Main Messages Diversification towards more productive economic - - PDF document

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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

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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

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• 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
• pportunities

– 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

• Fiscal Deficits
• High inflation
• Macroeconomic

management challenges

• Demography
• Geography
• Natural Resources

Challenges Strengths

• 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

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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

• f 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.

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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
• f different

economic activities

• Each producing a

single product (x) with different:

• productivity (q)
• employment (e)
• output (y)
• Each product

requires a specific combination of “productive capacities” to be produced q1 x1 q2 x2 q3 x3 qn xn … e1 e2 e3 en e0 = unemployed < < < y1 y2 y3 yn + + + + + + = Y = L

Productive capacities products productivity employment

• utput

q1 x1 q2 x2 q3 x3 qn xn … e1 e2 e3 en e0 = unemployed < < < y1 y2 y3 yn + + + + + + = Y = L

Productive capacities products productivity employment

• utput

Constant labour productivity of each economic activity:

• qj = (yj /ej)
• Function of the unique

productive capacities used in the production

Changing Average productivity of the economy as a whole:

• q = ∑(ej/L) qj
• changes with shifts in

employment and rate of growth by economic activity

• changes with creative

destruction

q1 x1 q2 x2 q3 x3 qn xn … e1 e2 e3 en e0 = unemployed < < < y1 y2 y3 yn + + + + + + = Y = L

Productive capacities products productivity employment

• utput

q1 x1 q2 x2 q3 x3 qn xn … e1 e2 e3 en e0 = unemployed < < < y1 y2 y3 yn + + + + + + = Y = L

Productive capacities products productivity employment

• utput

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Econom y evolves by ( a) shifting em ploym ent and changing rate of grow th by econom ic activity

q1 x1 q2 x2 q3 x3 qn xn … e1 e2 e3 en e0 = unemployed < < < y1 y2 y3 yn + + + + + + = Y = L

Productive capacities products productivity employment

• utput

q1 x1 q2 x2 q3 x3 qn xn … e1 e2 e3 en e0 = unemployed < < < y1 y2 y3 yn + + + + + + = Y = L

Productive capacities products productivity employment

• utput

Econom y evolves by ( b) adding/ rem oving productive capacities and/ or links of the netw ork of productive capacities

q1 x1 q2 x2 q3 x3 qn xn … e1 e2 e3 en e0 = unemployed < < < y1 y2 y3 yn + + + + + + = Y = L

Productive capacities products productivity employment

• utput

q1 x1 q2 x2 q3 x3 qn xn … e1 e2 e3 en e0 = unemployed < < < y1 y2 y3 yn + + + + + + = Y = L

Productive capacities products productivity employment

• utput

Xn+1

< qn+1 + en+1 = L + yn+1 = Y

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I nclusive econom ic developm ent

Growth of total output (Yt+1 > Yt) Reduction of inequality by increasing employment in more productive sectors Increase in total productivity of the economy (qt+1 > qt)

Growth with productive jobs

Tw o w ays to m ove em ploym ent into m ore productive activities

1) Demand must be increased in existing economic activities that are more productive which, in turn, increases output and associated employment in that activity; 2) Creation of new and more productive economic activities, which would increase the opportunity for more productive jobs.

q1 x1 q2 x2 q3 x3 qn xn … e1 e2 e3 en e0 = unemployed < < < y1 y2 y3 yn + + + + + + = Y = L

Productive capacities products productivity employment

• utput

q1 x1 q2 x2 q3 x3 qn xn … e1 e2 e3 en e0 = unemployed < < < y1 y2 y3 yn + + + + + + = Y = L

Productive capacities products productivity employment

• utput

q1 x1 q2 x2 q3 x3 qn xn … e1 e2 e3 en e0 = unemployed < < < y1 y2 y3 yn + + + + + + = Y = L

Productive capacities products productivity employment

• utput

q1 x1 q2 x2 q3 x3 qn xn … e1 e2 e3 en e0 = unemployed < < < y1 y2 y3 yn + + + + + + = Y = L

Productive capacities products productivity employment

• utput

Xn+1 < qn+1 + en+1 = L + yn+1 = Y

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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
• utcome 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

world

Path dependency

• New activities tend to

exploit the productive capacities that were previously developed for

• ther activities

q1 x1 q2 x2 q3 x3 qn xn … e1 e2 e3 en e0 = unemployed < < < y1 y2 y3 yn + + + + + + = Y = L

Productive capacities products productivity employment

• utput

q1 x1 q2 x2 q3 x3 qn xn … e1 e2 e3 en e0 = unemployed < < < y1 y2 y3 yn + + + + + + = Y = L

Productive capacities products productivity employment

• utput

Xn+1 < qn+1 + en+1 = L + yn+1 = Y

9 How to facilitate the em ergence of new productive capacities that would allow emulation of more productive activities?

Inclusive economic institutions (Acemoglu and

Robinson, 2012)

• Foster economic activity
• Economic opportunities

for a broad cross- section of society

• Should address

Information externalities

(Rodrik, 2004)

Address coordination externalities (Rodrik, 2004)

• Infrastructure
• Human capital
• Coordinate investment

Economic institutions

Specific rules of the game: set incentives and constraints for acquisition and combination of productive capacities

External Demand

Demand

Laissez-faire vs strategic approach

If economic institutions create an environment that foster economic activity, what is the probability (P) of more productive activities to emerge given the existing productive capacities and market incentives?

Higher productivity Potential new products Existing products in the world Existing products in the country

A B

Considering D(x) as the expected demand for x: P=D(B)/D(A+B) P > 50% => laissez- faire P < 50% => strategic approach

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From theory to practice

Which economic activities are more likely to emerge given the existing productive capacities in the economy?

• The Product Space (Hidalgo, Klinger, Barabási,

Hausmann, 2007)

Which of those are associated with higher productivity?

• Method of reflections (Hidalgo and Hausmann, 2009)

What is the probability of those more productive activities emerge given the market incentives?

• Export opportunity (ESCAP, 2012)

Product Space

Hidalgo, Klinger, Barabási, Hausmann (2007). The Product Space Conditions the Development of Nations Network in which products are nodes connected to each other if they are usually part of the same product mix proximity between products A and B (ΦAB) ΦAB = ΦBA = min(P(A|B), P(B|A))

Source: Hidalgo, C.A., and others (2007)

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Method of reflections

Hidalgo and Hausmann (2009). The building blocks of economic complexity.

Source: Hidalgo and Hausmann (2009)

Method of reflections

• Hidalgo, César A., and Ricardo Hausmann (2009). The building

blocks of economic complexity. PNAS, vol.106, No. 26, pp. 10570- 10575.

• The method is defined as the recursive set of observables:

∑

−

=

p N p cp c N c

K M K K

1 , , ,

1

∑

−

=

c N c cp p N p

K M K K

1 , , ,

1

∑

=

p cp c

M K

,

∑

=

c cp p

M K

,

⎩ ⎨ ⎧ ≥ = therwise. t CA if 1

cp

• reshold

R M cp

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Product complexity

Measure of how ubiquitous the product is and the level of diversification of the countries that produce it

2 4 6 8 2 4 6 8 2 4 6 8

• 4
• 2

2

Maldives Bangladesh Japan Percent Product complexity (global average=0, sd=1)

Abdon and others (2010): Major exporters of more complex products are high-income countries and major exporters of less complex products are low-income countries ESCAP (2012): Rich countries export products with a wide range

• f complexity

Source: Author based on data from the United Nations Commodity Trade Statistics Database (COMTRADE).

Product complexity by industry

• 4
• 3
• 2
• 1

Food and live animals

• 4
• 3
• 2
• 1

Beverages and tobacco

• 4
• 3
• 2
• 1

Crude materials, inedible, except fuels

• 4
• 3
• 2
• 1

Mineral fuels, lubricants and related materials

• 4
• 3
• 2
• 1

Animal and vegetable oils, fats and waxes

• 4
• 3
• 2
• 1

Chemicals and related products

• 4
• 3
• 2
• 1

Manufactured goods classified chiefly by materials

• 4
• 3
• 2
• 1

Machinery and transport equipment

• 4
• 3
• 2
• 1

Miscellaneous manufactured articles Source: Freire, 2012.

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Export Opportunities

Based on ESCAP (2012) Captures expected demand for potential new products Overlap indicator designed to measure the degree to which potential new products of

• ne country match the expanding markets
• f another

2010 1 ,

M G

i t t isd ×

∑

1 , 0 t t isd

G

1 1 t t id t t id

M m M m −

1 1 t t id t t id

M m M m >

where = if Φij>80% for some product j in the country’s existing product mix and , and zero otherwise.

• V. Methodology & Data

Identify the products that are more complex and that are nearby in the product space to the existing product-mix of the countries

• Calculate product complexity using Method of

reflections

• Map the structure of the product space
• Analyze price incentives (export)

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Trade data disaggregated at 6-digit level of HS 2002 Products are also differentiated based on their unit value 43,293 products in 2010

Source: Author based on data from COMTRADE.

code = 6-digit (HS) + 1digit (quantity unit code) + 1 digit (unit value range)

• 3
• 2
• 1

Complexity of potential new product

• 3
• 2
• 1

Complexity of existing product below $1 Million $1-$100 Million above $100 Million Export opportunities of potential new products

Myanmar

VI . I dentifying opportunities for FDI

Percentage of potential new products with above country's average complexity Percentage of export

• pportunities with above

country's average complexity 1 724 2 604 64% 25% Number of existing products Number of potential new products for emulation

• 3
• 2
• 1

Complexity of potential new product

• 3
• 2
• 1

Complexity of existing product

Myanmar

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New industries to target for FDI based on export

• pportunities

( Share of potential opportunities in percentage)

2 4 4 4 5 6 8 9 9 11 38

Inorganic chemicals, precious metal compound, isotopes Paper & paperboard, articles of pulp, paper and board Miscellaneous chemical products Organic chemicals Articles of iron or steel Iron and steel Electrical, electronic equipment Plastics and articles thereof Optical, photo, technical, medical, etc apparatus Machinery & mech appliance etc Sum of others with smaller shares

Myanmar

Exam ple of export opportunities of potential new products by HS sector

(HS) Description, price range Export

• pportunity

(US$ Million) top1 top2 top3 top4 top5 (020714) Cuts & edible offal of species Gallus domesticus, frozen, $1-3 238.7 HK 57.2 CN 45.5 RU 23.1 JP 21.9 UA 17.9 (040130) Milk & cream, not concentrated/sweetened, fat content by wt. >6%, $1-3 11.8 SE 1.5 RU 1.3 PL 1 CN .9 KR .7 (040310) Yogurt, $1-4 22.6 NL 3.1 SK 2.8 IT 1.8 AT 1.4 US 1.1 (040610) Fresh (unripened/uncured) cheese, incl. whey cheese, & curd, $0-3 36.4 GB 11.7 IT 5.2 BE 4.5 PL 2 CZ 1.4 (040610) Fresh (unripened/uncured) cheese, incl. whey cheese, & curd, $3-7 51.6 JP 9.1 FR 8.2 IT 5.4 RU 2.9 NL 2.6 (040630) Processed cheese, not grated/powdered, $3-7 27.3 BE 3.6 GB 3.1 SA 2.8 UA 1.4 LB 1.3 (060390) Cut flowers & flower buds of a kind suit. for bouquets/ornamental purps., d ..., $4-13 9.6 DE 4.5 FR 2.3 BE .5 IE .4 PL .2 (070490) Cabbages, kohlrabi, kale & sim. edible brassicas (excl. cauliflowers, heade ..., $0-1 6.8 RU 1.6 NL .8 CA .5 LT .5 FR .4 (070610) Carrots & turnips, fresh/chilled, $0-1 11.5 RU 5.1 TH .7 PL .4 MY .4 BE .4 (080232) Walnuts, shelled, $5-10 10.7 TR 1.8 KR 1.8 DE 1 ES .9 IL .8 (080510) Oranges, fresh/dried, $0-1 59.4 RU 9.6 JP 6.8 HK 6.5 UA 5.3 NL 4.8 (080620) Grapes, dried, $1-3 24.4 GB 3.4 NL 3.4 DE 2.9 CA 2.3 AU 1.9 (080920) Cherries, fresh, $1-7 18.9 HK 5.3 CA 2.4 RU 2 CN 1.9 US 1.8 (080940) Plums & sloes, fresh, $0-2 7.6 NL 2.2 RU 1.4 CN 1.1 BR .8 HK .3 (081190) Fruit & nuts, n.e.s., uncooked/cooked by steaming/boiling in water, frozen, ..., $1-3 16.2 US 5.5 NL 1.9 BE 1.3 AT .9 FR .8 (100620) Husked (brown) rice, $0-2 36.5 GB 7.3 NL 4.9 KR 3.9 IT 2.8 FR 2.3 (110812) Maize (corn) starch, $0-1 9.3 GB 1.8 NL 1.4 MY .7 MX .6 ET .5 (110813) Potato starch, $0-1 7.4 NL 2.1 DE .9 KR .6 BE .5 TH .3 (150790) Soya bean oil, other than crude, & fractions thereof , whether or not ref. ..., $1-2 40.8 BE 4.2 DE 3.2 CA 3 CO 2.3 MX 2.2 (150990) Olive oil (excl. crude & virgin) & fractions thereof , whether or not ref. ..., $2-6 5.4 RU 1.6 DE .8 IN .5 VE .5 MA .2 (151219) Sunflower seed/safflower oil, other than crude, & fractions thereof , wheth ..., $1-2 63.1 BE 10 GB 6.8 FR 6.2 ZW 5.3 NL 3.1 (151790) Edible mixts./preps. of animal/veg. fats/oils/fractions of diff. fats/oils ..., $0-1 23.7 CL 6.8 PL 1.5 CZ 1.1 KE 1 DE 1 (151790) Edible mixts./preps. of animal/veg. fats/oils/fractions of diff. fats/oils ..., $1-4 62.9 FR 9.5 UA 8.9 US 7.8 CA 4 NL 3.2 (151800) Animal/veg. fats & oils & fractions thereof , boiled/oxidised/dehydrated/su ..., $0-0 48.4 PH 8.2 AF 5.6 MX 4 ES 3.6 AT 3.5 (160232) Prepared/presvd. preps. of fowls of the genus Gallus domesticus (excl. homo ..., $0-2 27.5 DE 12 HK 6.8 MX 2.1 CO 1.6 CL .5 (160232) Prepared/presvd. preps. of fowls of the genus Gallus domesticus (excl. homo ..., $2-6 89.3 GB 20.4 NL 17.1 JP 12.7 FR 3.9 DK 3.2

… Full list of export opportunities of over $1Million has 848 products

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VI I . Conclusions

Creation of and investment on new economic activities would present a more successful approach to fostering inclusive development in Myanmar

• It will create new job opportunities and will push upwards the

productivity of the whole economy

But the process of economic diversification is path- dependent and not all new industries will deliver the desirable social benefits Diversification would require the strategic identification of potential new industries that would create productive jobs and would provide attractive investment possibilities Also important, these potential new industries should be the ones that are likely to emerge from the existing productive capacities in the economy.

VI I . Conclusions List of potential products could serve as a public good

• Reduces the cost of discovery of potential

successful new economic activities

• Guide the government in identifying factors

that could facilitate or prevent the process of discovery of these new economic activities by the business sector

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Thank you

Steven Ayres ( steven.j.ayres@gm ail.com ) Clovis Freire ( freire@un.org)