
accounting for 42.9% of the GDP and Services comes in second at 37.3%. In terms of employment, agriculture
provides 70%, services 23%, and industry employs only 7% of the labor force (CIA, 2010). The major industries
that contributed to the GDP in 2006 were manufacturing (11.4%), mining (0.4%), energy (0.2%), electricity (0.1%),
and others (3.1%). With regard to SMEs’ participation by sectors, the food and beverage industry accounted for
about 75% of total industrial output (Kan Zaw, 2006), yet SMEs remain the key agent for Myanmar’s
industrialization. Though they always start small, they have the potential of growing into large businesses. They are
also mostly private enterprises. Their growth truly reflects the growth of the private sector. “The development of the
entrepreneurship spirit is highly associated with the development of SMEs as these are formed and run by
entrepreneurs” (Aung Kyaw, 2008). SMEs are also important for the structural change of a country from being
agriculture based to industrial and service-oriented.
Thus, it becomes imperative that the economic development of the country is directly dependent on the
adoption of the free market system. Hence, there is a need to liberalize the economy, remove state monopolies and
allow free enterprise, support export development, and create the infrastructure to allow this to take place. This in
turn will stimulate the growth of SMEs as active participants in the economy. The existing system in Myanmar is far
from this. The economy “suffers from serious macroeconomic imbalances” and “the business climate is widely
perceived as opaque, corrupt and highly inefficient.” Better investment and business climates and an improved
political situation are needed. The government continues to exercise pervasive controls, the overall economic
policies are inefficient, the poor investment climate hampers foreign investment, access to credit is very limited, and
the country operates under very tight sanctions from the United States, the European Union, Canada and Australia
(CIA, 2010).
Myanmar is not ranked in the World Bank’s 2010 Ease of Doing Business Survey, the World Economic
Forum’s 2009-2010 Competitiveness Index. It is ranked 175 out of 179 in the Heritage Foundation’s Economic
Freedom Index, 99 of 141 in the UNCTAD Inward Potential Performance Index, and 139 of 141 in the Fraser’s
Institute’s Economic Freedom of the World Index. The country is ranked 138 of 182 in the 2009 United Nations
Development Program’s Human Development Index. Myanmar is one of the 31 countries in food crisis requiring
external assistance as defined by the Food and Agriculture Organization (FAO). The International Food Policy
Research Institute places Myanmar 53 out of 84 countries in the 2009 Global Hunger Index (eStandards, 2010). The
country has remained isolated for an extended period of time. The World Bank has not approved lending for
Myanmar since 1987. The country is in arrears in its repayments to the World Bank. There has been no direct
assistance from the Asian Development Bank (ADB) in over 20 years. These are clear indicators that Myanmar’s
efforts toward achieving its economic development goals leave a lot to be desired. The country remains one of the
least developed and poorest nations. The poverty incidence is estimated between 26.6% and 32.7% (CIA, 2007;
ADB, 2008). It has the least open economy in Asia. The Financial Standards Foundation, in its 2010 Country Brief
on Myanmar, finds the following areas requiring attention:
The country’s infrastructure is poorly developed. Much of it is old and decrepit. This includes roads,
railways, ports, airports, water and sanitation systems.
The country’s economic statistics and trade data are unreliable.
The country has a huge external debt ($ 7.373 billion end of 2009) and budget deficit (4.5% of GDP in
2009). Low revenues and high expenditures (estimated 40% is for defense) and heavy losses by state
enterprises are causes. Inflation in 2007 was estimated to be 30% (ADB, 2008)
The informal economy,which includes a huge black market, is very large. Smuggling is rampant, as is
illicit drug trafficking. Myanmar is also the second largest producer of opium in the world, after
Afghanistan.
The financial system is fully controlled by the government, which sets interest rate. Banks are mainly fully
or partially state owned. The few private banks are limited in their scope of operations.
The currency (Kyat) is non-convertible and non-negotiable outside of Myanmar.
There is a multiple exchange rate system. The official exchange rate of the kyat is 6.56 to the US dollar but
market rates range from 900 to 1,000.
Corruption is rampant and the judiciary is not independent. Myanmar is ranked 178 of 180 countries in
Transparency International’s 2009 Corruption Perceptions Index. Most people view corruption as normal
practice and requirement for survival.
Myanmar does not offer a friendly environment to foreign investors. Many sectors are reserved for state
enterprises - telecommunications, air and rail transport, broadcasting and television, exploration and
production of petroleum, banking and insurance services, and export of precious stones.
Tax rates are very high. Corporate tax rate is 30%. There is a withholding tax of 15% on interest and
royalties (for non-residents, it is 20%). Foreign companies must pay their taxes in US dollars at the inflated
exchange rate. Personal income tax ranges from 3% to 30% for residents and 5% to 40% for non-residents.
Human capital is weak. The country lacks skilled labor and access to technology.
Myanmar has survived on its agricultural sector which contributed 44% to the GDP, as well as export of
natural gas, which contributed 20% of GDP. Fiscal deficits have been financed by central bank money creation. In
order to rectify this trend, it is imperative that badly needed reforms are initiated. The ADB strongly recommends:
Further liberalization of agriculture, domestic trade, and privatization of state enterprises to promote growth
Development of banking and the creation of a domestic bond market to address deficits
Creation of a unified exchange rate to reduce pricing distortions
Improvement of the environment for private sector development to stimulate growth and employment
Higher standards of governance and transparency to create a better business climate
Improve availability of reliable data to allow for greater economic assessment and serve as a base for
enhanced policy-making.
These economic reforms can form the template for the development of the industrial sector and create an
environment for SME growth. They are unequivocally interrelated. Priority must therefore be given to removing
economic controls, encouraging foreign and local investment and exports, removing structural impediments to
entrepreneurship, encouraging and facilitating the use of technology, improving skills development through
education and training, providing all forms of access to credit, and improving the country’s infrastructure. Overall,
economic policy has to include an enabling environment for SMEs. This sector has to be given very serious
consideration and priority. A comprehensive and effective strategy has to be developed to address the following
urgent issues:
Myanmar’s economy is described by critics as the least open economy in Asia. It suffers from pervasive
government controls, inefficient economic policy, and extensive poverty. Despite Myanmar's increasing
hydrocarbons revenue, the social and economic environments have deteriorated because of the regime's
mismanagement or corruption of its economy and it suffers from major economic imbalances, including rising
inflation rates, financial deficits, multiple official exchange rates that overvalue the Burmese kyat, a distorted
national interest rate regime, unreliable statistics and indicators, and an inability to reconcile national accounts to
determine a realistic Gross Domestic Product (GDP) figure.” The economy has survived mainly due to agriculture
and mineral exports. The contribution of trade to the GDP has remained very low. Total exports in 2009 were
$6.504 billion and imports were $3.555 billion (CIA, 2010). Main exports are natural gas, wood products (mainly
teak), pulses and beans, fish, rice, clothing, and gems and were to Thailand (52.3%), India (12.7%), China (8.9%),
and Japan (4.4%). Main imports are petroleum products and crude oil, fertilizer, plastics, machinery, transport
equipment, cement and construction materials, and food products and edible oil. Major import partners are China
(31.9%), Thailand (21.2%), Singapore (20.7%), Malaysia (5.1%), and Indonesia (4%). FDI inflows have remained
very poor at $258 million in 2007 and $283 million in 2008. These have been mainly in the oil and gas sector,
tourism, and garment manufacturing. Per capita GDP remained at $442, which is $1,200 calculated at Purchasing
Power Parity (PPP) in 2009 (Global Finance, 2010). The economic outlook for Myanmar does not look very
promising when compared to other countries in the region and members of the Association of Southeast Asian
Nations (ASEAN) in which Myanmar became a member in 1997. GDP forecast for the coming years, projected by
the IMF, is shown in Table 5.
If Myanmar is serious about developing its economy, it is imperative that liberalizing the economy and
promoting private enterprise and investment need urgent addressing. SMEs can become a strong tool in this and the
government must take immediate steps to develop a comprehensive program to encourage the growth of SMEs. This
includes the creation of infrastructure for coordinating SME support, SME financing mechanism, development of
human resources, export development, technology transfer, and adoption of relevant best practices, networking,
good governance, and commitment of key policy makers. Much can be learned from other members of ASEAN,
such as Singapore, Malaysia and Thailand, that have succeeded in similar endeavors. Table 6 illustrates the position
of Myanmar within the regional pact of ASEAN in terms of its share of inward FDI. Myanmar stands to gain only
0.44%, even amongst its own partners sharing a regional agreement that pervades international trade. This
emphasizes the need for the country to develop an environment that is congenial for receiving international
institutional investments. ASEAN policies toward SME development indicate certain incentives granted to local
SMEs in Myanmar which include basic allowances, depreciation allowance, and rights to set off and/or carry
forward losses to encounter reduced direct taxation.
AUTHOR INFORMATION
Dr. Balbir B. Bhasin serves as Ross Pendergraft Endowed Professor of International Business in the University of
Arkansas, Fort Smith, Arkansas. He holds a Master of International Management (M.I.M.) degree from Thunderbird
School of Global Management, Glendale, Arizona and a Ph.D. in International Business from the University of
South Australia, Adelaide, Australia. He was the president of a private investment bank in New York, and CEO of
an international business information company in the Far East. His research interests are in cross-cultural studies and
FDI in Asian markets. He advises companies on opportunities in Emerging Asia. E-mail: [email protected]
Dr. Sivakumar Venkataramany serves as Professor of International Business in the Dauch College of Business &
Economics at Ashland University, Ashland, Ohio where he teaches global management and global finance. . He
received his MBA, MS and Ph.D. from the University of Miami, Coral Gables, Florida. His research interests are
risk management in global banks, emerging financial markets and FDI in developing economies. He has several
teaching commitments abroad and serves as an examiner for doctoral theses. E-mail: [email protected].
Corresponding author.
REFERENCES
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JETRO, Chiba, Japan 2002.
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the Transition to an open Economy”, Institute of Developing Economies, IDE Discussion paper No. 116,
August 2007.
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NOTES