In which industries to invest? Aligning market and development incentives in Myanmar MPDD Seminar Series Bangkok, 31 October 2012 Steven Ayres and Clovis Freire Macroeconomic Policy and Development Division (MPDD) Economic and Social Commission for Asia and the Pacific (ESCAP) Main Messages � Diversification towards more productive economic activities will best facilitate inclusive development in Myanmar � Given market incentives, it will require strategic interventions, including targeted FDI � Method to indentify economic activities to target 1
Content � I. Introduction � II. The opening up of the economy � III. Inclusive development, structural transformation and the role of FDI � IV. Theoretical framework � V. Methodology & Data � VI. Identifying opportunities for FDI � VII. Conclusions I. Introduction � Identifying investment opportunities in industries that will best facilitate inclusive growth and the achievement of development goals - the focus is not the broader issues of trade and investment in the new macroeconomic framework. (for a comprehensive review of this, see Anukoonwattaka & Mikic, 2012) � Development and market incentives must be considered in planning strategies � New industries should be the focus of such investments 2
II. The opening up of the economy Cause for optimism in Myanmar.... Years of isolation, both political and economic, have inhibited � Myanmar’s development. � Yet the current era of political and economic reforms offers new opportunities – FDI legislative reform could be instrumental in creating new economic activities � Chance to exploit a number of strengths in this transition phase, despite a number of potential challenges Strengths Challenges - Demography - Fiscal Deficits - Geography - High inflation - Natural Resources - Macroeconomic management challenges III. Inclusive development, structural transformation & the role of FDI � Opportunity to follow in neighbours’ growth and development footsteps � Growth of an inclusive nature is key � A transformation in the structure of the economy may help facilitate this. - Myanmar has made no progress in this respect, agriculture accounting for 35% of GDP in 1965, and 36% in 2010. � ESCAP (2012) stresses the need for the movement towards more productive industries and services 3
� Slow structural transformation is exacerbated by reduced private investment incentives. What role can FDI play? � The benefits of FDI can be felt in many ways: - incomes and employment, capital formation and market access, market structure, technology and skills, fiscal revenues, political, social and cultural issues, etc. (UNCTAD, 1999) - Yet there are also certain caveats: - Crowding out of domestic investment - Creation of macroeconomic instability - Investment in protected industries � It is both the quantity and quality of FDI that is of concern. But what constitutes quality FDI? � Myanmar requires a carefully implemented strategy. - targeted FDI can serve as an integral part of such a strategy. - this can be done by maximising the advantages specific to Myanmar, and ensuring that investment facilitates structural change that will be conducive to development goals. 4
I V. Theoretical fram ew ork Based on evolutionary grow th m odels ( Silverberg and Vespagen, 2 0 0 5 ) & Econom ic com plexity ( Hidalgo and Hausm ann, 2 0 0 9 ) Economy as a set � of different economic activities Productive Productive � Each producing a capacities capacities single product ( x ) with different: • productivity ( q ) • employment ( e ) x 1 x 1 x 2 x 2 x 3 x 3 x n x n products products • output ( y ) < < q 1 q 1 q 2 q 2 q 3 q 3 q n q n productivity productivity < < < < … … � Each product requires a specific employment employment + + + + = L = L + + e n e n e 1 e 1 e 2 e 2 e 3 e 3 combination of “productive output output + + + + + + = Y = Y y n y n capacities” to be y 1 y 1 y 2 y 2 y 3 y 3 produced e 0 = unemployed e 0 = unemployed Constant labour productivity of each economic activity: � q j = ( y j /e j ) Productive Productive � Function of the unique capacities capacities productive capacities used in the production Changing Average x 1 x 1 x 2 x 2 x 3 x 3 x n x n products products productivity of the economy as a < < q 1 q 1 q 2 q 2 q 3 q 3 q n q n productivity productivity < < < < … … whole: employment employment + + + + = L = L e 1 e 1 + + e 2 e 2 e 3 e 3 e n e n q = ∑ (ej/L) qj � � changes with shifts in output output + + + + + + = Y = Y y 1 y 1 y 2 y 2 y 3 y 3 y n y n employment and rate of growth by economic e 0 = unemployed e 0 = unemployed activity � changes with creative destruction 5
Econom y evolves by ( a) shifting em ploym ent and changing rate of grow th by econom ic activity Productive Productive capacities capacities x 1 x 1 x 2 x 2 x 3 x 3 x n x n products products < < q 1 q 1 q 2 q 2 q 3 q 3 q n q n productivity productivity < < < < … … employment employment + + + + = L = L e 1 e 1 + + e 2 e 2 e 3 e 3 e n e n output output + + + + + + = Y = Y y 1 y 1 y 2 y 2 y 3 y 3 y n y n e 0 = unemployed e 0 = unemployed Econom y evolves by ( b) adding/ rem oving productive capacities and/ or links of the netw ork of productive capacities Productive Productive capacities capacities x 1 x 1 x 2 x 2 x 3 x 3 x n x n products products Xn+1 < < < q n+1 q n q n q 1 q 1 q 2 q 2 q 3 q 3 productivity productivity < < < < … … + e n+1 = L employment employment + + + + + + = L = L e 1 e 1 e 2 e 2 e 3 e 3 e n e n + y n+1 = Y output output + + + + + + = Y = Y y 1 y 1 y 2 y 2 y 3 y 3 y n y n e 0 = unemployed e 0 = unemployed 6
I nclusive econom ic developm ent � Growth of total output ( Yt+1 > Yt ) � Reduction of inequality by Growth increasing employment in with more productive sectors productive jobs � Increase in total productivity of the economy ( qt+1 > qt ) Tw o w ays to m ove em ploym ent into m ore productive activities 1) Demand must be increased in existing economic Productive Productive capacities capacities activities that are more productive which, in turn, products products x 1 x 1 x 2 x 2 x 3 x 3 x n x n increases output and < < q n q n productivity productivity q 1 q 1 < < q 2 q 2 < < q 3 q 3 … … employment employment + + + + = L = L associated employment in e 1 e 1 + + e 2 e 2 e 3 e 3 e n e n output output y 1 y 1 + + y 2 y 2 + + y 3 y 3 + + y n y n = Y = Y that activity; e 0 = unemployed e 0 = unemployed 2) Creation of new and more Productive Productive productive economic capacities capacities activities, which would products products x 1 x 1 x 2 x 2 x 3 x 3 x n x n increase the opportunity for Xn+1 < < productivity productivity q 1 q 1 < < q 2 q 2 < < q 3 q 3 q n q n < q n+1 … … more productive jobs. + e n+1 = L employment employment + + + + + + e n e n = L = L e 1 e 1 e 2 e 2 e 3 e 3 + y n+1 = Y output output + + + + + + = Y = Y y 1 y 1 y 2 y 2 y 3 y 3 y n y n e 0 = unemployed e 0 = unemployed 7
� But big reliance on investment in existing industries pose risks for inclusive development • High global demand for primary products is more likely to create incentives for increasing resources on lower-productivity activities (ESCAP, 2012); • If demand-side dynamics lead to the desirable outcome of higher output and employment in more productive activities, such outcome in the longer-term may have the perverse effect of perpetuating social injustices and the old power dynamics within the society (Acemoglu and Robinson, 2012) . � Therefore, the creation of new more productive economic activities present a more successful approach to fostering inclusive development How diversification w ould com e about? � Emulation vs Innovation • Emulation: new to the country • Innovation: new to the Productive Productive world capacities capacities � Path dependency products products x 1 x 1 x 2 x 2 x 3 x 3 x n x n Xn+1 • New activities tend to < < q 1 q 1 q 2 q 2 q 3 q 3 q n q n < q n+1 productivity productivity < < < < … … exploit the productive + e n+1 = L employment employment + + + + + + e n e n = L = L e 1 e 1 e 2 e 2 e 3 e 3 + y n+1 = Y capacities that were output output + + + + + + = Y = Y y 1 y 1 y 2 y 2 y 3 y 3 y n y n e 0 = unemployed e 0 = unemployed previously developed for other activities 8
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